We first recommended Dominion Resources (D) in mid-2012 as one element on the high-dividend side of a barbell approach, thinking that it would contribute attractive income, downside protection, and ballast for a typical investor's equity portfolio. The stock has performed better than expected, producing good income in a low interest rate environment, but also recording significant stock price appreciation.
Dominion Resources has fully participated in the markets gains over this period, and has significantly out-performed the utility sector. In light of the stock's 20% plus gains year to date, and with Dominion Resources now selling at a premium valuation, we think it's opportune to lock in a gain by selling the position.
This has been a good year for Dominion Resources. Operationally, the company has performed adequately, with revenues and earnings generally within guidance and expectations. For the most part, the regulated utility business is better than average, with manageable regulatory regimes and superior growth prospects versus its peers.
The best news for Dominion Resources this year was its announcement to form a master-limited partnership (MLP) for some of its natural gas gathering, transport and export businesses. This provides a tax-advantaged structure to fund the growth of this non-regulated business, separate from the parent company.
This was a nice plus for stockholders, as the market typically ascribes a higher value to MLPs because of their tax status, strong free cash flow and payouts to their investors, and good operating growth. This higher market valuation of part of the company's assets ultimately benefits the parent's overall valuation, and of course Dominion Resources shareholders.
All this being said, we believe that Dominion Resources is now fully valued, as the stock has outperformed its group and the overall market. Its price-to-earnings ratio on 2013 estimated EPS has expanded to 18.7 times, while its dividend yield has eroded to 3.6%. The stock is no longer cheap, neither absolutely, nor vs. its history, or its peer group.
By way of comparison, we think investors should get better returns with less risk going forward in some of our other recently recommended utilities, including Duke Energy (DUK), Consolidated Edison (ED), and Southern Company (SO). Each of these stocks trades at a significantly lower earnings multiple, carries a much higher dividend yield, yet also has adequate growth prospects and good financial strength. In short, these companies should also provide the attributes that we originally found desirable in Dominion Resources.
Bottom line, it's time to declare victory in Dominion Resources, and to move on.
