Consolidated Edison (ED -0.32%), or Con Ed to its customers, is a dividend machine with a 3.3% yield. However, that's not the real reason retirees should like this utility industry standout. The outlook for the utility sector is cloudy today, but Con Ed's forecast is pretty clear because it's already made the changes that will prepare it for the future -- and protect its ability to provide you with sustainable income. Here's what you need to know.
A changing industry
Carbon dioxide is the environmental evil of the day because of global warming. Utilities are among the largest emitters of carbon dioxide, and that puts them in a rough spot. The trend recently has been for utilities to shift their electricity production from dirty fuels like coal toward cleaner alternatives like natural gas or, even better, solar and wind power. For example, coal made up around 60% of utility giant Southern Company's (SO -0.24%) generation in 2010, but only 34% in 2015. Natural gas was the big beneficiary, going from 25% to 46%.
That's a huge change, but it still leaves Southern, and plenty of its peers, in the crosshairs of the longer-term shift toward renewable power. That includes customers putting solar panels on their rooftops and, in a way, becoming utility competitors via distributed power. The changes being made in the utility space are real and here to stay, and every utility has to find a way to deal with them.
However, none of this is a big deal for Consolidated Edison because its business is centered on delivering power to customers, for which it gets a fee. It basically leaves the generation to others and just passes those costs on to its customers. (It has a renewable power business, but it's a relatively small portion of the top line and is a valuable strategic asset -- more on that below.) In other words, it's already sidestepped one of the biggest risks in the utility space and doesn't much care what fuel is used to generate power. As long as it's delivering that power, it gets paid.
As for distributed power, Con Ed's home base is New York City and its surrounding suburbs. Because New York City is heavily weighted toward multilevel apartment buildings, it's unlikely customers are going to start putting solar panels on their rooftops in large enough numbers to dent its top and bottom lines over the near term. And unless a customer actually goes off the grid, Con Ed still has a line into their home. So, distributed power is an emerging utility issue that's not likely to be as big of a problem for Con Ed.
Growing the business
Con Ed looks like it's in pretty good shape for the future of the utility industry, relatively speaking. But it's also in great shape to keep growing its business. There are a couple of reasons for this. Most importantly, regulators are fairly generous when it comes to supporting electric infrastructure, which is the core of Con Ed's business.
To put some numbers on that, nearly 85% (roughly $9.3 billion) of the company's capital spending between 2017 and 2019 is set to take place in its regulated businesses. That should support continued dividend hikes in the years ahead, with regulators likely happy to allow higher rates for things like storm hardening.
Con Ed is also reaching out a little bit from its core. It has a transmission business that owns stakes in the types of large power lines that help get renewable power from where it's generated to where it's used. That business also operates in the natural gas pipeline and storage space, too. And it has a renewable power business that owns renewable power that gets sold under long-term contracts. These assets actually allow Con Ed to benefit from the shifts taking place in the power market while its core operations remain somewhat protected from the very same industry shifts. That said, these businesses are, even together, a relatively small part of Con Ed's operation, but they offer growth potential over and above its core business.
How about that dividend?
So, not only has Con Ed has increased its dividend every year for 43 years, but it looks like it has the business foundation to keep that streak going for years into the future. And that dividend record is really impressive, putting this utility in the company of iconic names like Coca-Cola and Procter & Gamble, which are at 55 years and 61 years, respectively.
Equally exciting, though, is the fact that Con Ed's dividend growth has been shifting higher lately. For example, the company's 10-year annualized dividend growth rate is a modest 1.5%, roughly half the rate of inflation. However, it increases to 2.2% over the trailing five-year span, and 2.9% over the trailing three years. Over the last year, meanwhile, the hike was 3.1%. That means this utility has gotten its dividend growth back in line with the historical rate of inflation growth -- something long-term income investors should be keenly focused on throughout their portfolios.
Con Ed isn't going to blow you away with dividend growth, but it's not likely to let you down, either. That's largely because it's well prepared for the future of power in the United States. And that makes it a reliable foundation upon which you can layer higher dividend growth names. It would be a good cornerstone addition to a diversified portfolio.
All of that said, the company's shares have run up lately, so Con Ed's stock is not cheap today -- the utility's PE is around 19.5 compared to a five year average of 16.5. Enterprise value to EBITDA, meanwhile, is high relative to the company's historical range. That's true despite it sporting a yield that's more than a full percentage point above the S&P 500 Index's yield. But this is a utility name I would put on your wish list with an eye for a yield closer to the 4% range. It's worth watching and waiting to get this one in your portfolio.