Blue Chip Dividend Investing Without A Lid

Oct. 27, 2013 4:44 AM ETAZO, BDX, BP, CVX, D69 Comments

Even though we all know that a company's past results do not guarantee a company's future returns, and even though it is impossible to predict the future with precision, we can make intelligent estimates about the future returns of a particular investment that we contemplate.

For instance, let's take a look at a utility company that I happen to admire, Dominion Resources (D).

The company is trading at about 20x its current earnings power (that is to say, it is generating $3.15 in normalized profits for current shareholders, and you have to pay $64 per share to get your hands on that starting earnings base).

But there is a catch: the company's dividend payments and debt requirements consume a big chunk of those profits.

As of this writing, Dominion Resources is sliced up into 577,676,451 pieces that generate $3.15 in profits, for total company-wide profits of $1.81 billion. To generate that 3.48% dividend yield that you could get at current prices, Dominion Resources has to pay out $1.29 billion of that profit to current shareholders this year, giving the company's management $520 million in net profits.

But when we look on the horizon, we can see that Dominion has $9 billion in debt owed over the next five years, relative to a long-term debt base of $17 billion that is forcing the company to pay just shy of $900 million in long-term interest.

To achieve modest growth, Dominion Resources has to routinely issue new shares and dilute existing shareholders because it does not organically generate the profits necessary to grow, pay its dividend, and pay down its debt simultaneously (and this is a common condition for many utility companies). That is why the share count has increased from 570 million in 2011 to 576 million in 2012 and an estimated 581 million by year end.

This article was written by

Income-oriented investor with a focus on cumulative income over a multi-generational period. Special interest in buying "Top 20 companies in the world at a fair price" or great businesses selling at a 30% or greater discount while dealing with a problem that will eventually resolve. You can access my library of 1,200+ financial articles written over the past seven years at "The Conservative Income Investor": best ideas regarding what I'm purchasing are covered over on Patreon:

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