Consolidated Edison: A Utility For Slow But Reliable Dividend Growth

Utility stocks are known for their stability, consistency and reputation for high dividend yields. This is how they became known as “widow-and-orphan” stocks. Though investors aiming for growth should look elsewhere, utiliies deserve a look should one be seeking reliable earnings and income.

Consolidated Edison, Inc. ED stock has lost over 5 percent of its value year-to-date, and has underperformed the S&P 500 by a wide margin over the past year. That said, the company has an impressive track record of steady dividend growth. ConEd has been in business for over a century, and has increased its dividend to shareholders for over 40 consecutive years. The company should have no trouble continuing its dividend growth in the years ahead, and shares currently offer an attractive 3.6 percent dividend yield.

Business Overview And Growth Prospects

Consolidated Edison is a regulated electric and gas utility. The company generates approximately $12 billion in annual revenue, and has $49 billion in assets. It has four operating segments: Electric, Gas, Steam, and a non-utility business. It serves over 3 million electric customers, and another 1 million gas customers in New York. It operates electric, gas and steam transmission, and green energy businesses.

On August 2nd, ConEd released second-quarter financial results. Adjusted earnings-per-share increased 5.2 percent in the second quarter, and were up 7.6 percent over the first half of 2018. Earnings growth was driven by customer additions, rate increases throughout Con Edison's utility subsidiaries, and the impact of lower income tax expense.

ConEd does not have high growth potential. As a utility, it operates in a highly regulated and slow-growth industry. Long-term annual earnings growth for ConEd is likely to be within a few percentage points of U.S. GDP growth. However, what utilities like ConEd lack in growth potential, they more than make up for in consistency.

As a regulated utility, ConEd receives approval for periodic rate hikes that help ensure its profitability. Consolidated Edison expects to increase its rate base by 5.5 percent each year through 2019. In addition, operating in such a highly-regulated industry — electric and gas utilities are a matter of national security — virtually eliminates the threat of new competitors entering the market. Unlike the high level of competition across most other industries, large utilities like ConEd do not have to worry about smaller upstarts taking market share. ConEd is expected to grow earnings-per-share by 3-4 percent per year over the next five years.

One potential risk for ConEd’s future growth is rising interest rates, which are generally negative events for utilities, which typically rely on external sources of capital for growth. Fortunately, ConEd has prepared for rising rates by spreading out its debt maturities and maintaining a strong balance sheet. To that end, while ConEd has $1.28 billion of debt maturities in 2018, maturities wind down to $574 million in 2019. Moreover, ConEd has an investment-grade credit rating of BBB+, which helps reduce its cost of capital. The company also has a modest capital structure with a nearly-even split between debt and equity.

Dividend Analysis

ConEd is not an exciting growth stock, however it is a reliable dividend payer. The company’s consistent profitability allows it to generate more than enough earnings to maintain its hefty dividend, and grow the dividend payout each year at a modest rate. For example, For the year of 2018, the company reaffirmed its previous forecast of adjusted earnings per share in the range of $4.15 to $4.35 per share. Meanwhile, the company currently pays an annual dividend of $2.86 per share.

This means ConEd is likely to maintain a dividend payout ratio of 67 percent this year, if it hits the midpoint of its earnings guidance, and it is right in line with the company’s target payout ratio of 60-70 percent. A payout ratio below 70 percent leaves the company enough room to raise its dividend each year, at least at the rate of earnings growth, which should be in the low-to-mid single digit range.

Another benefit of investing in utility stocks is that the business model is highly resistant to recessions. ConEd should continue to pay its dividend — and raise the dividend each year — even if another recession hits. ConEd held up relatively well during the Great Recession. From 2007-2010, ConEd’s earnings per share were basically flat. This stability fuels ConEd’s steady dividend increases each year, no matter how the economy is doing.

Final Thoughts

ConEd has increased its dividend for 44 consecutive years. Future dividend increases should mimic the company’s rate of earnings growth. For example, in 2018 the company delivered a 3.6 percent dividend increase. Utilities are not high-growth dividend stocks, but ConEd’s dividend increases at least exceed inflation. And, the 3.6. percent dividend yield is significantly better than the average S&P 500 Index yield, which is currently around 2 percent.

Disclosure: The author is not long Consolidated Edison.

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