One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock and then decide whether Dominion Resources, Inc. (NYSE:D) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
- Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let’s take a closer look at Dominion Resources, Inc. (NYSE:D).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | (2.4%) | Fail |
| 1-year revenue growth > 12% | (8.9%) | Fail | |
| Margins | Gross margin > 35% | 26.4% | Fail |
| Net margin > 15% | 4.4% | Fail | |
| Balance sheet | Debt to equity < 50% | 199.4% | Fail |
| Current ratio > 1.3 | 0.66 | Fail | |
| Opportunities | Return on equity > 15% | 5.6% | Fail |
| Valuation | Normalized P/E < 20 | 52.18 | Fail |
| Dividends | Current yield > 2% | 4% | Pass |
| 5-year dividend growth > 10% | 7.6% | Fail | |
| Total score | 1 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Dominion Resources last year, the company has dropped another point after losing two points from 2011 to 2012. This year, a big drop in normalized earnings was the culprit, even as the stock managed to climb more than 10% over the past year.
Like many utilities, Dominion Resources, Inc. (NYSE:D) has been working hard at taking advantage of the boom in natural gas. On one hand, Dominion generates electricity for both regulated utility customers and the wholesale power market, and there, a new clean-coal facility will likely give way to the same conversions to natural-gas-fired plants that peers have done. In Dominion’s core markets, both The Southern Company (NYSE:SO) and Duke Energy Corp (NYSE:DUK) have taken big steps toward bring gas-fired plants on line, and that trend will likely continue if gas prices stay low.
Dominion Resources, Inc. (NYSE:D) also has a huge natural-gas business as well, delivering gas to utility customers but also owning an extensive network of nat-gas pipelines and storage systems. That gives Dominion Resources, Inc. (NYSE:D) characteristics of a midstream energy company, especially as it expands its network to take advantage of shale-gas plays in the eastern U.S. like the Utica Shale, and contemplates the conversion of its Cove Point liquefied natural gas facility as a potential export terminal.
Yet as exposed as Dominion Resources, Inc. (NYSE:D) is to natural gas, it also has an extensive nuclear fleet. Exelon Corporation (NYSE:EXC) has a more concentrated nuclear portfolio than Dominion, but unlike Exelon, the fact that nearly a quarter of Dominion’s generation capacity comes from nuclear power hasn’t held back Dominion’s stock.
For Dominion to improve, it needs to get its revenue moving in the right direction, and the best way to accomplish that will be for natural gas prices to rise. Until that happens, it’s hard to see Dominion moving much closer toward perfection.
The article Has Dominion Resources Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Dominion Resources, Exelon, and Southern.
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