Consolidated Edison stock has been in the red for the last 12 months, underperforming Mr. Market and its direct competitors. The utility has been hit hard by hurricanes and economic recessions alike, and some investors are wondering whether Con Ed's dividend is the next to be cut. Here's what you need to know.
The end of a dividend?
Con Ed's latest earnings have been a mixed bag. Its Q4 2012 earnings fell $0.04 below analysts' predictions while Q1 2013's numbers clocked in $0.04 above expectations. Over the past year, Consolidated Edison stock has dropped 8.3%, an embarrassing return compared to the S&P 500's 22% profit, and more than 12 percentage points below the Dow Jones U.S. Utilities Index.
But in the same period, the utility upped its dividend 1.65%, and over the last 10 years has steadily grown its distribution by 9.8%. Its most recent increase stands in stark contrast to two of its competitors, Exelon and Atlantic Power . Exelon announced in February that it would be cutting its dividend by 40%, while Atlantic Power gave its own distribution a whopping 66% haircut. Both utilities had overextended themselves, and their dividend reduction paved the way for more frugal and focused financial management.
Currently, Consolidated Edison stock sports a substantial 4.3% yield. That's still lower than Exelon's 6.2% and Atlantic's 17.9% yield, although Atlantic's is primarily a result of its 62% drop for 2013. But despite Con Ed's relatively low yield, there are three reasons its substantial dividend is here to stay.
1. Dabbling in debt
Utilities are capital intensive corporations, and low interest rates have pushed many utilities to take on excessive amounts of debt. While there's little doubt that extra cash can fuel future earnings, Con Ed has used debt conservatively. Its debt-to-equity ratio clocks in at just 1.01, lower than 60% of its peers. At 0.29, its debt-to-asset ratio tells a similar tale. For consolidated Edison stock, debt is no dividend destroyer.
2. Maximizing margins
Margins tell investors how much wiggle room a corporation has with its wealth, and Con Ed is making the most of its margins. At 36.2%, its gross margin is higher than 71% of its competitors, while its 18.8% operating margin is also above average. With sales up 16% in the last year, Con Ed is keeping a significant portion of its sales.
3. Regulation elation
Consolidated Edison stock is primarily pushed and pulled by its regulated earnings. Almost 95% of its $3.88 2012 EPS came from its regulated utilities, with just under 90% from Con Edison of New York (CECONY) alone. Looking ahead, the subsidiary expects a 1.3% annualized growth rate in electricity use over the next five years, with 4.3% growth in natural gas use. Regulated earnings are slow and steady, the exact kind of financial drip feed that dividend distributors love.
Can Consolidated Edison Stock cut it?
Con Ed's recent stock dip is more a factor of macro moves than any company-specific signs of trouble. With solid fundamentals and a sustainable dividend, Consolidated Edison stock is a solid investment option for any income investor.
There are many different ways to play the energy sector, and The Motley Fool's analysts have uncovered an under-the-radar company that's dominating its industry. This company is a leading provider of equipment and components used in drilling and production operations, and poised to profit in a big way from it. To get the name and detailed analysis of this company that will prosper for years to come, check out the special free report: "The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.
The article 3 Reasons Consolidated Edison Stock Dividends Are Here to Stay originally appeared on Fool.com.
Fool contributor Justin Loiseau has no position in any stocks mentioned, but he does use electricity. You can follow him on Twitter @TMFJLo and on Motley Fool CAPS @TMFJLo.The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.