Wednesday, August 1, 2018

The growth of Consolidated Edison and New York City population growth

I have a personal preference for stocks with recurring cash flows. Hence, my equity holdings comprise largely of REITs and consumer staples. Recently, I have been reading up on utility stocks, which is another sector known for stable, recurring cash flows.

In the US dividend aristocrat list, there is only one utility company on the list that has stood the test of time: Consolidated Edison

Consolidated Edison is a provider of electric, gas, and steam. According to their 2017 Annual Report, they are a holding company that owns:

  • Consolidated Edison Company of New York, Inc. (CECONY), which delivers electricity, natural gas and steam to customers in New York City and Westchester County;
  • Orange & Rockland Utilities, Inc. (O&R), which together with its subsidiary, Rockland Electric Company, delivers electricity and natural gas to customers primarily located in southeastern New York State and northern New Jersey (O&R, together with CECONY referred to as the Utilities);
  • Con Edison Clean Energy Businesses, Inc., which through its subsidiaries develops, owns and operates renewable and energy infrastructure projects and provides energy-related products and services to wholesale and retail customers (Con Edison Clean Energy Businesses, Inc., together with its subsidiaries referred to as the Clean Energy Businesses); and
  • Con Edison Transmission, Inc., which through its subsidiaries invests in electric and gas transmission projects (Con Edison Transmission, Inc., together with its subsidiaries referred to as Con Edison Transmission).
The same information could be visually represented as follows (taken from their Q1 2018 Earnings Presentation):

A huge chunk of the revenue and earnings for Consolidated Edison comes from its utility business. The screenshot below (taken from their 2017 Annual Report) shows that 94% of revenue and 76% of earnings is contributed by the utility business. Once we remove the revenue and earnings contribution from their O&R utility business, we can see that CECONY contributes a whooping 87% and 72% to revenue and earnings, respectively.

Hence, investors in Consolidated Edison have to be attentive to the changes in New York City and Westchester County, where CECONY operates.

In order for Consolidated Edison to continue growing its dividend (as of 2018, they have an annual dividend growth streak of 44 years!), prices for its services has to continue growing. However, there is a limit to raising utility prices. Another way that the company could grow is to see a growth in its consumer base in New York City and Westchester County.

How has the population growth in New York City been?

Let us turn to the New York City Department of City Planning website for further info. I would like to highlight a few salient points that I have gleaned from exploring their website.

First up is the Decennial Census data. A census is conducted once every ten years, with the two most recent ones done in 2000 and 2010. 2010 is a long time back, so care has to be taken when making inferences from the data.

NYC Decennial Census (2000 & 2010)

The data shows that population growth in New York City grew by 2.1% from 2000 to 2010. When population growth is segmented by race, another picture emerges. The Asian and Pacific Islander Nonhispanic group grew a whooping 31.7% while the other groups show small declines (the other exception is the Hispanic Origin group which grew by 8.1% over the same period).

New York City Race segment 2010

Asians are a very diverse category. In another report, a breakdown of the various Asian subgroups are provided. Of the subgroups, the Chinese is most heavily represented (6% of entire population) in 2010.

The above data is pretty dated. Let us turn to more recent data by reviewing the Current and Projected Populations page.

New York City Population (July 2017)

The Current and Projected Populations page estimates that the New York City population increased by 5.5% from April 2010 to July 2017. Compared to the 2000 to 2010 decade, this is an improvement. We also learn that population growth is fueled by a surplus of births over deaths due to improved life expectancy, which has been partially offset by net outflows from the city.

The details are unpacked in the report "Info Brief: Migration to and from NYC report" (dated August 2017). According to the report, population change is captured in two ways: (a) through migration, and (b) natural increase (births minus deaths).

NYC Migration Flow by Race

When migration flow is segmented by race, we see that the Asian, nonhispanic group has demonstrated consistent net inflows. In more recent times, net outflow of the White, nonhispanic group has transformed into net inflow.

NYC Migration Flow by Age

When the data is segmented by age, we learn that New York City consistently attracts people in their 20s across the years. In all other age groups, there is a net outflow, with the outflow slowing in recent years.

NYC Migration Flow by Worker Earnings

For people who have worked 50 weeks or more the preceding year, there has been a net inflow of migrants of all income categories in recent years.

The report concluded that "throughout the last 40 years, migrants have been disproportionately young adults, unmarried, and holding high-skilled jobs (not illustrated in this Brief), reflecting that these groups often have more flexibility and resources to move." They added that "age is one of the best predictors of migration. NYC consistently attracts large number of people in their 20s, and generally sees net migration losses of people in all other age groups. This is tied to a common pattern whereby young single people move to the City, and some residents move out after family formation."

There were also some statements that were made in reference to the GFC: "Following the 2009 recession, NYC has captured a large portion of the region's job growth, which is reflected in worker migration. For the first time since 1975, NYC now has net migration gains of workers in all earnings groups, particularly in the $25k to $49k range. Current data shows historically high net migration gains for workers making $75k and over. Higher earners are coming to the City in larger numbers than previously and are likelier to stay."

When you triangulate the data sources above, one could reasonably infer that the Chinese inflow has been contributing to the population growth in New York City. At a broad level, highly-mobile and highly-skilled workers have come to New York City to make their fortunes, have a better standard of living, etc. In my opinion, it is a tad bit optimistic to infer that these same qualified individuals might be settling down in New York City for the long term; we should also consider the alternative that they are free to reside wherever they want. As long as New York City remains a viable destination for people to make their fortunes, have a better standard of living, etc., the city could see further population growth. The trend documented above lends some support to this conclusion. If this pans out, we will see Consolidated Edison growing its user base, which would then be supportive of their dividend growth.