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A Bullish Case For Dominion Resources

Dominion is down more than 8% over the past one year and 13.9% YTD. Energy Information Administration expects that generation from natural gas will increase from 27.5% in 2014 to 31.6% in 2016. Utility sector forward P/E valuation has dropped to 14.9x, very close to its historical average of 14.1x. The utility stocks have remained the favorite choice for regular income seeking investors with less risk appetite. The utility stocks have posted some impressive gains over the past several years, and valuations expanded significantly. However, Fed’s indication to hike the interest rate has changed the ground and utility in S&P 500 index is now the second worst performing sector, so far this year. Dominion Resources (NYSE: D ), one of the largest utilities in the U.S., has significantly underperformed, just like other utility stocks, as investors adopted a defensive strategy. As a result, Dominion is down more than 8% over the past one year and 13.9% YTD. (click to enlarge) Source: Yardeni Research Dominion’s portfolio mix is well diversified, and it has the generation capacity of approximately 24,400 megawatts along with 12,200 miles of natural gas transmission. However, the largest natural gas storage system capacity of 928 billion cubic feet distinct Dominion from other utility companies. Dominion’s gas storage and transportation operating revenues have surged 7.3% to $1,221 million, or 13.4% of total revenue, so far this year. The storage and transportation revenue will continue to rise in the fourth quarter and next year as demand for U.S. gas in 2015 is estimated to increase by 4.6%. Coal-fired electricity generation has remained the largest component of power generation in the U.S., but the industry dynamics have changed dramatically in the recent past. In April, gas-fired power generation surpassed coal for the first time. In the near-term, Energy Information Administration (NYSEMKT: EIA ) expects that generation from natural gas will increase from 27.5% in 2014 to 31.6% in 2016 amid low natural gas prices. It bodes well for the company as low natural gas prices will reduce the fuel costs and will help Dominion to deliver 5% – 6% earnings growth in 2016. On the other hand, the significant increase in gas demand will fuel Dominion’s gas storage revenue, which will mute the unfavorable impact from the unregulated business. Currently, Dominion produces approximately 34% electricity from natural gas, and coal generation is 27%. Dominion’s 1,358-megawatt combined-cycle plant in Brunswick County, which is expected to become operational in mid-2016 and three-on-one combined-cycle plant with production capacity of 1,588-megawatt Greensville County will increase the share of natural gas generation to approximately 45% by the end of 2018. The declining cost of generation from natural gas and advanced technology will further strengthen the operating margins in the coming years. Moreover, the anticipated contribution from ongoing growth projects including The Cove Point LNG export facility will start fueling earnings growth from 2018 onwards. Thus, these factors completely justify that Dominion’s earnings will grow at an estimated 3-year CAGR of 7.3%, and growth will pick the pace in 2018 due to the addition to major growth projects. Source: NASDAQ With the low natural gas and power prices, the unregulated utility sector’s revenue stream may tumble in the coming quarters. However, Dominion is pretty secure against this headwind as it generates approximately 68.7% of total operating revenue from regulated business and only 16.5% is unregulated. It bodes well for the company as the supportive regulatory environment will enable Dominion to maintain the profit margins while generating steady cash flows. Thus, the growing gas storage business and stable outlook of regulated business will protect the operating margins on stable operating revenues, and will also improve the cash flow to debt ratio from its current level of 15.5%. However, Dominion’s cash flow to debt ratio may remain lower as compared to estimated industry average of 21% for 2016 primarily due to $8.6 billion CAPEX in 2015 and 2016. Dominion’s management is pretty confident to sustain organic growth as the company is deploying quality assets and major projects are on time and budget. The combined-cycle plants and plan for 400-megawatt utility-scale solar generation will pave the way for achieving 80% to 90% operating revenue from regulated business, which will further stabilize revenue stream. Moreover, the management has indicated the there is no need for a big merger deal as the company is well-positioned to meet the future demand while continuing profitable growth. It is a good sign from investors’ perspective because the leverage ratio will remain in its current range of 1.68 times and shareholders will receive 8% annual dividend increase over the next five years. The dynamics are quite favorable for Dominion except the slight drop in electricity demand in the U.S. Moreover, the industry-wide initiatives to reduce the nuclear power production costs by 30% by 2018 also suggests some margin gains for the major utilities. However, the rising yield on 10-year U.S. Treasury note is putting downward pressure on utility stocks, and the interest rate hike is pending yet. The Philadelphia Utility Index (UTY) is already down approximately 16% from its peak at the start of 2015 and Dominion followed the decline. Resultantly, utility sector forward P/E valuation has dropped to 14.9x , very close to its historical average of 14.1x and significantly lower than S&P 500 index forward PE of 15.6x. It is quite an aggressive reaction from investors. Fed has hinted several times that it will follow the gradual and cautious strategy to hike the rate. That said, if it happens, the rate will start increasing from a very low level that Dominion’s yield will still be attractive. Moreover, the interest rate will also increase the ROE, which will partially offset the additional finance cost burden. (click to enlarge) Source: NASDAQ The drop in stock price has pushed Dominion’s dividend yield to a very attractive level of 3.97%. And, now Dominion is trading at trading at a forward PE of 17.1x, significantly less than the 5-year historical average of 36.2x. Thus, it seems that the market has already incorporated the impact of interest rate hike and Dominion may perform well in 2016 as earnings of the company will sustain long-term growth owing to margin expansions and aggregate growth CAPEX of $14.9 billion from 2016 to 2020. That said, Dominion is still a very attractive dividend stock capable of providing upside potential once the dust settles.

Treasury Yields Have Me Shying Away From Buying Some More Dominion Resources

Summary The stock appears to be fairly valued on next year’s earnings estimates. Increasing treasury yields has people investors leaving safe-haven yields plays such as Dominion. The company at least pays a great dividend to help stem the losses on the capital side of things. Dominion Resources (NYSE: D ) is a producer and transporter of energy. It manages its daily operations through three operating segments namely Dominion Virginia Power of DVP, Dominion Energy and Dominion Generation. On February 6, 2015, the company reported fourth quarter earnings of $0.84 per share, which beat the consensus of analysts’ estimates by $0.01. In the past year, the company’s stock is up 2.53% and is losing to the S&P 500, which has gained 14.03% in the same time frame. Since initiating my position in the growth portfolio back on December 23, 2014, I’m down 4%. I’d like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the growth portfolio. Fundamentals The company currently trades at a trailing 12-month P/E ratio of 28.37, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 18.66 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (5.52), which measures the ratio of the price you’re currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 5.14%. Financials On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 3.55% with a payout ratio of 101% of trailing 12-month earnings while sporting return on assets, equity and investment values of 2.9%, 12.9% and 7%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 3.55% yield of this company is good enough alone for me to take shelter in for the time being. The company has been increasing its dividends for the past 11 years at a 5-year dividend growth rate of 6.5%. Technicals (click to enlarge) Looking first at the relative strength index chart [RSI] at the top, I see the stock approaching oversold territory with a current value of 36.65. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars decreasing in height which tells me bearish momentum may continue in the name. As for the stock price itself ($72.91), I’m looking at $74.85 to act as resistance and the 200-day simple moving average (currently $70.77) to act as support for a risk/reward ratio which plays out to be -2.94% to 2.66%. Wrap Up After taking a look at the stock I think I’ve determined this is not a good place to be buying more of the stock right now. Fundamentally I believe the company to be fairly valued on next year’s earnings estimates and expensive on future earnings growth. Financially, the dividend is great and doesn’t have a lot of room to grow. On a technical basis the risk/reward ratio shows me there is more risk than reward right now. With interest rates on the ten-year treasury beginning to climb these utility names have begun to take a hit. So I’d first like to see the utility stocks decouple first from the treasury yields before I buy some more of this particular name. Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing! Disclosure: The author is long D. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Dominion Resources Is Boosting Returns To Shareholders, But Is It A Buy?

The utility sector is generally known as a collection of high yield, slow growth companies. Dominion Resources has been a top performer in the sector with an attractive growth rate and dividend yield. Dominion Resources recently announced a boost to the dividend and guided for a higher payout ratio going forward. This article will discuss the current valuation levels for the company and determine if it is worth adding to my dividend growth portfolio. As an avid reader of the dividend growth investing strategy on Seeking Alpha, it’s apparent that many investors using this method have a fond appreciation for utility companies in their portfolios. The consistency of earnings and reliable nature of a long-term, slow and steady growth rate make these companies a great cornerstone for long-term buy and hold investors. One utility that is a great example of this slow and steady growth is Dominion Resources (NYSE: D ). Here is the company description from Dominion’s website: Dominion is one of the nation’s largest producers and transporters of energy, with a portfolio of approximately 24,600 megawatts of generation, 12,400 miles of natural gas transmission, gathering and storage pipeline and 6,455 miles of electric transmission lines. Dominion operates one of the nation’s largest natural gas storage systems with 949 billion cubic feet of storage capacity and serves utility and retail energy customers in 12 states. Dominion has a long history of providing outstanding total returns for investors. The company has a 10-year dividend growth rate of 6.3%, a 10-year earnings growth rate of 4.5%, and during that time has provided investors with 12.4% annual total returns with dividends reinvested. While the past has been great, the future may be even better. On February 9th, the company announced an 8% increase in the quarterly dividend from $0.60 to $0.6475 per share, and stated its intentions to increase the dividend payout ratio from a range of 65-70% of earnings to 70-75% through the end of the decade. Dominion also held its Investor and Analyst Meeting on February 9th, with management providing an overview of operations and expectations for the future. During this meeting presentation, management provided guidance for 6-7% earnings growth and 8% dividend growth through 2020, both of which exceed rates seen over the last decade. With a current yield of around 3.55%, investors buying for the long term can lock in an attractive yield growing at a high rate for a utility company. However, in the short term, the stock appears to be trading at a rich valuation compared to historical levels. (click to enlarge) Compared to a normal PE of 16.2 over the last decade, the current ratio of 21.3 would indicate that shares are trading at a 30% premium to normal values. The current yield shown has not yet updated to the newly announced dividend rate, but the 3.55% yield at that payout is still low compared to historical levels. Much of this premium being paid by the market is due to U.S. Treasuries trading at historically low levels, which is driving income seeking investors into equities as they search for yield. I discussed this in a recent article covering the utility sector , and a similar situation is being seen in the REIT sector as well. This trend has been reversing in recent weeks, as the Treasury rate has rebounded and the utility sector, as shown by the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ), has sold off. 10 Year Treasury Rate data by YCharts Circling back to Dominion, it appears that the share price was driven up by macro factors, as the sector traded higher on the weaker Treasury rate. With that rate appearing to be normalizing, there could be some continued short-term pain for Dominion investors. Dominion is a great company with multiple drivers leading to continued growth. I think it deserves a spot in my portfolio as a core holding, but the valuation appears stretched at current prices. This is a company I hope to own, and it has been added to my watch list for my dividend growth portfolio . I will be looking for an entry point at around $65, which would provide a dividend yield of 4% that would pair quite nicely with an 8% dividend growth rate going forward. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.