Why Consolidated Edison shares fell 20% in the first half of 2020

What happened

Underperforming the market in the first six months of 2020, Consolidated Edison (NYSE:ED) fell 20.5%, according to data from S&P Global Market Intelligencewhile the S&P500 fell 4%. The utility’s inability to keep up with the overall market has been a familiar refrain over the past two years. In 2019, for example, shares of Con Edison climbed 18% while the S&P 500 climbed 29%, and in 2018 the stock fell 10% as the S&P 500 fell 6%.

While investors often turn to utility stocks during periods of market volatility, that was not the case with Con Edison in the first half of 2020. Due to a variety of downgrades, a weak report on the first quarter results and a downward revision to the 2020 MD&A forecast, investors fled their positions in Con Edison shares.

Image source: Getty Images.

So what

Like many stocks, Con Edison fell in mid-March. While the decline of most companies stemmed from the start of stay-at-home orders across the country, Con Edison shareholders had something else on their minds: a loss of confidence in the company’s ability to service its debt.

On March 17, for example, Moody’s lowered Con Edison’s long-term rating from Baa2 to Baa1. And the agency was not alone in its view. A week later, Fitch Ratings lowered its outlook from stable to negative. Addressing the revised outlook, Fitch said “the revenue impact of lower kilowatt-hour sales and escalating bad debt is of particular concern, particularly in light of Governor [Andrew] Cuomo’s ‘stay at home’ decree and the resulting closure of non-essential business businesses.”

Following revised outlooks from Moody’s and Fitch, Con Edison was the subject of renewed skepticism from Wall Street. For example, in early April, Citi analyst Ryan Levine lowered the stock price target to $78.50 from $89, according to Thefly.com. Similarly, Credit Suisse analyst Michael Weinstein lowered his price target to $78 from $92 while maintaining an underperforming rating for the stock; and Sarah Akers, at Wells Fargo, lowered her price target to $78 from $99 while keeping an even weight rating.

In addition to pessimistic analyst views, Con Edison’s first-quarter earnings report shook investors’ resolve. For example, the company reported a year-over-year decline in operating revenue from $3.5 billion in Q1 2019 to $3.2 billion in Q1 2020. , it reported lower net income: diluted earnings per share fell from $1.31 in the first quarter of 2019 to $1.12. in the first quarter of 2020.

Another concern was the company’s less favorable outlook for 2020. While management originally forecast 2020 Adjusted EPS of $4.30 to $4.50, it lowered that forecast in early May to $4.15 to $4.35 per share.

Now what

For dividend-oriented investors, Con Edison’s 4.15% forward dividend yield may look attractive, but there are valid concerns about its financial health. In addition there are plenty of best options for investors looking for yield.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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