Dominion Resources (D 0.45%) has its fingers throughout the energy business, with operations in the regulated power market, electric transmission lines, natural gas infrastructure, and merchant power plants. That makes the company a virtual one-stop shop for utility-industry exposure. But that doesn't necessarily mean it's a good investment option for everyone.
For example, investors have rewarded the stock with an over 110% price increase over the last five years. Management has been moving away from unregulated business and toward regulated ones and those backed by long-term contracts. It expects at least 80% of its earnings to come from such businesses, which highlights its long-term earnings consistency and dividend paying ability.
In fact, dividends have increased on average 7% a year since 2010. That's roughly twice the historical level of inflation. Moreover, management has clearly stated that this level of increase is a long-term goal. And those dividend hikes compare favorably to top-five peers like Duke Energy (DUK 0.95%) and Southern Company (SO 1.12%), where dividends have been growing at roughly 2% and 4%, respectively.
But the impressive share-price advance has left Dominion trading at relatively expensive levels. For example, the utility's price to book value stands at roughly 3.5 times. That's well above the industry average of around 1.7 and higher than Dominion's five year average of 2.6. Duke, the largest publicly traded utility, sits at just 1.3. So Dominion is far from cheap, which means more conservative investors would probably be better off looking at other utilities.
Growth potential
However, for those with a more aggressive bent, it's worth looking beyond the numbers to decide if the impressive five-year stock advance has more room to run. And on that front, it just might. The projected dividend increases are one thing, but what underpins them is what's really exciting.
For example, Virginia Power makes up roughly a third of the company's earnings before interest and taxes. That's a stable floor for the company to build off of. Note that Virginia Power's rates are 14% below the national average. And it has the highest projected demand growth in the region in which it operates. So even this business could grow nicely over time.
One example of the future here is the plan to spend about $3 billion over the next four years or so to build new and improve existing transmission assets. Regulators have been taking a positive view of such spending. Not only because replacing old power lines increases system reliability, but also because you have to go to renewable power sources—they won't come to you.
(Source: ReubenGBrewer, via Wikimedia Commons)
Then there's the company's natural gas assets. These include the pipes into customers' homes, gathering assets, interstate pipelines, natural gas storage, and a proposed liquefied natural gas export terminal. The company is in the process of setting up a limited partnership (LP) to hold some of these businesses. That will allow it to retain control of them while still raising cash from their sale to the LP. Assuming this goes well, more assets will be sold (dropped down) over time, raising more cash for other long-term projects.
Even the currently struggling merchant power business has the potential to turn into a plus. While low natural gas prices have kept a lid on power prices, roughly half of Dominion's merchant power comes from its Millstone nuclear power plant. Unlike coal and natural gas, nuclear power is environmentally friendly. And unlike solar and wind, it's controllable. When power prices eventually rebound, Millstone will be an important asset.
Is it enough?
Are such positives enough to say Dominion Resources is a buy? The answer is yes, for more aggressive investors. For starters the 3.4% or so yield is reasonable, particularly with the projected growth rate of around 7%. And while the stock is far from cheap, the potential positives underlying Dominion's future are notable and, as management points out, 80% fall into the regulated arena or are under long-term contracts.
Increasingly exciting areas like natural gas infrastructure and electricity transmission, and a potential rebound in out of favor merchant power, should be watched closely. However, as long as management can keep hitting its goals, there's no reason to expect investors to abandon this stock.
