What the Consolidated Edison Downgrade Means for Mutual Fund Investors (ED)
Shauna O'Brien Dec 17, 2014
Inside the Downgrade
Analyst Jonathan Arnold noted: “We believe ConEd faces some challenges in 2015 for a few reasons as discussed below. First, ED is unlikely to fare well in a rising rate environment as a low risk, low growth, bond-proxy regulated utility. Second, ED’s largest utility is expected to file for new rates in February at a time when ROEs in the state are under pressure as a result of NY’s formula for setting utility investment returns, which relies on the dividend discount and capital asset pricing models. Lower returns would challenge ED’s earnings growth in 2016 and beyond (our model assumes an earned ROE of 9% while NY commission Staff has most recently supported an earned return on equity of 8.7% for another NY utility). Third, NY regulators are undertaking an important review of the regulatory construct in the state, with a goal toward encouraging more energy efficiency, customer choice, and distributed generation to reduce the need for more power plants, transmission lines or other material capital projects that have historically been necessary to support load growth; while the eventual impact of the proceeding remains unclear, on its face, it would appear the initiative could be negative for NY utilities by discouraging incremental capital investment and rate base growth. Fourth, the National Transportation Safety Board has yet to complete its review of the March 2014 Harlem building explosion, which was traced to a leak in ED’s gas distribution infrastructure.”
Great Yield, but Limited Growth
Mutual Funds to Watch
|VTSMX||Vanguard Total Stock Market Index||1.65%|
|VFINX||Vanguard 500 Index||0.92%|
|LCEAX||Invesco Diversified Dividend||0.85%|
The Bottom Line
Shares of ED are up 16% YTD.
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