Dominion Resources: Excessive Valuation For This Leveraged, Non-Growing Utility Giant

| About: Dominion Resources, (D)


Dominion Resources has failed to show revenue or earnings growth over the past decade.

Modest share repurchases, dividends and lower interest rates pushed up the share price.

Potentially higher interest rates, leverage and excessive valuation remain risks to the business.

Dominion Resources (NYSE:D), a big producer and transporter of energy, continues to trade near its all-time highs.

The company has extensive generation capabilities of 23,600 megawatts. On top of this come vast natural gas transmission pipelines, as well as electric transmission lines which are used to service 6 million retail customers across 15 northern states within the United States.

Low interest rates and a search for yield have pushed up shares in this utility company, despite the high debt load and struggles to grow its operations.

First-Quarter Results

On the final day of April, Dominion Resources released its first-quarter results, which indicated that the harsh winter conditions were not a blessing for every utility company.

The company reported net operating revenues of $3.63 billion, which came ahead of last year's reported $3.52 billion. Despite the growth in top line revenues, operating earnings fell from $930 million to $768 million. The bill for electrical fuel and other energy purchases needed to generate electricity for its customers jumped from $951 million to $1.33 billion. Obviously, this dramatic increase put pressure on the profitability of the business.

Net earnings came in at $379 million, or at $0.65 per share on a diluted GAAP basis. This was down twenty-one cents compared to last year.


Dominion holds just $149 million in cash and equivalents, although the company has access to a line of credit with a capacity of roughly $1.29 billion. Like most other utility companies, the company relies on its funding by issuing a lot of debt. Its debt position of $23.2 billion results in a net debt position of about $23 billion, a staggering amount.

Trading at $71 per share, the company commands a $41-billion valuation. This values equity in the company at 3.1 times last year's annual revenues at $13.2 billion. Based on reported earnings of $1.70 billion, the utility commands a price-earnings ratio of 24-25 times. Even based on adjusted earnings of $1.88 billion, the valuation is high, at 22 times last year's earnings.

With the dividend coming in at $2.40 per share on an annual basis, this implies that the company pays out $1.4 billion of its earnings of $1.7 billion. This leaves little opportunity to hike payouts or invest more heavily into new projects without running up debt.

Weaker Second Quarter

Dominion posted operating earnings of $1.04 per share in the first quarter, with earnings coming in ahead of the company's own forecast for earnings of $0.85 to $1.00 per share. Cold weather boosted results by $32 million on an after-tax basis.

For the current second quarter, Dominion foresees operating earnings of just $0.55 to $0.65 per share. This forecast trails analyst projections at $0.72 per share. The guidance furthermore implies that adjusted earnings might come in lower than the reported $0.62 in the comparable period last year.

For the entire year of 2014, operating earnings are seen between $3.35 and $3.65 per share, implying that earnings are foreseen at around $2 billion this year.

Implications For Investors

Dominion has shown a weak operating performance over the past decade, yet shareholders have benefited from cash being returned to them and from lower interest rates.

For most of the past decade, shares traded in a $30-$50 trading range, before shares broke the higher end of this range at the start of 2012. Ever since, shares have seen a continued rally to levels around $70 at the moment.

During this period, both revenues and earnings stabilized, at best. A reason why investors remained enthusiastic is the cumulative share repurchase rate of 15% over this time period, as well as the fat dividends. What is left is a stable business with an incredible amount of debt.

While the dividend payouts are appealing, the company only achieves this by paying out the vast majority of its earnings, leaving few funds to reduce debt or initiate new projects. With shares trading at a too steep an earnings multiple, the stock is much riskier than many might anticipate, and could hit serious turmoil if rates start to rise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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