Dominion Resources (NYSE:D) announced last week that it will acquire Carolina Gas Transmission from SCANA (NYSE:SCG) for $493 million. That's a big buy, even for Dominion, but the utility expects this purchase to boost its profits for decades to come. Will its dividend grow, accordingly? Let's find out.
Steady as she flows
Utilities are not the stalwart dividend stocks they used to be. With erratic energy prices, alternative energies, and emerging technologies, utilities are turning their business models upside down -- and not everyone is ending up on top.
Gas pipelines offer a near-guaranteed cash flow for utilities looking for something a little steadier. As a midstream point between gas production and energy delivery, pipelines serve as "toll booths" of sorts, pulling in regulated revenue for every drop of gas in transport.
At roughly the cost of a third of its 2013 profit, grabbing Carolina Gas Transmission will bring Dominion nearly 1,500 miles of FERC-regulated pipelines carrying 700 million cubic feet per day, or MMcf/day in South Carolina and southeastern Georgia. Additionally, Carolina Gas has another 820 MMcf/day worth of growth projects expected to come online by 2018. As Dominion Chairman, President, and CEO Thomas Farrell II put it in a press release:
Carolina Gas Transmission is a great fit for our well-run, regulated natural gas businesses as we expand our operations into the Southeast. It also boasts an outstanding safety record, a tremendous reputation for reliable service and a robust pipeline of committed expansion projects that we expect to create significant EBITDA [earnings before interest, taxes, depreciation, and amortization] growth over the next several years .
A dividend win?
Revenue and profits matter, but utilities deal in debt and cash. Debt allows them to take on massive infrastructure projects, while cash keeps everything up and running from quarter to quarter -- including dividend distributions. Dominion Resources had a slow stretch in distribution increases for nearly a decade, but it returned to building its "dividend staircase" in 2005.
Its current dividend yield of 3.1% is below industry average, but nothing any income investor should look down on. Slightly more concerning is Dominion's debt, which amounts to just over twice its equity and about half its total assets. That translates to Dominion being more aggressive with its debt than over 80% of its peers.
But Dominion has a master plan, and it involves a partnership. In March, the utility formed Dominion Midstream Partners (NYSE:DM) to serve as a lower-taxed holding company of sorts. Dominion expects to officially acquire Carolina Gas Transmission from SCANA in January 2015, and by midyear 2015 it will have passed the entire company on to Dominion Midstream's books. When all is said and done, Dominion expects this purchase to increase its earnings per share by 5% to 6%.
Dominion's latest acquisition is indicative of its overall strategy. It is aggressively pursuing growth, whether through solar investments, offshore wind, liquefied natural gas exports, or more pipelines.
This latest purchase pads Dominion's cash flow and earnings, but the utility isn't about to boost its dividend to record rates. It is focusing funding on energy adaptations and expansions, and believes these goals are ultimately in its shareholders' best interests -- even if it means missing out on a dynamite distribution.
Justin Loiseau has no position in any stocks mentioned. The Motley Fool recommends Dominion Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.