If you’re like me, you love a good sale.
I’m always looking for Buy 1 Get 1 Free deals at the grocery store. I comparison shop using online and newspaper ads. And yes, I clip coupons. The result is the kind of savings I received on my most recent shopping trip:
My love of bagging bargains extends beyond groceries. I shop hard for clothing, electronics, cars, you name it.
As an investor, I usually strive for deals on the stocks I buy, too.
Nevertheless, in the three months I’ve been putting together the Income Builder Portfolio for Daily Trade Alert, value has not been the primary driver behind my selections.
As I explained in the IBP Business Plan:
A company’s valuation will be considered before each purchase, but it will be a secondary concern to the perceived quality of the investment.
An investor making sizable additions to a large, established portfolio might be more concerned about valuation. The IBP, however, is a DGI (Dividend Growth Investing) newcomers’ portfolio that will be built over time through regular $1,000 purchases – similar to the concept of dollar-cost averaging.
When trying to decide between two similar companies, the more fairly valued stock usually will be selected.
Given the IBP’s rules (as well as the dates my bosses want to publish my articles), I have only so much control over the timing of purchases. Pretty much every other Tuesday, I am making a buy, whether the market is up or down.
Sometimes, the timing turns out to be a little unfortunate. That was the case with my 3M (MMM) buy of Jan. 30, as the market turned sour over the next week.
Since then, macro conditions (such as the steel tariffs that even fellow Republicans urged President Trump to abandon) have punished MMM further.
Chart from Morningstar
Thankfully, sometimes Mr. Market does put a quality company I want to buy on sale. I believe that has happened for my sixth pick for the IBP:
Dominion Energy (D).
Back on Dec. 21, in only my second article after joining the DTA team, I named Dominion one of “Five Core Stocks For Any Dividend Growth Portfolio.”
At the time, I noted that “investors starved for income have bid up prices for utilities, Dominion being no exception.”
The table within the article drove home the point: At $81.34 per share, D had a forward price/earnings ratio of 20.3.
Well, a lot has changed in the last three months.
Dominion closed Friday at $67.30, a decline of 17%. Its forward price/earnings ratio has decreased to 16.8.
I look at all that – as well as the rise of the dividend yield from 4.1% to 5% – and say, “Dominion Energy is on sale, baby!”
It will be our second consecutive buy of a utility, as the portfolio added NextEra Energy (NEE) on March 13.
A little bit later, I will be going into some of the reasons Dominion’s price has fallen and the challenges facing the company, but first a few words on why I believe D is worth owning.
Friendly Regulators & Growth Drivers
Dominion’s primary service area, Virginia, historically has provided a very friendly regulatory environment. That kind of relationship is the main thing I look for when I’m thinking about buying a utility.
Dominion investor relations presentation
Because of the rates Virginia lets Dominion charge customers, the company expects to experience a return on equity (ROE) in excess of 10% this year – well above the industry average.
Dominion will benefit greatly from the revenue gains from the recently completed Cove Point liquid natural gas export facility. The Atlantic Coast Pipeline, which is under construction and set to open in two years, will be another major boon.
Cove Point and the ACP contribute to Dominion being the only utility to receive a “wide” moat rating from Morningstar, which believes those operations will give the company “sustainable competitive advantages.”
And as this slide from Dominion’s investors presentation shows, there are plenty of other growth drivers for the years ahead:
D Is For Dividends!
The white line on the following FAST Graphs illustration shows D’s impressive dividend trajectory:
The numbers highlighted in yellow are the actual annual dividends paid through 2017. Dominion will pay out $3.34 per share during 2018 (circled in red). And the company already has announced plans to increase the divvy by 10% in each of the next two years (circled in blue).
Starting with its 2008 raise, D has grown its annual dividend by 8.2%, 10.8%, 4.6%, 7.7%, 7.1%, 6.6%, 6.7%, 7.9%, 8.1%, 8.4% and 10% … with two more 10% hikes to come.
That’s very good for any company, and incredible for a utility.
Dominion is the nation’s fourth-largest ute behind NextEra, Duke Energy (DUK) and Southern (SO). DUK and SO don’t even average 4% annual dividend growth. (NEE, like D, is a great divvy grower.)
Assuming Dominion follows through on its increases for 2019 and 2020, the dividend will have more than tripled in 13 years. Hello!
Let’s face it, if you are into Dividend Growth Investing, you care about stuff like that. As for this DTA endeavor, it’s called the Income Builder Portfolio for a reason.
The goal is to build a reliably rising income stream. And I’m very confident Dominion will deliver big-time.
Challenges & Headwinds
If Dominion Energy is all that, why has its price plummeted this year?
For one thing, utilities have been adversely affected by the rise in U.S. treasury bond yields. As the following graphic from FactSet (via Barron’s) shows, bond yields and utility share prices tend to move in opposite directions:
Dominion also has faced other headwinds specific to its operations.
It is trying to merge with another southeastern U.S. utility, SCANA (SCG), a move that would add at least 25% to Dominion’s customer base and greatly enhance earnings and revenue.
However, SCANA has encountered problems with an unbuilt nuclear plant. If South Carolina legislators make rulings leading to severe financial difficulties for SCG — or even bankruptcy — Dominion says it will cancel the deal.
Mr. Market hates uncertainly like that. And like this:
The Federal Energy Regulatory Commission (FERC) recently announced a major change to a rule that lets master limited partnerships (MLPs) recover income tax on service contracts.
The new rule, which would go into effect in 2020, could limit the ability of Dominion’s MLP – Dominion Midstream Partners (DM) – to create revenue for the parent company.
The March 14 FERC announcement resulted in a 3% loss on D’s stock price the next day, beginning a stretch that has seen the price decline in 6 of 7 trading sessions.
Table from Seeking Alpha
In an effort to calm investors, Dominion released a statement on March 19 in which it reaffirmed its outlook and downplayed the effects of the FERC action:
Price declines slowed after the statement, but D continued to drift downward along with the rest of the market because of the Trump tariffs, a rate hike by the Federal Reserve and other macro conditions.
Wrapping Things Up
Some of my very best investments over the years have come when I’ve bought good companies during bad stretches.
In February 2016, Boeing (BA) got crushed after regulators announced they would be looking into possible accounting irregularities. I bought it anyway at $115 per share’; two years later, it’s at $321.
It isn’t always easy to determine if a situation is Trouble with a capital T or Opportunity with a capital O. That’s when I fall back on quality — and a company’s ability to persevere through ups and downs.
Dominion has passed such tests repeatedly over the years. So I’m not panicking about the large position I own in my personal portfolio, and I’m happy to buy D at a bargain price for the Income Builder Portfolio.
My article about the execution of the purchase will be published on Wednesday, March 28.
As always, this is not a recommendation to buy any stock. Each investor should do his or her own thorough research.
— Mike Nadel