Income investors have long turned to the utility sector for reliable dividend stocks, and for good reason.
Utilities are essential to the safety and well-being of the nation, a simple reality that provides the major U.S. utility stocks with consistent profits.
In turn, this allows the best utility stocks to return cash to their shareholders each year. Dominion Energy, Inc. (D) and Consolidated Edison, Inc. (ED) are prime examples of high-quality dividend stocks from the utility sector.
Both companies have impressive histories of dividend growth.
Dominion is a Dividend Achiever, a list of companies that have raised their dividends for at least 10 years in a row.
Meanwhile, ConEd has an even more impressive streak of annual dividend increases. ConEd is a Dividend Aristocrat, having increased its dividend for over 40 years in a row.
Dominion and ConEd seem to have a great deal in common, as they both operate in the utility sector and have similar dividend yields. But looking deeper, they have significantly different business models and also differ in terms of their dividend growth.
Dominion: Not a Typical Utility
Dominion has traditional electric and gas generation and transmission businesses, with 7.5 million customers spread across 18 states, and $100 billion of assets.
But it also has a midstream energy business. Dominion's exposure to the energy transportation business is through ownership of Dominion Energy Midstream Partners DM, a master limited partnership involved in transportation and distribution of oil and gas.
Dominion recently acquired all the units of Dominion Energy Midstream Partners, and once the acquisition is completed will operate it as a wholly-owned subsidiary. In terms of its operation, Dominion is essentially an electric utility, and at the same time an oil and gas MLP.
Dominion reported operating earnings of $1.10 per share for the 2019 first quarter, a decline of 3.5% from the same quarter last year.
Operating earnings declined 10% in the company's gas infrastructure segment, 21% in power delivery, and 28% in power generation. These declines more than offset a significant contribution of the company's new Southeast Energy operating segment, created in connection with the acquisition of SCANA. The company's Southeast Energy business contributed operating earnings of 17 cents per share in the first quarter.
Meanwhile, ConEd operates much more similarly to a typical utility. It delivers electricity, natural gas, and steam to over 4 million customers in New York. It has annual revenue of $12 billion, and a market capitalization of nearly $28 billion. ConEd performed well in the most recent quarter, with adjusted EPS growth of approximately 1% year-over-year. Growth was primarily due to planned rate increases.
Both companies expect growth moving forward. Dominion expects to generate operating earnings in a range of $4.05-to-$4.40 per share in 2019. At the midpoint of guidance, Dominion sees EPS growing by 4.3% in 2019.
Not surprisingly, Dominion's strongest growth prospects are in its oil and gas midstream projects. For example, the Atlantic Coast Pipeline is a 600-mile route that is expected to be initially placed in service by late 2020. The pipeline, which cost $7.0 billion-$7.5 billion to complete, will meaningfully add to the company's distribution capacity.
For its part, ConEd's growth is confined to traditional utility operations, which are admittedly more modest. ConEd received approval to increase rates next year, with the average New York City customer seeing their bill increase by 4.9%. This will help ConEd stay on track for continued growth.
Consolidated Edison expects adjusted earnings per share in the range of $4.25-$4.45 for 2019. At the midpoint ($4.35), ConEd's adjusted EPS is expected to rise by 0.5%. This is a lower projected growth rate than Dominion's 2019 forecast, which explains why Dominion has set a more aggressive path of dividend growth as well.
Dividends: Consistency Versus Growth Potential
Over the past several years, Dominion's exposure to the oil and gas MLP industry has helped fuel its above-average dividend growth.
Dominion has benefited greatly from the recovery in oil and gas prices after the 2014-2016 industry downturn. In fact, in the past four years, Dominion increased its quarterly dividend by 9.1% per year on average. In comparison, ConEd increased its dividend by 3.2% per year in the same time.
Of course, the trade-off is that Dominion's exposure to the oil and gas industry makes it more vulnerable to recessions and downturns in commodity prices.
This is the major reason why Dominion has a much shorter history of annual dividend increases than ConEd. While Dominion is likely to pause its dividend growth rate if a recession occurs, ConEd has managed to continue growing its dividend through various economic downturns over the past 40+ years.
Dominion has a significantly higher current yield than ConEd, 4.8% to 3.5%. With a higher level of dividend growth potential, Dominion seems to be a "no-brainer" of the two stocks, for dividend growth investors.
But investors should note that Dominion is the high-risk, high-reward stock in the utility sector, while ConEd is a pillar of consistency.
Should oil and gas prices fall, or a recession occur in the years ahead, Dominion is likely to experience a greater negative impact to its bottom line than ConEd. Indeed, Dominion's net income per share declined 31% in 2009, while ConEd's EPS from continuing operations fell by a far more moderate 6.2% in 2009.
At first glance, Dominion's higher current dividend yield and stronger dividend growth in recent years appear to make it the obvious pick among these two stocks.
But for income investors, particularly risk-averse income investors such as retirees that typically invest in the utility sector, there is more than meets the eye.
If the U.S. economy stays out of recession, and commodity prices continue to rise, Dominion could very well be the more rewarding utility stock. But investors should also note potential risk before buying dividend stocks, particularly investors with a lower tolerance for risk.
Dominion's higher yield and dividend growth are accompanied by higher risk, particularly if a recession or downturn in the oil and gas industry occurs over the next few years. For its part, ConEd is likely to continue raising its dividend each year, regardless of the state of the economy.