Charles Fishman: We know many investors buy utilities for income, and for those at or near retirement, the security and growth of the dividend are very important. At Morningstar, we put a lot of effort into looking at future earnings and cash flows, trying to determine the safety of the dividend and where the cash to pay and grow the dividend will come from. We think Dominion Energy is a great opportunity for investors, as the shares have a common dividend with a yield currently around 4%, and an undervalued stock price.
This wide-moat company, in fact Morningstar's only wide-moat utility, is finishing up one huge infrastructure project and getting ready to begin another. The project nearing completion is the $3.5 billion Cove Point LNG export facility in Maryland. LNG stands for liquefied natural gas, and two large international energy marketing companies, one from Japan and one from India, will buy natural gas from producers, ship it to Cove Point where it will be cooled to minus 259 degrees Fahrenheit and loaded on a ship. The marketers have contracted with Dominion to do this for 20 years, regardless of whether they continue to use the facility. In other words, the cash flow to Dominion is solid and not dependent on energy prices.
The other project that should begin construction later this year is the $5 billion Atlantic Coast Pipeline, or ACP, in which Dominion is the lead partner with 49% ownership and is the builder and operator of the pipeline stretching from West Virginia to North Carolina. Most of the customers for ACP are investment grade utilities hauling cheap shale gas to power plants or to customers using the gas for heating and cooking. In other words, another great project with solid cash flow when completed in late 2019.
These two projects should provide over $7 billion of cash to Dominion over the next five years, supporting dividend growth that we project will be over 8% per year. Combine this with our estimate of 7% annual earnings growth, and you have the formula for a great growth and income stock for conservative investors.