I have been looking to add a utility company to my wife’s and my dividend growth portfolio for some time. Though we own more than 30 stocks, we did not yet own a utility stock. That changed when we recently purchased shares of Dominion Resources (NYSE:D). I’ve had this stock on our shopping list several times, but haven’t yet bought shares. As of 10 days ago, we added the stock to our portfolio.
Here is the company description from google.finance.com:
“Dominion Resources, Inc. (Dominion) is a producer and transporter of energy. Dominion is focused on its investment in regulated electric generation, transmission and distribution and regulated natural gas transmission and distribution infrastructure. It operates through three segments: Dominion Virginia Power operating segment (NYSEARCA:DVP), Dominion Generation, Dominion Energy, and Corporate and Other. The DVP segment includes regulated electric distribution and regulated electric transmission. The Dominion Generation segment includes regulated electric fleet and merchant electric fleet. The Dominion Energy segment includes gas transmission and storage, gas distribution and storage, gas gathering and processing, liquefied natural gas import and storage, and nonregulated retail energy marketing. As of December 31, 2016, Dominion served utility and retail energy customers, and operated an underground natural gas storage system with approximately one trillion cubic feet of storage capacity.”
One item of interest not found is this description is the company’s Cove Point Liquefied Natural Gas facility in Maryland. From this facility, Dominion will be able to export LNG. Morningstar forecasts that LNG exports from the United States will substantially increase over the coming decade. Dominion has signed a 20-year contract with its partners in Japan and India that covers all capital and operating costs associated with the project. Morningstar rates management as exemplary and assigns the company a wide moat rating. These are the highest ratings that Morningstar has for either category.
Some investors might shy away from utility companies when interest rates are on the rise. As I wrote about in my March shopping list, Dominion and the utility sector rose after the Fed announced it was raising rates. Granted it was a whopping 0.25% rise in rates, but Janet Yellen and co. indicated that they would likely be raising rates throughout the year. The fact that utilities, and Dominion in particular, didn’t suffer a vicious price drop tell me that investors expected the raise and aren’t spooked by the Fed’s actions.
Dividend Track Record
I’ve wanted to add a utility company to our portfolio because they often offer generous dividends. And Dominion is no slouch when it comes to the dividend. Dominion currently yields just under 4%. Though not as high as some other utility companies, the current yield is still strong. Where Dominion really shines is in the dividend growth. Over the past 3, 5 and 10 years, dividend growth has been 7.6%, 7.3% and 7.3% respectively. Not bad for what some might consider a stodgy old utility. In fact, this dividend growth is higher than many other companies that I follow in this sector. Dominion’s dividend growth greatly outpaces Southern Company (NYSE:SO), American Electric Power (NYSE:AEP) and Duke Energy (NYSE:DUK) over each of these time periods. The only utility company I follow with better dividend growth over these same time periods is NextEra Energy (NYSE:NEE) and they just barely beat Dominion’s numbers.
For those fearing that a company with such solid dividend growth might eventually fade, Dominion’s most recent raise was 7.86%, which is above its own 3, 5 and 10-year growth rates. On the company’s most recent conference call, management declared their intentions to raise the dividend at least 8% through the year 2020. Of course, I’ve been burned before by companies forecasting aggressive dividend growth rates (looking at you Kinder Morgan (NYSE:KMI)). Given the company’s track record of 14 years of dividend growth and sector dominance, I’m thrilled to be able to pick up shares of Dominion Resources.
We bought shares of Dominion on 4/10/2017 at a price of $77.77. At that time, F.A.S.T. Graphs listed the current price to earnings multiple at 20.6. Compared to the 5-year average PE, the stock was 6.31% overvalued. S&P Capital has a 1-year price target of $75 and a fair value of $66.10. By these measures, Dominion was 3.5% and 15% overvalued, respectively. Morningstar had just raised their fair value for the stock to $83 per share. By this measure, we bought shares at a discount of 6.72% to fair value. Average these numbers out and I found shares to be 4.5% overvalued at the time of purchase. For companies with at least a decade of dividend growth, I am willing to pay 5% above what I feel is fair value. When I consider Dominion’s business dominance and dividend growth track record, I am fine with overpaying for this quality company. With this purchase, we were finally able to add a utility company to our portfolio. What do you think of our pick to add Dominion Resources to our portfolio?
Disclosure: I am/we are long D.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are not investment professionals. Please do your own research prior to making an investment decision.