Updated March 17th, 2021 by Bob Ciura
The Dividend Aristocrats are a group of stocks in the S&P 500 Index with more than 25 years of consecutive dividend increases. These companies have high quality business models that are proven and have a remarkable ability to grow dividends every year regardless of the economy.
We believe the Dividend Aristocrats are among the highest quality stocks to buy and hold for the long term. With that in mind, we’ve made a full list of all 65 Dividend Aristocrats.
You can download the full list of Dividend Aristocrats along with key metrics like dividend yields and price / earnings ratios by clicking the link below:
The list of Dividend Aristocrats is spread across multiple sectors including consumer staples, finance, industrials, and healthcare. One group that is surprisingly underrepresented is the utilities sector. There are only 3 supply stocks on the Dividend Aristocrats’ list, including Consolidated Edison (ED).
The fact that only three utilities are on the Dividend Aristocrat list may come as a surprise, especially since utilities are widely viewed as stable dividend stocks. Consolidated Edison is as consistent a dividend stock as it comes.
The company has had more than 100 years of constant dividends and 47 years of annual dividend increases. This article explains what makes Consolidated Edison an attractive stock for high-income investors.
Consolidated Edison is a large-cap utility. The company has annual sales of approximately $ 12 billion and a market capitalization of nearly $ 25 billion.
The company serves over 3 million electricity customers and an additional 1 million gas customers in New York. The company operates electricity, gas, steam transmission and green electricity businesses.
2020 was an uneven year for Consolidated Edison. In the fourth quarter, sales rose 0.3% to $ 2.96 billion but fell short of estimates by $ 190 million. Adjusted net income of $ 253 million, or $ 0.75 per share, compared to adjusted net income of $ 288 million, or $ 0.87 per share, last year.
For the full year, sales decreased 2.6% to $ 12.2 billion. Adjusted earnings of $ 4.18 per share were down 4.6% from 2019. Adjusted earnings per share included an impairment loss of $ 0.95 related to ConEd’s investment in the Mountain Valley Pipeline. The warmer winter weather was a $ 0.03 headwind for ConEd’s New York operation.
Additionally, COVID-19 reduced results by $ 0.03. Total electricity revenue improved 2% and 0.4% for the quarter and year. Gas was flat in the fourth quarter but was down more than 5% for 2020. The company expects adjusted earnings per share in a range of $ 4.15 to $ 4.35 for 2021, an increase of 1.7% as of mid-2019.
With the US economy gradually improving and weather conditions returning to normal, we expect ConEd to continue its modest growth pattern in 2021. ConEd should continue to generate modest profit growth each year through a combination of new customer acquisitions and rate increases.
Profit growth in the utilities industry tends to mimic GDP growth. We expect Consolidated Edison to grow earnings per share by 3.5% per year over the next five years. This is just below the company’s own expectations for adjusted EPS growth of 4% to 6% per year for five years.
The growth drivers for Consolidated Edison are new customers and rate increases. One benefit of operating in a regulated industry is that utilities can periodically increase rates, which in effect ensures steady growth.
Source: Investor Presentation
Consolidated Edison assumes that the rate base can be increased by 6% every year through 2023. This is a natural way for a utility company to have steady sales and earnings growth.
A potential threat to future growth is rising interest rates, which increase the cost of capital for companies that leverage debt, such as debtors. B. Utilities, could increase. Fortunately, the Federal Reserve has cut rates several times this year, making it unlikely to reverse policy and raise rates. Lowering interest rates will help companies that rely heavily on debt financing, such as: B. Utilities so investors don’t have to worry about Consolidated Edison in a falling interest rate cycle.
Even if rates go up, Consolidated Edison is in a tough financial position. It has an investment grade rating of BBB + and a modest capital structure with balanced debt maturities over the next several years. A healthy balance sheet and strong business model help keep Consolidated Edison’s dividend safe. Investors can reasonably expect low, single-digit dividend increases per year, in line with the company’s annual growth per share.
Competitive advantage and recession performance
Consolidated Edison’s main competitive advantage lies in the high regulatory hurdles facing the utility industry. Electricity and gas supply are necessary and vital for society. As a result, the industry is heavily regulated so that a new competitor can practically no longer enter the market. This gives Consolidated Edison a high level of security.
In addition, the utility business model is very recession-resistant. While many companies posted sharp profit declines in 2008 and 2009, Consolidated Edison held up relatively well. Earnings per share during the Great Recession are shown below:
- 2007 earnings per share of $ 3.48
- 2008 earnings per share of $ 3.36, down 3%
- 2009 earnings per share of $ 3.14, down 7%
- 2010 earnings per share of $ 3.47, up 11%
Edison’s consolidated earnings declined in 2008 and 2009, but rebounded in 2010. The company continued to make good profits even during the worst economic downturn. That resilience allowed Consolidated Edison to keep increasing its dividend each year.
The same pattern continued in 2020 when the U.S. economy slipped into recession due to the coronavirus pandemic. Last year, ConEd remained highly profitable, which enabled the company to increase its dividend again.
Valuation and expected return
Using the current share price of ~ $ 72 USD and the forecast for mid-2021, the stock is trading at a price-to-earnings-ratio of 16.9. This is above our fair value estimate of 15.4, which is the average 10-year price-earnings ratio for the stock.
As a result, consolidated Edison stocks appear slightly overvalued. If the stock valuation is based on the fair value estimate, the corresponding multiple contraction would decrease the annual return by -1.8%. This could be a headwind for future returns.
Fortunately, the stock could continue to generate positive returns for shareholders through earnings growth and dividends. We expect the company to grow earnings by 3.5% per year over the next five years. In addition, the share has a current dividend yield of 4.3%.
Utilities like ConEd are valued for their stable dividends and secure payouts. Two other utility companies on the Dividend Aristocrats’ list are Atmos Energy (ATO) and NextEra Energy (NEE).
All in all, Consolidated Edison’s total expected return on investment could look like this:
- 3.5% profit growth
- -1.8% multiple inversion
- 4.3% dividend yield
Added and Consolidated Edison is expected to generate an annual return of 6.0% over the next five years. This is a decent return, but not enough to warrant a buy recommendation.
Income investors may find the return attractive as the current return is more than double the average return on the S&P 500 index. The company has forecast a payout ratio of just over 70% for 2021, which indicates a sustainable dividend. Growth investors or those looking for a higher return are unlikely to be drawn to consolidated Edison stock, however.
Consolidated Edison can be a valuable stake for high income investors such as retirees because of its dividend yield of 4.3%. The stock offers safe dividend income and is also a dividend aristocrat, which means it should increase its dividend every year. Therefore, risk averse investors who are currently primarily looking for income, such as B. Retirees, see a higher value when buying utility stocks like Consolidated Edison.
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