Can This Stock Power Your Portfolio?

By Matthew DiLallo - August 15, 2012 | Tickers: CQP, LNG, CNX, D, LINE | 0 Comments

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A longtime favorite sector of income seeking investors has always been utilities.  Steady demand for power has churned out steady earnings for decades.  These steady earnings have given utilities the power to pay nearly as steady dividends to their income seeking shareholders.  Who wouldn’t want a steady paycheck these days?

With all the volatility in the market the past few years, those steady dividend checks should help to smooth out some of that volatility.  That sounds pretty appealing if you ask me.  That’s why I’m on a personal journey to find the one utility stock that can provide some powerful stability to my portfolio for years to come.  Once I’ve selected my dividend dynamo, I’ll be adding shares to my virtual “No Drip, No Mess” portfolio which seeks income which is then reinvested in growth companies.  Not only that, but I’ll be looking to add shares to my own personal portfolio once trading rules allow. 

I’ll be searching for the utility company that is best positioned to succeed over the long term.  I’m looking for three things: Growing dividends, diversified business and a tilt toward cleaner energy. First up in my search is Virginia based Dominion Resources (NYSE: D).  I want to know if they can power my portfolio with dividends for the next decade? 

Dominion is one of the nation’s largest producers and transporters of energy and their focus is on both gas and electric infrastructure.  They do this with a portfolio of 27,500 megawatts of electricity generation, 11,000 miles of natural gas transmission, gathering and storage pipelines and 6,300 miles of electric transmission lines.  They also operate the nation’s largest natural gas storage system with 947 billion cubic feet of storage capacity.  These numbers sound big, but how big are they?

Well, for one, it is big enough to make Dominion the third largest utility in the country by market capitalization.  Their 27,500 megawatts of electrical generation is enough to power almost 14 million homes.  Those 11,000 miles of natural gas lines, if you laid them end to end you’d almost go half way around the world.  Oh, and those 947 Bcf of natural gas storage capacity, yeah, that’s billion with a “B” and enough gas to supply nearly nine and a half million homes for a year.

They operate under three business segments: Dominion Virginia Power which houses their retail business as well as their electric transmission and distribution operations, Dominion Energy which houses their gas transmission and distribution businesses as well as their producer services and finally Dominion Generation which has both their utility and merchant generation assets.  A look at each business segment shows a lot to like about the combined company.

Dominion Virginia Power serves 2.4 million customers in North Carolina and Virginia through 56,800 miles of distribution lines and 6,300 miles of transmission lines.  In addition, they have 2.1 million non-regulated customer accounts in 15 states.  This core utility business is located in one of the fastest growing areas with a projected 1.9% peak summer load growth rate for the next 10 years. 

Embedded within Dominion Energy is what would amount to having two thirds of the natural gas production cycle, the only thing they lack is an exploration and production business to complete a full vertical integration.  They used to have an E&P business but they sold it off in pieces to companies like Consol (NYSE: CNX) and Linn Energy (NASDAQ: LINE) to focus on their core utility operations.  Linn bought their mid-continent operations in a move that really helped to catapult Linn into a top tier producer while providing Dominion with capital to reinvest into their core operations.  Consol bought their Appalachian business in 2010 in a move to bolster their Marcellus acreage.  All told they sold off $17.4 billion dollars of E&P assets over the past five years.  What they were left with in their Energy business is a set of MLP type transmission assets which include nearly 8,000 miles of pipeline, 776 Bcf of storage, 228 MMcf/d of natural gas processing capacity and their Cove Point LNG facility.  These assets are perfectly positioned in the Marcellus and Utica developments.  In addition to these transmission assets they serve 1.3 million natural gas customers through their utility distribution business in Ohio and West Virginia. 

One asset which could prove to be a real gem is their Cove Point LNG facility.  Currently an import facility, they are in the process of turning it into an export facility.  They have already signed up two foreign customers to receive gas from this facility and are in the process of gaining Department of Energy approval for non-free trade agreement countries.  The facility is strategically located to capitalize on Marcellus and Utica shale production.  This facility has the potential to put Dominion right in line with Cheniere Energy (NYSEMKT: LNG) and Cheniere Energy Partners (NYSEMKT: CQP) and their Sabine Pass facility in the race to export gas.

Dominion’s generation business is a diverse mixture of regulated utility (19,000 MW) and unregulated merchant (8,500 MW), further diversified by fuel source at 31% coal, 28% natural gas, 21% nuclear, 20% oil, renewable and others.  They are investing $4.3 billion dollars over the next four years on their regulated infrastructure which includes several gas fired projects as well as several coal to biomass projects involving waste wood.  As far as their clean and renewable tilt that I am looking for, they have a very small wind business, some hydro.  They tilt a bit more toward dirtier energy at 42% coal and oil but they seem to be heading in a cleaner direction.

While they have a very diverse set of assets, the real question if they are enough to grow the business going forward?  According to management they’re expecting to grow operating earnings by 5-6% annually beginning this year.  They’ll do this by plowing more than $2 billion a year into their growth capex plans through 2016.  That capital will be spread fairly equally between their three businesses, however, their generation business will see the biggest spend.  They are evaluating another billion dollars’ worth of gas infrastructure spending projects as they have assets in the heart of the Marcellus and Utica Shale developments.  As those growth projects come on line and add to the bottom line the management team will have the ability to increase the dividend.

This leaves us with the most important piece of any utility investment, the safe, secure and hopefully growing dividend.  Dominion’s shares currently yield about 4% and they continue to target a payout ratio of 60-65% of their earnings. They’ve grown the dividend 33% over the past five years or about six and a half percent annually.  With earnings expected to continue to grow at that 5% to 6% annual clip  I think it is safe to expect the dividend to grow at least as fast as earnings growth going forward. 

Bottom Line:

I like what I’m seeing in Dominion and could see them having a place in my portfolio.  They pay a solid dividend that’ll grow over time.  Their three business segments contain a very diverse set of assets, among which is a perfectly positioned midstream business as well as their strategically positioned Cove Point LNG facility.  They don’t have the cleanest generation portfolio so that would be the only knock I have against them.  I like what I see in Dominion, but want to see what other utilities have to offer before putting down any capital. 

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