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Dominion Resources: A Reasonably Priced Utility

Charles Fishman, CFA

Charles Fishman: Due in large part to investor demand for yield, utilities in 2016 have been one of the top-performing sectors--up roughly 15% year to date. And, since they have done so well, most are expensive relative to our fair value estimates. However, one utility that is reasonably priced in our opinion is Morningstar best idea Dominion Resources. 

Three reasons we like Dominion: First, we expect the company to begin generating strong free cash flow in 2018 when Cove Point begins commercial operation. It will be the only LNG export facility on the East Coast. Cove Point is already fully contracted with long-term take-or-pay contracts.

Second, we expect Dominion to use the cash to accelerate its common dividend growth. Over the past five years, shareholders have seen Dominion's dividend increase at a 7% annual rate. We now expect Dominion to grow its dividend at over 8% per year when Cove Point is completed.

Third, we think the shares do not reflect the long-term benefit of the Questar acquisition. The acquisition is expected to close by year end, and in addition to a high-quality regulated utility, the transaction will add a 2,700-mile wide-moat interstate pipeline network in Utah, Wyoming, and Colorado. Although a small earnings contributor in the near-term, we think the pipeline will offer wide-moat investment potential during the next decade as a western hub for supplying natural gas to utilities that are retiring coal-fired power plants and building gas plants to meet environmental regulations.

In conclusion, we think conservative growth and income investors should take a hard look at Dominion Resources.