Consolidated Edison – An Unsettling Look At Shareholder Yield
In a prior commentary I looked at the “shareholder yield,” that is dividends and share repurchases, for Coca-Cola and Exxon Mobil. In both instances the shareholder yield was greater than the dividend yield. Alternatively, a company like Consolidated Edison has a shareholder yield that has been routinely lower than its dividend yield. In a previous article I compared the “shareholder yield” of both Coca-Cola (NYSE: KO ) and Exxon Mobil (NYSE: XOM ). The idea was to take it a step further than simply looking at dividend yield, and instead focus on funds used for both dividends and share repurchases. As a part owner, share repurchases are commonplace. Yet if you owned the entire business, there would be no need to repurchase shares and thus these funds could be diverted elsewhere. For Coca-Cola and Exxon Mobil, this meant that the “shareholder yield” – dividends plus buybacks – was reasonably higher than the ordinary dividend yield that you commonly see quoted. Exxon Mobil turned out to have a higher shareholder yield than Coca-Cola (it’s share repurchase program has more room and a lower valuation of purchased shares) but the takeaway was that both companies had the ability to send away more cash without impairing the business. Which brings us to a company like Consolidated Edison (NYSE: ED ). Unlike Coca-Cola or Exxon Mobil or any number of well-known dividend paying companies, Consolidated Edison’s share count has been increasing over the years rather than decreasing. Thus conversely the shareholder yield tends to be lower than the quoted dividend yield. Let’s look at the past decade to see what I mean: Year Divs Sh Re Shares Total / Sh Price Sh Yield 2005 $518 -$78 245 $1.79 $46.33 3.9% 2006 $533 -$510 257 $0.09 $48.07 0.2% 2007 $582 -$685 272 -$0.38 $48.85 -0.8% 2008 $618 -$51 274 $2.07 $38.93 5.3% 2009 $612 -$257 281 $1.26 $45.43 2.8% 2010 $640 -$439 292 $0.69 $49.57 1.4% 2011 $704 -$31 293 $2.30 $62.03 3.7% 2012 $712 $0 293 $2.43 $55.54 4.4% 2013 $721 $0 293 $2.46 $55.28 4.5% 2014 $739 $0 293 $2.52 $66.01 3.8% The first three numerical columns are in millions, while the next two represent a per share basis. On the dividend front we can see that Consolidated Edison has been paying more and more total dividends, as to be expected from a company with a long history of regularly increasing its payout . What’s not readily obvious until you take a closer look is that the company had been issuing a good amount shares during the 2005 through 2011 period. This makes sense when think about it – the business is inherently capital intensive – but it might not be something that you would instantly notice. As such, the share count has been increasing. The company had 245 million shares outstanding in 2005, which has now become 293 million. This makes a difference when you’re thinking like an owner rather than a small shareholder. Here’s a comparison of the shareholder yield and the dividend yield over the years: Year Div Yield Sh Yield Difference 2005 4.6% 3.9% 0.7% 2006 4.3% 0.2% 4.1% 2007 4.4% -0.8% 5.2% 2008 5.8% 5.3% 0.5% 2009 4.8% 2.8% 2.0% 2010 4.4% 1.4% 3.0% 2011 3.9% 3.7% 0.2% 2012 4.4% 4.4% 0.0% 2013 4.5% 4.5% 0.0% 2014 3.8% 3.8% 0.0% The first number is what you’re accustomed to seeing quoted on any financial website – a dividend yield in the 3.5% to 5% range. The next column – shareholder yield – illustrates what magnitude of cash is actually being returned to shareholders. Consolidated Edison was indeed paying the full dividend, but it was also receiving cash back from shareholders to increase the share count. If you owned Coca-Cola or Exxon Mobil or any number of other firms in their entirety, the amount of cash that would be available to you would likely be greater than the current dividend yield. When a company both pays a dividend and buys back shares, the shareholder yield is greater than the dividend yield. With Consolidated Edison you have the opposite effect take place. The amount of cash that can be extracted from utility-like business models (without impairment) is lessened when you think about owning the entire thing. Issuing shares is common practice in the utility world (and other worlds for that matter) but it likely wouldn’t be occurring if there was just one owner. (You wouldn’t buy more shares yourself, or you could, but that would simply be inputting more capital). Thus you have a couple other options: issue more debt or reduce the dividend payment. The second option is what is being illustrated in a “shareholder yield” way, but the first one is much more common. Incidentally, whether you own all of it or not, this is exactly what we have seen with Consolidated Edison in the past decade. Notice the difference in the 2005 through 2011 period and the 2012 through 2014 timeframe. In the first period you had an increasing dividend to go along with a good deal of shares being issued. In 2007 shareholders received $582 million in dividend payments, but gave back $685 million to add to the share count. You can call the dividend payment yield, but in the aggregate the company was actually a net beneficiary of cash received. The amount of funds available had been quite a bit lower than what the dividend yield alone would indicate. Notably, Consolidated Edison did not issue shares in 2012, 2013 or 2014. Which means that the shareholder yield was equal to the dividend yield in those periods. Yet there was still impairment during this time. The company had net debt issuances of $1.1 billion, $1.4 billion and $1.1 billion during those years. Instead of issuing shares, debt was used – much like what might be required if you owned the business in its entirety. The shareholder yield gives a reasonable gauge as to the type of cash flow that could be extracted from the business, but naturally it’s just a first step in the process. In this instance, it shows that while the dividend has been above average and increasing, the amount of cash than can be taken out of the business without impairment has been consistently lower than this yield. Warren Buffett had a particularly revealing commentary related to this concept (and incidentally Consolidated Edison itself) back in the 1970’s: “In recent years the electric-utility industry has had little or no dividend-paying capacity. Or, rather, it has had the power to pay dividends if investors agree to buy stock from them. In 1975 electric utilities paid common dividends of $3.3 billion and asked investors to return $3.4 billion. Of course, they mixed in a little solicit-Peter-to-pay-Paul technique so as not to acquire a Con Ed reputation. Con Ed, you will remember, was unwise enough in 1974 to simply tell its shareholders it didn’t have the money to pay the dividend. Candor was rewarded with calamity in the marketplace.” “The more sophisticated utility maintains – perhaps increases – the quarterly dividend and then ask shareholders (either old or new) to mail back the money. In other words, the company issues new stock. This procedure diverts massive amounts of capital to the tax collector and substantial sums to underwriters. Everyone, however, seems to remain in good spirits (particularly the underwriters).” Naturally today you can make a bevy of arguments (rock bottom interest rates, for one) that did not qualify back then. However, the concept is similar: the amount of money that can be taken out from owning the entire business is apt to be lower, not higher, than the stated dividend yield. Ideally you’d like to think in “owner’s earnings” terms, but the shareholder yield provides a short cut to get you started. Whereas a company that regularly repurchases shares has a bit of wiggle room (those repurchase funds could be diverted toward sustaining the dividend in dire times) a company issuing shares has the opposite effect occurring. A company that regularly issues shares has “negative” wiggle room. Now I’m not suggesting that Consolidated Edison is a poor business or that it’s bound for doom – far from it. Utilities tend to exist out of necessity and have been churning out cash for decades. However, looking at shareholder yield (and ultimately owner earnings) is a bit of a different way to think about it. If you owned all of Exxon Mobil you could pay yourself a 5% or 8% dividend in regular times and not put an added burden on the business. That is, the quoted dividend yield understates the amount of cash that could be extracted without impairing the company. With Consolidated Edison, this likely isn’t the case. If you owned all of Consolidated Edison, you’d be more likely to see a lower not higher percentage of cash being paid out. No longer would you be issuing shares and thus the focus would turn to added debt or a reduced payout. The debt could go on indefinitely, but the capital necessities are such that the current dividend payment coexists with other pressing requirements. When they say that you’re “buying it for the dividend” this could be even more applicable than it first appears.