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The Dividend Kings consist of companies that have raised their dividends for at least 50 years in a row. Because of their unparalleled streak of annual dividend increases, it is common to view the Dividend Kings as among the best dividend growth stocks in the stock market.

Consolidated Edison (ED) recently increased its dividend for the 50th consecutive year. As a result, the company now joins the exclusive list of Dividend Kings.

Over the years, utilities have become relied upon for their steady dividend payouts, even during recessions. This article will analyze the company’s business overview, future growth prospects, competitive advantages, and more.

Business Overview

Consolidated Edison is a large-cap utility stock. The company generates approximately $14 billion in annual revenue and has a market capitalization of approximately $31 billion.

The company serves over 3 million electric customers, and another 1 million gas customers, in New York. It operates electric, gas, and steam transmission businesses.

On October 1st, 2022, Consolidated Edison announced that it was selling its interest in its renewable energy business to RWE Renewables Americas, LLC for $6.8 billion. The transaction is expected to close in the first half of 2023. As a result of this transaction, Consolidated Edison will not issue common stock this year while also withdrawing its share issuance guidance for 2023 and 2024. The company typically regularly issues shares for financing.

On November 3rd, 2023, Consolidated Edison reported third quarter results for the period ending June 30th, 2023. For the quarter, revenue grew 7% to $3.87 billion, which was $36 million more than expected. Adjusted earnings of $561 million, or $1.62 per share, compared to adjusted earnings of $579 million, or $1.63 per share, in the previous year. Adjusted earnings-per-share were $0.03 above estimates.

As with prior quarters, higher rate bases for gas and electric customers were the primary contributors to results in the CECONY business, which is accounts for the vast majority of the company’s assets. Average rate base balances are expected to grow by 6% annually through 2025. Consolidated Edison expects capital investments of nearly $15 billion for the 2023 to 2025 period.

Consolidated Edison provided updated guidance for 2023 as well. The company now expects adjusted earnings-per share in a range of $5.00 to $5.10 for 2023, up from $4.85 to $5.00 and $4.75 to $4.95, previously. At the new midpoint, this would be a 10.5% increase from the prior year.

Growth Prospects

Earnings growth across the utility industry typically mimics GDP growth. Over the next five years, we expect Consolidated Edison to increase earnings-per-share by 3.5% per year.

We expect ConEd to continue its pattern of modest growth moving forward. ConEd should continue to generate modest earnings growth each year through a combination of new customer acquisitions and rate increases, helped by the gradual improvement of the U.S. economy and a return to normalized weather conditions,

The growth drivers for Consolidated Edison are new customers and rate increases. One benefit of operating in a regulated industry is that utilities are permitted to raise rates on a regular basis, which virtually assures a steady level of growth.

Source: Investor Presentation

Consolidated Edison expects to increase its rate base by ~7% each year, through 2024. This is a natural way for a utility to generate steady revenue and earnings growth.

One potential threat to future growth is rising interest rates, which could increase the cost of capital for companies that utilize debt, such as utilities. Fortunately, the market is increasingly expecting the Federal Reserve to stop raising interest rates this year and possibly even begin to cut them. Lowering rates helps companies that rely heavily on debt financing, such as utilities, so investors do not need to be concerned about Consolidated Edison in a falling-rate cycle.

Even if rates do continue to go up, Consolidated Edison is in strong financial condition. It has an investment-grade credit rating of A-, and a modest capital structure with balanced debt maturities over the next several years. A healthy balance sheet and strong business model help provide security to Consolidated Edison’s dividends.

Investors can reasonably expect low single-digit dividend increases each year, at a rate similar to the company’s annual adjusted earnings-per-share growth.

Competitive Advantages & Recession Performance

Consolidated Edison’s main competitive advantage is the high regulatory hurdles of the utility industry. Electricity and gas services are necessary and vital to society. As a result, the industry is highly regulated, making it virtually impossible for a new competitor to enter the market. This provides a great deal of certainty to Consolidated Edison.

In addition, the utility business model is highly recession-resistant. While many companies experienced large earnings declines in 2008 and 2009, Consolidated Edison held up relatively well. Earnings-per-share during the Great Recession are shown below:

• 2007 earnings-per-share of $3.48
• 2008 earnings-per-share of $3.36 (3% decline)
• 2009 earnings-per-share of $3.14 (7% decline)
• 2010 earnings-per-share of $3.47 (11% increase)

Consolidated Edison’s earnings fell in 2008 and 2009 but recovered in 2010. The company still generated healthy profits, even during the worst of the economic downturn. This resilience allowed Consolidated Edison to continue increasing its dividend each year.

The same pattern held up in 2020 when the U.S. economy entered a recession due to the coronavirus pandemic. Last year, ConEd remained highly profitable, which allowed the company to raise its dividend again.

Valuation & Expected Returns

Using the current share price of ~$89 and the midpoint of 2023 guidance, the stock trades with a price-to-earnings ratio of 17.6. This is above our fair value estimate of 16.0, which is in line with the 10-year average price-to-earnings ratio for the stock.

As a result, Consolidated Edison shares appear to be overvalued. If the stock valuation retraces to the fair value estimate, the corresponding multiple contractions would reduce annualized returns by 1.9%.

Fortunately, the stock could still provide positive returns to shareholders, through earnings growth and dividends. We expect the company to grow earnings by 3.5% per year over the next five years. In addition, the stock has a current dividend yield of 3.7%.

Utilities like ConEd are prized for their stable dividends and safe payouts. Putting it all together, Consolidated Edison’s total expected returns could look like the following:

• 3.5% earnings growth
• -1.9% multiple reversion
• 3.7% dividend yield

Added up and Consolidated Edison is expected to return 5.3% annually over the next five years. This is a modest rate of return, but not high enough to warrant a buy recommendation.

Income investors may find the yield attractive, as the current yield is meaningfully higher than the yield of the S&P 500 Index and grows very consistently. The company has a projected payout ratio of 64%, which indicates a sustainable dividend.

Final Thoughts

Consolidated Edison can be a valuable holding for income investors, such as retirees, due to its 3.7% dividend yield. The stock offers secure dividend income, and is also a Dividend King, meaning it should raise its dividend each year.

Therefore, risk-averse investors looking primarily for income right now–such as retirees–could see greater value in buying utility stocks like Consolidated Edison. However, we rate the stock as a hold at today’s current price of $89.

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