My Portfolio Holdings – ED

In addition to posting posting our portfolio and the income we receive from it, I’m going to also post my reasoning for purchasing these companies.  Overall, investing is about buying companies that add value to your portfolio.  These assets should pay you back in a higher share price, dividends or both.  My main focus is on receiving dividend payments so that I can reinvest those dividends by buying more companies.  I think that if my strategy was to simply trade stocks based on price fluctuations, I’d be a poor steward of my finances.  I’d pay commission fees in what is essentially gambling on hot stock tips.  I’d much rather think like a business owner, and invest for the long term.  I do speculate sometimes, but not in a way that would risk my family’s ability to give or pay our expenses.  Our goal is to create a portfolio of assets that generate income, so that we can use that income to bless others.  Let’s look at how ED accomplishes that.

Consolidated Edison Inc.

(ED) is a holding company which owns all of the outstanding common stock of Consolidated Edison Company if New York, Orange and Rockland Utilities Inc., and other competitive energy businesses such as Con Edison Solutions, Energy and Development.  ED provides energy services to almost 5 million customers in the NYC and Westchester counties of NYC.  These services include gas, electricity and steam.

What matters most: Cash money

Before we talk about the company’s cash holdings and ratios, I think it’s important to talk about its debt. ED has $11 billion in long term debt, and of that, $1.5 billion is currently due within the year.  The amount of debt on ED’s balance sheet is a bit alarming. The company only has $728 million in cash, and only $3.4 billion in current assets. ED’s current ratio is .89 and their quick ratio is .52 meaning ED has more current liabilities than current assets, and does not have a strong cash position in order to cover all of its expenses.  This cash position may result in ED borrowing even more money to pay off its current obligations, which would only cause ED to have even more difficulty paying its liabilities.  I usually like to invest in companies with a P/FCF of 15 or below, and would consider adding a stock to my portfolio if it fits this criteria.  ED has operating cash flow of $2.9 billion and free cash flow per share of $1.56, giving it a P/FCF of 39.1, which is a little overpriced for my taste. ED is in my portfolio, and I'll explain why towards the end of this post.

Dividends – The privilege of ownership

I like to invest in companies that pay a dividend in order to reduce my risk, earn a return on my capital invested, and reinvest those dividend payments into a snowball of dividend checks. ED is a Dividend Aristocrat, which means it is part of a group of 51 companies that have been increasing their dividends for at least 25 consecutive years.  This is an exclusive group of companies with a very tough membership rule, fail to increase the dividend payment in a year and you're out.  ED currently pays a dividend of $.63 a quarter, $2.52 annually, which results in a 4.13% dividend yield.  Their dividend payout ratio, when compared to earnings, is 58% and 160% when compared to free cash flow.  ED needs to strengthen its cash position and improve its operating efficiency in order to continue increasing its dividend for the next 25 years. I like to do some calculations to see how long it would take one share of a company’s dividend payments to equal another share, if prices remained the same and dividend payments were held for the sole purpose of buying one more share, with no compounding. It would take 24.2 years for one share to become two ED shares with the current level of dividend payments. I also like to calculate how many shares an investor would need to buy now in order to generate the equivalent of one share in dividend payments a year, all else being equal. It’s interesting to note that, if an investor wanted to generate the cash in dividend payments for one share this year, it is equal to the amount of time it would take for one share to double from its dividend yield. Buying 24.2 shares would result in an extra share at the end of the year, generated by passive dividend income.

Book Value – Real Company Value

ED’s P/B ratio is 1.4, meaning it is priced at about one and a half times its actual value. I personally like to invest in companies with a P/B ratio of 2 or less, and in some cases I’ll invest in companies with a higher P/B if the income stream of dividends is worth paying more for it.  ED is priced below 2 times its intrinsic value, which was one of the reasons why I've added it to my portfolio. Most of ED's value is derived from its fixed assets like property plant and equipment.

Income – How well a company is managed

I normally don’t like to rely on the income statement as a measure of value. I do think it offers the best glimpse of how well a company is able to manage its expenses while generating revenue, but I’ll rely more on the cash flow statement to find value. ED’s  P/E ratio is 14.2. Most people invest in companies that have a P/E ratio between 15 and 25, while companies with a P/E ratio of 20 are seen as fairly valued, and using this criteria, ED is currently undervalued. Honestly I don’t care too much about P/E ratios, but it can help me gauge whether or not I can pass up on a company that is priced too high, and look for other companies. ED has a gross margin of 65.58%, an operating margin of 18.94% and a net margin of 9.74%.  This tells me that most of the expenses ED incurs has to do with supplying service to its customers and further emphasizes the need to improve their operating efficiency.

Valuation

Using Guru’s DCF calculator and inputting FCF of $1.56 we get a valuation of $15.58 a share, and $56.63 a share after adding tangible book value. Since the company has so much property and equipment it’s import to consider their tangible book value per share. The company isvery cheap when looking at its P/B, and P/E ratios, although my main focus when investing in a company is its P/FCF which is really high for ED.  An investor would have to seriously consider their investment philosophy and see whether investing in this business coincides with their investment objectives.

Why I'm Investing in ED

I'm investing in ED for a couple of reasons.  Living in NYC, its hard not to feel like most of my fellow New Yorkers in believing that ED has a monopoly on NYC energy service.  Yes, we can switch our energy supply to different ESCOs to save money but most people don't, and ED would still be offering the service of providing energy, and collecting a fee for that.  Next, it would cost another company billions of dollars to try and compete with ED in NYC, so there isn't going to be any competition anytime soon.  ED's price doesn't fluctuate as much as most companies, which allows me to purchase stock on a consistent basis at almost the same price every time I invest. Being a Dividend Aristocrat with a yield over 4% is a huge bonus, and since ED is a utility company, their will always be a need for its services.

1 Comment

  1. DivHut says: Reply

    Good enough reason to own ED. I have held ED for over seven years in my dividend portfolio and plan to keep it for a while longer. While the debt can be an issue and their dividend growth rate is very small you are getting a pretty generous current yield which you can use to purchase more ED or other faster growing dividend payers. Besides ED I also own SO and D in the utility sector. Thanks for sharing your analysis of ED.

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