Edison International’s Fire Sale has Created a Buying Opportunity

On January 7, 2025, the Eaton Fire ignited in California’s Eaton Canyon, rapidly escalating into one of the state’s most catastrophic wildfires. Fueled by hurricane-force Santa Ana winds, the blaze ravaged over 14,000 acres, claimed 17 lives, and obliterated approximately 10,000 structures, including homes, businesses, and schools. 

In anticipation of these disasters, California established a $21 billion wildfire insurance fund in July 2019 under Assembly Bill 1054 (AB 1054). This fund is designed to support utility companies found liable for wildfire damages, provided they have acted prudently. 

Edison International, the parent company of Southern California Edison, has historically met or surpassed their own earnings guidance for two decades. This predictability has enabled its board to increase the dividend 21 straight years in a row. However, since the onset of the Eaton Fire, Edison’s stock has plummeted by approximately 35%, erasing around $9 billion in market capitalization. 

The crux of the issue lies in the potential financial repercussions if Edison is deemed to have acted imprudently in relation to the fire’s cause. Preliminary investigations suggest that a de-energized transmission line owned by Southern California Edison may have been involved in the fire’s ignition. 

If found imprudent, Edison could be liable for up to $3.9 billion in damages (which are tax deductible). Conversely, a determination of prudence would allow the company to access the state’s insurance fund without the need to reimburse the money. However, the market capitalization of the stock has dropped almost $9 billion since the wildfires began.

Edison’s stock trades at 9x earnings, nearly 30% below its typical valuation, and offers a dividend yield of 6.1%. Analysts project earnings growth between 6% and 8% from 2025 to 2028. 

The substantial drop in stock value can be attributed to investor uncertainty surrounding the fire’s cause, potential liabilities, and the outcome of ongoing investigations. Additionally, Edison faces over 40 legal claims related to the fire, further contributing to market apprehension. 

Edison believes that pending the investigation’s outcome, which is expected to take 12-18 months, the insurance fund should shield the company’s balance sheet from significant financial strain. 

We purchased this security for suitable client portfolios after the stock price dropped. We are optimistic there will be a recovery to its share price.

-written by Jeff Pollock