Edison International (EIX) is a renewable energy company that is active in energy generation and distribution; the company can trace its origins back to 1886, notes Ben Reynolds, editor of Sure Retirement.
Edison International’s competitive advantage is that it operates in a highly regulated industry with high barriers to entry. Edison is among California’s largest utilities, serving about 15 million people in the state.
The company’s operations have been very recession-resilient in the past, and this will likely remain the case going forward, as consumers need electricity no matter how poor the economy is.
Edison International remained highly profitable during the last financial crisis, as the company’s earnings-per-share declined by just 12% between 2008 and 2009, and then started to rise again during 2010.
Despite the fact that earnings have seen some ups and downs, Edison International grew its dividend very consistently throughout the last decade.
This was only possible due to an increase in the company’s dividend payout ratio, as its earnings-per-share did not grow as consistently. Still, the dividend looks relatively safe, as Edison International’s operations are not overly cyclical.
The firm's regulated utility business is a slow grower, which is typical for utilities, but the business generates stable cash flows. Growth in the rate base helps utilities generate steady earnings per share growth.
Meanwhile, its non-regulated segments, such as renewable energy production via methods ranging from biomass to wind energy, has the potential to grow at a higher rate.
We believe it is likely that Edison International will be able to grow its earnings-per-share at a mid-single-digit rate going forward, relatively in line with the growth that the company has generated in the past.
We expect Edison International to generate adjusted earnings-per-share of $4.40 for 2020. Based on this, the stock trades for a price-to-earnings ratio (P/E) of 11.6, which is below our fair value estimate of 12.6. Expansion of the P/E multiple could increase annual returns by 1.7% through 2025.
Combining valuation changes with 4.0% expected annual earnings growth and the 5.0% dividend yield, we expect total returns of 10.7% per year for Edison International stock over the next five years.
