Stock rally sends S&P 500 within 3% of record high

NEW YORK — Stocks started August with more gains, and a worldwide rally Monday sent Wall Street back to where it was just a couple days after it set its record early this year.

The S&P 500 tacked 0.7% more onto its four-month winning streak, and Big Tech once again led the way. The index rose 23.49 points to 3,294.61 to get within 3% of its record for the first time since February.

The Dow Jones Industrial Average rose 236.08 points, or 0.9%, to 26,664.40. The gains for tech stocks, particularly Microsoft and Apple, pushed the Nasdaq composite up 157.52, or 1.5%, to 10,902.80, another record.

Helping to launch markets higher were reports showing manufacturing activity strengthened across Europe in July by more than economists expected. The gains built higher after a separate report showed U.S. manufacturing growth accelerated last month at a faster pace than economists expected.

Still, “there is clear confusion among investors,” said Mark Hackett, chief of investment research at Nationwide. Even though the stock market is indicating a steady recovery, he said big moves in the foreign-currency and gold markets are “suggesting greater disruption.”

In Washington, meanwhile, grinding negotiations on another huge relief effort for the U.S. economy are ongoing. Both the Trump administration negotiating team and top Capitol Hill Democrats reported progress over the weekend, though differences remain.

The discussions have taken on more urgency because $600 in weekly benefits for laid-off workers from the federal government have expired, just as the number of layoffs ticks up across the country amid a resurgence of coronavirus counts and business restrictions.

The continued spread of the virus is raising worries that the economy could backslide again and snuff out the budding improvements it’s shown. The shakeout from the pandemic took down two more big retailers over the

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Asia shares supported by upbeat U.S. manufacturing, but virus woes cap gains

TOKYO/HONG KONG (Reuters) – Asian shares advanced on Tuesday thanks to strong U.S. manufacturing data and upbeat tech stocks, though broader worries about the coronavirus and global economy saw some markets trim early gains.

FILE PHOTO: A man wearing protective face mask, following an outbreak of the coronavirus disease (COVID-19), walks in front of a stock quotation board outside a brokerage in Tokyo, Japan, March 10, 2020. REUTERS/Stoyan Nenov

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.41%, but shares in China .CSI300 edged 0.04% lower on simmering Sino-U.S. tensions. Australian stocks gained 1.88% for the biggest intraday gain since July 21. Tokyo shares .N225 also jumped by more than 1%.

Euro Stoxx 50 futures STXEc1 were up 0.49%, German DAX futures FDXc1 rose 0.53%, while FTSE futures FFIc1 were up 0.13%.

Oil futures gave up their overnight gains and fell due to nagging worries about an increase in the supply of crude. U.S. stock futures ESc1 were 0.24% higher.

An industry gauge released overnight indicated U.S. manufacturing activity expanded in July at the fastest pace in more than a year, which helped Wall Street shares rise on Monday.

However, some investors remain cautious due to worries about a resurgence of the coronavirus and a diplomatic tussle over Chinese tech companies’ operations in the United States.

“It has been an upbeat U.S. trading session and Asia will absorb the leads accordingly,” Chris Weston, head of research at Pepperstone, said in a market note.

On Monday the Dow Jones Industrial Average .DJI rose 0.89%, the S&P 500 .SPX gained 0.72%, and the Nasdaq Composite .IXIC advanced 1.47% to set a record closing high as investors cheered the manufacturing data.

That data also caused the U.S. Treasury curve to steepen, an indication of improved investor sentiment.

U.S. stocks received an additional

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Why I Sold Dominion Energy

My last review of Dominion Energy (D) was just as the coronavirus pandemic was unfolding in the U.S., so rereading it shows how much has changed. Indeed, Dominion’s electricity demand was less affected by the pandemic than many other utilities. Nonetheless, some of the changes at the company since February are not pandemic-related.

After lengthy legal and regulatory battles, and despite a Supreme Court win, Dominion Energy has canceled the $8 billion Atlantic Coast gas pipeline project which it had undertaken with Duke Energy (DUK). Note that the pipeline was meeting demand: its capacity was over 90% subscribed for 15 years. As in the Northeast, and due in part to the decisions against the Keystone XL Pipeline, the Dakota Access Pipeline, and the Tesoro High Plains Pipeline, this suggests a hostile regulatory and judicial environment, exacerbated locally by Virginia’s Executive Order 43, which targets zero hydrocarbon use for Virginia’s electricity by 2050. At present, Dominion’s generation mix – primarily for electricity sales in Virginia, North Carolina, and South Carolina – includes 12% coal and 42% natural gas.

Moreover, Dominion is selling some of its natural gas storage and transmission assets to Warren Buffett’s Berkshire Hathaway (BRK.A) for $4.0 billion in cash and $5.7 billion of debt assumption. Gas storage and transmission as a sector is separately notable, since Berkshire Hathaway has a reputation for buying undervalued assets.

The asset sale will reduce operating earnings, and so, the company expects to reduce its dividend from $3.76/share (4.7% yield) to an estimated $2.50/share starting in 2021 (a 3.1% yield at the current stock price).

Although Dominion Energy operates in several states besides Virginia, Virginia is its core. The hostile governmental (Executive Order 43), judicial, regulatory and environmental (cancellation of the well-subscribed Atlantic Coast pipeline) conditions necessitating an asset sale to Berkshire Hathaway

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Why I Sold Dominion Energy

My last review of Dominion Energy (D) was just as the coronavirus pandemic was unfolding in the U.S., so rereading it shows how much has changed. Indeed, Dominion’s electricity demand was less affected by the pandemic than many other utilities. Nonetheless, some of the changes at the company since February are not pandemic-related.

After lengthy legal and regulatory battles, and despite a Supreme Court win, Dominion Energy has canceled the $8 billion Atlantic Coast gas pipeline project which it had undertaken with Duke Energy (DUK). Note that the pipeline was meeting demand: its capacity was over 90% subscribed for 15 years. As in the Northeast, and due in part to the decisions against the Keystone XL Pipeline, the Dakota Access Pipeline, and the Tesoro High Plains Pipeline, this suggests a hostile regulatory and judicial environment, exacerbated locally by Virginia’s Executive Order 43, which targets zero hydrocarbon use for Virginia’s electricity by 2050. At present, Dominion’s generation mix – primarily for electricity sales in Virginia, North Carolina, and South Carolina – includes 12% coal and 42% natural gas.

Moreover, Dominion is selling some of its natural gas storage and transmission assets to Warren Buffett’s Berkshire Hathaway (BRK.A) for $4.0 billion in cash and $5.7 billion of debt assumption. Gas storage and transmission as a sector is separately notable, since Berkshire Hathaway has a reputation for buying undervalued assets.

The asset sale will reduce operating earnings, and so, the company expects to reduce its dividend from $3.76/share (4.7% yield) to an estimated $2.50/share starting in 2021 (a 3.1% yield at the current stock price).

Although Dominion Energy operates in several states besides Virginia, Virginia is its core. The hostile governmental (Executive Order 43), judicial, regulatory and environmental (cancellation of the well-subscribed Atlantic Coast pipeline) conditions necessitating an asset sale to Berkshire Hathaway

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Why I Sold Dominion Energy

My last review of Dominion Energy (D) was just as the coronavirus pandemic was unfolding in the U.S., so rereading it shows how much has changed. Indeed, Dominion’s electricity demand was less affected by the pandemic than many other utilities. Nonetheless, some of the changes at the company since February are not pandemic-related.

After lengthy legal and regulatory battles, and despite a Supreme Court win, Dominion Energy has canceled the $8 billion Atlantic Coast gas pipeline project which it had undertaken with Duke Energy (DUK). Note that the pipeline was meeting demand: its capacity was over 90% subscribed for 15 years. As in the Northeast, and due in part to the decisions against the Keystone XL Pipeline, the Dakota Access Pipeline, and the Tesoro High Plains Pipeline, this suggests a hostile regulatory and judicial environment, exacerbated locally by Virginia’s Executive Order 43, which targets zero hydrocarbon use for Virginia’s electricity by 2050. At present, Dominion’s generation mix – primarily for electricity sales in Virginia, North Carolina, and South Carolina – includes 12% coal and 42% natural gas.

Moreover, Dominion is selling some of its natural gas storage and transmission assets to Warren Buffett’s Berkshire Hathaway (BRK.A) for $4.0 billion in cash and $5.7 billion of debt assumption. Gas storage and transmission as a sector is separately notable, since Berkshire Hathaway has a reputation for buying undervalued assets.

The asset sale will reduce operating earnings, and so, the company expects to reduce its dividend from $3.76/share (4.7% yield) to an estimated $2.50/share starting in 2021 (a 3.1% yield at the current stock price).

Although Dominion Energy operates in several states besides Virginia, Virginia is its core. The hostile governmental (Executive Order 43), judicial, regulatory and environmental (cancellation of the well-subscribed Atlantic Coast pipeline) conditions necessitating an asset sale to Berkshire Hathaway and upcoming dividend reduction suggests investors should wait out Dominion’s retrenchment.

Second-Quarter 2020 Results

Pandemic shutdown effects on electricity use in Dominion’s service areas were less than expected. For the March-July 2020 period, electricity use in the mainly (87%) Virginia-North Carolina service territory was actually up by 0.2% compared to the 2018-2019 average for the same period. However, between March and July 2020, electricity use in the South Carolina service territory was down by -3.9% compared to the 2018-2019 average.

The difference between the two service areas reflects different mixes between higher residential demand and lower combined commercial/industrial demand that has been experienced from the coronavirus-caused shutdowns.

Overall, the Energy Information Administration expects U.S. electricity use to be lower by a huge -4.2% for full-year 2020 relative to 2019, implying a very large decline in the second quarter and subsequent recovery in the third and fourth quarters.

For the second quarter of 2020, Dominion Energy’s net loss was -$1.2 billion, or -$1.41/share, compared to a net gain of $54 million for the same period a year ago. Operating earnings for the quarter were $706 million, compared to $619 million for the second quarter of 2019.

In 2Q20, the -$2.8 billion impairment charge for the Atlantic Coast Pipeline and Supply Header project was only somewhat offset by a $400 million gain from the company’s nuclear decommissioning trust and a $550 million income tax benefit.

Dominion expects 2020 operating earnings of $3.37-3.63/share (down from a pre-COVID-19 estimate of $4.25-4.60/share).

The company’s operating earnings by segment for 2Q20 were:

  • Dominion Energy Virginia, +$437 million (62% of net total);
  • Gas Transmission and Storage, +$184 million;
  • Gas Distribution +$87 million;
  • Dominion Energy South Carolina, +$75 million;
  • Contracted Generation, +$21 million;
  • Corporate and Other, -$98 million.

Asset Sale to Berkshire Hathaway

In early July 2020, Dominion announced it was selling gas transmission and storage assets to Berkshire Hathaway for $4 billion and the assumption of $5.7 billion in debt, or almost $10 billion. This includes 7700 miles of natural gas transmission lines and 900 billion cubic feet (BCF) of storage: specifically, Dominion Energy Transmission, Questar Pipeline, Carolina Gas Transmission, 50% of the Iroquois Gas Transmission System, and 25% of the Cove Point liquefied natural gas (LNG) facility in Maryland. Dominion will retain 50% of Cove Point and Brookfield Asset Management owns the remaining 25%.

As noted above, in the second quarter of 2020, the gas transmission and storage segment being sold to Berkshire Hathaway contributed $184 million in operating earnings, or 26%. Gas transmission and storage earnings for the first six months of the year was similar at $405 million in operating earnings out of $1.64 billion, or a 25% share.

The sale is expected to close in the fourth quarter of 2020. Once closed, with earnings from these assets no longer going to Dominion, the company expects to cut its dividend to 65% of remaining operating earnings, or about $2.50/share.

The Net-Zero Initiative and Virginia Executive Order 43

Dominion’s Net Zero initiative aligns with Virginia Executive Order 43 for decarbonization throughout the state.

Several states, including Virginia, (but not North Carolina or South Carolina, also both served by Dominion), are targeting partial or full decarbonization by 2030-2050. The primary carbon fuels to generate electricity have been coal and natural gas. Virginia has not legislated a goal, but it has implemented an executive order targeting 30% clean generation fuels by 2030 and 100% clean generation fuels by 2050. Clean fuels are defined as hydropower, solar, wind, (aka “renewables”) and nuclear. As the graphs below show, because of the sizable contribution of nuclear, Dominion is already reaching this goal.

Another near-term goal specific to the state government: “The Commonwealth shall procure at least 30 percent of the electricity under the statewide electric contract with Dominion Energy from renewable energy resources by 2022.”

Electricity Fuel Generation Sources

In its earnings call slides, Dominion notes that in 2019 natural gas was 42% of its electric generation fuel and renewables were 4%. The company expects a significant ramp-up by 2035 of renewables to 33% and a ramp-down (at least on a percentage basis) of natural gas to 26%. This is illustrated below.

(Data Source: Company website)

Natural Gas Prices

Low natural gas prices (shown above) benefit Dominion’s electricity customers due to lower costs for gas-fueled generation. This cost advantage will dissipate in Virginia as natural gas use becomes increasingly limited in the state’s electricity generation due to Executive Order 43.

However, do note that post-Berkshire sale, generation in North Carolina, in Dominion’s South Carolina operations – which will comprise 15% of its earnings – and the six states shown below in its gas distribution segment – which will comprise another 15% of its earnings – have not enacted policies requiring Dominion to reduce either the direct sale of natural gas for heating and other applications or the use of natural gas for electricity generation. This energy flexibility will benefit the natural gas and electricity consumers of those states.

(Image Credit: Seeking Alpha)

Governance

Institutional Shareholder Services (ISS) recently ranked Dominion Energy’s overall governance as 8, with sub-scores of audit (1), board (6), shareholder rights (7), and compensation (9). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk.

At July 15, 2020, shorted shares were only 1.3% of floated shares. Insiders own a fractional 0.28% of outstanding shares.

Dominion’s beta is 0.43: its stock moves directionally with the overall market but with less volatility, as is typical for utilities.

Senior management changes effective October 1, 2020: current chairman, president, and chief executive officer Tom Farrell will become executive chair; Bob Blue will become president and CEO; and Diane Leopold will become the chief operating officer.

Competitors and Dow Jones Utility Index Comparison

Utilities have no exact competitors – they have a monopoly on their service areas in exchange for regulation – but they can be compared to one another, especially in the 15-stock Dow Jones Utility Index (DJU).

Nor are utilities uniform in approach. They vary by their regional economies’ growth, by level of non-regulated businesses, and by whether their state governments and public utility commissions are limiting their generating fuel sources, as many – including Virginia – are.

With the sale of its natural gas transportation and storage, Dominion will become much more focused (about 90%) on regulated utilities.

By contrast, utilities with revenue from non-regulated merchant sales include Exelon Corp. (EXC) and NextEra Energy (NEE).

Other Financial and Stock Highlights

At June 30, 2020, Dominion had $72.84 billion in liabilities and $103.73 billion in assets, resulting in a steep-but-utility-standard liability-to-asset ratio of 70%. Again, the sale of assets to Berkshire Hathaway will reduce debt by $5.7 billion.

Market capitalization is $67.4 billion at an August 3, 2020 closing stock price of $80.33 per share. Dominion’s 52-week price range is $57.79-90.89 per share, so its August 3, 2020 closing price is 88% of the high.

The company expects 2020 operating earnings per share of $3.50 for a current price-to-earnings ratio of 23.0. Analysts’ average estimate for 2021 EPS is $3.86 for a forward P/E of 20.8.

Market value per share is two and a half times book value per share of $31.53, indicating positive investor sentiment.

The current dividend of $3.76/share represents a 4.7% yield. However, the company’s new dividend of an estimated $2.50/share starting in 2021 would represent a dividend of 3.1%/share at today’s stock price.

The mean overall rating from eighteen analysts is 2.7, or “Hold” leaning slightly toward “Buy.”

ChartData by YCharts

Positive and Negative Risks

In addition to the pandemic recovery and Virginia regulatory risks, with a liability-to-asset ratio of 70%, Dominion is more exposed to interest rate increases than companies in other sectors. However, interest rate increases appear unlikely for now.

Recommendations for Dominion Energy

I do not recommend Dominion Energy to growth-seeking or dividend-hunting investors. Although the company has surfed the pandemic shutdowns without a terrible demand loss, the extreme resistance it encountered in trying to build the Atlantic Coast pipeline – despite its Supreme Court win – resulting in the cancellation and the company’s $2.8 billion write-off of its shares speak to the negative environment in which it operates in the Virginia part of its service territory.

The sale of gas assets to Berkshire and follow-on expected dividend cut reduces the attractiveness of a stock in a sector in which investors expect healthy dividends. It is possible the company’s stock price will fall to align with the lower expected operating earnings, an unappealing prospect for growth investors.

It is also disappointing to see the company not pushing back on Virginia’s unrealistic executive guidance to replace all (cheap) hydrocarbon-fueled electricity generation – especially given nearby plentiful natural gas – with nuclear and intermittent, more-expensive renewables.

Those interested in Dominion should wait for the post-Berkshire sale shakeout of lower dividends and likely lower price after the fourth quarter.

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

Asian shares extend rally after S&P 500 nears record

Shares were mixed in early European trading on Tuesday after a strong day of gains in Asia, while U.S. futures edged lower.

Benchmarks slipped in London and Frankfurt on Tuesday but rose in Paris, Tokyo and Hong Kong.

Investors appeared to be shrugging off surging coronavirus caseloads in dozens of countries after the S&P 500 started off August by closing within 3% of the record high it set in February.

According to the World Health Organization’s tally, there were nearly 18 million confirmed coronavirus cases as of Tuesday, up from 10.2 million at the beginning of July, as outbreaks expanded or revived in many regions.

Such tallies are thought to vastly understate the number of actual cases due to limits of testing and other issues.

Germany’s DAX lost 0.6% to 12,572.29 while in London, the FTSE 100 edged 0.3% lower to 6,017.13. The CAC 40 in Paris was 0.1% higher at 4,879.84. The future contract for the S&P 500 fell 0.3% while the future for the Dow lost 0.2%.

The continued spread of the coronavirus is raising worries that the economy could backslide again, snuffing out recent budding improvements.

But overnight, the S&P 500 added another 0.7% onto its four-month winning streak, closing within 3% of the record high it set in February, at 3,294.61.

Microsoft and Apple alone accounted for most of the S&P 500′s gain: Through the pandemic Big Tech has remained almost immune to such concerns on expectations that it can continue to grow.

Apart from the “wall of money” buttressing markets thanks to massive monetary stimulus and government spending, it seems that “investors are already inoculated from the virus while camping under the tech umbrella,” Stephen Innes of AxiCorp. said in a commentary.

Tokyo’s Nikkei 225 gained 1.7% to 22,573.66 and the Hang Seng in Hong

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