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Dominion Resources, Inc. (D), Hershey Co (HSY): Should You Pay a Premium for a Great Stock?

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A company with a steady history of rewarding shareholders may carry a premium stock valuation compared to its peers. Such stocks tend to perform well in the market but are ignored by critics who think they are overpriced. Should you buy such stocks? The answer is yes, if you have a long-term outlook.Warren Buffett’s partner Charlie Munger influenced Buffett’s investment philosophy to include investing in high-quality businesses, such as Coca-Cola, for the long term. Munger convinced Buffett that sometimes it’s worth paying a premium for a great business.

Dominion Resources, Inc. (D)

Let’s take a look at three stocks that are trading at a premium to their peers. Dominion Resources, Inc. (NYSE:D), Hershey Co (NYSE:HSY), and Boston Beer Co Inc (NYSE:SAM boast projected growth in sales and earnings. They’re leading businesses in their fields — Dominion Resources, Inc. (NYSE:D) in energy, Hershey Co (NYSE:HSY) in confections, and Boston Beer Co Inc (NYSE:SAM) in craft brewing. This table compares them to major competitors with regard to several key metrics:

Name Forward P/E Price/Sales Price/Book Dividend Yield
Dominion Resources 17.92 2.65 4.25 3.76%
Consolidated Edison 14.6 1.3 1.4 4.5%
Westar Energy 14.18 1.64 1.3 4.5%
Hershey 24.6 2.84 18.3 2.13%
Smucker 18.37 1.92 2.22 2.16%
Kellogg 15.86 1.47 8.51 3.06%
Boston Beer 42.72 4.57 11.59 N/A
Anheuser-Busch 20.1 3.86 3.27 2.29%

Source: Charles Schwab Research; Yahoo! Finance.

High-value voltage
Dominion Resources, Inc. (NYSE:D) trades at a premium to comparable electric-utility holding companies. However, this premium is warranted based on the company’s long-term earnings-growth prospects, multiple energy-generation sites, huge natural-gas holdings, stable operations, and above-average financial strength. Much of the company’s business is a regulated monopoly; for example, it is the only source of electricity in parts of Virginia. I project average annual earnings growth of 5% to 6%. The U.S. Department of Energy recently approved Dominion Resources, Inc. (NYSE:D)’s Maryland Cove Point LNG facility for natural-gas exports to non-free-trade-agreement countries.

Is this chocolate too rich?
Hershey Co (NYSE:HSY) trades at a forward P/E of 24.6 — higher than the five-year average range of 17.5 to 24.2. The current price-to-sales multiple is much higher than those of competitors J.M. Smucker and Kellogg. Hershey Co (NYSE:HSY) warrants a premium based on its dominant position in the chocolate confectionery business, growing sales and EPS outlook for this year and next. Management projects full-year earnings growth of 14%.

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