Why I Purchased Shares of Dominion Energy (D)

January has been off to an interesting start.  Lanny has crushed it with his stock purchases over the last 30 days, adding some serious dividend income to his total.  Me, not so much.  I’ve been on the sidelines for a while now and talked about how frustrated that was making me in my last dividend income summary.  Now, that’s no longer the case and I’ve finally made my first stock purchase of 2019.   As the title suggests, I purchased shares of Dominion Energy recently and here are some of the main reasons why.

The other day I sent out a Tweet teasing a stock purchase.  You guessed it, this was the “mystery” purchase that I could not wait to write about.

Why dominion energy?

So why Dominion Energy (D)?  There were several reasons why the company was once again on my radar.  Yes, I added shares in 2018 to my wife’s Roth IRA.  However, this purchase was made in my regular brokerage account.  Following Lanny’s lead last year (like most things for that matter), I am going to work on building the dividend income in my regular brokerage account.  Before running the company through the Dividend Diplomats Stock Screener, here were a couple of recent announcements about Dominion that had me excited me about the company going forward.

Completion of the SCANA Merger –  The company announced the merger early in 2018.  However, there were some major regulatory hurdles to clear before the acquisition could proceed.   The hurdles resulted in Dominion offering steeper rate cuts for customers, impacting their future revenue.  However, as discussed in an article in Yahoo! Finance, the concessions that were made to obtain regulatory approval of the deal were lighter than other deals in the past (a nice positive).

On top of it, even with the rate concessions, the projected earnings growth from the deal did not change.  The company estimated that the deal would be immediately accretive to the company and provide 6%-8% annual earnings growth over the next decade.   The article cites that outside analysis are projecting closer to 3% annual growth.  But even their estimates did not change per the article. Now, the merged company is larger and Dominion has once again expanded its footprint.

Dividend Increase –  The dividend increase was icing on the cake and a great sign for shareholders after the completion of the merger.  If the rate recessions to customers were going to significantly reduce the company’s cash flow, surely  the company wouldn’t have announced a large dividend increase for 2019, right?  That’s why when the company announced a 10% dividend increase in December, I was pretty pumped up.   Further, in addition to increasing their dividend after the acquisition, it was nice to see that the dividend increase was announced amidst a turbulent time in the market (mid-December).  Management could have easily changed course based on the broader market environment.  But instead, the decided to forge ahead with their plan.  Love it!

dividend diplomats’ stock screener

With the completion of the merger and the dividend increase behind us, it is time to run Dominion Energy through the Dividend Diplomats’ Stock Screener.  Our simple stock screener helps identify potentially undervalued dividend growth stocks.   For the purposes of this analysis, I will use my purchase price of $68.28/share, average $4.29/share, and an annual dividend of $3.67/share (post-dividend increase).

Metric #1:  P/E Ratio Less than the S&P 500 –  15.91X  –  The S&P 500 typically trades in the low 20X earnings (using trailing earnings) and in the high teens/low 20X  (using forward earnings).    Since we look to find undervalued dividend growth stocks, it is pretty important to us that we only look into stocks that are trading at a multiple below the broader market.  Dominion clearly passes this metric.

Metric #2:  Payout Ratio Less than 60% –  Typically, we look for companies that have a dividend payout ratio below 60%.  This is the sweet spot, with exceptions of course, that will allow the company to continue growing their dividend without sacrificing the safety of the dividend.  Naturally, Dominion falls into the exception category.  This is because there are certain industries (such as utilities, certain oil, etc.) where the industry standard is to have a >60% payout ratio.  Thus, the fact that Dominion’s dividend payout ratio is 85% didn’t cause me to run for the hills.  Now, with that being said, if the acquisition is not accretive and causes  earnings to decrease going forward, there may be an issue.  However, assuming earnings growth, I am not concerned about this metric at the moment.

Metric #3:  Increasing Dividends – We love companies that increase their dividend.  Heck, that’s the name of the game for the Diplomats and those looking to create a passive, growing dividend income stream.  I’ve already mentioned it a few times that Dominion just announced a dividend increase in December.  So that is old news by this point.  However, what is important that the company has increased their quarterly dividend for 16 consecutive years!   They aren’t quite a Dividend Aristocrat, but they are over halfway there.   A nice check here for Dominion.

Summary – The stock purchase

Based on the nice recent news and the company’s performance in our stock screener, I was ready to buy.  Thus, I purchased 14 shares of Dominion.  This added $51.38 in dividend income to my annual total.   My wife owns 50.564 shares.  Now, we will receive over $235 in dividend income from the utility company.  What’s nice is that Dominion is our gas utility.  So at least we are receiving a dividend from the company that we are paying monthly for our gas services!

What are your thoughts about my purchase?  Are you as excited about Dominion as I am?  If not, what other company would you have invested in instead?  Is there a different utility company on your radar?

-Bert

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23 thoughts on “Why I Purchased Shares of Dominion Energy (D)

    • Thanks IWD! I loved the quarterly dividend payments we have been getting so far and now cannot wait until this upcoming March one. Maybe I’ll add a little more before the upcoming ex-dividend date.

      Bert

  1. I like the buy. D has been a looooong time hold in my portfolio and I added to the stock not long ago when it was about $70. Under $70 looks like a great price to get in. D, ED and SO are with me for the foreseeable future. Congrats on starting 2019 with a strong yield purchase.

    • Thank you very much Keith. Those are some of the best utilities. I’ve added to ED over the years and love adding to my position when the price falls. I’ll continue adding D if the price dips below $70/share, like you suggested. Let me know if you decide to buy.

      Bert

  2. Very nice buy, Bert! A few percent below my purchase price is a very attractive valuation. I liked D in the low $70s, so I love it in the high $60s. Keep hustling and making every dollar count!

  3. Hi Bert. Good buy. Good yield, nice p/e. Stable growth is sales and earnings. Balane also more or less ok. Altough leverage of 5x and equity of 20% is a bit high and low, but for a utility is more or less ok. I own AEP and SO. Utilities are doing quite well. AEP div growth even surpassed such giants like JNJ or PG which is not a normal thing taking into acount that JNJ or PG yield is much lower.

    • Thanks P2035! Much appreciated. I appreciate you bringing those metrics up. Sure, I would be more concerned if this was not a utility company. However, for that reason, I am more comfortable with their metrics. AEP is a great company and I own them as well. DGR is great, they just haven’t been cheap compared to other utilities in a long time. IF they had a yield closer to 5%, that’d be different. But that’s not the case here sadly.

      Bert

  4. I’ve been looking at a few different utilities recently, D being one of them. I’m currently holding NÉE and CMS, but neither of them have reached a price that I want to add more yet. You’ve made a nice buy here and it’s nice that they are your provider too, as that dividend will be covering your annual expense before long!

  5. What should I say: D is a great defensive business and it was also my recent purchase in January. Agree with DivvyDad that the price looks more attractive compared to other utilities out there. Enjoy the dividends from this purchase.

  6. I have 50 shares and am hoping to buy another 50 this year. Dominion seems to be a true defensive stock, going up on days all my other holdings are down. It is a good value under $70. I am a bit concerned about the company’s debt levels and hope they pay down debt before doing any more mergers.

    • Brian,

      Wow. 50 shares. That’s a nice haul right there. I can’t imagine how sweet those dividends are going to be once you hit the 100 share mark. WOW! It doesn’t sound like the company will purchase any other utilities for a little. I know their dividend growth is expected to slow down, so hopefully they can use that to pay down some debt and continue unlocking some more free cash flow.

      Bert

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