Dominion: Ramping up for Growth & Income

06/30/2016 8:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Investments in solar power, the electricity grid, pipelines and gas-fired power plants will drive earnings and dividend growth at this utility over the next five years, asserts Roger Conrad, editor of Conrad's Utility Investor.

Dominion Resources (D) – a diversified utility company -- is our latest conservative income feature.

Its pending acquisition of Utah-based Questar (STR) will give a growth platform in the Rockies that stands to benefit from the region’s transition from coal-fired power plants to natural gas.

At this juncture, formal approvals from Utah and Wyoming regulators remain the only remaining hurdles for the deal to clear.

The company’s legacy asset base in the Mid-Atlantic region offers exposure to a similar story.

Dominion Resources has spearheaded the development of the Atlantic Coast Pipeline, a project that will transport inexpensive natural gas from the Marcellus Shale and Utica Shale to utilities in Virginia and the Carolinas.

This pipeline will support the company’s ongoing efforts to transition away from coal-fired power plants to facilities fueled by natural gas.

A multi-year investment and rate plan approved by Virginia regulators provides a high level of visibility to earnings growth.

Earlier this year, regulators approved the construction of a 1,588-megawatt gas-fired power plant in Southern Virginia.

This investment will add $1.3 billion to Dominion Resources’ rate base, while replacing purchased power with reliable generation will slash its operating costs by $2.1 billion.

Dominion Resources’ wholesale electricity division formerly consisted entirely of unregulated power plants in New England.

However, the company continues to ramp up its investment in solar power, building rooftop systems for Amazon (AMZN) in Maryland and Microsoft (MSFT) in Virginia.

All these capital expenditures should enable Dominion Resources to deliver annual earnings and dividend growth in the upper single digits through 2020.

As a prominent holding in many popular exchange-traded funds that offer one-stop exposure to the utility sector, Dominion Resources’ stock tends to benefit disproportionately when investors pile into these vehicles.

Although the stock trades at a demanding 21 times earnings, the prospect of highly visible dividend growth in coming years makes Dominion a buy up to $75, preferably through its dividend reinvestment plan.

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By Roger Conrad, Editor of Conrad's Utility Investor

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