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Bull Of The Day: Dominion Energy (D)

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In this period of unprecedented uncertainty, there is no safer equity sector than utilities. Dominion Energy (D - Free Report) is a dynamic utility company that offers a wide range of essential energy services primarily on the east coast. Dominion has been driving growth through acquisitions, growing synergies, as well as organic expansion. This stock offers both a capital growth opportunity and a healthy dividend yield. Analysts have been upwardly revising their EPS estimates for the next 3 years, despite the global pandemic, propelling D into a Zacks Rank #1 (Strong Buy).

Utility stocks have flight-to-safety characteristics due to the sector’s consistent cash-flows, low beta (low market risk), and healthy dividends. People will continue to need gas and electricity no matter the economic conditions, which gives utility companies relatively consistent cash-flows through economic slowdowns.

With the US working from home, the demand for residential utilities is going to grow, which should offset the decline in commercial utility.

The Business & Pandemic Impact

Dominion is split up into 5 segments, with 47% of its guided 2020 EPS being derived from Dominion Energy Virginia, followed by Gas Transmission & Storage, which is anticipated to make up 24% of 2020 EPS. Its other segments, Gas Distribution, Dominion Energy South Carolina, and Contract Generation are generating the remaining 29% of this year’s expected EPS.

According to Dominion’s most recent investor presentation on April 6th, the company is in excellent health. The only segment that is sizably exposed to the uncertain economic conditions is Dominion Energy Virginia, with a 1% change in residential sales impacting EPS by roughly 1.5 cents, and a 1% change in commercial sales will impact 2020 earnings by about 1 cent. 30% of its commercial demand is derived from datacenters, which will continue to hum throughout this slowdown to keep cloud-computing abilities accessible to the surging US population that is working from home.

Below is a graph that illustrates Virginia’s electric demand compared to its 2018 & 2019 levels from March 1st through April 6th and the stay at home order has not substantially impacted the market.

I believe that this shelter-in-place order may have a positive impact on the company’s earnings, with an anticipated increase in residential energy demand. Analysts agree with a slue of upward revisions to EPS estimates over the past 3-months.

Financials

According to the Dominion’s most recent investor update (April 6th), they now have access to $7.2 billion in liquidity. The firm doesn't have long-term debts due until the second half of 2020, where the firm has a robust plan and flexibility to meet its $2 billion in debt obligations.

D offers shareholders a juicy 5% dividend at its current share price, and this payout is expected to grow by 9% annually for the next 5 years.

Looking To The Future

Dominion closed its deal with SCANA in January of 2019. According to CEO Thomas Farrell, “Dominion Energy is pleased to add SCANA’s fast-growing, high-performing Southeastern businesses to our 18-state footprint. Together, we are committed to providing safe, dependable, affordable and clean energy to the communities served by SCANA and to maintaining its excellent record of reliability and customer service.”

This acquisition attributed to the 24% topline growth that Dominion experienced in 2019, but steady growth is expected to continue through 2020. Dominion's management guidance for its top 3 segments illustrated high single-digit to low double-digit growth, with regulated investments being the key catalyst.

Dominion continues to invest in alternative energy sources like wind & solar, getting ahead of the curve for the universal shift toward renewable energy.

Take Away

Dominion provides investors with a double-edged sword during this time of uncertainty with its capital growth potential combined with its cushy 5% yield. D may be a stock to start putting your money to work if you are a long-term investor. 

These shares may still experience some short-term volatility, but I would say that any price below $80 would be reasonable for a long-term investment.

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