Consolidated Edison Earnings: Did Sandy Sink This Dividend?

Consolidated Edison (NYSE: ED  ) reported earnings last Friday, missing on both revenue and net income. With Superstorm Sandy on this utility's books and negative stock returns for 2012, some shareholders are wondering whether Con Ed can still kick it. I'll take a look at this quarter's results, some long-term trends, and deliver my own verdict on this utility's future finances. Here's what you need to know.

Number crunching
Con Ed reported Q4 sales of $2.9 billion, 3% lower than 2011's fourth quarter and a full $500 million below expectations. Earnings per share failed to impress, coming in $0.04 below analyst estimates at $0.69.

These newest numbers also represent a $0.04 drop behind Q4 2011. For 2012 overall, the company reported EPS of $3.88, 8.1% higher than in 2011.

Like most utilities, Con Ed is a holding company for smaller regulated utilities and unregulated wholesale generation power companies. Its utilities include Con Ed Company of New York (CECONY) and Orange & Rockland Utilities (O&R), while Con Ed Solutions and Con Ed Developments provide a variety of energy sales, services, and infrastructure projects to over 40 utilities.

For the last quarter, CECONY swallowed a $0.03 EPS loss stemming mainly from depreciation and property taxes, as well as operations and maintenance expenses. For 2012 overall, a $0.90 increase in rate plan EPS boosted CECONY to a $0.12 improvement over 2011.

For its non-regulated businesses, Con Ed pulled in $0.08 more in Q4 2012 than Q4 2011, and $0.15 more in 2012 than in 2011.

Can Con Ed keep up?
Utilities used to be steady (albeit boring) income earners with juicy dividends. But those days are coming to a close as policy changes and energy transitions are forcing utilities to reorient their businesses. A recent Department of Energy report estimates that electricity use will slow to a 0.58% compound annual growth rate over the next decade.

For Con Ed, that means that its energy portfolio and efficiency are becoming increasingly important. It also means that the utility's bragging rights on its 39th consecutive annual dividend increase may need to be subdued. Although Con Ed has a manageable debt-to-equity ratio (0.91 vs. industry average 1.06), using funds for capital expenditures like post-Sandy restoration, smart grid development, and renewable energy investments may ultimately prove more valuable to shareholders.

Dividend dynamite?
Con Ed currently sports a 4.2% dividend yield, but its stock fell around 10% following Sandy's devastation of the utility's predominantly Northeast business. With a dynamite dividend and a undervalued P/E ratio, now could be the perfect time to invest in Con Ed for the long haul. But let's take a look at a few other key statistics to see how this utility is managing its money and preparing for the future.

First up: capital expenditures. In its most recent earnings report, the company stated that it plans to pour $2.4 billion into its utilities in 2013. That's equivalent to 20% of 2011's revenue, no small chunk of change. For a peck of perspective, here's how Con Ed held up to other utilities for its 2012 capital expenditures:

Company

Capex ($M)

Capex-to-Sales Ratio (%)

Consolidated Edison

1,967

0.16

Atlantic Power (NYSE: AT  )

115

3.56

First Energy (NYSE: FE  )

2,278

0.14

Exelon (NYSE: EXC  )

4,042

0.21

Duke Energy (NYSE: DUK  )

4,363

0.30

Source: Yahoo! Finance

Atlantic Power trounces its competition, but the utility is in an intense growth period and not directly relatable to its peers. For the others, Con Ed falls on the lower end of the spectrum, a potential sign that this company is focusing on short-term return instead of long-term value.

But spending for spending's sake isn't always worth it, which is where efficiency analysis comes in. Examining a company's margins shows investors how good a company is at turning capital into value, whether through cheaper energy sources, management effectiveness, or a variety of other cash-conserving tricks.

ED Gross Profit Margin Quarterly Chart

ED Gross Profit Margin Quarterly data by YCharts

ED Operating Margin TTM Chart

ED Operating Margin TTM data by YCharts

Con Ed takes the cake on both gross and operating margins. While this is good news for investors by itself, it also puts the utility's capital expenditures into perspective. With efficient operations, Con Ed can focus on other aspects of its business like maintaining its current setup (e.g. Sandy restorations) and immediate shareholder value (e.g. dividends and stock returns).

Foolish bottom line
Con Ed has been hit hard, and its stock price reflects Mr. Market's disappointment in its latest offerings. But after examining the company's margins and spending decisions, I think Con Ed's got more to give than Wall Street expects. I'm making an "outperform" call on my Motley Fool Caps page, and am looking forward to seeing where this utility heads in Q1 2013 and beyond.

As the nation moves increasingly toward cleaner electricity, energy margins will make or break companies like Con Ed. Exelon has the largest nuclear fleet in North America and is increasingly focused on renewable energy. With its recent merger with Constellation, Exelon and its best-in-class dividend are on a short list of top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.


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