In my blog post about diversification, I showed to you, my dear reader, the asset allocation of my Vrijheid Fonds. I wrote: “At this moment I have not invested in the Utilities sector. I’m looking to increase my exposure in this sector. With some high yields in this sector it can be interesting (but first I have to do my homework 😉 )”
So it is time to do some homework!
In the utilities sector a lot of companies can be found. But for my Vrijheid Fonds, I only want the best. And a company that paid dividend for more than 100 years !! must be good. So lets take a look at one of the dividend Zombies. If you do not know what I’m talking about, read this blog post.
This analysis is on Consolidated Edison INc. (ED).
Company (from google finance): Consolidated Edison, Inc. (Con Edison) is a holding company, which owns Consolidated Edison Company of New York, Inc. (CECONY), which delivers electricity, natural gas and steam to customers in New York City and Westchester County; Orange and Rockland Utilities, Inc. (O&R) (together with CECONY referred to as the Utilities), which delivers electricity and natural gas to customers primarily located in southeastern New York, and northern New Jersey and northeastern Pennsylvania, and competitive energy businesses, which provide retail and wholesale electricity supply and energy services. CECONY’s business operations are its regulated electric, gas and steam delivery businesses. O&R’s business operations are its regulated electric and gas delivery businesses.
Can I explain this to a 10-year old? What Does This Company Do?
Consolidated Edison, commonly known, as Con Edison of Con Ed is a company that provides electricity, gas and steam to factories and houses.
Dividend Aristocrat: ED is paying Dividend for more than 100 years in a row! And Richard Berger on Seeking Alpha called it a Dividend Zombie. It also raised their dividend for more than 40 years in a row. Its number 54 on the CCC-list from David Fish! And is a 2 star stock on Morningstar.com. This looks like a fine and solid investment. That’s a Pass!
Dividend Yield > 2.5%: The dividend Yield of ED is 3.7%. This is above the industry average of 3.0%. But it is below the 5 years average (4.3%). The Yield is above the requirements of the Pollie-Code, and therefore it passed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 60%. This is below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. And that is what we are looking for! If we take a look at there history we can see that they managed to lower their payout ratio the last decade. And this is good news. So also passed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3, 5 and 10 years are 2.4, 1.6, 1.3 and 1.1. With a 3-years average over 1%. This is not that much, and is a little bit disappointed. But is above the requirements of the Pollie-code, so it is a pass.
P/E-ratio < 15: ED has a current P/E ratio is 16.3. And is higher then their 5 years average (15.4). It is below the industry average of 22.2%. If we look at the current ratio we can say that is below the requirement of the Pollie-Code. Therefore this is a pass on the Pollie-code. But we have to do some further digging, because the signals say ED is overvalued.
EPS > 0: The EPS is 4.23. So ED also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 10.0%. Another pass.
Market Cap. > 100M: No problem at this point. ED is one of the largest investor-owned energy companies in the United States. The Market cap. Is more than $ 19.334 Mil. You guested is already: Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 5.1. This is therefore a fail on the Pollie-code.
Stock price 52wk high-25%: The 52 wk. high and low are: 69.15 and 52.23. This means that ED will be in my buying zone when the stock price is below 64.92 ((69.15-52.23)*0,75 + 52.23). At this moment ED is trading for $69.10. Therefore it is a fail on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for ED is 0.19.
Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. On the Internet their 2 formulas can be found.
Stock Value (P) = D / (k-G) or Stock Value (P) = (D*(1+G))/ (k-G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
When applied to ED with D = $2.52, G = 5%, and k = 10% (corporate bond rate 2% + inflation rate 2% + equity risk premium 6% (very solid company), the intrinsic value will be around $50. At this moment ED is trading above its intrinsic value.
Conclusion: When I look at the analysis, ED passed 8 out of 10 from the Pollie-code! The Pollie-code failed at the Chowder rule and stock price. If we take a look at Gordon Growth Model we can see that the stock is trading in the overvalued zone.
In my analysis you can read that the growth rate is around 1%. This is (very) low. This growth rate translates into the dividend payment doubling every 72 years on average. However if we check the dividend history of ED, they managed to double their dividend every 20 years. This, combined with the knowledge that they managed to lower their payout ratio, feels good. The downside at this moment is that ED is trading in the overvalued zone and very close to their 52 week high.
ED is definitely a great stock! And will be a very nice addition to my portfolio. It is a stock with a high yield and as an utility stock it is safe. I certainly put ED on my watch list for my Vrijheid Fonds.
What are you – the readers, thoughts on Consolidated Edison Inc.? Is it a buy, do you own it? Please comment on my analysis and thanks for stopping by!
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