Thursday, July 3, 2014

ED Stock Analysis -- Consolidated Edison, Inc.

ED is a slow and steady growing utilities company.  Without doubt, it has massive competitive moat, and also shares the common features of utilities companies.  This article gave thorough analysis of this company and I can't agree more.  I thus won't go detail of this company.

As a dividend growth investor, I am more concerned about a company's annual dividend, payout ratio, and potential dividend growth rate.  ED's annual dividend is currently at $2.52.  Its payout ratio is 60%.  Both are decent and meet my criteria.  But its super low dividend annual growth rate prevents me from taking action of purchasing at current market price dip.

 


 (Yahoo data)

From above charts, In history since 1970, ED has 3 years dividend cut.  This is very respectable.  However, it is also obvious that ED's annual growth rate is too low.  Since 1992 till now, about 20 years, its annual dividend growth rate has maintained at lower than 3%. Recent 10-year moving average rate is even lower at 0.9%.  Even thought its current yield rate is high at 4.40%, with annual dividend growth rate crawling at 0.9%, it takes forever to reach annual return rate at 10%.

Another highlight is regarding capital expenditure.  From its financial report, annual cap spending is growing.  During the company's annual meeting held last week on May 19 it was noted that the company's aging New York infrastructure alone requires $10 billion of repair work. The statement tallies with the data from annual reports.


(Morningstar data)

Free cash flow has been improved in recent 10 years, turning negative to positive, but still remain at a low level and lower than dividend payments. (One of my criteria is free cash flow is higher than dividends.) Free cash flow is low because operating cash flow is flat in growth while capital spending goes high.  This will deserve further study.  But I think it's related to the nature of utilities industry.

In summary, considering its massive competitive moat and guaranteed stable customers, I'll consider to initiate a small portion if the price drops to $50.40 (yield rate at around 5%.)  If it really drops to mid-40's, as this article hopes, I'll purchase more shares.


Full disclosure: I don't own shares of ED.