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Dominion Earnings: Can Natural Gas Power Your Dividend Stock's Profits?

Justin Loiseau
August 14, 2013

Dominion (NYSE: D) reported Q2 earnings last week, pushing down its top line and missing on its bottom line. But there are two aspects of Dominion's business that defy quarterly numbers, and you need to weigh each in turn to know whether or not Dominion's a dynamite dividend stock. Let's take a look at the latest.

Number crunching
On the top line, Dominion's Q2 revenue rolled in at $3.0 billion, a 3.4% drop from 2012's second quarter. But while sales slumped, the real worry for investors came from the utility's bottom line.

Although quarterly earnings clocked in slightly above Q2 2012, the utility's $0.62 adjusted EPS fell $0.03 short of analyst estimates. After missing the mark during its first quarter, this most recent report marks another disappointing quarter.

Looking back further for some perspective, Dominion has seen TTM sales taper off 17% in the last five years, while adjusted EPS has fallen a whopping 86.5%.

D Revenue TTM Chart

D Revenue TTM data by YCharts

It's more than a numbers game
In the same five-year period, however, Dominion stock has headed 40% higher. Shares are up 16% so far for 2013, so the company has to be doing something right... right?

First up: natural gas. Dominion relies on natural gas for 17% of its production capacity and just received approval for a new $1.3 billion, 1,358 MW plant, but the fuel has deeper roots in the utility's fundamentals.

One of the company's steadiest subsidiaries has been its transmission business. This last quarter's gas transmission growth exceeded expectations, and the company continues to expand its lines and processing centers around the Marcellus and Utica shale formations.

Source: Dominion Q2 Earnings Presentation 

Dominion isn't alone in cashing in on this latest transmission trend. NextEra Energy (NYSE: NEE) and Spectra Energy (NYSE: SE) are teaming up for a $3 billion joint-venture partnership to bring Florida its third major gas pipeline, a move that both companies believe will provide steady "toll booth" earnings in the years to come.

But where Dominion goes one step further in its natural gas notions is in its LNG export aspirations. The company is now second in line for Department of Energy approval, and it expects commercial operation by late 2017. If natural gas remains cost competitive, LNG exports could mean major growth opportunity for this utility.

The second reason for Dominion's continued market success is its dividend. The utility currently offers a 3.7% annual yield and has kept its distribution growing right alongside share prices.

D Chart

D data by YCharts

A soli