Is This Utility's Dividend Safe?

Blame it on the sunshine. Dominion Resources (NYSE: D  ) reported earnings today, and "milder-than-normal weather" was one of the many excuses that CEO Thomas Farrell gave for his company's rainy day results. Is this a rough patch in Dominion's stalwart dividend performance, or does it hint at holes in the utility's model? Let's take a look.

Number crunching
Dominion reported GAAP earnings of $209 million for Q3 2012, the equivalent of $0.36 per share. Compared to last third quarter's $392 million income, these numbers represent a whopping 47% decline.

Expectations weren't high, but even Wall Street was disappointed. Mr. Market had hoped for $0.97 operating earnings per share, but Dominion delivered only $0.92.

Chairman and CEO Thomas Farrell gave three reasons that Dominion's results came in "toward the bottom of our guidance range of $0.90 to $1.00:"

1. Unplanned outages at Milestone Unit 2 and the Hastings Extraction Plant

2. Lower results from Dominion Retail

3. Milder-than-normal weather

Looking ahead, Dominion expects its fourth quarter earnings to flip-flop its current decline, with a 20% increase over 2011's Q4 results. 

A peck of perspective
Dominion hasn't seen annualized quarterly growth since 2009, and these results aren't promising a turnaround. Last quarter, earnings were 7.2% lower than in Q2 2011.

The company is comprised of three separate divisions, and quarterly earnings show some stark differences between them.

Dominion Virginia Power, a 2.4 million customer utility in Virginia and North Carolina, knocked $0.01 off Dominion's earnings compared to a year ago. "Weather" is the reddest line item, but retail energy marketing operations are also down.

Dominion Energy, the utility's natural gas storage and pipeline division, balanced out Virginia Power with a $0.01 gain.

Dominion Generation, responsible for electricity generation from coal, nuclear, gas, and renewables, dropped a full $0.06 off the utility's earnings per share. "Weather" decreased earnings by $0.05 cents, and tightening merchant generation margins also hurt the division.

Long-term debt has creeped up from $13 billion in 2007 to $17 billion in 2012, but this quarter's results show a slight $350 million dip from last year's $17.3 billion debt.

Gone with the dividend?
Dominion's executives are not popping open the bubbly tonight, and investors should cast a wary eye on this company's results. Although the June derecho storm undoubtedly hurt the company's results, annual revenue continues to flatline as expenses rise.

The company currently boasts a 4.1% dividend, and has consistently increased it over time. Dominion's dividend is up 64% since 2005, and 7% in the past year.

But the utility also has above-average debt, an above-average payout ratio, and free cash flow that has hovered around $0 for the past 10 years. Let's take a look at some key statistics to see how Dominion holds up to other utilities:

 

Dividend Yield

Debt-to-Equity Ratio

Price-to-Book

Ratio

Dominion Resources

4.1%

1.7

2.5

NextEra Energy (NYSE: NEE  )

3.5%

1.6

1.9

Duke Energy (NYSE: DUK  )

4.8%

0.9

2.0

Exelon (NYSE: EXC  )

5.9%

0.9

1.4

National Grid (NYSE: NGG  )

5.5%

2.5

2.8

Source: e*trade.com

The only company that "beats" Dominion's debt load and overvaluation is National Grid, and investors might be luring themselves into a dividend trap. Companies like NextEra go light on dividends to invest in renewables, and Exelon's looking mighty cheap with the best dividend at the lowest price. Duke Energy toes the midpoint, offering an above-average dividend at an affordable price.

Foolish bottom line
Dominion's not cheap, and its debt is not disappearing. It's a dividend play for now and, although the utility company has an admirable track record of increasing its yield, the fundamentals don't add up. Utilities across the nation are feeling the squeeze of macroeconomic struggles, but Dominion's most recent results haven't convinced me that it's on the right track to emerge as a lean, mean, utility machine.

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