Is Consolidated Edison A Good Income Investment With Its Underperforming Total Return?
Summary Consolidated Edison’s dividend is high at 4.1% and has been increased each year over the last 41 years making Consolidated Edison a dividend aristocrat. Consolidated Edison’s total return underperforms over the last 35.8 month test period but its cash flow is good to make the dividend safe that will most likely be increased in. Consolidated Edison’s revenue growth is not great at 2% going forward but is very stable and the company business is defensive. This article is about Consolidated Edison Inc. (NYSE: ED ) and why it’s an income company that’s being looked at in The Good Business Portfolio. Consolidated Edison is a holding company with its business being an electric and gas utility in the North East United States. The Good Business Portfolio Guidelines, total return, earnings and company business will be looked at. Good Business Portfolio Guidelines. Consolidated Edison passes 7 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don’t break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article ” The Good Business Portfolio: All 24 Positions .” These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the Dow average. Consolidated Edison is a large-cap company with a capitalization of $17.829 billion. The Company operates through its subsidiaries, which include Consolidated Edison Company of New York, Inc. (CECONY), Orange and Rockland Utilities, Inc. (O&R) and the Competitive Energy Businesses. Consolidated Edison has a dividend yield of 4.1% that has been increased each year for 41 years. The dividend grows slowly but is extremely safe. Consolidated Edison therefore is a income story. The average payout ratio is 67% over the past five years which leaves plenty of cash remaining for investment after paying its high dividend Consolidated Edison’s cash flow is good at $1.2 Billion which leaves it with plenty of cash allowing it to pay its high dividend and have cash left over for company equipment modernization. I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Consolidated Edison has a three-year CAGR of 2% not meeting my overall requirement. Looking back five years $10,000 invested five years ago would now be worth over $15,379 today (from S&P IQ). This makes Consolidated Edison a good investment for the income investor with its steady slow growing 4.1% dividend that has been raised for over the last 41 years each year but does not meet the 5% CAGR growth I require. Consolidated Edison’s S&P Capital IQ has a two-star rating or sell with a price target of $59.0. This makes Consolidated Edison slightly over priced at present but a good choice for the income investor that does not need much capital gains growth and wants a safe income stream. Total Return and Yearly Dividend The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Consolidated Edison did worst than the Dow baseline in my 35.8 month test compared to the Dow average but does have a positive total return of 24.54% over the test period of 35.8 months.. I chose the 35.8 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014 and the losing year of 2015 YTD. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. This total return makes Consolidated Edison appropriate for the income investor with the steady slow growing dividend of 4.1%, but the aggressive investor should look for companies with more growth potential. It is expected that the dividend will be increased from its present $0.65/Qtr. to $0.67/Qtr. in January of 2016. DOW’s 35.8-month total return baseline is 30.71% Company Name 35.8 Month total return Difference from DOW baseline Yearly Dividend percentage Consolidated Edison Inc. 24.54% -6.17% 4.3% Last Quarter’s Earnings For the last quarter Consolidated Edison reported earnings on November 5, 2015 that missed expected at $1.44 compared to last year at $1.48 and expected at $1.48. They reaffirmed yearly earnings of $3.90 – $4.05. This was a fair to weak report. Earnings for the next quarter are expected to be at $0.52 compared to the last year at $0.58. The steady slow growth in Consolidated Edison over long periods of time should provide a company that will continue to have slightly below average total return but provide steady income for the income investor. Business Overview Consolidated Edison, Inc. (Con Edison) is a holding company. The Company operates through its subsidiaries, which include Consolidated Edison Company of New York, Inc. (CECONY), Orange and Rockland Utilities, Inc. (O&R) and the Competitive Energy Businesses. CECONY delivers electricity, natural gas and steam to customers in New York City and Westchester County. Orange and Rockland Utilities Inc. (O&R) delivers electricity and natural gas to customers located in south-eastern New York, northern New Jersey and north-eastern Pennsylvania. O&R’s utility subsidiaries include Rockland Electric Company and Pike County Light & Power Company. Competitive energy businesses provide retail and wholesale electricity supply and energy services. The Competitive Energy Businesses include three subsidiaries: Consolidated Edison Solutions, Inc. (Con Edison Solutions); Consolidated Edison Energy, Inc. (Con Edison Energy), and Consolidated Edison Development, Inc. (Con Edison Development). The good cash flow of Consolidated Edison, Inc. allows the company to expand its business slowly and modernize its equipment as the population of its service area increases over time. Takeaways and Recent Portfolio Changes Consolidated Edison Inc. is an income company choice considering its steady slow growth and its total return underperforming the Dow average. Consolidated Edison is a buy for the income investor that is willing to have underperformance of total return but have a steady increasing income and have safety of a defensive company business. Consolidated Edison is not being added to The Good Business Portfolio right now since there are no open slots in the portfolio and the total return underperforms the DOW average for the 35.8 month test period. Bought Eaton Vance Enhanced Income Equity Fund II (NYSE: EOS ) to bring it up to 6.5% of the portfolio. Great income fund that beats the DOW average. Trimmed Cabela’s (NYSE: CAB ) to 4.6% of the portfolio, want to take a little off the table while its up due to the buyout possibilities. The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Home Depot (NYSE: HD ) is 8.3% of portfolio, Walt Disney (NYSE: DIS ) is 7.5% of the portfolio and Boeing (NYSE: BA ) is 8.9% of the Portfolio therefore BA and HD and now in trim position with DIS getting close. I have written individual articles on EOS, CAB and HD, if you have an interest please look for them in my list of previous articles. Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.