Is Dominion Energy stock a buy?

Most investors probably think utilities are the polar opposite of AI stocks.

After all, AI stocks are disruptive, high-growth, high-tech and have attracted a lot of attention from investors. Utilities, on the other hand, are generally considered slow-growth, recession-proof, safe, dividend-paying stocks. In other words, boring.

However, there is at least one stock that falls into the world of utilities and artificial intelligence. That’s it Dominion Energy (D -0.05%).

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What is Dominion Energy?

Dominion Energy is an electric and natural gas utility company serving 4.5 million customers in 13 states. It is based in Virginia (nicknamed “The Old Dominion”), which is its largest market.

Like most utility stocks, Dominion is a solid dividend payer, currently offering a dividend yield of 4.8% at recent prices.

What separates Dominion Energy from most utility stocks — and what makes it attractive to AI stock investors — is that Northern Virginia is the largest data center market in the world, and many of those data centers are based on Dominion Energy to power them (through the company). subsidiary Virginia Power). Data centers are the beating heart of the AI ​​industry, and complex models like ChatGPT require massive computing power. More data centers are rapidly being built to meet the increased demand for AI.

Dominion says in its latest annual report that this booming demand “is expected to continue over the next decade.”

Data centers accounted for 24% of Virginia Power’s electricity sales in 2023, up from 21% the previous year, and that number is expected to grow. Virginia Power accounts for the vast majority of Dominion’s profits, more than two-thirds in 2023.

The company is also spending aggressively to keep up with that demand, as it plans to spend $9 billion to build new power generation capacity this year.

Dominion reported solid growth from continuing operations in the second quarter, with revenue up 10% to $3.49 billion and earnings per share from continuing operations rising from $0.47 to $0.55.

Its guidance was also strong, calling for operating earnings per share of $2.62 to $2.87 this year and $3.25 to $3.54 in 2025, a 24% improvement. From there, management expects 5%-7% annual earnings growth through 2029.

Why lower rates could help Dominion Energy stock

Investors tend to like utility stocks for two reasons. They’re safe, recession-proof stocks that operate like regulated monopolies — so they make money in good times and bad — and they tend to pay good dividends.

Dominion’s exposure to data centers and AI gives investors another reason to bet on the stock, though it will still function as a utility.

However, another reason to buy stocks right now is that interest rates are set to fall, as Federal Reserve Chairman Jerome Powell indicated at the recent Fed conference in Jackson Hole, Wyoming. When interest rates fall, income investors tend to rotate out of bonds and into dividend stocks like Dominion, which is likely to give it a boost.

Additionally, the company has substantial debt of $36.6 billion and interest expense is significant at $469 million in the second quarter. Lower interest rates could allow the company to refinance its debt, saving money on interest.

Is Dominion Energy stock a buy?

Dominion won’t be a performer like some AI stocks, but the company’s exposure to the data center and artificial intelligence boom makes it unique among utility stocks.

In addition, the benefit of lower interest rates should also lift the company’s valuation as bond investors rotate back into dividend stocks, and it will also have a chance to reduce its interest expenses.

If you’re looking for a safe, dividend-paying stock with upside potential, Dominion Energy looks like a great bet.