Utility stocks are primarily owned for their high dividends. The utility sector as a whole widely offers much higher yields, often 4%-5%, which is well above the average. That is because utilities are highly stable businesses. Utilities provide electricity, which is essentially a matter of national security.
Regulated utilities are allowed to pass through moderate rate hikes each year, which provides them with a steady increase in profits. The bulk of their profits are then passed along to their shareholders through dividends.
Consolidated Edison (NYSE: ED) is one of the nation’s largest utilities. It operates in the Eastern United States and serves New York City, among other markets. ConEd offers a 4% yield and has increased its dividend for 41 years in a row. And its strong fundamentals should keep its dividend growing for many years.
Powering Up Profits and Dividends
ConEd is the classic slow-and-steady stock. It grew earnings per share by 3% last year, and is off to a good start to the current year. Adjusted EPS is up 11% through the first six months of 2015, year-over-year.
The company expects to have another good year in 2015. Full-year earnings are expected to clock in at $3.90-$4.05 per share. At the midpoint of its forecast, that would represent 6.5% earnings growth from 2014. This is a very solid earnings growth rate for a utility.
Admittedly, ConEd isn’t the highest dividend yield in the utility sector. There are others like Southern Co. (NYSE: SO), which provides a 5% yield. But abnormally high yields are frequently a sign of trouble. In Southern’s case, the company continues to be negatively impacted by delays and cost-overruns at its massive Kemper Project.
Southern is building a huge facility in Kemper County, Mississippi, which the company has said holds the promise to utilize coal in a much cleaner, more efficient manner than ever before. That sounds great; the problem is that the company is spending much more on this project than it previously anticipated.
Last year, Southern took $536 million in after-tax charges related to increased costs at Kemper. Through the first six months of 2015, it took $235 million in charges from the project. This is weighing on Southern’s profitability this year: Its adjusted earnings per share are down 4% over the first half, year-over-year.
Higher Interest Rates Won’t Hurt ConEd
Investors may be reluctant to buy utility stocks because of the threat of rising interest rates, which could increase the cost of capital for utilities that operate debt-heavy capital structures. However, even when interest rates do begin to rise, ConEd will be able to navigate the rising-rate environment because it has a manageable level of debt.
According to ConEd’s last 10-K filing, its interest payments total $662 million in 2015, $1 billion in 2015 and 2016 combined, and then just $878 million for the two years after that. Its interest payments over the next four years are very manageable, given the company’s steady profitability.
Last year, ConEd earned $1.1 billion in net income. Clearly its profits are more than enough to meet its debt obligations, as well as to continue to reward shareholders with earnings and dividends.
The Best Utility Stock for Dividends
ConEd is one of the few stocks out there that can offer investors a safe 4% dividend yield that is supported by strong profits – and the added benefit of uninterrupted annual dividend growth for more than four decades. Fundamentally, this is because utilities are highly recession-resistant businesses. After all, people always need to keep the lights on, even when the economy isn’t doing well.
ConEd’s 4% yield is attractive, considering interest rates are still at historic lows and will remain low for some time. Along with its steady earnings and dividend growth each year, ConEd could be a good addition to a dividend investor’s portfolio.
(For a smorgasbord of stable high yielders you can depend on, click here.)