Dominion Resources, Inc. (D) Annual Valuation

Utility companies can be difficult to value, because the investor’s first instinct is to look primarily at the dividend yield along with the stability in the earnings; however there is so much more to making a solid investment decision than that.  Though the dividend yield is ultimately a key factor in evaluating whether one utility company is better than another, Intelligent Investors following Benjamin Graham’s methods will be keen to compare the utility company against an industrial or retail company to determine which presents the greatest opportunity for the greatest profit.  That sort of analysis requires looking into the fundamentals of the company and considering opportunity for capital appreciation as well as dividend growth.  The ModernGraham analysis is intended to compile information in order to compare an investment opportunity against another, and what follows is a specific look at how Dominion Resources, Inc. fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Dominion Resources, Inc. (Dominion), is a producer and transporter of energy. The Company is a provider of electricity, natural gas and related services to customers primarily in the eastern region of the United States. Dominion’s portfolio of assets includes approximately 27,500 megawatts of generating capacity, 6,300 miles of electric transmission lines, 56,900 miles of electric distribution lines, 11,000 miles of natural gas transmission, gathering and storage pipeline and 21,800 miles of gas distribution pipeline, exclusive of service lines of two inches in diameter or less. Dominion also operates one of the underground natural gas storage systems, with approximately 947 billion cubic feet of storage capacity, and serves nearly six million utility and retail energy customers in 15 states. In July 2013, the Company acquired three solar-power development projects near Indianapolis, Ind., from Sunrise Energy Ventures.

D data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
3. Earnings Stability – positive earnings per share for at least 5 years – PASS
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data:

MG Value	$12.07
MG Opinion	Overvalued
Value Based on 3% Growth	$35.61
Value Based on 0% Growth	$20.88
Market Implied Growth Rate	9.40%
Net Current Asset Value (NCAV)	-$55.23
PEmg	27.30
Current Ratio	0.81
PB Ratio	3.46

Balance Sheet – 9/30/2013

Current Assets	$5,210,000,000
Current Liabilities	$6,453,000,000
Total Debt	$18,548,000,000
Total Assets	$48,488,000,000
Intangible Assets	$3,087,000,000
Total Liabilities	$37,246,000,000
Outstanding Shares	580,000,000

Earnings Per Share

2013 (estimate)	$3.00
2012	$0.57
2011	$2.45
2010	$5.02
2009	$2.17
2008	$3.16
2007	$4.13
2006	$2.23
2005	$1.50
2004	$1.91
2003	$1.49

Earnings Per Share – ModernGraham 

2013 (estimate)	$2.46
2012	$2.35
2011	$3.29
2010	$3.58
2009	$2.79
2008	$2.93

Dividend History

D Dividend data by YCharts

Conclusion:

Dominion Resources, Inc. does not qualify for the Defensive Investor or the Enterprising Investor.  Like most utilities, it has a poor current ratio, so it must pass the remaining requirements for the Defensive Investor, but in this case the growth over the ten year period has been insufficient, the PEmg ratio is too high, and the PB ratio is too high.  As a result, value investors following the ModernGraham approach should research other companies that pass the ModernGraham requirements.  From a valuation standpoint, the company has seen its EPSmg (normalized earnings) drop from $2.93 in 2008 to an estimated $2.46 for 2013.  That lack of growth leads the ModernGraham valuation model to return an intrinsic value that is significantly lower than the market price today, and it should be noted that the market is currently implying a growth rate in earnings of over 9%.  The investor is then left to decide whether the dividend yield alone is worth the potential risk of capital loss, and that is a decision best left to individuals.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Dominion Resources, Inc. (D)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Dominion Resources, Inc. (D) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.