Con Ed's Renewables Sale Unlikely to Impact Dividend Policy

Consolidated Edison, or Con Ed, on October 1 announced plans to sell the firm's renewable energy business in a $6.8 billion deal expected to close in the first half of 2023.

We don't expect this transaction to affect Con Ed's dividend policy as the segment being sold represents only around 8% of the firm's operating income.

Excluding profits contributed by the utility's renewable energy businesses, we estimate Con Ed's payout ratio would increase from 70% to around 75%.

While this exceeds management's target range of 60% to 70%, Con Ed will use some of the sale's proceeds, rather than issue equity, to help fund its investment plans the next few years.

Source: Simply Safe Dividends

Con Ed planned to sell about $1.6 billion of stock through 2024, an amount that could easily be covered by the divestiture's proceeds.

Issuing less equity than previously planned helps support Con Ed's earnings per share and dividend coverage, mitigating some of the lost cash flow from the clean energy business.

After earmarking $1.6 billion for future capital spending needs and setting aside around $2 billion for taxes on the sale, the utility could have as much as $3 billion of proceeds leftover.

Con Ed could use this money to pay down the roughly $1 billion of debt it held at the parent level rather than at its operating utilities as of the end of 2021, reducing its interest expense.

The remaining $2 billion could be used to reinforce the financial strength of its utilities, repurchase shares ($2 billion would buy up to 6% of outstanding shares at today's price), or even pay a special dividend (upwards of $5.50 per share).

From a strategic perspective, divesting its solar, wind, and battery storage businesses increases Con Ed's mix of earnings from regulated activities to nearly 100%.

Other utilities, including Dominion Energy, DTE, PSEG, and Exelon, have shed non-regulated businesses in recent years.

Fully regulated utilities enjoy more predictable profits, which are generally rewarded by a higher valuation multiple.

Overall, Con Ed should remain in solid financial shape following this transaction and can pursue several attractive options to return more capital to shareholders.

We expect the BBB+ rated utility and dividend aristocrat to maintain its streak of higher annual payouts since 1975, albeit with low single-digit growth potential.