Dominion Resources Has the Power to Withstand Coming Market Downturn

The high-dividend utility comes off a strong third quarter and has a smart, multi-faceted strategy in place.
By John Persinos ,

The double-whammy of volatility and a looming interest rate hike makes certain high-paying dividend stocks, especially utilities, vulnerable.

With stock markets gyrating and investors fretting over Team Yellen's next move, the utility sector has taken a beating. The Utilities Select Sector SPDR (XLU) - Get Report is down about 9.5% year to date.

However, even in this environment, you don't have to forsake the stability and high dividends of utility stocks altogether. One utility stock is particularly well positioned to weather future turbulence: Dominion Resources (D) - Get Report .

To be sure, many stocks are in precarious shape. But Dominion's yield is sustainable, as reflected by its stellar earnings report this week. Dominion's gross margins rose a whopping 60% from a year ago. It has a multi-faceted energy strategy that includes an increasing presence in the nenewables market, and the company recently announced construction of a major pipeline project with partners that should spur further growth.

Below, you'll find why Dominion belongs in your dividend portfolio, even as rates rise.

Since the financial crisis of 2008, the Federal Reserve has kept interest rates at record lows. Now, the central bank is about to remove the proverbial punch bowl from the party, a prospect that is making markets anxious, especially in the utility sector.

Rising rates hurt utilities in two key ways:

  • They increase utilities' interest payments on debt (the industry is capital intensive).
  • They prompt income-minded investors to move away from riskier yield choices among stocks to safer investments, such as bonds, money market accounts and CDs.

But Dominion should hold up for the rest of the year and beyond.

Based in Richmond, Va., Dominion operates via three divisions: Dominion Virginia Power, Dominion Generation, and Dominion Energy. DVP is focused on regulated electric transmission and distribution that serve residential, commercial, industrial, and governmental customers in Virginia and North Carolina.

Dominion Generation generates electricity through coal, nuclear, gas, oil, hydro, and renewable sources. Dominion Energy centers around regulated natural gas distribution and storage.


Dominion enjoys several inherent strengths that should propel revenue and earnings in future quarters. The company has been boosting its capital expenditures to grow its electric and natural gas businesses and is extending operations throughout the Mid-Atlantic.

During the third quarter, the company launched official FERC filings with key partners, including Duke Energy for the $5 billion Atlantic Coast Pipeline project, a 564-mile interstate natural gas pipeline scheduled for completion in 2018 that will drive future revenue and earnings growth.

Dominion also has been beefing up its renewable energy portfolio. Renewable energy is shaping the future, and the company is establishing an early footprint.

Dominion's multi-faceted energy strategy is paying off for investors. This week, the company reported that operating earnings arrived at $611 million, for a year-over-year increase of 12.1%. Operating earnings a share reached $1.02, for a year-over-year gain of 10.8%. Gross margins grew from 54.51% to 60.16% compared to the same year-ago quarter, and operating EBITDA margins reached 50.83% from 43.86% a year ago.

The stock sports a trailing 12-month price-to-earnings (P/E) ratio of 22.4, a slight premium compared to the trailing P/Es of comparable utility competitors NiSource (16.2) and American Electric Power (15.3) and 16 for the overall utility industry. But the extra price is worth it.

For the fourth quarter, Dominion anticipates operating earnings to be in a range of 85 cents to 95 cents a share, ahead of the 84 cents posted in the same quarter a year ago.

With a dividend yield of 3.64%, this stock confers both a juicy dividend as well as superb potential for capital appreciation, regardless of the Fed's decision in mid-December.

These stocks, on the other hand, are at serious risk. For a free report that lists the 29 most dangerous stocks in the world, click here.

John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

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