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Are These 2 Stocks Down and Out or Great Bargains?

Reuben Gregg Brewer, The Motley Fool

So far, 2018 hasn't been a great one for the S&P 500, which is up in the low single digits through the first five months of the year. However, it's been even worse for industrial icon General Electric Company (NYSE: GE) and utility giant Dominion Energy, Inc. (NYSE: D), which are down around 20% each over the same time span. Are these two high-yield stocks worth buying on this weakness?

The fall from grace

General Electric is a household name with a history dating back to 1890 and Thomas Edison. It has changed a lot since its founding, as you would expect, but it has long been an icon in the industrial sector. However, under the leadership of Jack Welch, the company strayed too far into the financial industry and allowed its business interests to go well beyond its industrial core.   

A woman drawing a risk/reward graph

Image source: Getty Images.

That quickly became an issue during the Great Recession. The company was forced to take a government handout and cut its dividend shortly after Welch passed the CEO title on to Jeff Immelt. The new CEO went to work selling off non-core assets (like the NBC television network) and trimming the size its finance arm. It looked as if the company was making solid progress, highlighted by the dividend quickly shifting back into growth mode and revenue starting to move higher again in 2014.   

But by late 2017, with activist investors agitating for more change, Immelt passed the CEO torch to John Flannery. Flannery's outlook for GE's near-term future wasn't nearly as positive as the one being proffered by Immelt. Flannery has begun a deep restructuring at GE, which has included selling off more businesses and cutting the dividend by 50%. Worse, the current dividend may not hold, with Flannery effectively refusing to say it was sustainable at a recent industry event.   

GE Chart

GE data by YCharts.

At this point, General Electric is a turnaround story. If Flannery can streamline the company and get it back into growth mode, there is material recovery potential. But getting from here to there is going to be a difficult and possibly drawn-out process that might include another dividend cut as more of the business gets sold off. Despite a robust 3.4% yield, dividend investors should avoid the company. GE is only appropriate for aggressive investors willing to bet that the new CEO can get this struggling icon back into growth mode.

A utility giant that's getting by

The material share price decline at Dominion Energy, meanwhile, is being driven by a number of factors. First, higher bond yields have been a headwind for yield-focused investments like utilities, which helps explain part of the decline at this giant, diversified utility. However, Dominion is badly lagging similarly large peers, so this issue is part of the reason, but not the entire reason.

Which brings into play the utility's plan to buy struggling smaller rival SCANA Corp in an all-stock deal. SCANA was forced to scuttle a nuclear power plant project mid-construction when its contractor went bankrupt. Although Dominion says it will walk away from the deal if its terms, specifically regarding the nuclear plant, aren't agreed to by all parties, investors are concerned about it taking on SCANA's nuclear troubles. That's headwind No. 2.   

The third big issue facing Dominion today is its controlled master limited partnership Dominion Energy Midstream Partners LP. A material decline in the partnership's unit price has put Dominion's plans to use it as a funding source on hold. That means that Dominion is going to have to find other ways to fund its growth plans, including more debt and additional equity sales, neither of which has investors pleased.   

Two bar charts. One showing Dominion's old plan of using Dominion Energy Midstream Partners to fund growth and the other the new plan, which relies on debt and stock sales.

Dominion has been forced to change its funding plans, but that hasn't changed its growth plans. Image source: Dominion Energy.

This is clearly a tough patch. However, Dominion continues to push forward with its growth plans, intending to spend as much as $4.2 billion a year on capital projects over the next few years. That spending will, in turn, support the utility's dividend growth target of 10% a year in 2018 and 2019, and 6% to 10% in 2020. Financially speaking, Dominion's leverage is relatively high, but it is covering its interest expenses by more than three times. There doesn't appear to be any reason to worry about its ability to live up to its projections. And its payout ratio, while high compared to peers, is still comfortably below 100%.   

At this point, Dominion and its impressive 5% yield looks like a buying opportunity for long-term dividend investors. There are clear headwinds, but they appear near-term in nature. In fact, even conservative types might want to take a look, given that the stock's beta is a very low 0.3.

Opposite sides of the spectrum

General Electric isn't a good choice today for conservative investors or for those seeking reliable dividend income. There's material recovery potential, to be sure, but it is a high-risk turnaround play today that's only appropriate for more aggressive investors. Dominion, on the other hand, appears to be facing a number of near-term issues that are unlikely to derail its growth plans. Although the headwinds have investors concerned, the utility's high yield is likely worth what appears to be just modest long-term risk to its growth and dividend plans.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.