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Dominion Energy: High Quality Electric Utility for Income

Dominion Energy: High Quality Electric Utility for Income
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Friday, 20 July 2018 05:07 PM Current | Bio | Archive

Investors might consider electric utilities to be too boring, and while buying stock in the electric company may not sound exciting, these stocks serve a valuable purpose. Income investors have relied upon utilities for decades, because of their dependability and consistent dividends.

There are hundreds of dividend-paying utility stocks to choose from, but Dominion Energy (D) is the top electric utility stock for income today. Dominion stock offers a rare combination of yield and growth that sets it apart from its industry peers.

Business Overview & Growth

Dominion is primarily an electric utility. It has over 26,000 megawatts of generation capacity, and 6,600 miles of electric transmission lines. It also has a large natural gas storage and transportation business, which includes 14,800 miles of natural gas pipelines, and storage systems with 1 trillion cubic feet of capacity. Dominion serves more than 6 million utility and retail energy customers in 7 U.S. states.

On 4/27/18 the company reported first-quarter earnings results. Operating earnings increased 17.5% for the quarter, to $1.14 per share. Growth was attributable to higher generation margins, normalized weather conditions, and the impact of tax reform. Dominion also expects operating earnings growth of 4.5%-19% for the 2018 second quarter.

Future growth will be fueled by new electric utility customers, and natural gas projects. Dominion is pursuing growth in its electric business through the planned acquisition of SCANA (SCG). On 7/13/18, Dominion announced the merger received approval from the Federal Energy regulatory commission.

The deal would significantly expand Dominion’s operations. The combined company would have a portfolio of over 31,000 megawatts of generation capacity; 93,000 miles of electric transmission and distribution lines; and over 106,000 miles of natural gas pipeline. To help reduce the impact of the acquisition on the company’s balance sheet, Dominion is looking to sell two power plants for $1.5 billion.

Separately, the Cove Point Liquefaction facility was placed into service in the first quarter. This is a major liquefied natural gas facility with capacity of 5.25 million tons of LNG per year. The Cove Point project cost $4 billion and took several years to complete. Now that it is on line, it will begin generating cash flow for Dominion.

Dividend & Valuation Analysis

Dominion Energy has paid 361 consecutive quarterly dividends, a 90+ year streak of steady payouts. Dominion’s current annual dividend of $3.34 per share represents a dividend yield of 4.6%. This is more than double the average dividend yield of the S&P 500 Index. Dominion’s dividend is secure—the company expects to have a dividend payout ratio of 83% in 2018.

In addition to a high yield, Dominion offers high dividend growth. Dominion already hiked its dividend by 10% in 2018. And, the company has notified investors it intends to raise the dividend by another 10% in 2019, and 6%-10% in 2020. Such a strong dividend growth rate makes Dominion a unique blend of yield and growth in the utility sector.

From a valuation standpoint, Dominion stock has a price-to-earnings ratio of 17.9, as the company is expected to generate earnings-per-share of $4.03 in 2018. In the past 10 years, the stock held an average price-to-earnings ratio of 16.5. If Dominion shares trade down to their average valuation, it would create negative returns of 1.6% per year.

That said, earnings growth and dividends will still provide strong returns to shareholders. Assuming 6% annual earnings growth, plus the 4.6% dividend yield, total annual returns could reach 9% per year. This includes the negative impact from valuation changes and represents a strong rate of return, for a relatively low-risk utility stock.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
 

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There are hundreds of dividend-paying utility stocks to choose from, but Dominion Energy (D) is the top electric utility stock for income today. Dominion stock offers a rare combination of yield and growth that sets it apart from its industry peers.
dominion, energy, electric, utility, income
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2018-07-20
Friday, 20 July 2018 05:07 PM
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