A Brief History of Consolidated Edison's Returns
Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:
- Earnings growth.
- Changes in valuation multiples.
In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Consolidated Edison (NYS: ED) .
Edison shares returned 143% over the past decade. How'd they get there?
Dividends pulled most of the weight. Without dividends, shares returned 44% over the past 10 years.
Earnings growth was ho-hum. Edison's normalized earnings per share grew by an average of 1.8% per year from 2001 until today. That's low, but it's about what investors should expect from utilities: earnings growth that roughly tracks the rate of inflation.
But if earnings were so meek, why were returns so strong? One reason is Edison's dividend policy. The company pays out the vast majority of its earnings as dividends. Numerous academic studies show this is the best capital-allocation policy most corporate managers should follow (alas, most don't). Rather than squander profits on expensive acquisitions or ill-timed buybacks, writing shareholders a check four times a year has the best chance of creating long-lasting shareholder wealth. Edison -- along with other utilities like Southern Company (NYS: SO) and Dominion Resources (NYS: D) -- attests to that.
Here's another reason:
Source: S&P Capital IQ.
Edison produced strong shareholder returns over the past decade largely because shares weren't overvalued 10 years ago. This might seem obvious, but overvaluation 10 years ago is the main reason the broader market has stagnated for the past decade -- a fact that has discouraged many investors. One of the most important aspects of successful investing is understanding that starting valuations determine future returns. Buy a good company at a dear price, and returns will be low. Buy an ordinary company at a good price, and returns will be great. Edison's returns over the past decade is one of the best examples of that lesson.
Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.
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At the time this article was published Fool contributor Morgan Housel owns shares of Edison. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Dominion Resources and Southern. 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.
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