For years, Consolidated Edison (ED 0.63%) has rewarded investors with steady, solid gains. Over the past 15 years, Con Ed total returns have matched the S&P 500. Serving the greater New York City area, this prime mover of electric, gas, and steam does what investors expect a utility stock to do: protect shareholder equity and provide steady dividends.
Let's break down four reasons why Con Ed is a stalwart utility stock.
Regulated utilities are safer
Prior to electric deregulation, most all utility stocks were regulated. Regulated utilities must seek approval for rate changes through a utility commission. These commissions arbitrate between consumer and investor interests. They look to ensure consumers get fair rates, and shareholders get a fair return on investment.
Post-deregulation, many utilities became free to compete with other power generation providers. While this offered a chance to improve profits, the business is rough-and-tumble, unlike the more insulated regulated climate where rates and returns are controlled, but nearly guaranteed.
Over 90% of Con Ed revenues come from the regulated electric, gas and steam generation businesses. Serving the New York metropolitan area provides a strong enterprise platform.
Other utilities, like Exelon Corporation (EXC 0.71%), spread their wings to play in the power generation markets. Unfortunately, the results have often not met expectations. Exelon has seen earnings tumble for three years in a row, largely due to its weak wholesale power generation business. The share price was $44 in late 2011. It's about $27 today, and the dividend has been cut. Most utility shareholders seek share stability and steady dividends. Deregulated power generation changed the calculus.
Share price tracks earnings closely
Good utility stocks are "easy" to own. The share price tracks earnings closely, and year-over-year EPS changes are modest. The following 12-year graph shows Con Ed's price (the black line), earnings (the purple shaded area), and the average price/earnings multiple for the period (the blue line). Note that the price never strays far from earnings or the P/E ratio. If the share price moves much above or below earnings, it always returns quickly.
courtesy of fastgraphs.com
Beta is an investment measurement of stock price volatility. Con Ed has a beta of 0.2. The S&P 500 has beta of 1.0. This means that if the market moves 1%, Consolidated Edison stock will only move about 0.2%. This "steady Eddie" performance is another attribute of a stalwart utility stock.
A long record of building shareholder equity
Good stocks in general, and utility stocks in particular, are led by management teams that focus on value creation. Consolidated Edison is textbook example.
Since a picture says a thousand words, here is a 12-year chart depicting Con Ed's growth of shareholder equity per share.
courtesy of fastgraphs.com
Notice management's record of uninterrupted increases in shareholder equity, even during periods of recession (indicated by the shaded grey areas on the graph).
Not many utilities have demonstrated such consistency. One of the few that approach Con Ed's ability to grow shareholder equity is Southern Company (SO 1.10%), an electric utility serving much of Georgia, Alabama, Florida, and Mississippi. Unsurprisingly, Southern Co's recipe is similar to Consolidated Edison: About 90% of its revenues are generated via regulated customer service, the company has a distinguished dividend history, and management has improved shareholder equity for the last 11 years in a row.
Consolidated Edison is a dividend aristocrat
A dividend aristocrat is defined as a company that has increased its cash payout for at least 25 consecutive years. Less than 100 listed companies make this cut.
Con Ed has rewarded shareholders with higher dividends for 38 years.
Investors also appreciate the fact that the dividend yield is robust. The current 4.43% yield is near the top of the S&P 500.
How about valuation?
Despite the recent run-up in the market, Consolidated Edison shares trade at reasonable value. The operating price/earnings multiple is 14.6, just a tad below the long-term historic average of 14.8. The P/E ratio on consensus forward operating earnings is about 14.4. So the shares may be purchased near fair value.
Con Ed's stock performance has been muted due to investor fears of rising interest rates. Utilities typically carry a lot of debt, and higher interest rates spur worries about future borrowing costs. Concerns about the New York State Public Utility Commission ruling against the company on a 2014 rate case request is another near-term overhang.
Investors with a longer-term view may see Consolidated Edison as a steady, dividend growth performer that consistently creates shareholder value and is located in one of the most powerful utility markets in the United States.
