Stock of the Week
Dominion Resources NYSE Symbol : D Industry: Utility Price as of 2/28: $72.09
After a lousy January, the markets came roaring back in February up over 5%. Year to date the Dow and Nasdaq are up roughly 2% while the Nasdaq is up 4.4%. The Nasdaq is being led by Apple up 14% year to date. The Dow is being led by Disney up nearly 10% and Boeing up 15%. We highlighted Boeing twice, once in December and then again in January. Looking forward, it's getting harder and harder to find undervalued stocks. Typically when I have a tough time finding undervalued stocks, we're nearing a top. It's also getting tough to justify new highs in the major averages will earnings estimates for the current quarter dropping as fast as they are. Four or five months ago, first quarter earnings were expected to grow 10%. Now with only 2 months left in the first quarter, earnings estimates are now projecting a negative 3.4% growth rate. Subtract Apple's gigantic earnings and the numbers are even worse. The biggest drag on the lower numbers is from the oil and energy related companies. Analysts for Exxon and the other major oils have cut earnings estimates by 50% for the first quarter. If we do get a correction this spring it may be wise to avoid the energy sector. The worst performing sector so far in 2015 has not been energy, but Utilities. Since Jan 1st, the utilities have gone straight down falling 3% for the year. If the major averages back off from recent highs, the utilities may be a good place to hide. This week we'll highlight a utility with recent insider buying. The stock of the week is Dominion Resources. The Virginia based utility company is a consistent blue chip company beating earnings estimates and raising its dividend year after year. While not flashy, the recent 10% pullback looks to have provided an attractive entry point. Recent insider buying would confirm this thesis. If the major averages start to crumble in the coming months, Dominion and the rest of the utilities should become an attractive sector once again.
Back at the start of the coldest February on record, Dominion beat earnings estimates for the fourth quarter by a penny recording 84 cents per share or $243 million. Revenue came in at $2.94 billion in the period missing estimates of $3.03 billion. Management at Dominion is excited about their new infrastructure and growth plans. The company secured all regulatory approvals and began construction on the Cove Point liquefaction project. They announced the development of the Atlantic Coast Pipeline, a transformational infrastructure project designed to bring new supplies of natural gas to the Southeast. They also announced the acquisition, which closed last month, of Carolina Gas Transmission, a 1,500-mile FERC-regulated pipeline in South Carolina and Georgia. Dominion recently opened a new 1,342-megawatt, gas-fired power station in Warren County, Va. They continue to construction a 1,358-megawatt, gas fired power station in Brunswick County, Va and recently put in to commercial operation, a 211 megawatts of solar generation. The company also successfully completed the initial public offering of Limited Partner common units in Dominion Midstream Partners , restructuring their operation to save on taxes to generate more cash flow. Speaking of cash flow, Dominion recently increased their quarterly dividend by 8% to 64.75 cents a quarter for a yield of 3.6%. Going forward, the board also set a new goal to achieve a 70-75% dividend payout ratio in 2015 through the end of the decade which means further dividend yikes down the road.
Even with the new projects, Dominion's earnings and sales are only expected to grow 5% and 4% respectively. The stock trades at a high PE of 18 times earnings, but the utilities have traded at a high multiple for more than half a decade thanks to low interest rates. A dividend of yield of 3.6% and technical support at the $72 and $70 levels should limit further downside in the stock. The insiders seem to agree with nearly $3 million in recent stock purchases at higher levels. If the broader market does pullback, Dominion and the rest of the utilities may see upside to their share prices.