Recent Purchase – Consolidated Edison

I recently reloaded my Sharebuilder (now Capital One Investing…I know, it will take some time getting used to) with some extra capital and was ready to make a purchase.  We recently built a small watch list that had me focused on buying two stocks I already own.  But man, what a difference a week can make and after some time, a new stock entered the picture for me.  This is a stock Lanny and I have been watching for a while and are huge fans of the stock.  Not only is it a Dividend Aristocrat, but it is one of the five stocks we consider a foundation stock for any dividend portfolio.  Unfortunately my title gave the purchase away, so let’s see why I initiated a position in Consolidated Edison this week.

So why Consolidated Edison (“ED”) and why now?  Let me start with the first question.  ED is a Dividend Aristocrat that has increased their dividend for 41 consecutive years.  A  big check for me.  I don’t own all Dividend Aristocrats, I don’t think any dividend investor does.  But since our min goal is to focus on building a growing income stream, why wouldn’t being an Aristocrat be a huge plus?   ED also performed well in several of the metrics in our stock screener and a few of the extra metrics Lanny and I typically look at while researching a stock.

  1. ED’s current and forward PE ratios are ~16 and 15, respectively, depending on the source of the information and earnings estimate.  Both of which are lower than the broader market’s PE ratio.  Since I own two other utility stocks, AEP and FE, I wanted to compare ED’s metrics to my other holdings to determine ED’s place in the industry.  ED was in line with AEP (~15.5 current PE and ~14.75 forward PE) and has a much better current PE ratio than FE (~47 current PE and ~13 forward).  So what did I gather from these comparisons?  ED is trading at a discount to the broader market and is in line with others in the industry.
  2. As I mentioned before, ED has a history of increasing its dividend.  41+ years is more than enough to pass this metric on our stock screener.
  3. We typically look for stocks with a payout ratio below 60%.   This is one of the few dark spots for ED in our analysis, as their current payout ratio is ~70% and their forward payout ratio (using estimated earnings of $3.96 from TheStreet.com) is ~65%.  While ED’s payout ratio is above the threshold, I am not as concerned about this metric considering management’s long history of paying and increasing their dividend, the fact the company has maintained a higher payout ratio for an extended period of time, and that the payout ratio just barely sits above our threshold.  I am willing to make an exception if ED performs well in other metrics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
  4. Share buybacks?  Not so much.  While comparing the March 31 10-Qs from the last year, their shares have decreased by .006%, which makes sense considering the company’s high payout ratio and history of increasing dividends.  While we love to see company’s buyback their shares, as it provides a great benefit to dividend investors, it is not the end of the world if they do not.  The dividend is the most important factor to me.
  5. Lastly, let’s take a look at the dividend growth rate for ED, and this is probably the most controversial metric for the company.  ED’s three and five year dividend growth rate’s are a dismal 2.04% and 1.56%, respectively.  Wait a second, with such a low dividend growth rate (one that is below inflation), why did I still consider purchasing ED.  When I reviewed my portfolio at the end of last year, I set a rule for all future investments.  While both are ideal, all my future investments had to have either a current dividend yield or dividend growth rate that is greater than my portfolio’s current metrics.  At the time, my average dividend growth rate was about 7.5% and my current portfolio’s yield is 3.67%.  ED’s current dividend growth rate is obviously below my portfolio’s average; however, ED’s 4.3% yield is greater than my current yield, so I was willing to overlook this low dividend growth rate.  Some of you will probably disagree with me on this point, so if so, please let me know how you assess the high dividend yield, low dividend growth rate stocks!

Hopefully that answers the first question as to why I purchased ED.  It is a solid dividend stock for a long-term portfolio, music to my ears!  The second question I asked myself was why now?  It has been a tough 2015 for ED and the broader utilities industry, as ED is down 7.5% YTD.  And this week in particular ED has fallen nearly 3%.  So with some extra capital to spare, I finally decided to initiate a position in ED, purchasing 16 shares, adding $41.60 in projected annual dividend income to my portfolio.  Barring a dramatic increase in price, I will be adding to this position in the near future and would be satisfied with holding anywhere between 30-40 shares in the company going forward, so get ready for that future purchase article!

Let me provide a post-purchase update on some of my 2015 goals.  I set a goal of investing $15,000 of new capital into my portfolio (not including DRIP of 401(k) contributions).  After this purchase, my year to date total increased to $6,485, or 43% of my goal.  It looks like I am right on track considering we are about 42% through 2015.  Adding the 16 shares increase my projected forward dividend income to $2,099.  Come on, why couldn’t it have pushed me over $2,100!  Regardless, I am taking steps towards reaching my goal of $2,750.  I still have room to go, but adding a stock yielding 4.3% definitely helps.  Finally, I purchased ED in my Roth, bringing my 2015 contribution total to %1,092, which is well under the limit.  But I will make sure to max out my Roth before the end of the year.

So there we have it, another purchase in the books.  Man do I love adding Dividend Aristocrats to my portfolio!  What do you think of my purchase?  Would you have purchased Consolidated Edison?  Or would you have gone Lanny’s route and purchased a different Aristocrat?

Bert

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11 thoughts on “Recent Purchase – Consolidated Edison

  1. Hum, I can’t say ED is not a good company. But I think there are better opportunities out there. As far as you’re comfortable with your buy though, that is what matters.

    Cheers,

    Mike

    • Mike,

      I cannot completely disagree with you here. There are plenty of great opportunities in the market right now and I could have probably picked 10 different companies and been okay. There is a little method to my madness here, and you guys will see as the next couple of months take shape. I have been reviewing my portfolio recently and there are some moves to be made, so this was one of many transactions that I feel will make my portfolio stronger. I decided not to disclose more because I wanted to get everyone’s thoughts on the Consolidated Edison purchase!

      Thanks for stopping by. Have a great weekend Mike. As always, it is great to hear from you.

      Bert

  2. As long as you are comfortable with the buy than that is all that matters. Like the poster above, I think there are better options in the market but that’s my opinion. As long as ED keeps raising that dividend, then you’ll do just fine.

    • Thanks ADD. As I said in my response above, there are a ton of great opportunities out there. I just picked one of the many low hanging fruits that the market gave us this week. But you mentioned it in the last sentence, what brought me to ED was that the company has consistently raised their dividend over the last 41 years. Even though the increases are not the greatest, I am very happy with the larger yield plus growing income stream.

      Have you bought any stocks this week with the downturn? Who is on your watch list?

      Bert

  3. Hi Bert, congrats on your buy! I looked at ED before. I agree that the yield is appealing, and 41 years of increasing dividends is amazing, especially for a utility. And FAST Graphs shows that ED is at fair value, which is always nice.

    But your discussion on the DGR is exactly why I decided to stay away. The historical inflation rate is ~3.1%, IIRC. I am scared of any stock that offers a long-term DGR of less than that. Sure, when you’re reinvesting dividends, your holdings will probably compound at a rate higher than inflation. But someday, that glorious day will come where DRIPping is turned off, and you live solely on the dividend income. Then what? Your holding’s income will slowly and surely lose to inflation. That loss of purchasing power is a Bad Thing to me. It’s a losing battle in my eyes, and one I don’t want to fight. Especially when I never want to sell a stock again, owning a stock with a DGR less than inflation won’t work for my objectives. Hence, I decided to pass; for electric utilities I’m considering WEC and NEE instead, which have much higher DGRs.

    • Developer.

      Thank you very much and thanks for stopping by! ED definitely has some positive and negative aspects, so I understand any DGI decision to stay away from the stock. You raise a great point about what happens when I turn the DRIP off and it was one that I have never really considered until now. Because yeah, re-investment definitely increases the value of the dividend growth because you are receiving additional benefits for X number of years (you can take the present value of the extra shares, etc., and realize just how much you will get). But once you turn that off, it is just a nominal dollar amount, and once you factor in inflation for the real rate of the income stream it’ll be much lower. Quickly thinking about it for my recent decision, I am happy that the current yield is at least higher than the inflation rate. IF my income is not going to grow, at least I am realizing a positive real rate here. If the yield were lower, I would not have touched this stock with a ten foot pole.

      Thanks for the great comment DD. You have given me something to consider going forward with my investment decisions. I definitely learned something today!

      Bert

  4. Bert,

    Not a big fan of ED, but it’s your money and your opinion is the only one that counts. 🙂

    Generally speaking, the sum of a stock’s yield and its long-term dividend growth rate will be a fair proxy for its total returns, assuming a static valuation. So you’re looking at somewhat poor long-term returns here if ED’s future is a lot like its past (factoring out the overvaluation there during some stretches). And, like DD mentioned, your income will slowly lose purchasing power over time.

    I’m not a big fan of utilities in general, but I think there are better utilities out there.

    Best of luck with it, though. No doubt they’ll likely continue increasing that dividend for the foreseeable future.

    Cheers!

    • Thanks for the comment DM. I know you aren’t the biggest utility fan, so I was eagerly awaiting your comment haha All of you commentators have brought up great points about great points about the dividend growth rate and I knew that they were coming. Your equation is spot on, and EDs rate using their recent growth rates (1, 3, or 5 year) brings the total return to about 5%-7.5%. The greatest, heck no, and I know there are some other great opportunities out there. This move just fits what I am looking for in my portfolio right now, as I am planning some secondary moves shortly here, and ED will fit very nicely into this new vision. Also, I am a fan of the utility industry. It has different high barriers of entry than most companies (definitely different than UNP and NSC, our recent buys), but the constant regulation and the fact the company’s products are so critical for our everyday life creates some nice walls for the larger companies here. ED has been around for a while, whether different regulatory environments and different eras, so I like the company over the long-term even if the growth rate is dismal now.

      As always DM, thank you very much for the comment. We love hearing from you on this site! Have a great weekend.

      Bert

  5. Interesting buy among the dividend blogging community. You don’t really read much about utility plays. I have ED, SO and D in my portfolio and have held them for a long time. Yes, the DGR is a controversial metric for this stock and many utilities in general but I think it’s a sector that can provide healthy returns for the next ten plus years with lots of safety and stability. It won’t be a high flying stock but it can, as you mentioned, offer a solid base for any dividend growth portfolio.

    • Thanks for stopping by DH. I think the utility sector may be the LEAST sexy industry in the stock market. You said it best, the utility industry thrives on safety and stability, and these two factors are aided by just how regulated the industry is. The growth rates just can’t be that spectacular because the companies are already paying out a high percentage of their earnings. And due to the nature of the companies, the income streams won’t suddenly spike allowing a larger-than usual dividend increase. Because of that, that’s why I picked up ED. They have a pretty high yield, exceeding my current portfolio, so I am adding value that way. Even though my growth rate declined, my current yield increased, so I can live with that.

      Thanks for stopping by!

      Bert

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