Mixed Outlook for ConEd Shares

Stable regulated utility operations, a reasonably strong balance sheet, steady cash flow, regulated electric rate increases, anticipated gains from the sale of generation projects and earnings from non-regulated businesses collectively make Consolidated Edison Inc. (ED - Analyst Report) a conservative income-based investment story.

ConEd offers an above-industry-average dividend yield. However, the issues of future electricity sales growth, rising capital expenses and a mounting debt level continue to curb valuation. Accordingly, with a mixed outlook, we maintain our market-neutral Hold recommendation on ConEd common stock with a six-month target price of $41.75. Price appreciation to our near-term valuation target, coupled with the recently increased $0.585 per share quarterly dividend, which appears sustainable assuming modest projected EPS growth, represents annualized total return potential of 14.9%.

Operationally, the planned investment of nearly $2.8 billion to develop the company’s transmission and distribution infrastructure in New York City provides additional upside potential to ConEd’s growth prospects. Looking ahead, we remain optimistic about stable modest earnings growth given management’s focus on core electric operations.

Despite the mixed outlook, we believe ED stock will attract conservative investors seeking a very competitive 5.8% dividend yield with modest EPS growth. As of this report, ED trades at 13.3x and 12.9x, respectively, 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. Looking ahead through 2008-09, we expect continued stability, albeit with a downward reversion-to-the-historical-mean bias in return-on-equity ROE.

Read the full analyst report on ED