Recs

0

Will Consolidated Edison Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Utilities have always been favorites among conservative investors looking for solid dividend income and not too much volatility. With its roots in the greater New York metropolitan area, Consolidated Edison (NYSE: ED  ) has a highly concentrated customer base that provides predictable income flows and dependable demand. Yet although the company has likely benefited from low natural gas prices, how long can those good times last? Below, we'll revisit how Consolidated Edison does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Consolidated Edison.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $17.1 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 3 years Fail
  Free cash flow growth > 0% in at least four of past five years 4 years Pass
Stock stability Beta < 0.9 0.24 Pass
  Worst loss in past five years no greater than 20% (15.7%) Pass
Valuation Normalized P/E < 18 16.61 Pass
Dividends Current yield > 2% 4.2% Pass
  5-year dividend growth > 10% 0.9% Fail
  Streak of dividend increases >= 10 years 38 years Pass
  Payout ratio < 75% 65.9% Pass
       
  Total score   8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Consolidated Edison last year, the company has kept its eight-point score. The utility's run of dividend increases continues unabated, but the pace of that growth is extremely weak, and revenue actually fell slightly last year.

Even with all the topsy-turvy markets we've seen in the past several years, utilities have given investors a smooth ride. Along with fellow utilities Progress Energy (NYSE: PGN  ) and SCANA (NYSE: SCG  ) , ConEd was one of the least volatile stocks in the S&P 500 over the past 10 years. Combined with average annual returns of nearly 9% over that span, ConEd has been a great find for conservative investors.

But some investors are growing concerned that ConEd's shares have come too far and that its yield has dropped too low. Fool contributor Morgan Housel singled out the stock as showing that the market is in a dividend bubble, as ConEd hasn't had a yield this low in more than a decade. With 20% gains two years in a row, the stock looks due for a correction. Analysts recently agreed, downgrading ConEd along with peers Southern Company (NYSE: SO  ) and Dominion Resources (NYSE: D  ) based largely on high valuations that are nearly all-pervasive in the industry.

Back in January, ConEd beat analyst expectations on earnings, but revenue fell. That's not necessarily indicative of a trend, but it does give you a sense of ConEd's business sensitivity to changing conditions.

For retirees and other conservative investors, ConEd's high valuation and relatively low dividend yield compared to historical values raises some concerns. At this point, waiting for a more attractive price point may be the best way to play a decision to add ConEd's stock to your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills and teach you how to separate the right stocks from the risky ones.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add Consolidated Edison to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Dominion Resources and Southern. 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 Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1863546, ~/Articles/ArticleHandler.aspx, 11/23/2014 11:25:58 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 1 day ago Sponsored by:
DOW 17,810.06 91.06 0.51%
S&P 500 2,063.50 10.75 0.52%
NASD 4,712.97 11.10 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

11/21/2014 4:05 PM
ED $62.37 Up +0.25 +0.40%
Consolidated Ediso… CAPS Rating: ****
D $73.25 Up +0.58 +0.80%
Dominion Resources CAPS Rating: ***
PGN $5.10 Up +0.16 +3.24%
Paragon Offshore P… CAPS Rating: ***
SCG $56.52 Up +0.21 +0.37%
SCANA Corp CAPS Rating: ****
SO $47.25 Up +0.14 +0.30%
Southern Company CAPS Rating: ****

Advertisement