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.
D data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- 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
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
|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|
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
D Dividend data by YCharts
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.? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Dominion Resources, Inc. (NYSE: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.