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Dominion Resources Set To Grow At Better Pace Than Its Peers

Summary Ongoing efforts to extend and improve operations will grow future top and bottom-line numbers. Company’s healthy earnings growth prospects will support cash flow base. D offers cheaper growth as compared to peers. Dominion Resources (NYSE: D ), one of the largest U.S. utility companies, has extended operations across the Mid-Atlantic region. D’s diversified electric and natural gas operations have been getting better revenue and earnings growth. As the company is increasing its growth capital expenditures to grow both electric and natural gas businesses, D’s long-term earnings growth outlook looks stable and attractive. And in fact, significant growth potential as a result of capital expenditures makes me believe the company will continue to grow its dividends at a healthy pace in the long term. The company’s earnings are expected to grow at an average rate of 6% in the next five years. Along with healthy growth prospects, the stock offers an attractive dividend yield of approximately 3%, which makes it an attractive pick for dividend-seeking investors. Elevated Growth Capital expenditure will guard D’s Long-Term Growth The U.S. utility sector has performed pretty well in 2014. And in the wake of improving economic conditions, future growth prospects of the industry also look bright. As far as D is concerned, with ongoing increases in its growth capital expenditures directed towards betterment and extension of its infrastructure and operations, the company has been strengthening its position among other utility sector giants. And in this regard, D has recently increased its long-term capital expenditure outlook from 2014-2019; the company will now spend $20.4 billion (guidance mid-point), higher than the previous forecast of $14 billion , on its various energy infrastructure projects. The value of these growth investments lies in strengthening the company’s current energy infrastructure in order to serve its customer base in a more competent and effective way. The following chart shows updated figures for the company’s increased capital expenditure on various growth projects. (click to enlarge) Source: Investor’s Meeting Presentation As natural gas production has significantly increased in the U.S., D is directing the major chunk of its capital expenditure to improve its natural gas infrastructure. As a matter of fact, one of the most important growth projects of the company is the Atlantic Coast Pipeline (NYSE: ACP ) project, which is a joint venture of D, Duke Energy (NYSE: DUK ), Piedmont Natural Gas Company (NYSE: PNY ) and AGL Resources Inc. (NYSE: GAS ). The ACP project’s pipelines, which have a capacity of 1.5Bcf/day, expandable to 2Bcf/Day, are waiting for FERC approval. The project’s construction is expected to begin in mid-2016, after which it will be made available for commercial operations by the end of 2018. D has the largest stake of 45% in the project, and I believe the company will benefit from this $5 billion project in the long run by meeting the increased natural gas transmission demand in Virginia and in North Carolina. Also, the company has invested $500 million towards its 1.0-1.5Bcf/day Supply Header Project (NYSE: SHP ). The timing to start SHP operations has been perfectly linked to the ACP project in order to support ACP by connecting its pipelines with five supply header reception points. With their operations scheduled to start in 2018, ACP and SHP will deliver natural gas to Virginia and North Carolina. In fact, these projects will allow D to increase its rates, which will portend well for its top and bottom-line growths in the long term. In addition to the ACP and SHP projects, the company has also agreed to acquire CGT for its subsidiary Dominion Midstream Partners, LP (NYSE: DM ). The addition of CGT offers an appealing opportunity to DM to raise rates in Virginia and Carolina, which will portend well to improve the company’s overall earnings base in the years ahead. Furthermore, the company is actively working to capitalize on the growth potentials of its Cove Point LNG export project, which has a capacity of 5.25 million tons/year . The Cove Point terminal facility is the first LNG export facility outside Louisiana and Texas to get government permission to export LNG. And it has created D’s monopoly, which will allow the company to enhance its bargaining power with suppliers. The company has already signed a 20-year LNG supply contract with Japan’s Sumitomo Corporation and Gail India. Owing to the longevity of these contracts, I believe D will have secure and strong top and bottom line bases for the years ahead. In addition to the abovementioned projects, the company is also making investments in renewable energy projects to strengthen its energy portfolio and comply with environmental regulations. In this regard, D has acquired the 28.4MW West Antelope Solar Park and the 50MW Pavant Solar Project . In its attempts to further capitalize on the growth prospects of renewable energy projects, the company has recently filed a request with VSCC to construct the first and largest solar facility in Virginia. By facilitating its customers to purchase electricity from its 2MW solar energy facility in Virginia, the company has created another important revenue generating source. Due to the impressive capital expenditure outlook and healthy growth prospects of the ongoing projects, I believe D is well-headed to delivering EPS growth in high-single digits. The company is scheduled for the 4Q’14 earnings call early next month, and during the earnings call, D will update its capital expenditure outlook and provide 2015 earnings guidance; any increase in capital expenditure outlook will portend well for its future growth and stock price. Hefty Dividends D’s healthy growth prospects have been fueling its earnings and cash flow growth, and helping it make attractive dividend payments to shareholders. Owing to its strong track record of making hefty dividend payments, the company is currently offering an attractive dividend yield of 3% . Since D is aggressively pursuing growth opportunities by making capital expenditures, I believe the company will attain more cash flow stability in the years ahead. Also, the company will continue to grow its dividends at a healthy pace in the years ahead; in the last five years, the company increased its dividends at an average rate of 7.3% . Risks The company’s efforts to expand its business operations, if not handled and executed effectively, could result in mismanagement and could weigh on its future performance. Moreover, regulatory restrictions and unfavorable movements in commodity prices are key risks to its future stock price performance. Conclusion The company’s ongoing efforts to extend and improve its operations are well-headed to grow its future top and bottom-line numbers. Moreover, the company’s healthy earnings growth prospects will support its cash flow base, which will allow it to consistently grow its dividends. The company currently has a higher forward P/E of 21.15x , as compared to Duke Energy’s and Southern’s forward P/E of 18.60x and 18.20x , respectively. I believe the higher forward P/E of D is justified due to its better growth prospects, as shown below in the table. Also, the company offers cheaper growth as compared to its peers, as it has a lower PEG of 2.9 , as compared to DUK’s PEG of 3.5 and SO’s PEG of 4.5 . The following table shows that D’s future earnings growth rate remains better than its peers. 2015 2016 2017 Long-Term 5-Year D 8.77% 4.80% 6.11% 6.05% DUK 3.97% 4.34% 5.27% 4.76% SO 2.13% 3.66% 4.31% 3.63% Source: Nasdaq.com

Transport ETFs Jolted By Weak UPS Earnings Forecast

With the economy growing at the fastest clip in over a decade and the oil price at a five-year low, transportation was one of the best performing sectors of 2014. This trend continued in 2015 driven by solid retail, manufacturing, and labor data that created strong demand for the movement of goods across many economic sectors. Additionally, strong earnings from major players in the industry are fueling growth in the sector. However, the space was badly hit by the recent profit warning and sluggish outlook from the bellwether United Parcel Service (NYSE: UPS ) on January 23 that dampened investors’ mood making them cautious on the stock and the broad sector. UPS Warns of Soft Q4 Earnings The world’s largest package delivery company said that higher operating expenses and temporary hiring for the peak holiday season might take a toll on the earnings for the fourth quarter and full-year 2014. It is slated to release its fourth quarter earnings on February 3. The company now projects earnings for Q4 to come in at $1.25 per share, missing the Wall Street’s expectations of $1.47. Accordingly, the Zacks Consensus Estimate moved down to $1.25 from $1.47 over a period of seven days. United Parcel also slashed its full-year guidance to $4.75 per share, much below the previous expectation of $4.90-$5.00 a share and the current Zacks Consensus Estimate of $4.77. The Zacks Consensus Estimate has declined 21 cents over the past 7 days. Weak 2015 Guidance Further, the company expects 2015 earnings to grow slightly less than its long-term growth target of 9-13% due to increased pension costs and currency headwinds. The Zacks Consensus Estimate currently represents growth of 7.85% for this year. Market Impact The news has spread bearishness not only on this package delivery giant but also on the broad space. UPS shares dropped as much as 10% on Friday after this bearish announcement and are down nearly 11.7% over the past three days. Its major rival FedEx (NYSE: FDX ) fell 4.1% over the past three sessions. The sluggish trading has also been felt in the ETF world as both the transport ETFs – the iShares Dow Jones Transportation Average Fund (NYSEARCA: IYT ) and the SPDR S&P Transportation ETF (NYSEARCA: XTN ) – lost 2.3% and 1.2%, respectively, in the same period. What Lies Ahead? Despite the slide and UPS’ sluggish outlook, investors shouldn’t completely write off transportation ETFs from their holdings. This is because the funds have spread out exposure to a number of firms in various types of industries like railroads, airline and low cost trucking suggesting that the space can easily counter shocks from some of the industry’s biggest components. In fact, IYT puts about 47% in railroads while airfreight & logistics makes up for nearly 27% share. Meanwhile, XTN is heavily exposed to trucking and airlines as these make up roughly 62% of the total while air freight & logistics accounts for 21% share. In terms of individual holdings, the iShares product is heavily concentrated on the top firm – FedEx – at 11.65% while UPS takes the fourth spot at 6.71%. On the other hand, State Street fund uses an equal weight methodology for each security. While IYT is more popular and liquid among the two, XTN is cheap by 8 bps. Further, FedEx reaffirmed its EPS guidance of $8.50-$9.00 for fiscal 2015 on the heels of UPS’ warnings. The midpoint is well above the Zacks Consensus Estimate of $8.94, indicating sound business for the transport ETFs. If these were not enough, cheap fuel will provide a big-time boost to transport earnings growth. This has already started to reflect in the latest earnings results as earnings for the transport sector reported so far is up 20.6% with a beat ratio of 57.1% and median surprise of 3.3%.

ALPS Plans A Put Write ETF To Play Market Volatility

The U.S. markets have seen a volatile start to the year, thanks to the relentless slide in crude oil prices, worries about a possible exit of Greece from the Euro zone, global economic growth concerns and slumping commodity prices. Rising market volatility has led some issuers to plan for funds based on put write strategy. WisdomTree has lately filed for a fund – WisdomTree CBOE S&P 500 Put Write Strategy Fund – to generate returns by writing put options on the S&P index. Most recently, ALPS has filed for a fund based on a similar strategy. The proposed fund will go under the name of ALPS Enhanced Put Write Strategy ETF (Pending: PUTX ). Below, we have highlighted some of the key details of the recently filed fund. PUTX in Focus As per the SEC filing , the proposed actively managed product looks to maximize total return by selling put options on the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). SPY tracks the S&P 500 index measuring the performance of large-cap U.S. stocks. The premium received will then be invested in an actively managed portfolio of investment grade debt securities. The portfolio will include Treasury bills, corporate bonds, commercial paper and mortgage- and asset-backed securities, having an average duration of less than 6 months and maturity of less than one year. How might it fit in a portfolio? The fund is a good choice for investors who wish to add income and thereby boost risk-adjusted returns. Investors who believe that the U.S. equity market will trade in a narrow range next year can look to invest in the fund. A put write strategy usually outperforms the index in a down trending market and significantly outperforms the S&P 500 index in a sideways market. Moreover, put write strategies have historically outperformed buy strategies. However, investors should keep in mind that the fund’s potential return is limited to the amount of option premium it receives and that the proposed fund might underperform during strong bull markets. ETF Competition The recently filed product is quite similar in strategy to the WisdomTree CBOE S&P 500 Put Write Strategy Fund. However, unlike PUTX. which sells options on SPY ETF, WisdomTree’s product looks to sell options on the S&P 500 index itself. Moreover, while PUTX looks to invest the premium received in an actively managed portfolio of investment grade debt securities with less than one year maturity, the CBOE S&P 500 Put Write Strategy Fund will invest the premium received in one-to-three month U.S. Treasury securities. As such, both the funds might be good competitors if launched. Apart from this we also have another put-write fund in the market from ALPS itself. The fund in question – US Equity High Volatility Put Write Index ETF (NYSEARCA: HVPW ) – tracks the NYSE Arca U.S. Equity High Volatility Put Write Index. The index sells put options on the largest capitalized stocks having the highest volatility. The index uses the sales proceeds to invest in short-term U.S. Treasury securities. The fund manages an asset base of $50.8 million and trades in low volumes of roughly 23,000 shares a day. The ETF charges 95 basis points as fees and has delivered flat returns in the year-to-date frame. So, there is hardly any competition for the newly proposed fund. If launched, the fund has a fair chance of making a name for itself. However, let’s not forget that success over the longer run is ultimately a huge factor of the fund’s performance.