You may be wondering… Why does stock price standard deviation matter? There are two answers.
First, lower stock price standard deviation means a less ‘bouncy’ ride on your way to total returns. Lower dips make Consolidated Edison, Inc. (NYSE:ED) stock easier to hold as compared to more volatile stocks.
Second, stocks with low stock price standard deviations have historically outperformed the market. That’s why low stock price standard deviation is one of the ranking metrics used in The 8 Rules of Dividend Investing.
The image below shows the relative outperformance of the S&P Low Volatility Index over the last decade. The S&P 500 Low Volatility Index is comprised of the 100 lowest volatility stocks in the S&P 500 index.
Source: S&P 500 Low Volatility Index Factsheet
Consolidated Edison’s Future Growth Potential & Total Returns
Consolidated Edison grew its earnings-per-share at 3.4% a year over the last decade. Earnings grew around 5%, but the company partially financed itself through share issuances, which dilutes earnings-per-share. In total, the company’s share count has grown at around 1.4% a year over the last decade.
Going forward, I Consolidated Edison is expected to grow its earnings-per-share at around 3.5% a year. This number is very close to its 3.4% 10 year historical compound earnings-per-share growth rate.
Consolidated Edison’s management is targeting a 60% to 70% dividend payout ratio. The company currently has a 68.8% dividend payout ratio; on the high end of management’s range. As a result, I believe that the company’s dividend payments will increase at either the same rate as earnings-per-share growth for the company, or slightly slower.
Investors in Consolidated Edison should expect total returns of around 7.5% a year from the company’s stock. Returns will come from earnings-per-share growth of around 3.5% a year and dividends of ~4% a year.
Consolidated Edison stock has a payback period of 16 years using an assumed growth rate of 3.5% and the company’s current share price and dividend. Click here to download a free Excel dividend payback period calculator (it’s near the end of the linked article).
More Safety: Invest In What You Understand
Consolidated Edison is an easy to understand stock. The company makes the vast majority of its profits selling electric and gas utility services to both business and residential customers on the East Coast.
Other investors have taken notice of Consolidated Edison’s durable geography based competitive advantage. Here’s what Lanny at Dividend Diplomats had to say about the Consolidated Edison:
“I understand utilities, I know how they physically work and I know what benefit and value it provides: Providing energy to fuel the day-to-day of operations. Let’s think big businesses, industries, etc., all the way to our entertainment platforms and this stems into our very own households. The need is and for now – will always be there, therefore, this is a very used product that will always be used.”
It is very, very likely that Consolidated Edison will be around for a long time in the future. The company operates in a highly regulated industry that creates natural local monopolies. Moreover, the company operates a business that we all use every day (though not necessarily from Consolidated Edison, depending on where you live) – electricity and gas utility services.
Peter Lynch is one of the most successful institutional investors of all time. Here’s what he has to say about investing in what you know:
Final Thoughts: Who Should Buy Consolidated Edison
Consolidated Edison stock is not for everyone. The company has a passable-but-not-great expected total return of 7.5%. As a utility, Consolidated Edison does not have rapid, or even average, growth potential.
The company’s high dividend yield and high levels of safety (both qualitatively and quantitatively) make it an ideal choice for risk-averse investors looking for high yielding investments that will pay inflation adjusted (or better) dividend payments.
Consolidated Edison, Inc. (NYSE:ED) is the prototypical tortoise investment. Slow and steady dividend growth wins the race.
Disclosure: None
