I know that collecting an over 4% yield in this environment seems tempting. I know that CDs don’t pay much of anything, and savings and money market accounts pay even less. However, it seems that some investors are just buying the first option they come across instead of researching their options. Consolidated Edison, Inc. (NYSE:ED) is the perfect example of a company that is not performing terribly, but it certainly is not the best option in the utility sector.
Respected Company = Poor Investment?
It seems that every report I read about utilities uses the same terminology. Analysts describe utility investments with words like prudent, safe, low-risk, and stable. There is also a lot of talk about how utilities are going to use alternative energy options like wind, solar, or others to grow their business.
The problem is, utility customers consume power based on what they need. Utilities can’t grow their business if customers aren’t consuming more power. It doesn’t matter if the company provides power via solar, wind, hydroelectric, nuclear, or coal. The ultimate difference between these sources of power is the long-term cost of providing the resource to the customer.
One of the biggest challenges facing utilities is that customers and businesses are getting smarter about their power usage. Businesses are buying more efficient heating and cooling systems, customers are buying appliances that are more efficient, and desktops are being replaced with long-life tablets and smartphones. Long story short, utilities have to hope that population growth outpaces the decline in power usage from these many sources.
Second To The Bottom
When it comes to Consolidated Edison, Inc. (NYSE:ED), compared to their peers, the one thing that was consistent was that the company seemed to always rank second to the bottom. Consolidated Edison’s peers include The Southern Company (NYSE:SO), Duke Energy Corp (NYSE:DUK), and Exelon Corporation (NYSE:EXC).
Each of these utilities trades for a forward P/E ratio in the mid-teens. The cheapest of the bunch is Exelon at about 12.5 times projected earnings, and the most expensive is The Southern Company (NYSE:SO) at about 15.8 times earnings. Relatively speaking, these valuations make sense as Exelon Corporation (NYSE:EXC) has the poorest expected growth rate at a negative 3.4%, and Southern Co is expected to grow the fastest at about 4.8%.
The bad news for Consolidated Edison, Inc. (NYSE:ED) investors is the company’s P/E of 14.9 seems high relative to the company’s 2.27% expected growth rate. To put it another way, Duke Energy Corp (NYSE:DUK) sells for almost the same P/E yet is expected to grow 77% faster at 4.03%. This is the first reason to avoid Consolidated Edison: the stock ranks second to the bottom among peers in terms of expected earnings growth.