This Blue-Chip Dividend Stock Has Got Some Spark

Finding a high yield and high quality investment can be a difficult task. A higher yield can imply that a company's dividend is at risk. To screen against this, you can watch for a stable underlying earnings base, a modest payout ratio and a record of increasing dividends year after year. One blue-chip stock that fits that description is Edison International , a high-quality utility stock with a 4.6% dividend yield. Edison International is one of the nation's largest electric utility holding companies and is the parent company of Southern California Edison, which delivers electricity to 15 million people in California. In addition, Edison International is also the parent of Edison Energy, which is a global energy advisory firm. The company has a $22 billion market capitalization and generates about $14 billion in annual revenue. Edison International has not only paid, but also increased its dividend for 17 consecutive years. Last year, the company generated strong profits and impressive consistency, given the coronavirus pandemic's impact on the U.S. economy. For the quarter, adjusted core earnings equaled $451 million or $1.19 per share compared to $355 million or $0.99 per share in Q4 2019. Results improved during the quarter due to rate increases and lower expenses, which were partially offset by an increase in the number of shares outstanding. For the year, adjusted core earnings equaled $1.7 billion or $4.52 per share compared to $1.6 billion or $4.70 per share in 2019. Even though company-wide earnings were up, earnings per share were lower due to a higher share count. This was the result of equity offerings in July 2019 and May 2020. Further, the company also plans to issue up to $1 billion of common equity in 2021. Edison International is not yet providing 2021 earnings guidance, but we are expecting the company to earn about $4.58 per share this year. Wired for Growth Over 2010 through 2020, Edison International grew its earnings-per-share by roughly 3% per year. This result was driven by an uptick in margins, offset by a slow top line growth rate and an increasing share count, which is typical of a utility. Edison International's regulated utility business is a slow grower, but the business is a very stable cash cow. Its non-regulated segments, such as renewable energy production via methods ranging from biomass to wind energy, has the potential to grow at a somewhat higher rate. Because it's not regulated, this business can be more cyclical than the regulated utility operations. Edison has put a focus on renewable energy when it comes to energy production over the last decade. Among other moves, Edison has also sold coal power plants and shut down a nuclear power plant. This was, at least partially, based on heavy regulation in California, where Edison operates, as California no longer allows utilities to generate electric power from coal. We are forecasting mid-single digit earnings-per-share growth for Edison, bumping the current expected EPS of around $4.58 to $5.95 after five years. Insulated From Downturns Edison International is one of California's largest utilities. Due to the regulated nature of the utilities business, Edison International does not have to worry about significant competitive pressures. The company's operations have been recession-resilient in the past, and this will likely remain the case going forward, as consumers need electricity no matter how well the economy is doing. Edison International remained highly profitable during the last financial crisis, posting EPS of $3.68, $3.24 and $3.35 in the 2008 through 2010 stretch. Meanwhile, the dividend continued to increase throughout this period. Despite the slow growth of EPS, Edison International has grown its dividend very consistently throughout the last decade. This, however, was only possible due to an increase in the company's dividend payout ratio. Last year, Edison International had a dividend payout ratio of 57%. Although the payout ratio has risen noticeably, it's important to point out that a payout ratio under 60% is still not excessive for a utility. Moving forward we would anticipate dividend growth to more or less match earnings growth over time, keeping the payout ratio somewhat stable. Based on a current share price near $58, a $0.6625 quarterly dividend and around $4.58 in expected EPS this year, Edison International is trading hands with a 4.6% dividend yield, a 12.7 price-to-earnings ratio and around a 58% payout ratio. If earnings were to grow by just over 5% annually, you might expect Edison International to earn $5.95 or so after five years. Over the past decades, shares have traded with an average valuation near 14-times earnings. If we discount this to the current multiple, baking in a bit of caution, this implies the potential for a future share price of just over about $75. If the dividend were to grow at a slightly slower rate, allowing the payout ratio to decline slightly as well, you might expect the payout to reach $3.10 or so after half a decade. In total you would anticipate collecting ~$14.60 in cash dividends during the next five years. Adding together the potential share price and dividends you reach a collective value of just under around $90, keeping in mind that you get a very precise number with these calculations, but this is only one possibility out of a wide range of potential outcomes. Against the current share price near $58, this implies the possibility of 9.2% total annualized returns. With its recession-resistant business model and steady dividend growth, Edison International is a top utility stock for income investors.

This Blue-Chip Dividend Stock Has Got Some Spark

Edison International is a well-run utility with a 4.6% dividend yield.

Columnist Conversation

This Weekend on Real Money

Stocks Under $10

My Very Best Pick for the Next 12 Months

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.