Most investors probably think of utilities as the polar opposite of AI stocks.
After all, AI stocks are disruptive, high-growth, and high-tech, and have attracted a ton of attention from investors. Utilities, on the other hand, are generally thought of as slow-growth, recession-proof, safe, dividend-paying stocks. In other words, boring.
However, there's at least one stock that straddles the worlds of utilities and artificial intelligence. That's Dominion Energy (NYSE: D).
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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's based in Virginia (nicknamed "the Old Dominion"), which is its biggest 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 appealing to AI stock investors -- is that Northern Virginia is the world's biggest data center market, and many of those data centers rely on Dominion Energy to power them (through the company's subsidiary Virginia Power). Data centers are the beating heart of the artificial intelligence industry, and complex models like ChatGPT demand massive computing power. More data centers are fast being built to accommodate more demand for AI.
Dominion says in its most recent annual report that this booming demand "is expected to continue over the next decade."
Data centers represented 24% of Virginia Power's electricity sales in 2023, up from 21% in the previous year, and that number is expected to grow. Virginia Power makes up 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 construct 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 up 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 projects a 5%-7% increase in 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 as 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 perform like a utility.
However, another reason to buy the stock right now is that interest rates are set to come down, as Federal Reserve Chair Jerome Powell indicated at the Fed's recent 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 a substantial debt burden of $36.6 billion, and its 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 breakout performer like some AI stocks, but the company's exposure to data centers and the artificial intelligence boom makes it unique among utility stocks.
Additionally, the benefit from interest rate cuts should also lift the company's valuation as bond investors rotate back into dividend stocks, and it will also have a chance to cut its interest expense.
If you're looking for a safe dividend-paying stock with upside potential, Dominion Energy looks like a great bet.
Should you invest $1,000 in Dominion Energy right now?
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
