SCANA Corporation (NYSE: SCG) started 2018 with a bang, rising nearly 14% after agreeing to merge with fellow utility Dominion Energy (NYSE: D) in a $14.6 billion transaction. However, while that deal sent SCANA's stock up sharply, Dominion's went in the opposite direction, falling 5.3% for the week, which is a big drop for a utility stock. In fact, it was such a significant decline that it nearly wiped out Dominion's entire gain from 2017.
Furthermore, that sell-off pushed Dominion's yield to an even more attractive 4%, which is more than double that of the average stock. That higher yield and cheaper stock price, when combined with its growth prospects -- which will see a nice bump as a result of the SCANA deal -- makes Dominion an even more compelling stock for investors seeking a low-risk income stream.
Taking advantage of the situation
SCANA Corporation is coming off an atrocious 2017, when its stock plunged more than 45%. It began melting down after the company and its partner decided to abandon a nuclear project in South Carolina after the contractor developing the facility went bankrupt. Investors became gravely concerned that the company would no longer be able to recoup what it spent on that project by passing the costs on to electricity customers, which would significantly impact its financial situation and could force the utility to stop paying its 5.4%-yielding dividend.
With the pressure mounting and its stock in a free fall, SCANA agreed to sell itself to Dominion Energy in an all-stock deal. Dominion saw it as an opportunity to buy an attractive utility in a fast-growing region for a discounted price.
Powering high-end growth
In fact, Dominion believes that the deal will enable it to grow earnings by a more than 8% compound annual rate through 2020, which is above its prior view that profits would increase by a 6% to 8% compound annual rate over that time frame. That bolstered outlook comes even though Dominion has offered several concessions to win over regulators, including writing off $1.7 billion of the nuclear costs and buying a replacement natural gas power plant without passing that expense to consumers. Furthermore, it agreed to pay out $1.3 billion in cash to customers while also reducing their rates by 5%.
That higher-end earnings growth strengthens Dominion's ability to increase its dividend by a 10% annual rate through 2020. It also sets the company further apart from its three largest utility peers:
While investors could collect a higher current yield in both Duke Energy or Southern Company, those payouts would grow at a slower rate than Dominion's. Meanwhile, NextEra offers higher near-term dividend growth but a much lower yield. It's Dominion's combination of a fast-growing, high-yield dividend supported by a higher-earnings growth rate that makes it the most attractive stock in this group.
The best of the bunch just went on sale
Dominion is now even more alluring after selling off this week. That's because it increases the odds that it can deliver peer-leading total returns in the coming years for investors who buy at the lower price. This greater upside potential is why investors who are looking for a low-risk income stock should seriously consider scooping up Dominion while it's still on sale.
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