Electric and gas utilities were once known as "widow and orphan" stocks. Because of their stable business models and consistent dividends, utilities were stocks that offered safety to those who could not afford to take huge risks in the market. This reputation still holds true today.
Consolidated Edison (ED) -- or ConEd, for short -- has a long track record of steady dividend payments. It raises its dividend like clockwork each year. Indeed, the company recently hiked its dividend another 3.5% effective with the March 2019 payment. The company has now increased its dividend for 45 years in a row, and has paid a dividend to shareholders for over 100 years. ConEd's dividend growth history places it on the exclusive list of Dividend Aristocrats, a group of stocks in the S&P 500 Index with 25+ consecutive years of dividend increases.
ConEd offers a safe dividend and will continue to pay its dividend even during a recession. Given the recent volatility in the stock markets, ConEd's rock-solid dividend becomes that much more valuable for income investors.
Business Overview and Growth Prospects
Consolidated Edison, Inc. is one of the largest U.S. based utilities, with $50 billion in assets generating $12 billion in annual revenue. It operates through the following subsidiaries: Consolidated Edison Company of New York, Inc. (CECONY), a regulated electric, gas, and steam utility in New York City and Westchester County, New York; Orange and Rockland Utilities, a regulated utility serving customers in southeastern New York and northern New Jersey; a renewable energy arm called Con Edison Clean Energy Businesses, Inc.; and Con Edison Transmission, Inc., which invests in electric and natural gas transmission projects.
In all, ConEd serves over 3 million electric customers and another 1 million gas customers in New York. The company's recent financial results show that it is a highly stable business. In the most recently reported quarter, its adjusted earnings per share increased 6.8% to $1.57. Over the first three quarters of 2018, adjusted earnings per share increased 7.2%, to $3.56.
Future growth will be cemented by customer growth, as well as periodic rate increases. Last year, ConEd received approval to raise its rates by 6% per year in both the electric and gas delivery segments for the next three years. ConEd is also pursuing growth through investments in new technology. For example, the company initiated its biggest investment program in its history last year. It will install more than 5 million smart meters in its network until 2022 for a total cost of $1.4 billion. This will help customers optimize energy use while the company will be able to realize lower peak demand and thus reduce its operating cost.
Investors can reasonably expect low-to-mid single digit earnings growth from ConEd on an annual basis, in the 3%-5% range. This will easily allow ConEd to continue raising its dividend each year, as shareholders have come to expect.
Competitive Advantages Fuel Steady Profits
Perhaps the most attractive aspect of high-quality utilities like ConEd is their stable business model. Put simply, everyone needs to keep the lights on. This holds true, even during recessions and market downturns. Electricity and gas are vital and necessary services, which means ConEd will see a certain level of demand every year, no matter whether the economy is expanding or in recession. That is how the company has maintained a dividend track record of over 40 years of annual increases.
Even better, there are few competitive threats facing ConEd's business today. Since electricity is a matter of national security, the utility industry is highly regulated. Some investors might be reluctant to invest in such a heavily regulated industry. And while it is true that utilities should not be bought for growth, the trade-off is that the regulated nature of the industry presents tremendous barriers to entry. It would be nearly impossible for a new competitor to enter the electric and gas utility business to compete with ConEd, given the huge costs and regulatory hurdles involved. This virtually eliminates the threat of competition, and that level of certainty helps secure ConEd's profits and dividends.
In the stock market, nothing is guaranteed. At times, companies pay dividends that later have to be cut or eliminated if the underlying business enters a downturn. But the utility sector is a rare example of an industry that should continue to pay dividends each year, regardless of the economic climate.
Power Up Your Dividend Income
ConEd has a very secure dividend payout. For 2018, the company expects its adjusted earnings per share to be in the range of $4.25 to $4.35 a share. After providing third-quarter results, ConEd hiked the lower-end of its earnings guidance. Previous forecasts called for earnings in a range of $4.15 to $4.35 per share. Based on new earnings guidance, ConEd is set to generate earnings of $4.30 per share at the midpoint of the guidance range.
With a 2018 dividend payout of $2.86 per share, ConEd is expected to have a dividend payout ratio of 67%. In other words, the company is projected to distribute roughly two-thirds of its earnings in 2018 to shareholders. This is a manageable dividend payout ratio that secures the current payout, and provides room to increase the dividend at a rate aligned with future earnings growth.
Another factor helping to secure ConEd's dividend is its strong balance sheet. Investors should be wary of buying shares of highly-indebted companies, particularly in a rising interest rate environment. Companies that take on too much debt might be blindsided by a recession, and may have to cut their dividends if interest costs rise going forward. This is largely not a concern for ConEd shareholders. The company has a manageable level of debt, and a strong credit rating of BBB+ from S&P and Baa1 from Moody's. It also has a stable outlook from all three major credit ratings agencies. An investment-grade credit rating helps lower ConEd's cost of capital, which leaves more cash flow available for dividends to shareholders.
The Bottom Line
ConEd stock has a 3.9% dividend yield, which towers above the average dividend yield in the S&P 500 Index. It also offers the security that few other companies can match. Even during the Great Recession, ConEd not only kept its dividend intact, it continued to raise its dividend each year. The company's profits should hold up extremely well, even in a recession. This makes ConEd one of the safest stocks in the S&P 500, and an ideal holding for risk-averse income investors such as retirees.
(This article was originally sent to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Nick McCullum, Peter Tchir, Chris Versace and others.)