Take A Serious Look: This Stock Is Cheap And Pays A Market - Smashing Yield

Edison International (EIX) is a utility holding company for Southern California Edison, an electric utility business that provides electricity to 5 million customers across Southern, Central, and Coastal California.

Founded in 1886, Edison International is now a $21 billion (by market cap) utility giant that employs more than 13,000 people.

SCE is their main operating segment.

Investing in a utility business such as Edison International is always a pretty straightforward affair with a simple investment thesis.

The thesis is that modern-day society cannot function without reliable access to power. We basically can’t live without electricity. There is a captive consumer base in place because of this.

Thus, utility companies that can meet this inherent and unflinching demand for power tend to prosper. And since there is often only one major utility provider in any single geographic area, these businesses further benefit from their monopolistic characteristics.

All of this is true for Edison International, giving their business model a powerful one-two punch. And this bodes well for their ability to continue increasing their profit and their dividend over the long run.

As it stands, they’ve increased their dividend for 18 consecutive years. Their 10-year dividend growth rate of 7.3% is uncommonly high for a utility business, which is impressive.

However, more recent dividend raises have been in the 4%-5% range.

The stock’s P/E ratio is only 12.21. Now, that’s based on core EPS.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a dividend discount model analysis.

I factored in a 9% discount rate (due to the elevated yield) and a long-term dividend growth rate of 4.5%.

This DGR is on the lower end of what I usually allow for when looking at a utility.

However, I think this is a realistic take on the business.

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