Is Consolidated Edison a Buffett Stock?
Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Consolidated Edison (NYS: ED) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
Consistent earnings power.
Good returns on equity with limited or no debt.
Management in place.
Simple, non-techno-mumbo-jumbo businesses.
Does Consolidated Edison meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Consolidated Edison's earnings:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, Consolidated Edison's net income has been pretty consistent.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison among peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
Company | Debt-to-Equity | Return on Equity (LTM) | Return on Equity (5-year average) |
|---|---|---|---|
Consolidated Edison | 93% | 10% | 9% |
Exelon (NYS: EXC) | 97% | 19% | 22% |
Duke Energy (NYS: DUK) | 84% | 9% | 6% |
Dominion Resources (NYS: D) | 166% | 14% | 18% |
Source: Capital IQ, a division of Standard & Poor's.
Consolidated Edison tends to generate modest returns on equity with moderate amounts of debt.
3. Management
CEO Kevin Burke has been at the job since 2005. Prior to that, he held a number of other jobs at the company over the years, including COO.
4. Business
Electric and gas utilities aren't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Consolidated Edison, we've learned that, while it doesn't particularly generate high returns on equity with limited debt, it does exhibit several of the characteristics of a quintessential Buffett investment: consistent earnings, tenured management, and a straightforward industry.
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At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada.Motley Fool newsletter serviceshave recommended buying shares of Exelon and Dominion Resources.Motley Fool newsletter serviceshave recommended creating a write covered strangle position in Exelon. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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