Is Dominion Resources Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Dominion Resources (NYSE: D  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Dominion's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Dominion's key statistics:

D Total Return Price Chart

D Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

(8.6%)

Fail

Improving profit margin

(89.3%)

Fail

Free cash flow growth > Net income growth

(46.5%) vs. (90.2%)

Pass

Improving EPS

(90%)

Fail

Stock growth (+ 15%) < EPS growth

80.7% vs. (90%)

Fail

Source: YCharts.
*Period begins at end of Q2 2010.

D Return on Equity Chart

D Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(90.1%)

Fail

Declining debt to equity

(50.1%)

Fail

Dividend growth > 25%

23%

Fail

Free cash flow payout ratio < 50%

Negative FCF

Fail

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
This is one ugly performance from a supposedly sterling stock. Dominion earned only one out of nine passing grades, and even that lone pass was granted more on a technicality than because of a genuine improvement. Over the past three years, Dominion's free cash flow has diverged significantly from its net income as the cost of its infrastructure continues to weigh heavily. Despite evident weaknesses, Dominion's shareholders have enjoyed robust stock price growth over the past three years as this defensive darling attracts spooked investors looking for a steady yield. Is this rebound sustainable, or will Dominion's fundamental weaknesses catch up it to the end? Let's dig a little deeper to answer that question.

Dominion seems poised to capitalize on a trend toward LNG exports, as the U.S. Department of Energy has recently approved its fourth LNG export facility, located in Cove Point, Md. This will enable the company to export LNG to non-Free Trade Agreement countries across the world, especially India and Japan, which offer huge market potential.

Dominion's Cove Point plant has been approved to export up to 0.77 billion cubic feet of natural gas per day, which will be split evenly between Sumitomo Corporation and GAIL Global. However, Cheniere Energy (NYSEMKT: LNG  ) is going to be a big challenger in the nat-gas export arena, since its Sabine Pass LNG terminal is expected to be operational by 2015. My fellow Fool Justin Loiseau notes that rival nat-gas exporter Freeport LNG has also filed a request to double its existing export capacity. Freeport LNG already has contracts with two Japanese companies, as well as a 4.4 million tons-per-annum deal with BP. In addition, a third LNG export facility, which is owned by both Energy Transfer Partners and BG Group, will be on line by mid-2019.

Looking back at Dominion's domestically focused operations, its Virginia Power subsidiary scored a federal land lease off Virginia's coast for $1.6 million. Justin Loiseau notes that the land will be used to build an offshore wind farm, which will be capable of generating 2,000 MW of electricity. In addition, Dominion has received approval for a 1,358 MW natural gas power plant to expand its lines and processing centers around the Marcellus and Utica shale formations. Dominion isn't cheap right now, but investors appear to be banking on a long-term rebound. However, that may already be baked into the stock's high price. Investors may want to look elsewhere for yield today.

Putting the pieces together
Today, Dominion has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report "5 Dividend Myths ... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.

Editor's note: A previous version of this article incorrectly characterized the ownership of Freeport LNG. The Motley Fool regrets the error.


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