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Consolidated Edison’s Ticker ‘ED’ Should Stand For ‘Enticing Dividend’

ED has consistently grown dividends per share with increases each year over the past five years. The Payout Ratio over the same period has been steady ranging from ~55-70% of earnings. In 2016 the dividend per share could be as high as $2.80 based on a 70% payout ratio on $4.00 of earnings (analyst consensus). Consolidated Edison (NYSE: ED ) has arguably one of the most enticing risk-adjusted dividend yields around, at > 4%. The company has a strong track record of growing dividends per share (5 consecutive years of increases), a stable payout ratio (~55-70%), and the ability to make future increases. ED’s share price is up 11% over the last twelve months. ED data by YCharts The divided yield has increased since the start of 2015 on recent share price weakness and represents a good entry point. ED Dividend Yield (NYSE: TTM ) data by YCharts ED has consistently grown dividends per share with increases each year over the past five years. ED Dividend data by YCharts Over the past five years ED has shown steady growth in EPS with an increase from $3/share to $3.6/share. ED Normalized Diluted EPS (Annual) data by YCharts The Payout Ratio over the same period has been steady ranging from ~55-70% of earnings. I believe this is a conservative ratio and expect to see an average payout ratio of ~70% going forward. ED Payout Ratio ( TTM ) data by YCharts If we take the payout ratio expectation of 70% and apply it to analyst EPS estimates , we can get a good sense of the potential for dividend increases going forward. EPS estimates are as follows: $3.97 in 2015 $4.00 in 2016 In 2016 the dividend per share could be as high as $2.80 based on a 70% payout ratio on $4.00 of earnings. This implies a yield of 4.6% on the current share price. Given the company’s track record of 5 consecutive years of dividend increases, a reasonable payout ratio, and analyst estimates for EPS of $4.00 in 2016 ED represents a great risk adjusted opportunity. Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in ED over the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague

Could RWE Be A Takeover Target?

RWE has confirmed talks with Gulf investors. RWE needs funding for growth and is looking for a new geographical growth region. It trades on low multiples. A full take-over is unlikely, but a deal could underpin valuation. RWE ( OTCPK:RWEOY ) has confirmed that it is in talks with Arab investors on cooperation. The company has said it is looking at several potential routes of cooperation and would not rule out anything. Gulf investors could take a minority stake, possibly 10%. Dubai’s Sheik Mansur bin Zayed Al Nahyan is being mentioned. A stake at those levels would amount to c. Eur 1.5bn at RWE’s current market capitalization. A full take-over is very unlikely. German municipalities hold about 25% of RWE. That has been a hard stop of any potential deal in the past and will likely remain so. The interest by RWE in cooperation with Gulf investors, including a potential minority investment could be on several levels. Firstly, to acquire a stable shareholder that would not likely take material influence on operational management decisions. There are other big German companies with minority investors from the Gulf region, notably Siemens ( OTCPK:SIEGY ) and Deutsche Bank (NYSE: DB ). RWE could look for a similar deal. The company needs funding for investment in renewables and downstream electricity, its new focus areas. Its capex is now close to maintenance levels, after the most recent reduction that came after company reiterated its focus on cash preservation during its 2014 earnings call ( see my previous article on SA: “Why RWE remains uninspiring” ). The company is barely cash generative in its generation business, which accounts for approximately 36% of total Ebitda. Beyond that, there could be potential growth avenues for RWE in the Gulf. Energy demand growth is amongst the highest globally, and there is keen interest in renewables (aside from new nuclear, but I think it is unlikely that RWE will get involved there). RWE has mentioned it is looking for new geographic growth regions. Masdar, one of the largest global clean energy developers, is owned by Dubai. RWE has announced it is taking a minority stake in solar manufacturer and developer Conergy ( OTC:CEYHF ) recently, in my view a transaction that makes a lot of strategic sense for RWE. It might need funding for growth coming out of that deal. Gulf investors might find that an attractive proposition. RWE is cheap on headline multiples, at a P/E of 11.4x 2015E, vs. a sector average of 16x, EV/Ebitda of 6.6x and a yield of 3.8%. That is another attraction for a potential investor, despite the weak earnings outlook. Sovereign investors tend to look for long term underlying assets. Even though those have below average cash generation prospects, there still of high asset quality which makes them appealing for such a deal. While I only see short term outperformance for RWE from this, there is some positive from the funding impact and potential signal towards valuation underpinning. I have been expect sustained M&A activity in the energy sector going forward. This confirms my view. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

E.ON Should Continue To Outperform

FY 2014 numbers were in line with low expectations. Earnings are still declining, but at a slowing speed. Cash generation is strong enough to support leverage and to allow for new growth capex. The corporate split is well under way. Relative out-performance vs RWE should continue. E.ON’s (OTCQX: EONGY ) FY 2014 results were in line. Ebitda was in line with guidance, at Eur 8.3bn (USD 8.8bn), vs. consensus of Eur 8.4bn (USD 8.9bn). Net income came in at Eur -3.3bn (USD -3.5bn), broadly in line with consensus of Eur -3.2bn (USD -3.4bn). The Eur 5.4bn (USD 5.7bn) write-offs, most of which on the power plant, were well flagged. They now allow for a clean slate ahead of the corporate split. Adjusted net income was in line at Eur 1.6bn (USD 1.7bn). Management’s guidance for 2015 Ebitda of Eur 7-7.6bn (USD 7.4-8bn) is 5% short of the Eur 7.7bn (USD 8.1bn) consensus at the mid point. The outlook is weak, but largely reflected. The power price impact is smoother than for RWE ( OTCPK:RWEOY ). Achieved hedged prices are still coming into line with market forwards over the next two years. Nevertheless, among the two Germans, E.ON stacks up much better than RWE. The generation business accounts for ~21% of Ebitda, vs. ~36% for RWE. E.ON’s generation portfolio has a stronger cash flow base due to its better fuel mix. It is cash positive. Even when excluding the one off effects of the nuclear tax and provisions release, I estimate cash flow generation would have been flat y/y. Going forward, there will be a small positive impact from capacity payments in the UK. Leverage is still high at 4.1x Ebitda, but it is slightly less of a concern: Higher cash flows leave a greater degree of financial flexibility. And, there will be further cash inflows from the various announced disposals. There will be movement on gearing as the split will entail different balance sheet structures from today. Capex is twice the amount of RWE’s capex, with a correspondingly higher level of growth capex. I estimate that at least Eur 2.5bn will go into growth capex, most of which into renewables. That will build a stronger foundation for growth post 2015. In a sector that is returning to growth mode, E.ON has a good foundation in place: Renewables, one of the most important growth drivers, account for ~15% of Ebit, vs. ~8% for RWE. The split is well under way and both new companies are viable propositions. There will be intense scrutiny on the company’s ability to meet its nuclear liabilities post split. The government has commissioned legal studies, but not found any factors that were conducive to stopping the deal at this stage. So far, there will likely be a very public debate, but outright government intervention seems less likely. While the outlook is challenging for E.ON, I expect it to outperform on a relative basis. The shares are trading on a 16x 2015E P/E which is in line with the broader sector peer group. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.