What the Consolidated Edison Downgrade Means for Mutual Fund Investors (ED)

Deutsche Bank lowered its rating on Consolidated Edison (ED) on Wednesday. Here’s what the downgrade means for mutual fund investors.

Deutsche Bank has downgraded Consolidated Edison from “Hold” to “Sell” as analysts see additional downside in the company.

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.”

With a dividend yield around 4%, Con Edison has always been a favorite for income-focused investors. Our concern is that too many income investors have been piling into ED for its yield. This stock would be a much better play if it pulled back. Shares of ED are up 16% YTD, which is way above is historical rate of return.

Investors interested in ED may also consider the following mutual funds as an alternative to investing directly in the stock. The funds below currently hold the largest stakes in the company.

The funds listed above allow investors to gain exposure to a wide range of holdings. Investors interested in ED may also be interested in Dominion Resources (D) and Exelon (EXC).

Shares of ED are up 16% YTD.