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Consolidated Edison – Slow And Steady Growth While Bringing Stability To Your Portfolio

Summary Consolidated Edison serves 3.4M customers in the New York City area. ConEd is a Dividend Champion having raised dividends for 41 consecutive years; a starting yield of 3.91% and a 5-yr dividend CAGR of 1.3% brings Chowder Rule to 5.21. In a slow and steady growth sector, ConEd is stable and is planning to grow by investing heavily in the electric and gas infrastructure investments in the next two years. Consolidated Edison Inc (NYSE: ED ) is a regulated electric, gas and steam utility delivery company serving New York City and Westchester County. The company serves 3.4M customers and is an iconic dividend growing company loved for its long track record of not only paying dividends — which it has paid since 1885 — but has raised those dividends for 41 consecutive years. The company operates in three segments: Consolidated Edison Company of New York (CECONY), Orange & Rockland Utility Company (O&R) and Competitive Energy Business. Corporate Profile (from Yahoo Finance) Consolidated Edison, Inc., through its subsidiaries, engages in regulated electric, gas, and steam delivery businesses in the United States. It offers electric services to approximately 3.4 million customers in New York City and Westchester County; gas to approximately 1.1 million customers in Manhattan, the Bronx, and parts of Queens and Westchester County; and steam to approximately 1,700 customers in parts of Manhattan. The company owns 62 area distribution substations and various distribution facilities; 39 transmission substations and 62 area stations; electric generation facilities with an aggregate capacity of 705 megawatts that run with gas and fuel oil; 4,330 miles of mains and 369,339 service lines for natural gas distribution; and 1 steam-electric generating station and 5 steam-only generating stations. It also supplies electricity to approximately 0.3 million customers in southeastern New York, and in adjacent areas of northern New Jersey and northeastern Pennsylvania; and gas to approximately 0.1 million customers in southeastern New York and adjacent areas of northeastern Pennsylvania. The company operates 572 circuit miles of transmission lines; 14 transmission substations; 62 distribution substations; 86,379 in-service line transformers; 3,991 pole miles of overhead distribution lines; and 1,869 miles of underground distribution lines, as well as 1,867 miles of mains and 105,077 service lines for natural gas distribution. In addition, it is involved in the sale and related hedging of electricity to retail customers; and provision of energy-related products and services to wholesale and retail customers. Further, the company develops, owns, and operates renewable and energy infrastructure projects, as well as invests in transmission companies. It primarily sells electricity to industrial, commercial, residential, and governmental customers. The company was founded in 1884 and is based in New York, New York. A Closer Look Consolidated Edison operates in one of the most vibrant and densely populated areas — New York City. Operating with a focus on the transmission and distribution business, the commodity exposure is less than other utility companies in the sector such as Southern Company (NYSE: SO ). The following chart provides an overview of the different segments of ConEd and the contributed earnings per segment. (click to enlarge) (Source: 2015 Wolfe Research Power & Gas Leaders Conference Presentaton ) The regulated nature of the industry has kept the stock performance stable and tempered through rough times in the economy. However, ConEd still has avenues to grow. The company’s forward-looking focus for growth includes: Delivering energy to a growing service area Energy conversion programs Oil-to-gas conversions Development of renewable energy Energy infrastructure investments for electric & gas transmissions and electric & gas storage. (Source: Created by author. Data from Capex Forecast 2014 10-K) One worrying trend that investors need to be aware of is that the utilities sector is seeing continued headwinds in revenue growth. There are various reasons, but the main ones are motivated by increased costs from utility companies to cover operating and overhead costs. In addition, revenue growth headwinds come from a combination of energy conservation, energy efficiency and shift towards independent power generation as renewable energy becomes more affordable and accessible for the end users. The following chart from ConEd shows the changes in electricity usage, which has seen steady declines from both residential and commercial users over the last few years. As electricity is the biggest segment in ConEd’s business, it should be something potential and current investors should stay vigilant about. (click to enlarge) (Image Source: ConEd Credit Suisse Energy Summit Presentation ) Dividend Stock Analysis Financials Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations. (click to enlarge) (Source: Created by author. Data from Morningstar) (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The utility industry is resilient and has seen a slow and steady rise over the years. Revenues and earnings are fairly constant with year-over-year growth ranging between -0.25% to +0.25%. The debt load is also stable and ED enjoys an “A+” credit rating from S&P. ED has a debt/equity of 1.07 and a current ratio of 0.90. Dividends and Payout Ratios Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/Manageable payout ratio to indicate that the dividends can be raised comfortably in the future. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: Utility companies are slow and steady growers and are perfectly suited for long-term dividend investors. Consolidated Edison is a Dividend Champion having raised dividends consecutively for 41 years. The 1-, 3-, 5-, and 10-year dividend CAGRs are 2.4%, 1.6%, 1.3%, and 1.1% respectively. Coupled with a current dividend yield of 3.91%, ED has a Chowder Rule number of 5.21. The current payout ratio is 67.7%. The payout ratio falls within the target range of 60%-70%. Outstanding Shares Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The number of shares have risen steadily over the years until 2011, but have stabilized since. Book Value and Book Value Growth Expected: Growing book value per share. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The book value is a bright spot in the company’s financials. The book value has steadily increased over the years maintaining a nice upward trajectory. Valuation To determine the valuation, I use the Graham Number, average price-to-earnings, average yield, average price-to-sales, and discounted cash flow. For details on the methodology, click here . The Graham Number for ED with a book value per share of $43.66 and TTM EPS of $3.77 is $60.86. Based on the last closing price, the stock is currently 10.15% overvalued. ED’s 5-year average P/E is 15.34, and the 10-year average P/E is 15.23. Based on the analyst earnings estimate of $4.04, we get a fair value of $61.97 (based on the 5-year average) and $61.53 (based on the 10-year average). ED’s average yield over the past five years was 4.67% and over the past 10 years was 4.99%. Based on the current annual payout of $2.60, that gives us a fair value of $55.67 and $52.10 over the 5- and 10-year periods, respectively. The average 5-year P/S is 2.16 and average 10-year P/S is 2.0. Revenue estimates for next year stand at $21.18 per share, giving a fair value of $45.74 and $42.35 based on 5- and 10-year averages, respectively. The consensus from analysts is that earnings will rise at 2.72% per year over the next five years. If we take a more slightly conservative number at 2.5%, running the three-stage DCF analysis with an 8% discount rate (expected rate of return), we get a fair price of $67.27. The following charts from F.A.S.T. Graphs provide a perspective on the valuation of ED. (click to enlarge) (Source: F.A.S.T. Graphs ) The chart above shows that ED is slightly overvalued. The Estimates section of F.A.S.T. Graphs predicts that at a P/E valuation of 15, the 1-year return would be -6.5%. (click to enlarge) (Source: F.A.S.T. Graphs ) Conclusion Electric utilities in general have seen slower sales industrywide amid a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. The utility sector is a stable slow-growth sector that is revered during recessions by investors. ConEd fits the bill, as it has slowly and steadily grown the business over many years, although the stock is currently overvalued. Based on the metrics discussed above, if we give equal weight to all metrics, we get a fair value of $58.94. Remember that utilities sector stocks play a very different role in a portfolio — it will not rise fast, bringing amazing capital gains and quick wealth. What utility stocks bring to an investor’s portfolio is inertia and stability while providing steady and reliable income. One added risk for investors is the potential rise of interest rates by the US Fed. Bond substitutes such as utility stocks suffer the most in rising rate environments. Full Disclosure: None. My full list of holdings is available here .

Dovish Fed, Rising Oil And Falling USD Set Stage For GLD Rally

Summary Central banks in Japan and Europe continued to ease monetary policy, and Fed had just revealed its dovish side as two governors stood out to oppose the rate hike this year. GLD had formed a double bottom since August and reformed the uptrend on October 1 as oil got stronger and USD weakened. This sets the stage for stronger inflation, and GLD is about to get more valuable in its role as an inflation hedge. In this article, I am going to express my views on gold as seen on the SPDR Gold Trust ETF (NYSEARCA: GLD ). Basically, I am bullish on gold and see the current weakness as a mere retracement for the serious gold investor to build their gold stockpile at slightly lower prices. Gold serves as an inflation hedge throughout time. The current situation is making it easy for inflation to burst above the 2% inflation target suddenly and on a prolonged basis. This is because major central banks are all engaged in monetary easing, and there are no concrete signs that they are going to stop anytime soon. Japan & Europe To Continue on Easing Bias The Bank of Japan (BOJ) renewed its commitment to increase its monetary base by $80 trillion yen per year on its latest monetary policy statement on 7 October, 2015 . This is despite a moderately growing Japanese economy as inflation was still below its 2% target at 0.2% for August 2015. In Europe, inflation continued to be weak. Eurostat reported that inflation was negative 0.1% for the month of September 2015. This is one reason that the ECB continued to keep main refinancing interest rates at 0.05% and deposit facility interest rates at -0.20% . In addition to negative inflation, Europe is facing more risk to its growth as seen in the recent speech by ECB President Mario Draghi to the International Monetary and Finance Committee on 9 October, 2015 : “However, developments surrounding the slower growth in emerging market economies are posing renewed risks to the euro area outlook. Our monetary policy measures have supported, and continue to support, domestic demand, contributing to the euro area recovery and to a gradual improvement in the inflation outlook.” Hence it is clear that the ECB would not be changing its monetary easing stance soon and would continue to purchase $60 billion per month of public and private securities. Fed Steps Away For 2015 Rate Hike Most crucially, the Federal Reserve had just made it clear that it is doubtful over the lack of inflation in the US. The first hint came when the Fed failed to raise interest rates in its September 2015 meeting as widely anticipated. Next, the September meeting’s minutes were released, and it showed that the Fed officials were more worried about the lack of inflation despite the steady growth in the US. It was mainly blamed on low oil prices and the strong USD. After the minutes were released, Chair Janet Yellen and FOMC Vice Chair William Dudley stepped forward and made speeches to keep the hopes of a hike rate alive in this year, presumably in December 2015. However, recently, we have heard that two Fed governors had stepped out in opposition of a rate hike this year. It is rare to hear from Fed Governors Lael Brainard and Daniel Tarullo . Brainard made the case that he wanted to see a more robust recovery and Tarullo wanted to see a more robust inflation recovery. The Bureau of Labor Statistics reported that the most recent consumer price index declined 0.2% for September 2015. Fed governors have a permanent vote on the FOMC, and it should be noted that both immediate past Chairman Ben Bernanke and current Chair Janet Yellen had to go through the appointment of Fed governor before their supreme appointment. Hence the fact that both Fed governors bothered to appear on record to make their stance is a highly noteworthy event. With such opposition, it would be very difficult for Chair Yellen to hike rates this year even if she felt that it was necessary to do so to get ahead of the curve. Externally, this dovish position is supported by the IMF. Therefore, it should not come as a surprise that a Reuters survey showed that 55% of the polled economists expect a rate hike in December, and this is down from 60% in the previous month. Bullish GLD Formation Aided By Strengthening Oil & Weakening USD As we can see on the chart below, GLD had been on the rise since August and has since formed a double bottom. (click to enlarge) Source: StockCharts The Fed had overlooked the recent recovery of oil prices and has provided the ideal environment for inflation to grow. (click to enlarge) Source: StockCharts The other factor that would encourage inflation would the continued weakening of the USD, as seen in the chart below: (click to enlarge) Source: StockCharts Both effects require time to appear on the official reports which often come up with two months of delay. In the meantime, the market is actively pricing in higher inflation as gold prices have been on the uptrend since 1 October, 2015, in its latest wave up. Conclusion Gold prices are on the verge of a breakthrough as indulgent central banks around the world continue to either ease monetary policy or at the best stick to a neutral stance. The action of the Fed to signal clearly that it is unlikely to hike rate this year is a game changer. Don’t be too affected by the minor weakness on October 16. This is due to a strong consumer confidence report and this only provides a needed profit-taking opportunity. Gold should continue its uptrend after the retracement as fundamentals are in its favor.

3 Ways To Play A Nearing Fed Rate Hike

Summary Thanks to weaker than expected job growth and retail sales along with global economic uncertainty, the futures market is not expecting a rate hike until into 2016. Investors want to plan for rising interest rates should look for investments with low duration, low interest rate sensitivity or that can profit from higher rates. In this article, I suggest three different ETFs that can fit those criteria. With the target Fed Funds rate sitting at 0% for the last 6+ years, the Fed is finally getting poised to raise interest rates again. Many watchers felt a rate hike in 2015 was imminent until a slew of economic data – weak job growth and retail sales data along with uncertainty in China – have pushed off rate hike expectations into 2016. Fed funds futures suggest that there’s only a 50-50 chance will see a rate hike at the March Fed meeting with the first likely hike coming in June. For those looking to protect themselves from rising rates, now might be a good time to reposition your portfolio. That means looking for investments that maintain a low duration, staying away from sectors that are highly rate sensitive and looking for stocks that can profit from higher rates. If you’re looking to stay away from interest rate risk, consider these ETFs for your portfolio. The iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) This is the good old fashioned conservative approach. Its 30 yield of 0.49% won’t necessarily impress income seeking investors but with a beta of near zero this is exactly the type of risk averse investment that those looking for safety should consider. Since its inception in 2002, we’ve been able to see how the fund performs in both a rising rate and falling rate environment. In the 2004-2007 period when the Fed Funds rate rose from 1% to over 5%, the fund managed a total return of around 8%. Not a huge return by any means but it demonstrates how the fund was still able to generate a return even in a rapidly rising rate environment. In the subsequent 2007-2008 period during the financial crisis when the target Fed Funds rate dropped to 0%, the fund returned around 12%. These are solid returns in both scenarios but the risk minimization and capital preservation strategy of this ETF is what matters most. The SPDR S&P Bank ETF (NYSEARCA: KBE ) Banks profit when the yield curve is steeper and interest rates are higher. This fund debuted right at the tail end of when interest rates were rising in 2005. As you can see, the overall performance of the fund followed the Fed Funds rate downward. KBE Total Return Price data by YCharts Conversely, it would be expected that bank stocks should outperform when rates begin moving back up. Being an equity ETF, this will still experience the volatility that comes with investing in the stock market but it should be positioned better than the broader market when rates finally begin to move back up. The PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEARCA: XRLV ) Debuting just earlier this year, this ETF looks to isolate the stocks of the S&P 500 that exhibit the lowest volatility and low interest rate sensitivity characteristics of the broader index. The fund’s composition is largely as one would expect. Most of the fund’s assets are invested in financials, industrials, consumer defensive and health care stocks – areas of the market that experience steady demand and are less prone to economic fluctuations. There’s not much of a track record to go on with this ETF but the strategy is such that it should help limit the downside associated with interest rate risk while maintaining broader exposure to the equity markets.