When customers are angry, how do companies justify shareholder payouts?
As tens of thousands in the New York metropolitan area remain powerless amid a massive cleanup campaign after Hurricane Sandy hit the region, Consolidated Edison, the utility that powers about 3.3 million customers in New York City and Westchester County, reported earnings and reaffirmed its guidance for 2012. Kevin Burke, Con Ed’s chairman and chief executive officer, said that the company was devoting all its resources to aiding Sandy’s victims. The company’s bottom line, though, seems secure, despite the costs of cleanup.
New York Governor Andrew Cuomo has promised that regulators will scrutinize Con Ed’s preparations for Sandy, as well as its subsequent attempts to restore power in the New York City region after the hurricane. Con Ed operates as a regulated monopoly in the region and owns extensive infrastructure that no competitor could duplicate. Not only would it be far too expensive for any potential rival to enter Con Ed’s territory, it would be impossible because of the logistics of ripping up many sections of the city to install new underground lines and then hook them up to every building. The few competitors Con Ed has use the giant’s grid to deliver power.
Regulators currently allow Con Ed about a 10 percent return on its electricity business (the allowable return is tied to interest rates), and the company is about to present a new rate plan for 2013. Barron’s reported last week that Con Ed had delayed its rate requests for months, hoping interest rates would rise so the company could ask for a little more.
According to the Bureau of Labor Statistics, the average price per kilowatt-hour for electricity in the United States is 13 cents. New Yorkers pay an average of 20 cents. The difference isn’t funding the construction of backup systems and flood protections to keep the power on during a major storm, nor are they paying for the crews of technicians necessary to get power restored even five days after what was a forecasted, and hyped, event. The premium that New Yorkers pay is instead padding the coffers of Con Ed’s largest shareholders, in the form of the company’s rich dividend, which is just over 4 percent. The dividend yield on an index-fund share of the S&P 500 is about 2.2 percent.
Con Ed’s dividend payments should be of particular interest to regulators. In the quarter that ended in June, Con Ed shelled out $352 million in dividends for its common and preferred stock. The company spends well in excess of $1 billion on dividend payments every year. If this money had been invested in upgrading New York City’s infrastructure, the difference between the 12-foot storm surge that the company said it had planned for and the 14-foot surge it faced might not have blacked out most of Manhattan below 40th Street.
Don’t be fooled by excuses based on the “unprecedented” nature of the storm. Fitch Ratings, which analyzes corporate debt, wrote in a recent report on Con Ed’s bonds that, “Con Edison of New York has an aging infrastructure that is costly to maintain and subject to sudden breakdown. Failure to maintain adequate levels of service can lead to customer dissatisfaction, reputation risk, and regulatory fines or penalties.”
Buyers of Con Ed’s bonds know the company’s New York City infrastructure is aging and has long been in need of upgrades. But instead of spending every cent on that, the company pays generous common stock dividends. Con Ed has for years faced the need for capital-intensive work within New York City, yet its board of directors has seen fit to return that capital to its shareholders.
Because Con Ed has a monopoly and sells a vital service at a profit, its dividends should be subject to more scrutiny than others’. That the utility sector has long been one of the most reliable dividend payers out there suggests that the industry’s regulators have failed. National consumer protection agencies need to start taking an interest in all service companies, including utilities.
Con Ed is not the only publicly traded company in New York to blame. There’s another ubiquitous quasi-monopoly in the city — Time Warner Cable. If you need help, you call and, if they have to send a specially trained expert out, you wait a few days (if you’re lucky) for an “appointment.” But it’s not the typical appointment that you or I make and keep at a certain time. Instead, it’s a four-hour window during which the technician could show up at any moment. It’s such an old joke that it was the plot of a 1996 episode of “Seinfeld,” and yet it persists.
It’s not that Time Warner can’t afford to hire enough technicians to render service at appointed times. Just scan the company’s quarterly reports. In July the board approved a 56-cent-per-share dividend, up 14 percent from the same quarter in 2011. The payment, made to approximately 311 million outstanding shares, totaled $174 million. Time Warner Cable also buys back its stock in the open market, which sends more money back to its owners. Since July 2010 the company has spent $4.1 billion buying back its stock, and it plans to spend an additional $3.1 billion before it’s through.
If Time Warner can spend $7.2 billion on stock repurchases while maintaining a rising dividend, it can do a lot more for its customers.
Con Ed and Time Warner are paying dividends; but it is their customers – the ones left in the dark for five or more days and those still digging out of the debris and destruction – who are putting up for the payout.
Additional reporting by Natasha Gural.
Natasha Gural is a freelance writer and editor with two decades of experience including National and Business Editor at The Associated Press, U.S. Editor of Financial News (Dow Jones) and founding Editor-in-Chief of Markets Media. Her current roles include Editor-in-Chief of the BTM Institute.
PHOTO: Residents look at the National Guard drive through the Rockaway Beach neighborhood as they stand near a fire listening to the radio for news of the U.S. presidential election, while still missing access to power in New York’s Queens borough November 6, 2012.