Dominion Resources: Utility Value for Conservative Investors

| About: Dominion Resources, (D)

NYSE Symbol: D

August 28, 2009: $33.15 /share

52-week range: $27.15 (Mar. 9, 2009) - $44.65 (Sep. 22, 2008)

Dividend = $0.4375 quarterly = 5.28% current yield

Dominion Resources generates, transmits, and distributes electricity. The company generates electricity through coal (33%), nuclear (31%), gas (6%), and oil (1%) resources. Purchased power accounts for the final 29%. They serve approximately 2.4 million retail customer accounts in Virginia and NE North Carolina. Through their Consolidated Natural Gas division they also supply approximately 1.7 million residential, commercial, and industrial gas customers in Ohio, Pennsylvania, and West Virginia.

The company also involves in merchant generation, energy marketing, and price risk management activities, as well as natural gas exploration and production in the Appalachian basin. Dominion Resources also operates a regulated interstate natural gas transmission pipeline and underground storage system.

EPS hit all-time high in 2008 and seem on pace to exceed that level both this year and in 2010. The dividend has been increased in each of the past six years. Current yield is a very nice 5.28% and is well covered at about 54.3% of this year’s earnings projection.

Value Line gives Dominion an ‘above average’ safety rating, a B++ for financial strength and a 100th percentile ranking for ‘stock price stability’ (on a 1 – 100 scale with 100 being best).

Here are Dominion’s per share numbers from continuing operations as reported by Value Line:

*2009 data includes Value Line’s H2 estimates.

At today’s quote of $33.15 the multiple for Dominion is just 10.2x this year’s expected earnings. That the lowest P/E for these shares in more than 10 years. (The shares may be cheap today as they went ex-dividend yesterday). Dominion’s 10-year median multiple has been 16x and the lowest annual average P/E of the past 15 years (pre-2009) was 12x in the last severe bear market of 2002.

The current yield of 5.4% is well above historical normal for D, as can be seen from the chart above.

Value Line is assuming a normalized 14 multiple and a 4% dividend yield in calculating their 3 – 5 year target price range. A rebound to even 12x this year’s estimate of $3.25 would lead to a share price of $39 by early 2010.

If the current payout stayed level and the 4% ‘normalized’ yield returned, the shares would rise to $43.75.

Is it reasonable to expect Dominion shares to get back to the high $30’s – low $40’s? Sure. These shares have traded as high as $37.20 already in 2009 and they hit peaks of $43.50, $42.20, $49.40 and $48.50 in 2005-2006-2007 and 2008. Earnings were substantially lower in each of those years than they are today.

My low-end goal price of $39 would bring a gain of 17.6% from today’s asking price on top of the 5.28% yield. That would make for a 20% - 25% total return if it took a full year to achieve. Not too bad for a low Beta (0.70), regulated utility stock.

Here’s a nice buy/write combination that can deliver excellent returns out to April 2010 with a bit less risk than just the outright purchase of shares.

If Dominion shares rise to $35 (+5.6%) or higher by April 16, 2010:

  • The $35 calls will be exercised.
  • You will sell your shares for $35,000.
  • The $35 puts will expire worthless.
  • You will have collected $875 in dividends.
  • You will have no further option obligations.
  • You will end up with no shares and $35,875 in cash.

That’s a best-case scenario total return of $7,875/$28,000 = 28% achieved in less than eight months on shares that only needed to rise by 5.6% from the trade’s inception price.

What’s the risk?

If Dominion shares remain below $35 on April 16, 2010:

  • The $35 calls will expire worthless.
  • The $35 puts will be exercised.
  • You will be forced to buy another 1000 shares.
  • You will need to lay out an additional $35,000 in cash.
  • You will have received $875 in dividends.
  • You will have no further option obligations.
  • You will end up with 2000 shares and $875 in cash.

What’s the break-even point on the whole trade?

On the original 1000 shares it’s their $33.15 purchase price less the $1.40 /share call premium = $31.75 /share.

On the ‘put’ shares it’s the $35 strike price less the $3.80 /share put premium = $31.20 /share.

Your break-even would be $31.48 /share (excluding dividends) and $31.04 /share (including yield).

Dominion Resources shares could drop by up $2.11 /share or (-6.3%) without causing a loss on this trade.

That $31.04 final break-even price is lower than the absolute low trading prices for Dominion shares in 2005-2006-2007-2008. Earnings and dividends are each way higher now than during any of the above referenced years.


Dominion Resources appears to be a high-quality, low-risk stock to own with total return potential of 20 – 25% over the next 12 months. If you’re option savvy and feel comfortable doing the buy/write as described you could see 28% total returns between now and April 16, 2010 on any move up to $35 or better.

With the option combination play you have a margin of safety of 6.3% just in case things do not go as planned.

Disclosure: Author is long Dominion shares and short their options.