Stable, regulated utility operations, a strong balance sheet, regulated rate increases, earnings from non-regulated businesses and an increased dividend payout collectively make Consolidated Edison, Inc., a.k.a., ConEd (ED) a conservative income-based investment story. However, concerns relating to future electricity sales growth and increasing capital expenditures continue to restrain valuation.
Accordingly, with a mixed outlook, we maintain our market-neutral Hold rating on ED common stock with a six-month target price of $43. Despite the mixed outlook for ConEd, in our view, we believe ED stock will attract conservative investors seeking a very competitive 5.7% dividend yield with modest EPS growth.
As of this report, ED trades at 12.9x both our 2008 and 2009 earnings per share estimates, or at a moderate discount to its comparable regulated energy distribution utility peers and the broader electric utility industry. Such an earnings-based multiple discounts are appropriate for ED given low, yet conservative and stable, long-term earnings growth expectations.
Likewise, ED trades at the low-end of the range of its industry peers based on relative price multiples of sales and book value, yet in-line within the range of comparable public companies with respect to relative cash flow multiples.
Our target price amounts to 13.4x our current-year 2008 and forward 2009 EPS estimates. Price appreciation to our near-term valuation target, coupled with the recently increased $0.585 per share quarterly dividend which we view as sustainable and secure if modest projected earnings growth is generated as expected represents annualized total return potential of 14.5%. Income-seeking investors may be content to Hold the stock, although those seeking stronger growth should look elsewhere.
Read the full analyst report on ED.
Get real-time market insights and profitable stock recommendations from the team of analysts at Zacks Equity Research. See all todays Analyst Blog entries on Zacks.com.