Tag Archives: industry

Dividend Aristocrats Part 24 Of 52: Consolidated Edison

Summary See why Consolidated Edison is the ultimate ‘tortoise stock’. The company has paid increasing dividends for 41 consecutive years. Are you the type of investor that will benefit from Consolidated Edison stock? Aesop was born into slavery in Greece around 620 BC . His tremendous intelligence did more than earn him his freedom. He rose to become a respected advisor to kings and city-states. One of Aesop’s most famous fables is the tortoise and the hare. An arrogant, speedy hare brags to a plodding turtle about how fast he is. The plodding turtle challenges Aesop to a race. The hare took a commanding lead and looks back, feeling confident that he will win the race. The hare decides to take a ‘power nap’. The slow and steady turtle passes the hare and wins the race. The moral of Aesop’s fable: slow and steady wins the race . Aesop’s story of the tortoise and the hare reminds me of Consolidated Edison (NYSE: ED ). (click to enlarge) Consolidated Edison’s History Consolidated Edison can trace its history back to 1823 – nearly 200 years ago. Back then, the company was known as New York Gas Light Company. In 1884, representatives of several gas light utilities throughout New York came together and consolidated their respective companies into a new business – the Consolidated Gas Company of New York. The company continued to grow and acquire gas, electric, and steam companies serving New York City and Westchester County. In 1936, the company changed its name to Consolidated Edison. Consolidated Edison has paid increasing dividends for 41 consecutive years . The company is the only utility in the S&P 500 with 30+ years of increasing dividends. Consolidated Edison’s dividend growth over the last 41 years is shown below: (click to enlarge) Source: Data from Yahoo! Finance Consolidated Edison Business Overview Consolidated Edison is primarily a regulated utilities business. The company has generated 89% of its revenue from its regulated utilities business segments through the first 9 months of fiscal 2015 . (click to enlarge) Source: 2015 EEI Conference Presentation , slide 25 The company operates in 3 segments: CECONY O&R Competitive Energy Business CECONY stands for C onsolidated E dison C ompany O f N ew Y ork. O&R stands for O range & R ockland. Together, these two segments make up Consolidated Edison’s regulated utilities business. The company’s Competitive Energy Business segment which participates in infrastructure projects, provides energy related products to wholesale and retail customers, and sells electricity purchased on wholesale markets to retail customers. Low Stock Price Standard Deviation & High Yield Investing in ‘turtles’ is not right for everyone. If you are looking for a high dividend yield, safety, and inflation matching (or beating) growth, then Consolidated Edison is a suitable investment. The company’s stock is currently offering investors a high dividend yield of 4.2%. For comparison, the 20 year U.S. Treasury Bond ETF (NYSEARCA: TLT ) is offering investors a yield of just 2.6%. Unlike a bond, Consolidated Edison’s dividend payments are growing (albeit slowly). The company has managed dividend growth of 1.4% a year over the last decade. This is about in line with inflation over the same period. The company should grow its dividend payments faster over the next decade (more on that in the future growth section of this article). Consolidated Edison has a 10 year stock price standard deviation of just 16.7%; the second lowest of any large cap dividend stock with 25+ years of dividend payments [for reference, Johnson & Johnson (NYSE: JNJ ) has the lowest]. You may be wondering… Why does stock price standard deviation matter? There are two answers. First, lower stock price standard deviation means a less ‘bouncy’ ride on your way to total returns. Lower dips make Consolidated Edison stock easier to hold as compared to more volatile stocks. Second, stocks with low stock price standard deviations have historically outperformed the market . That’s why low stock price standard deviation is one of the ranking metrics used in The 8 Rules of Dividend Investing . The image below shows the relative outperformance of the S&P Low Volatility Index over the last decade. The S&P 500 Low Volatility Index is comprised of the 100 lowest volatility stocks in the S&P 500 index. (click to enlarge) Source: S&P 500 Low Volatility Index Factsheet Consolidated Edison’s Future Growth Potential & Total Returns Consolidated Edison grew its earnings-per-share at 3.4% a year over the last decade. Earnings grew around 5%, but the company partially financed itself through share issuances, which dilutes earnings-per-share. In total, the company’s share count has grown at around 1.4% a year over the last decade. Going forward, I Consolidated Edison is expected to grow its earnings-per-share at around 3.5% a year. This number is very close to its 3.4% 10 year historical compound earnings-per-share growth rate. Consolidated Edison’s management is targeting a 60% to 70% dividend payout ratio. The company currently has a 68.8% dividend payout ratio; on the high end of management’s range. As a result, I believe that the company’s dividend payments will increase at either the same rate as earnings-per-share growth for the company, or slightly slower. Investors in Consolidated Edison should expect total returns of around 7.5% a year from the company’s stock. Returns will come from earnings-per-share growth of around 3.5% a year and dividends of ~4% a year. Consolidated Edison stock has a payback period of 16 years using an assumed growth rate of 3.5% and the company’s current share price and dividend. More Safety: Invest In What You Understand Consolidated Edison is an easy to understand stock . The company makes the vast majority of its profits selling electric and gas utility services to both business and residential customers on the East Coast. Other investors have taken notice of Consolidated Edison’s durable geography based competitive advantage. Here’s what Lanny at Dividend Diplomats had to say about the Consolidated Edison : “I understand utilities, I know how they physically work and I know what benefit and value it provides: Providing energy to fuel the day-to-day of operations. Let’s think big businesses, industries, etc., all the way to our entertainment platforms and this stems into our very own households. The need is and for now – will always be there, therefore, this is a very used product that will always be used.” It is very, very likely that Consolidated Edison will be around for a long time in the future. The company operates in a highly regulated industry that creates natural local monopolies. Moreover, the company operates a business that we all use every day (though not necessarily from Consolidated Edison, depending on where you live) – electricity and gas utility services. Peter Lynch is one of the most successful institutional investors of all time. Here’s what he has to say about investing in what you know: (click to enlarge) Final Thoughts: Who Should Buy Consolidated Edison Consolidated Edison stock is not for everyone . The company has a passable-but-not-great expected total return of 7.5%. As a utility, Consolidated Edison does not have rapid, or even average, growth potential. The company’s high dividend yield and high levels of safety (both qualitatively and quantitatively) make it an ideal choice for risk-averse investors looking for high yielding investments that will pay inflation adjusted (or better) dividend payments. Consolidated Edison is the prototypical tortoise investment . Slow and steady dividend growth wins the race.

Otter Tail Corporation: Reaffirmed Guidance Leading To Next Dividend Bump

Otter Tail Corporation reported 2015 third quarter earnings on November 2, 2015. Guidance for the full year was reaffirmed. Recent events introduce both support and uncertainty for Otter Tail’s near-term future earnings. Otter Tail’s dividend growth history points to another increase in February 2016. Otter Tail Corporation (NASDAQ: OTTR ), a diversified electric utility, started the year a tad slow. In the first quarter, the company lowered its full-year guidance. The second quarter brought an unofficial bump in the full-year projections. On November 2nd, the company reported 2015 third quarter earnings and officially confirmed its unofficial guidance bump. Full-year earnings per share is still expected to be in the middle to upper half of the $1.50 to $1.65 range. In other words, EPS for 2015 is expected to be $1.57 to $1.65. The company’s overall target is for the utility segment to deliver 75% to 85% of total earnings while the manufacturing segment delivers 15% to 25%. Like many utility companies, Otter Tail pays an attractive dividend – $1.23 annually. Its strategy is to allocate the utility segment’s earnings in support of the dividend. Its manufacturing segment’s earnings are intended to cover corporate costs and drive share price appreciation. For the third quarter, the utility segment earned $0.34 per share exceeding the dividend payment of $0.3075. The manufacturing segment earned $0.15 per share exceeding the corporate costs of $0.07. Year-to-date, the utility segment has earned $0.91 per share trailing the year-to-date dividends of $0.9225. The manufacturing segment has earned $0.40 which is $0.24 ahead of corporate costs of $0.16. Third quarter results revealed both support and uncertainty for full-year projections and Otter Tail’s near-term future. In support of its long-term goals, on September 1st, Otter Tail acquired Impulse Manufacturing. Impulse is located in Dawsonville, Georgia. The metal fabricator will join Otter Tail’s BTD Manufacturing segment. The acquisition is expected to be accretive to earnings in 2016. In 2014, Impulse generated $27 million in revenue compared to BTD’s $219.6 million. On August 3rd, the EPA (Environmental Protection Agency) published its final Clean Power Plan. The fully-implemented plan is designed to reduce carbon dioxide in machines from power plants by 30% of 2005 levels. Otter Tail believes the final Section 111(d) rule was a major change from the proposed rule. Its initial analysis showed the impacts to Otter Tail were improved under the final rule as compared to the proposed rule. Compliance begins in 2022 and must be complete before 2030. States must submit plans for approval by September 2016 and must receive approval by September 2018. Otter Tail is working with South Dakota, North Dakota and Minnesota to determine a framework and plan for each state’s compliance. At this point, Otter Tail is encouraged regarding its plant in South Dakota, concerned regarding the required addition of renewable energy in North Dakota and expecting its planned retirement of a plant in Minnesota to aid in compliance. Overall, the company expects the legislation to create increases in the costs of generation for its customers. Regarding renewable energy, the plan establishes eligibility dates: “Incremental emission reduction measures, such as RE and demand-side EE, can be recognized as part of state plans, but only for the emission reductions they provide during a plan performance period. Specifically, this means that measures installed in any year after 2012 are considered eligible measures under this final rule, but only the quantified and verified MWh of electricity generation or electricity savings that they produce in 2022 and future years, may be applied toward adjusting a CO2 emission rate.” In North Dakota, Otter Tail expects the state to have to add a substantial amount of wind power. In 2013, South Dakota was producing more than 25% of its electricity from wind. Minnesota will require 25% of its electricity to be generated from wind by 2025. Finally, Otter Tail’s third quarter information mentions a potential impact to earnings before year-end. “Should the federal government change current tax law before the end of 2015, the corporation’s consolidated earnings guidance could be negatively impacted in the range of $0.02 to $0.04 per share.” Considering there are $0.08 in the range of $1.57 to $1.65, the potential negative impact could be absorbed and Otter Tail would still meet its own projections. The company has earned $1.15 per share in the first nine months of 2015. Therefore, Otter Tail’s fourth quarter must deliver $0.42 to $0.50 in EPS. Since Otter Tail is a “winter-peaking” utility, achieving full-year guidance should not be a problem. The company’s dividend yield is healthier than other diversified utility companies. With full-year guidance reaffirmed, the stability of Otter Tail’s dividend is also presumed. Prior to 2009, the company increased its dividend for 33 consecutive years. In February of both 2014 and 2015, Otter Tail reestablished the tradition. February, 2016 should yield yet another increase.

Closed-End Target Date Muni Bond Funds Have A Good Yield And Low Interest Rate Risk

Blackrock and Nuveen target date funds pay back upon maturity. These funds hold pretty safe municipal bonds. These fund have decent yields. Blackrock (NYSE: BLK ) and Nuveen have a series of closed-end municipal bond funds that have a target date maturity. These funds have a nice yield and pay back principal in just a few years. We will look at the Blackrock Municipal 2018 Term Trust (NYSE: BPK ). As of today, it is trading at $15.50 and is almost at par with its net asset value (NAV). That means that the underlying portfolio of cash and bonds are worth what the market capitalization is. The portfolio holds 124 different issues of municipal bonds. They appear to be revenue bonds with names like: New York State Dormitory, California Waste, and Maryland Transportation. Revenue bonds are backed by the revenues generated from a certain project like a toll road or student housing. The bonds are rated: 6.9% AAA, 21.4% AA, 41% A, 18.9% BBB, 5.2% BB, 3.3% not rated, and 3.3% cash. The portfolio is only 1.5% leveraged, meaning that in a closed-end fund, that is all that has been borrowed. The fund has returned 5.8% since it was taken public in October 2001. Most of the time, it trades at par to NAV except when the markets went crazy in ’08 and then recovered. The trust yield 4.7¢ a month, so the total yield is 56.4¢ a year divided by today’s market price of $15.50 for a yield of 3.64%. The bonds will be liquidated or will have matured by December 31, 2018. That’s a pretty good yield for a bond that matures in about three years. The maturity price is $15. I assume that there could be some cash left over. The internal fee is 0.64%. It does not appear that there are many funky bonds that could go under. These include Detroit, Illinois, and Puerto Rico government obligations. As the bonds in the portfolio are backed by specific projects, they appear to be pretty safe. I must say, it’s seems like a pretty good investment for certain circumstances. As bonds are sold in $1,000 increments and the minimum that most bond brokers require is to buy in a $5,000 a lot, an investor must have quite a bit of money to hold a diversified portfolio. These Blackrock funds are good to hold smaller amounts of cash that are low risk, provided that the trade fees don’t negate the returns. These funds are traded like stocks. Other funds that fit in this category include: the Blackrock Municipal 2020 Term Trust (NYSE: BKK ), the BlackRock New York Municipal 2018 Term Trust (NYSE: BLH ), the Nuveen Intermediate Duration Quality Muni (NYSE: NIQ ), and another Nuveen Intermediate Duration Municipal Term Fund (NYSE: NID ). I have not done the research on these as I have on the Blackrock listed above. I have also not looked at the prospectus and just looked at the fact sheet. The particular closed-end fund seems to have a decent return and should do well in a rising interest rate environment. It would be nice if the fees were a little lower but what can you do? A yield of over 3% with a maturing of three years is pretty good in this environment.