Those who prefer utilities as a way to build dividend income may be looking closely at New York City-based Consolidated Edison (NYSE:ED) right now. Shares of Consolidated Edison have come down from their 2013 high of $63 to just $54 today, a total drop of 14%. Meanwhile, the market has drifted higher. As with many similar instances in the stock market, though, Consolidated Edison is down for a reason. This article will weigh the positives and negatives of ConEd, with a particular emphasis on valuation.
Consolidated Edison is a utility holding company that owns ConEd of New York and Orange and Rockland Utilities. The former delivers electricity, natural gas, and steam to customers in New York City and Westchester County. The latter delivers electricity and natural gas to customers in southeastern New York, northern New Jersey, and northeastern Pennsylvania.
As a metropolitan New York-focused utility, ConEd benefits from outsized employment and GDP growth in the most dynamic city in the world. For example, since the 2009 recession, New York City has since gained back over 200% of the jobs that it lost, trailing only Houston in job recovery in the U.S.
The below chart illustrates another positive trend ConEd has behind it: a conversion from heating oil to natural gas.
As a gas distributor, Consolidated Edison is the primary benefactor of the New York area's switch from heating oil to natural gas. Part of this switch is regulatory: New York City is phasing out the use of several types of dirtier heating oil in an effort to clean up the skies and reduce CO2 emissions. The growing supply of shale gas has reduced natural gas prices and has also provided a market-based incentive to switch. Since 2010, over 2 million New Yorkers have since switched from heating oil to natural gas.
Management foresees 3.8% compounded growth in peak gas usage and 1.4% peak electricity usage from its core ConEd business over the next five years. Orange and Rockland should see 0.9% and 0.7% growth in peak usage of electricity and gas, respectively, over the same period. Analyst consensus is for per share earnings growth of 2.4% for the year. Not too bad for a utility.
At what cost does this come, though? Over the next three years, ConEd plans on spending $8.5 billion in capital spending. Much of that is going to renew old infrastructure or to increase renewable energy infrastructure as per regulatory guidelines. This costly expenditure might eventually mean that ConEd can hike its utility rates accordingly to provide a higher return for all that spending, but ultimately even such price hikes will be up to the regulatory bodies.
Consolidated Edison is certainly cheaper than it was back in 2013. In fact, it trades at a price-to-earnings (P/E) ratio of just 14.4, which is just about aligned with the company's 15-year average P/E ratio of 14.6. In addition to a reasonable valuation, ConEd provides a solid yield of 4.7%, which is not at all bad for a utility.
Given Consolidated Edison's limited growth, large capital spending requirements, and a regulatory body that heavily favors renewable energy, I believe there are better options among utilities. Specifically, look at those that operate in more business-friendly jurisdictions. Names such as American Electric Power (NYSE:AEP), which expects earnings growth of 4%-6% on a far lighter capital budget, come to mind.
Because utility companies are often near monopolies and their profitability is often strictly regulated, the utilities sector is regarded as a low-risk sector despite the high debt load which these companies carry. ConEd is, no doubt, a low-risk investment. However, I believe there are better low-risk options out there at this time.
The top dividend plays from America's energy boom
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free.
Casey Hoerth has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.