Expect 10% Annual Dividend Growth From This Utility

Charles Fishman: Earlier this year Dominion Resources changed its name to Dominion Energy, but in our opinion, the market does not appreciate the conservative strategy pivot relying on wide-moat infrastructure investments that we expect to provide 10% per year dividend increases over the next five years. Dominion's attractive dividend currently provides a 4% yield, but we believe the company's conservative strategy means future dividend increases are almost locked in for investors.

The company exited oil and gas exploration and production in 2010 and is now less dependent on merchant generation, two businesses where earning a moat is difficult. Dominion's wide-moat growth projects--notably the Cove Point Liquefied Natural Gas facility and the Atlantic Coast Pipeline--illustrate the new conservative strategy and should be in commercial operation later this year and late 2019, respectively.

Cove Point's 20-year agreements with two creditworthy international gas companies have a fixed fee that covers all operating and capital cost. Natural gas is supplied by the counterparties. Thus, Dominion takes no commodity or volume risk with the $3.5 billion Cove Point project. The market also does not appreciate the conservative, demand-driven $5 billion Atlantic Coast Pipeline. Dominion will use gas from the ACP to fuel two huge gas-fired power plants in southern Virginia. Partners Duke and Southern have 20-year agreements to take gas for their retail natural gas customers or as fuel for electricity generation as they retire coal plants. This is much less risky than agreements with gas producers.

We think Dominion's dividend and earnings growth have the potential to deliver double-digit total annual return for conservative investors for the foreseeable future.