Dominion Resources: A Stock For Income Investors' Portfolios

| About: Dominion Resources, (D)


The stock offers a solid dividend yield of 3.9%.

Robust capital expenditure will support long-term EPS growth.

Completion of construction projects will augur well for the stock's valuation.

Dominion Resources (NYSE:D) stays attractive investment prospect for income-hunting investors, as it offers a solid dividend yield of 3.9%. Also, D has best in class dividend growth profile, as the company plans to increase dividends at an average rate of 8% per annum from 2015 through 2020. The company's plan to steadily grow its midstream business, ongoing construction projects and focus on renewable energy generation will fuel its long-term earnings and dividend growth.

Also, on-time completion of the Atlantic Coast Pipeline (ACP) and Cove Point will augur well for the business risk profile and long-term growth. The company is aggressively working to increase its net-generation assets, which will expand its rate base and fuel earnings growth; D's net generation assets are anticipated to grow from $40.8 billion in 2015 to $56.5 billion in 2020.

Financial Performance and Growth Catalysts

The company reported operating EPS of $0.96 for 1Q16, beating consensus of $0.95. It reported revenues of $2.9 billion for the quarter, down from $3.4 billion in 1Q15; revenues for the quarter were adversely affected by unfavorable weather conditions and the absence of a farmout agreement.

The company maintained its full-year operating EPS target of $3.6-4.0. D's future growth will be driven by its efforts to strengthen, expand and diversify its asset base. It has a robust capital expenditure profile, which will support its long-term growth. The company plans to make $15.7 billion of growth capital expenditure from 2016 through 2020, which will help it to expand its net asset base at an average rate of 7%. The following chart shows D's planned growth capital expenditures.

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Source: Investor Presentation

The ongoing construction of the two demand-driven projects (ACP and Cove Point) remains the key driver for its future growth. The construction of the company's Cove Point project remains on budget and on time. The Cove Point project is 64% complete and is expected to be in service by the end of 2017, which will allow D to export almost 5.75 million metric tons of LNG.

Also, D's ACP project expected to be in service in late 2018, and surveying and pipeline engineering will complete by the end of 2016. As the company completes these projects, its construction risk will reduce substantially, which will enhance investors' confidence and augur well for the stock's valuation.

To support its near-term growth and diversify its asset base, D has planned to acquire Questar Corporation. The $6 billion deal to acquire Questar is the third big Southeast electric gas acquisition announced within twelve months, following Duke Energy's (NYSE:DUK) acquisition of Piedmont Natural Gas (NYSE:PNY) and Southern Company's (NYSE:SO) acquisition of AGL Resources (NYSE:GAS). The strategic rationale for these acquisitions is to improve growth and generate synergies in the regulated gas distribution companies. The Questar acquisition is anticipated to close by the end of 2016, and will help D to backfill some of 2017 earnings pressure before the two ongoing construction projects start contributing towards earnings.

Also, the acquisition has a strategic rationale, as it will position D to take advantage of rising need for the gas generation to meet renewable energy and carbon emission targets. Moreover, the acquisition will further strengthen the company's top-quality, low-risk, MLP-eligible assets and will improve the regulated and predictable nature of D's natural gas operations and cash flows, which will allow the company to grow its dividends. Furthermore, the combination of Questar will allow D to enhance the operational scale and diversify into premium regulatory jurisdictions. The following chart shows the company's pro forma geographical and asset profile.

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Source: Investor Presentation

Dividend and Summation

The stock offers a solid dividend yield of 3.9%, and the company has a target to grow its dividends at an average rate of 8% until 2020. The company's dividend growth will be driven by its robust capital expenditure in the upcoming years to strengthen, expand and diversify its asset base.

The completion of Questar acquisition will not only help D to expand and diversify its operations but will also support its near-term earnings growth. Moreover, the completion of the ACP and Cove Point will drive its long-term earnings growth, enhance investors' confidence, improve the company's business risk profile and augur well for the stock's valuation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.