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Home / Business / 3 High-Return, Highly Returnable Blue Chips – Dominion Energy, Inc. (NYSE: D)

3 High-Return, Highly Returnable Blue Chips – Dominion Energy, Inc. (NYSE: D)





(Source: imgflip)

My goal is to help income investors find good places to park their money to earn safe and growing dividends, regardless of what the market or the economy do. Well, unfortunately, on March 22 and the long-feared (for the past eight years) 10y-3m yield curve finally took place.

According to the San Francisco Federal Reserve, the 10y-3m yield curve is the best ever recession forecast, and according to the Cleveland Fed, any reversal (an accuracy of 89%) since 1966 has been a recession within the next 16 months Episode.

In a Dallas Fed survey of bank credit officers, banks use a prolonged moderate reversal of the 10y-3m curve as a sign that they must withdraw lending (causing the recession they fear).

Recent Months The flattening yield curve points to a rising risk of recession, peaking on February 22, 19459015 and 19459015, in the Cleveland Fed economic cycle.



(Source: Cleveland Fed) – February 22 data nd (as the curve was 21 basis points)

Currently the 10y-3m curve is -4 Basis points and triggers a 10-day window, in which, if the curve does not rise above zero, the recession clock will start to count down.



(Source: MarketWatch, Bianco Research)

This means that a recession in 2020 is more likely than not (we are on Day 3 of this 10-day window) and not since World War II The recession has always avoided stocks getting into a bear market.

This means that it is likely to be a good time to become defensive, especially by ensuring that your asset allocation and portfolio holdings are recession-proof, as I have done now with my own retirement portfolio.

But even with a recession that is likely to happen soon (about 90% probability if the yield curve remains inverted), that does not mean that investors need to panic. Rather, they must focus on the best, undervalued dividend growth stocks, especially on recession-resistant sleep well at night or SWAN chips.

I spent the last few weeks developing a quality rating system that measures each company on my watch list according to three criteria

  • Dividend security (balance sheet, cash flow stability, payout ratio)
  • Risk of the business model (moat, Fault Risk, Capability to Return Return on Capital Costs) [19659014] Management Quality (Capital Allocation Success Rate, Dividend-Friendly Corporate Culture)

This gives me an 11-point scale for companies rated 8 or higher than Blue Chips are and 9 or above are SWAN shares. 19659017] Let's take a look at why Altria (MO), Enbridge (ENB) and Dominion Energy (D) are three of my favorite high-yield SWAN recommendations for income investors. Because all three offer

  • High quality (quality ratings of 9 or higher)
  • Secure dividends (with recession-resistant cash flow)
  • Probably their payouts rise during a recession
  • Low volatility (likely to fall much less in a bear market .)
  • Everyone fell far below the S & P 500 during the Great Recession

. Best of all, from today's point of view, all three high-yielding SWANs are likely to double that -digit total returns, making them not only some of the best defensive stocks you can buy today, but also the best low-risk investment opportunities in the coming years.

Altria: The American King of a Wide Moat Recession-proof Business Model

  • Yield: 5.7%
  • Sensei Quality Score: 9/11 (NYSEARCA: SWAN)
  • Beta: 0.51 (generally 49% less volatile than S & P 500)
  • Peak decrease during the Great Recession: 20% (vs. 57% for S & P 500)

Altria posted a 10% sales growth in Great Recession, which shows that itself In the worst economic downturn since the Great Depression, the addictive cigarettes are a very stable business and represent a rich free cash flow in support of the dividend.

This explains why Altria has grown due to spin-offs dividend for 49 years. This is an amazing track record that has made the company one of the top investments of the past 50 years. Even more impressive is the fact that Altria was able to generate steady revenue, cash flow and dividend growth while facing a multitude of existential threats that would bankrupt the company, according to Bears, including

  • 60 years less smoking in US rates ( from 42% in the early 1960s to 14% today)
  • A $ 206 billion master settlement when 46 prosecutors sued large tobacco in the 1990s
  • Continuous regulatory risks by the FDA
  • Steadily higher state / Urban Tobacco Taxes

Morningstar, known for its conservative growth estimates (often lower than other analysts and even the management itself), expects the perished cigarette volume to decline by about 4% of CAGR.



(Source: Investor presentation.))

This is roughly the historical decline in the volume of cigarettes that the industry has experienced over the last decade, which has not stopped Altria from achieving impressive earnings and dividend growth , It is also about that interest rate management is expected to continue until 2023 (and is integrated into the growth forecast).



(Source: Investor Presentation)

The key to Altria's impressive growth in the face of endless volume declines is the strong brand power that gives it a large moat and the ability to raise prices fast enough to increase sales slowly but steadily increase. Cost cutting (cigarettes are a very low investment industry) and opportunistic buybacks are leading to impressive earnings and cash flow growth, leading to a safe and steadily rising (and recession-resistant) dividend.

The most important cash cow is Marlboro, which is the leading cigarette brand in America with 43.1% market share. Studies show that cigarette smokers are the most likely to stop getting out and about 80% of the company's operating income is derived from premium cigarettes.

Morningstar estimates (and I agree) that Altria's core strategy of ongoing price increases is growing slightly Topline can probably last for about 20 years. How can that be when a smoke package already costs so much? In fact, in Australia even more draconian anti-smoking laws and much higher taxes mean that the average pack costs about three times as much as in the US.



(Source: Investor Presentation)

And believe it or not, in terms of affordability for consumers, Australia is only the most expensive country of the nine . With smokers falling in developed and emerging markets with much higher cigarette packs, most analysts remain confident that Altria's core business model will not die in the foreseeable future.

And you say what you'll say about the highly controversial prize Altria paid for Juul (more on that at once), but it was a very strategic move. That's because Juul has a 75% market share in the booming vaping industry, which has tripled its sales in the last five years.



[Source: Investor Presentation]

The investments of Juul (and Cronos) stand for Altria's long tradition of diversification outside of cigarettes, including wines, cigars and their 10.2% Share in Anheuser-Busch InBev (BUD). Only time will tell if these recent strategic investments are paying off or not, but no one can deny that getting into the fast-growing steam factory and the global cannabis industry is a smart game (outside the paid ratings) if you're worried to make the future of the cigarette industry.



(Source: Investor Presentation)

This is because Juul's net promoter score (a measure of brand loyalty), unlike the leading industry leaders in steam generation (a measure of brand loyalty), is equivalent to Apple (AAPL) and ahead of other well-known brands is Trader Joe's and Southwest Airlines (LUV).

Juul Labs will likely continue to dominate the steaming US market, even though the endangered US Doomsday scenario (see "Risk" section) is no longer dominated.



(Source: Investor Presentation)

The reason for this is that the international markets offer a three times as addressable market as North America, even if Juul does not dominate overseas It should be a fast growing business to replicate. In addition, Altria's interest in Juul would mean a growing income (through the equity method of accounting) that would not be detrimental to the US-based cigarette business. [194559049]

(Source: Investor Presentation)

Why does Altria believe Juule's international efforts will succeed? Due to its early attempts to intervene in the UK, Italian, German and Canadian markets have gained considerable market share. This includes the dominance of competition in early Canadian test stores.

What does Juul mean for Altria? Now, according to management,

  • dominance in the US steam market, whose CAGR is expected to grow by 15% to 20% over the next five years.
  • Operating margins (at Juul) within five years of US cigarettes
  • International sales equivalent to US sales within five years
  • International operating margins of cigarettes to 2023
  • Returns above the cost of capital of 8% within five years

Basically, Altria expects that Juul will pay It was true that Altria has recently had to emit a ton of debt (16.3 billion dollars) at an average interest rate of 4.1% (the average interest cost) now 4.4%). This led to several credit downgrades (more about this in the risk area). However, management is confident that the planned cost reductions in 2019 (including the closing of the Damping business, as it now owns 35% of Juul) will effectively pay for the additional interest cost.

In addition, future cost reductions are expected to generate $ 1 billion in annual withholding cash flows that can be repaid over time (restoring their creditworthiness).



(Source: Investor Presentation)

Altria has a good track record of repaying debts after major M & A transactions, such as after the purchase of US tobacco (purchase of $ 10.4 billion in 2008). And even before the debt is repaid, Altria's leverage ratio is the second lowest in the industry and lower than that of most major consumer goods companies.

For 2019, management expects adjusted EPS growth of 4% to 7%, which is below its growth long-term forecast (due to cost and time to lower costs).



While earnings growth of 5.5% this year may not sound like much, keep in mind that analysts expect the S & P 500 to grow 3.8%, according to FactSet Research 1.4% for the consumer staples sector. In other words, even in a rapidly weakening economy and all headwinds, Altria is likely to achieve the best earnings growth in America for companies in 2019.

And Advice Altria CEO Howard Willard Holds the Call to Acquire Juul,

While we are forecasting fourth-quarter earnings in January in the fourth quarter, we expect the growth of the adjusted diluted EPS in 2019 will be slightly below the lower end of our long-term development. Runtime growth of 7% to 9% due to debt from our announced transactions at Cronos and Juul. And we maintain our long-term financial goals of increasing adjusted diluted EPS at an average annual rate of 7% to 9% and to maintain the target of a dividend payout ratio of approximately 80% of adjusted diluted EPS. "- Howard Willard (emphasis added)

This strong long-term earnings and dividend growth forecast (based on the pay-out target) is the linchpin of Altria's bullish thesis.



(Source: Investor Presentation)

This Forecast was reaffirmed at the CAGNY conference in late February.

Essentially, Altria is a large-scale, recession-proof company whose success in delivering safe and fast-growing dividends, even in economic downturns, makes it one of the best companies in the world.

That's why it's one of my favorite recommendations for high-yield blue chips today, before a probable recession is due in 2020. But even though Altria is a low-risk SWAN stock, this is the case in my Quality Ratings section not that there are not many risks Note before you enter the company invest.

Risks to Consider

Altria has two obvious risks. The first is the regulatory war against tobacco. This is a decade-long trend that industry in general and Altria in particular has been able to navigate and still generate strong revenue and earnings growth, leading to steady dividend growth income investors crave.

However, investors must always keep in mind that the FDA has recently stepped up its anti-tobacco efforts, including through threats.

These risks justify the bearish thesis that "this time is different" and the Altrias run as a dividend growth stock comes to an end. Personally, I consider these risks to be reasonable, but I do not currently consider a break with the theses (as income, cash flow and dividends continue to grow). If this changes, I have to downgrade my assessment of the company.

An even greater concern is Altria's debt of $ 14.6 billion to buy its shares in Cronos and Juul Labs.

Company [19659080] Net Debt / EBITDA Interest coverage ratio

S & P Credit Rating

Altria 2.5 8.0 BBB
Security Level 8.0 or less Higher [19659079] BBB- or higher

(Sources: Management Statements, Simply Safe Dividends, Moody's

Moody's left Altria on the negative A3 outlook due to leverage (AS & P) -Equivalent) completion of the acquisition of Juul / Cronos jumps to 2.5. S & P and Fitch downgraded the company two levels down to BBB through A-Two's two deals.

The rating agency says that if Altria does not reduce the lever quickly to 2.5 or less, it will cause a downgrade. In order to get an upgrade, Moody's wants the net debt ratio to fall to 2.0 or less (before investing 1.3).

However, debt is not in itself dangerous, and even a downgrade would leave Altria behind with a rating above S & P (and fixed investment grade). However, this shows the risky move that Altria is making. The reason that Altria is a Level 9 SWAN (while ENB and D are Level 10) on my quality scale is in fact due to the higher level of debt that lowers the dividend security from very sure to safe.

Special I'm worried that Altria will base the bottom line in a recession and two unprofitable assets that will not increase cash flow (if any) over years. Altria plans to maintain both investments through equity financing. If Cronos and Juul (not for many years) distribute dividends, Altria's higher debt does not contribute to the free cash flow that dividend investors are interested in.

And there's a lot of uncertainty about whether or not Altria bought Juul at the top of the cycle, and overpayments on a fast-growing company whose growth is nearing a halt.

In late 2018, Altria announced its $ 12.8 billion investment to acquire 35%. by Juul Labs, the most dominant US vaping company, which, according to Nielsen estimates, has a market share of about 75%. Numerous analysts grossly overstated the company for Juul (40x sales and 150x EBITDA based on the most recently available pitchbook data). In fairness to Altria, management has said that Juul's sales increased by 400% to $ 1 billion in 2018, and some sources believe they are closer to $ 1.5 billion (possibly less than ten times the turnover).

Philip Gorham of Morningstar (the analyst I trust most When it comes to Altria's coverage, the company's estimate of the fair value has been downgraded by 3% because of the amount of the deal's return on invested capital However, this is a drop from 29% to 21%, and 15% or more is considered good for a tobacco company.

But it is certainly worrying that management is making such a big strategic move leading to a great future could be depreciation, and could never prove beneficial to FCF, because the US Airways Steam Generator War recently climbed up against the steamer war.

The National Youth Tobacco Survey from 2018 shows that American schoolchildren's vapor reduction is up 78% and the mean at 48% is increasing schoolmates, the outgoing FDA comm issar Scott Gottlieb threatened to kill the entire vaping market (or at least drastically reduce the ability to sell his most popular products).

As youth use continues to increase, usage will increase significantly in 2019. In addition to the dramatic increase in 2018 the entire category will face an existential threat . Gottlieb (19659099) Gottlieb has announced that he will resign in April, which may be a blessing to the industry since vaping was in the crosshairs of Gottlieb because of the "epidemic" of teenage vaping and it should be noted that the Commissioner was not a fan of the Juul investment, which he believes is a sign that Altria may break his promise to the FDA to As part of its Juul investment, Altria plans to commercialize Juul-E-Liquid pods alongside cigarettes in retail stores.

Some analysts believe that Gottlieb's resignation could help reduce Juul's investment risk and thus the Gottlieb's successor, Norman Sharpless, director of the National Cancer Institute, is far too early to tell if Shar Pless is more lenient with either Juul or tobacco companies. Morningstar and I believe the current anti-vaping policy will persist under Sharpless.

Although a new study was published in the New England Journal of Medicine, it shows that vapors are twice as effective as any other method of stopping smokers from smoking.

19659104] Public Health England (a UK government agency) has even said that vaping is 95% safer than smoking and that the government should provide these products through the National Health Service at the expense of the taxpayer. The safety assessment is underpinned by a recent study by Philip Morris (NYSE: PM).

But as investors know, tobacco / vaping is now a highly political matter and just because doping is an objectively far superior alternative to smoking does not mean that the global war will subside in the foreseeable future. Bear in mind that San Francisco has recently proposed

  • a complete ban on vaping
  • India is attempting to deter Juul from entering the country (international expansion was a large part of the Altria investment thesis)
  • FDA (Gottliebs Last blow against the vaping on his (out the door) has proposed very strict new anti-vaping regulations, including the potential withdrawal of the most popular flavors completely from the market.

It's about the Vaping war, the Juuls' future A man crusade that ends up safe after Gottlieb left.

And while Altria's higher debt burden on Juul and Cronos does not jeopardize the dividend, the dividend is not significantly threatened (because £ 575m) US dollars in cost reductions will effectively cover the interest costs), it is also true that this deal will increase the growth rate v could slow down on Altria. This is because the company now has to focus on repaying debt with retained cash flow rather than repurchasing shares.

Due to this lack of EPS growth attributable to the buyback, analysts currently anticipate a 5-year Altria clearing gain of 5.7%. This is below the management's long-term forecast of 7% to 9%.

It should be remembered that these risks mainly threaten the future growth rate of the dividend and not the dividend itself. However, as my recommendation from Altria relies on the company's overall return profile (more to come soon), should Altria fail to achieve earnings and dividend growth, his thesis (and the fair value estimate) would score. [19659114] Enbridge: The continent's leading energy supplier likely has decades of steady dividend growth ahead

  • Yield: 6.0%
  • Sensei Quality Score: 10/11 (SWAN)
  • Beta: 0.59 (in general 41% less volatile than S & P.) 500)
  • Peak Waste during the Great Recession: 23% (vs. 57% for S & P 500)

When it comes to midstream blue chips, they will not larger than Enbridge, founded in 1949, and to the north is America's largest oil and gas storage and transportation infrastructure provider.



(Source: Investor Presentation)

Enbridge can be thought of as an energy supplier operating in three major companies.

[Source: Investor Presentation]

It owns, in whole or in part, over 200,000 miles of pipelines that carry 25% of the continental oil content (including 70% of the total) Canadian snack capacity) and 18% of North American natural gas. The vertically integrated inventory card means that the company brings together oil producers in almost all major oil production regions at 9 million barrels of refinery capacity per day, as well as export capacity, which is the lifeblood of the US shale boom.

Wide Trench assets provide extremely stable cash flow on long-term volume contracts, allowing it to raise the dividend for 24 consecutive years and double digits. This is true even during four oil spills, two recessions and the worst financial crisis since the Great Depression.



(Source: Investor Presentation)

It also contains long-term interest rates of up to 7%, demonstrating the need for Enbridge investors. Do not worry that rising interest rates will endanger Enbridge's growth. According to Enbridge, a 1% increase in long-term interest rates would result in a 0.25% drop in DCF / share (which will finance the dividend). Considering the economic situation, such a scenario is almost impossible, but the key point is that rising interest rates will never pose a threat to Enbridge.



(Source: Investor Presentation)

While all Midstream Operators Try to Minimize Money Flow sensitivity to commodity prices has made Enbridge the industry's lowest sensitivity, accounting for 98% of cash flow that is insensitive to oil prices. As a result, adjusted EBITDA has been stable or rising over the last decade, even though crude oil prices fluctuate widely.



(Source: Investor Presentation)

And the contracts have an average maturity of over 10 years all with investment grade counterparties, including regulated utilities. For this reason, the rating agencies consider Enbridge to be one of the least risky midstream providers on the continent.

Even more impressive than Enbrig's rapid cash flow and dividend growth is that the company managed to do so during the 2014-2016 oil spill. Many colleagues were forced to cut their payoffs due to excessive debt. [194559127]

(Source: Investor Presentation)

Enbridge has steadily reduced its leverage while maintaining one of the best growth rates of all midstream blue chip payouts. That's why it's tied to the highest credit in the industry. At BBB + stable, Enbridge is comparable to other midstream SWANs such as TRP, EPD and MMP.

Company Debt / EBITDA Interest Rate Hedge S & P Credit Rating

Average Interest Rate

19659083] Enbridge

4.7 4.7 BBB + 4.9%
Industry Average 4.4 4.5 NA NA

(sources) Gurufocus, FAST Graphs)

Enbridge ended the year with a debt ratio of 4.7, which was below the 5 0, which is considered safe by rating agencies and bond investors. Keep in mind that this is essentially a utility with an incredibly stable, recurring cash flow. For this reason, the absolute debt is not dangerous.

But with the low-risk, recursion-resistant toll of the utility business model inadequate, Enbridge's adoption of a new strategy has made it even more conservative into a self-financing business model. That is, it finances all of its future organic growth through retained cash flow (disbursement rate of 65%) and modest amounts of low-cost fixed income bonds, without relying on stock markets.



(Source: Investor Presentation) – Figures in CAD

Enbridge expects to spend over $ 3.7 billion to $ 4.5 billion annually. This year, the current order backlog of $ 12 billion has been completed.



(Source: Investor Presentation) – Figures in CAD

Billions of growth projects are the second biggest backlog in the industry (behind only TransCanada (NYSE: TRP)). This is the case over the next two years after 2018 projects worth $ 5.2 billion went into operation. These projects contributed to growth of 20%. This enabled Enbridge to safely increase the dividend by 10% in 2019 and to meet the target of 10% payout growth by 2020.



Im nächsten Jahr steigen die 10%, die Ende 2019 stattfinden werden, mit 25 aufeinander folgenden Schritten Jahr der Dividendenerhöhung bei weitem der beste Auszahlungswachstumsrekord der Branche.

Das Management von Beyond 2020 geht davon aus, dass sein Geschäftsmodell mit Selbstfinanzierung und jährliche Wachstumsinvestitionen von 4,2 Milliarden US-Dollar ein langfristiges Wachstum von DCF / Aktie von etwa 6% bewirken können. Und da erwartet wird, dass die Ausschüttungsquote stabil bei etwa 65% bleibt, bedeutet dies ein langfristiges Dividendenwachstum, das eng mit dieser Zahl übereinstimmt.

Dies mag viel weniger sein als in den letzten Jahren, aber bedenken Sie, dass Enbridge im Wesentlichen ein Nutzen ist . Aber eine, die weitaus mehr bringt und ein langfristiges Dividendenwachstum bietet, mit dem praktisch kein regulierter Nutzen vergleichbar ist.

Der Schlüssel zu Enbridges Wachstumsthese ist die Unterstützung des nordamerikanischen epischen Energiebooms, der voraussichtlich Jahrzehnte anhalten wird.



(Quelle: Investorenpräsentation)

Enbridge plant, etwa die Hälfte seines Investitionsbudgets für den Ausbau seines bestehenden Rohölsystems auszugeben, das aus 17.000 Meilen Pipeline besteht trägt 70% des kanadischen Öls, einschließlich 65% seiner Exportkapazität in die USA. Damit soll das schnell wachsende westliche kanadische Sedimentbecken gedient werden, in dem nicht nur ein Ölmeer, sondern auch die größten Erdgasreserven des Kontinents liegen.

Enbridge dringt auch in das Perm-Becken ein, das möglicherweise die größte Ölformation ist jemals entdeckt, wobei Rystad Energy weitere 250 Milliarden Barrel erzielbarer Öläquivalente schätzt.



(Quelle: Rystad Energy, Rattler Midstream S-1)

Der Permian produziert jetzt über 3 Millionen Barrel pro Tag und wird voraussichtlich die Produktion in den nächsten fünf Jahren verdoppeln



 

(Quelle: Investorenpräsentation)

Enbrigs erster Vorstoss in das Permian ist ein kleines Joint Venture-Projekt, das den Permian mit Exportanlagen an der Golfküste von Texas verbindet. Da jedoch erwartet wird, dass die US-Ölexporte bis 2040 potenziell von 2 Millionen Bpd auf 10 Millionen ansteigen werden, sehen Sie die enormen zukünftigen Wachstumschancen, die Enbridge (und alle Midstream-Giganten) potenziell für dieses Exportwachstum bieten.



( Quelle: US Energy Information Administration)

Und das sind nur die wichtigsten Wachstumskatalysatoren von Enbridge auf der Ölseite des Unternehmens.



(Quelle: Präsentation von Investoren)

Wir können fast 200.000 Meilen von Erdgaspipelines nicht vergessen Das Unternehmen plant, den massiven, säkularen Trend des steigenden Gasverbrauchs auszunutzen, vor allem bei den Exporten von Flüssiggasen und mexikanischen Gasexporten (über Pipelines mit einem 25-jährigen Vertragsvolumen, das zu 100% aus Kapazität besteht).



(Quelle: Investor Präsentation)

Aber vergessen wir nicht, dass Enbridge auch der größte Gasversorger in Ontario ist, dessen Bevölkerung in den nächsten 21 Jahren voraussichtlich um 32% zunehmen wird. Enbridge schätzt, dass das Versorgungsunternehmen in Ontario allein nach 2020 einen Anstieg des Cashflows pro Aktie von 1% bis 2% erzielen kann.

Im Grunde ist Enbridge einer meiner bevorzugten Midstream-Blue-Chips, da dies dem risikoarmen Charakter entspricht Industrie und kurbelt sie auf 11 an, dank

  • Die am meisten diversifizierte Kundenbasis
  • Das stärkste Kontraktprofil / geringste Rohstoffsensitivität
  • Eine festungsähnliche Bilanz (die mit der Zeit stärker wird)
  • Eine der niedrigste Ausschüttungsquoten in der Branche
  • Ein sich selbst finanzierendes Geschäftsmodell mit einem Mittelzufluss von 2,6 Milliarden US-Dollar zur Finanzierung des künftigen Wachstums
  • Zahlreiche Wachstumskatalysatoren erschließen nahezu jeden Teil des Midstream-Investitionsbooms (1 Billion US-Dollar an neuen Ausgaben) erforderlich bis 2050)

Mit Enbridge erhalten Sie nicht nur einen ertragsstarken SWAN mit einem rezessionssicheren Geschäftsmodell, sondern eine jahrzehntelange Wachstumslandebahn, die ihn zu einem der besten Blue Chips seiner Branche macht die besten erträge s tocks you can buy before an economic downturn.

But as with any company, low-risk doesn't mean no risk and here's what investors need to know before investing in Enbridge.

Risks To Consider

The biggest risks to keep in mind with any pipeline giant is execution risk. Enbridge recently suffered a one year delay on its most important growth project, the Line 3 replacement, which at $6.8 billion, makes up nearly 50% of the current growth backlog.



(Source: Investor presentation)

The good news is that management has learned from earlier mistakes, such as when it failed to secure the approval of native tribes in Canada (which killed the Northern Gateway oil pipeline, which it spent 12 years trying to build but had to cancel in 2016).

This time Enbridge dotted all its Is and crossed all its Ts by meeting with officials over 2,600 times, holding dozens of open houses with the public and most importantly, obtaining full cooperation of all native tribes over which the pipeline runs.

This final delay is not due to court cases (regulators have rejected the final appeals by environmentalists) but merely the timing of final state approvals. Federal approvals come 30 to 60 days later and by the time they will arrive it will be too late to begin construction. Line 3 is expected to be fully in service by the end of 2020 and the delay doesn't change 2019's DCF guidance or plans for the final 10% dividend hike for 2020.

However, the point is that, as we'll see with Dominion next, major midstream projects often get delayed (or even canceled) by an endless stream of court battles from environmentalists who seek to kill North America's energy boom.

Dominion Energy: Recession-Proof Business Model From One Of The Best Utilities In The Country

  • Yield: 4.8%
  • Sensei Quality Score: 10/11 (SWAN)
  • Beta: 0.25 (generally 75% less volatile than S&P 500)
  • Peak Decline During Great Recession: 34% (vs. 57% for S&P 500)



(Source: Investor presentation)

Dominion is one of the largest regulated utilities in America with 7.5 million gas and electric customers in 18 states. What makes them my second favorite utility in the country (behind NextEra Energy) is the quality management team has spent the past decade transforming its business model into a low-risk one that's ideal for conservative high-yield investors.



(Source: investor presentation)

The company sold off its cyclical businesses (such as oil & gas production) and has focused like a laser on achieving industry-leading growth rate while focusing on maximizing stable and regulated cash flow.



(Source: investor presentation)

Today 95% of the company's earnings are in regulated and wide-moat businesses that are recession-resistant.

By 2020 the company plans to generate 65% to 70% of operating earnings from regulated utility businesses in its core five states.



(Source: Investor presentation)

Those are located in some of the most constructive (ie profitable) regulatory environments.

These are where returns on equity are above average and allow for rapid earnings growth. Dominion's location in fast-growing states (with rapidly expanding economies) plus its ability to get 35% of its power from non-carbon sources today keep its regulatory relationships favorable, with regulators eager for it to continue rapidly expanding its infrastructure.

  • Virginia electric utility: 1% customer growth, 2.4% sales growth, 10.2% returns on equity (vs. 9.7% national average)
  • Gas utility business (four states, 6th largest gas utility in America): 1.4% annual customer growth, 10.1% ROE
  • South Caroline gas & electric businesses: 2% annual customer growth, 10.2% ROE

By the end of next year, another 25% to 30% of operating earnings will come from its midstream gas transmission/storage business (FERC regulated) located in 15 states.

Less than 10% of earnings will be from contracted electrical generation. 55% of that cash flow is under long-term (10 years or longer) contract, with 45% being market-based with hedges in place to smooth out cash flow. This includes 1.1 GW of solar power under PPAs with other regulated utilities.

In 2018 Dominion grew its earnings 12.5%, its dividend 10% and most importantly improved its balance sheet significantly via $8 billion in corporate level debt reduction.

Company Debt/ EBITDA Interest Coverage Ratio S&P Credit Rating Average Interest Cost Return On Invested Capital
Dominion Energy 4.5 3.3 BBB+ 4.0% 7%
Industry Average 3.8 4.9 NA NA NA

(Sources: Gurufocus, F.A.S.T.Graphs, Simply Safe Dividends, earnings supplement)

A strong balance sheet is essential, not just for a safe dividend, but also maintaining access to low-cost capital that is the lifeblood of the utility industry.



(Source: Investor presentation)

In 2018, Dominion, despite having to acquire SCANA and its MLP, Dominion Midstream Partners, was able to achieve its deleveraging targets two years early, resulting in a credit rating outlook upgrade that reduces the risk of downgrades in the future.



(Source: Investor presentation)

Today the credit rating agencies view the company's strong investment grade ratings favorably which is great going into a recession when credit markets are likely to tighten.

That strong balance sheet, when combined with the regulated, wide-moat nature of its business and highly stable cash flow, means that Dominion is likely to continue its impressive track record of steady dividend growth in all economic conditions.



 

(Source: Simply Safe Dividends)

But Dominion's balance sheet strengthening (at just the right time) wasn't just about surviving the next recession with its dividend intact, it was made with a long-term view on cashing in on some major secular macroeconomic trends.



(Source: Investor presentation)

That includes the rapid replacing of coal with natural gas-fired power plants, which will provide the baseload power to recharge electric cars. By 2050, millions of EVs in its core markets will need low-carbon power that Dominion expects to provide, both through new natural gas plants (some supplied by its own gas pipelines) as well as its rapidly growing solar/wind operations.



(Source: Investor presentation)

In Virginia alone, the company plans to spend $17 billion over the coming five years which will grow its rate base (on which it obtains permitted ROEs) by 7% to 8% CAGR.



(Source: Investor presentation)

The midstream gas storage and transmission business is under long-term contracts, with 73% of sales contracted with regulated US and international utilities. These "take-or-pay" contracts have firm volume commitments ensuring Dominion gets paid in full, even if actual gas demand were to fall during a recession (same as Enbridge).



(Source: Investor presentation)

Over the next five years, Dominion plans to invest $3.6 billion into expanding its midstream business, growing its rate base by double-digits.



(Source: Investor presentation)

The gas utility business plans to invest $3.5 billion to better serve the needs of 3 million customers in North Carolina, Ohio, West Virginia and Utah.

And now that the $14.6 billion acquisition of SCANA is finally complete, Dominion is one of the biggest electric and gas suppliers to the state (with 1.1 million customers), including its largest, richest and fastest growing cities.



(Source: Investor presentation)

Through 2023, Dominion is budgeting $2.1 billion in growth capex which will grow its SC rate base 5% annually.



(Source: Investor presentation)

In total, Dominion's $26 billion growth backlog will grow the rate base by 7% annually ($19 billion in total) and help drive some of the fastest earnings growth of any regulated utility, much less one of Dominion's impressive size.



(Source: Investor presentation)

That's expected to drive long-term earnings growth of 5% to 6%, which is above average for a large-cap utility.



(Source: Investor presentation)

Basically, Dominion Energy is a high-yielding regulated utility with a growing empire of profitable markets, that is poised to benefit from decades of steady and industry-leading growth rates. That means it's one of the best low-risk, high-yield names in its sector, and one of my favorite defensive SWANs to recommend going into a recession.

But while Dominion is low-risk, that doesn't mean there aren't important factors to consider before investing.

Risks To Consider

While Dominion's cash flow is protected by an empire of regulated monopolies and long-term contracted assets, just like any highly regulated company it can face setbacks.

One such recent problem is the Atlantic Coast Pipeline, which it owns 48% of and is now likely to be completed in 2021, two years behind schedule, and at a cost of close to $8 billion.



(Source: Investor presentation)

That project, like many long interstate pipelines, has faced never-ending challenges from environmentalists suing to block it. The 4th Circuit Court of appeals recently ruled against Dominion and so now it's taking its case all the way to the Supreme court.



(Source: Investor presentation)

Given the current composition of the court (5/4 conservative) and the numerous affidavits from regulated utilities explaining why they absolutely need this project to be completed, analysts believe Dominion will ultimately prevail.

However, it's important to remember that in the courts nothing is guaranteed, and even if the ACP (which represents pretty much all of Dominion's midstream growth backlog) isn't killed off, it will end up being two years late and costing roughly $3 billion more than expected. Should Dominion lose the case ACP might have to be abandoned, with billions in capex already spent amounting to nothing. Worse still, its long-term growth guidance might prove unattainable.

Another thing to remember is that while Dominion has access to $6 billion in theoretical liquidity to complete its growth plans, in reality, it can't borrow that much.



(Source: Investor presentation)

Not without leveraging the balance sheet to dangerous levels that would threaten its investment grade credit rating and access to low-cost debt. This is why over the coming three years the company plans to rely on about $1.2 billion in equity issuances.



 

(Source: Investor presentation)

Selling stock to fund growth is a natural part of the sector's business model, but it does mean that Dominion's future EPS growth is partially at the mercy of fickle equity markets. While utilities are low volatility by nature, share prices still tend to fall during recessions and so if the bear market is longer and more severe than expected, higher shareholder dilution could result in weaker-than-expected EPS growth.

Finally, there's the dividend growth to consider. While Dominion expects to grow earnings 5% to 6% over time, the dividend growth rate is going to fall off a cliff for the next few years.



(Source: Investor presentation)

After growing the payout at 9% CAGR over the past five years, Dominion's payout ratio is now at 87% which is far higher than most regulated utilities. Management wants to bring that down over time, both to improve its dividend safety, and to retain more earnings to fund growth in the future (further deleveraging the balance sheet).



(Source: Investor presentation)

But that means the dividend is likely to grow at slightly less than half the earnings growth rate until the payout ratio declines to the low 70s. That will still be roughly in line with the dividend growth rate of most utilities, but prove extremely disappointing to anyone who expected double-digit dividend growth to continue.

My point is that anyone considering investing in Dominion needs to have a realistic expectation for future payout growth and remember that the stock price is likely to track earnings higher over time.

Total Return Profile: Defensive High-Yield Stocks With Double-Digit Return Potential

What ultimately determines my recommendations is a company's dividend profile which is composed of yield, dividend safety, long-term growth potential, and valuation. Together, these tend to determine total returns and whether or not I consider a dividend stock to make a good long-term investment.

Company Yield Payout Ratio Sensei Quality Score (Out Of 11) Expected Long-term Cash Flow Growth Total Return Expected (No Valuation Change)

Valuation-Adjusted Total Return Potential

Altria 5.7% 69% 9 (SWAN) 5.7% to 9% 11% to 14.7% 12% to 18.1%
Enbridge 6.0% 58% 10 (SWAN) 5% to 7% 11% to 13% 13.6% to 17.4%
Dominion Energy 4.8% 87% 10 (SWAN) 5% to 6% 9.8% to 10.8% 10.9% to 13.1%
S&P 500 1.8% 33% 6.4% 8.2% 2% to 8%

(Sources: Simply Safe Dividends, F.A.S.T. Graphs, Morningstar, analyst estimates, Moneychimp, Multpl.com, Yardeni Research, Gordon Dividend Growth Model, Dividend Yield Theory)

All three of these defensive, low-volatility and recession-resistant SWANs offer very attractive yields that are up to three times what the S&P 500 is offering. More importantly, all of the dividends are safe, thanks to dividend well covered by cash flow that won't decline in a recession.

The balance sheets are also strong enough to avoid payout cuts, even during the Financial Crisis. The coming recession is likely to be far milder and give these blue-chips little trouble.

And in terms of long-term dividend growth potential, all three are likely to deliver similar or superior growth to the S&P 500's 20-year median rate of 6.4%. For Dominion that faster growth won't come until the payout ratio falls to management's new target range.

Even if you assume no valuation changes over time, the combination of yield and long-term growth would likely deliver double-digit returns, and all in a high-yield, recession-proof, low volatility package.

But adjusting for valuations (return to fair value) and you find that MO, ENB and D are likely to outperform the market by a wide margin, at least based on the current range of forward return targets most analysts/financial firms have (according to Morningstar).

Valuations: All 3 Blue-Chips Are Good To Great Buys Today



(Source: Ycharts)

It's been a great year for Dominion and Enbridge with only Altria underperforming the market, though rallying hard off recent lows (I last recommended it around $44). But even with strong rallies in recent weeks all three blue-chips are still good to great buys today.

That's based on my favorite valuation method for blue-chip dividend stocks, dividend yield theory or DYT. This is the only strategy that asset manager/newsletter publisher Investment Quality Trends has used since 1966.



(Source: Investment Quality Trends)

Decades of market-beating returns (and the best risk-adjusted track record of any newsletter over the past 30 years according to Hulbert Financial Digest) give credence to this approach. DYT simply compares a stock's yield to its historical yield, because unless the thesis breaks, yields tend to cycle around a relatively stable level that approximates fair value.

Company Yield 5-Year Average Yield Estimated Discount To Fair Value Long-Term Valuation Boost
Altria 5.7% 4.0% 29% 3.4%
Enbridge 6.0% 3.9% 35% 4.4%
Dominion Energy 4.8% 3.8% 21% 2.3%

(Sources: Simply Safe Dividends, Dividend Yield Theory, Moneychimp)

Keep in mind that interest rates are not likely to go much higher, even should the yield curve un-invert and the US avoid a recession. Thus I fully expect each stock to return to its five-year average yield, as long as management is able to deliver on its long-term guidance. And if I didn't have confidence in each of these companies' management teams I wouldn't recommend them.

A return to their historical yields would potentially give significant valuation boosts to each company, which could send long-term total returns to between 13% (for Dominion) and 18% (for Altria).

But in case you think I'm being overly bullish let's also consider Morningstar's highly conservative three-stage discounted cash flow models.

Company Morningstar Fair Value Estimate Discount To Fair Value

Long-Term Valuation Boost

Altria $62 9% 1.0%
Enbridge $47 22% 2.6%
Dominion Energy $84 10% 1.1%

(Source: Morningstar)

Indeed, Morningstar considers these blue-chips to be trading at lower margins of safety than dividend yield theory, but each is still at a modest to significant discount to its estimated fair value. Thus investors will likely, over time, see shares appreciate slightly faster than cash flow growth rates.

Splitting the difference between DYT and Morningstar's DCF models, I fully comfortable recommending Altria, Enbridge, and Dominion as strong to very strong buys under my blue-chip valuation scale.



  • Altria: 19% undervalued: strong buy
  • Enbridge: 29% undervalued: very strong buy
  • Dominion Energy: 16% undervalued: strong buy

Remember that undervalued blue-chips do not necessarily go up in a bear market (almost no stock does). Nor does a SWAN rating under my 11 point quality scale mean "no risk" (no such company exists), or that a stock might not fall significantly if the market were to crash like in 2008 (which it's not likely to).

Rather SWAN just refers to the quality of the company and the safety of the dividend. All three of these SWANs are likely to deliver generous, safe and rising income over time, no matter what the market or economy does, which is why I'm recommending them ahead of 2020's likely recession.

Bottom Line: These Are 3 High-Yield Blue-Chips You Can Trust To Deliver Safe And Growing Dividends Even In A Recession

With a recession now looking likely in 2020, it's more important than ever for conservative high-yield income investors (like retirees or near retirees) to know what blue-chips they can buy that will provide safe and rising income even in an economic downturn.

While none of these SWANs are likely to avoid share price declines, their low volatility, recession-resistant cash flow, and safe and rising dividends make them some of the best pre-recession blue-chips you can buy.

Altria and Enbridge might not be for everyone, depending on your personal comfort with investing in tobacco/energy industries. But if you don't mind their business models, all three of these high-yield giants makes for an attractive buy right now, both in terms of valuation and as a defensive holdings for your diversified dividend portfolio ahead of a likely bear market.

Best of all, all three are likely to deliver double-digit, market-beating total returns, making them not just great choices for conservative income-focused investors, but anyone looking to a solid, low-risk way to likely outperform the market in the coming years.

Just remember that proper asset allocation is crucial going into a bear market. So make sure you have enough cash/bonds available to meet expenses (along with dividends, SS and any pension you may have) to avoid selling quality stocks at firesale prices.

Disclosure: I am/we are long ENB, MO, D. I wrote this article myself, and it expresses my own opinions. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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