Long-term growth rates are expected to approximate 10%, and the company pays a 4.6% dividend yield. Assuming these numbers, too, hold true post-merger, the stock looks, at-worst, fairly valued. If free cash flow comes anywhere near the levels I expect a Verizon Communications Inc. (NYSE:VZ)-in-full-control-of-Verizon-Wireless to produce, the stock could be even cheaper than it looks.
In the kingdom of high, P/Es, Dominion’s the king
Want to see a company that makes even Verizon’s 88 P/E look reasonable, and Under Armour Inc (NYSE:UA)’s 63 P/E look almost quaintly “cheap?” Take a gander at electric utility Dominion Resources, Inc. (NYSE:D)– recipient of an upgrade of its own today, this time, from JPMorgan.
Dominion Resources, Inc. (NYSE:D)’s price-to-earnings ratio simply staggers the mind, coming in at 142 — and this for a rather mundane utility stock that’s expected to grow earnings at a plodding 7% pace over the next five years. Free cash flow at the firm… well, I’d tell you about it if there was one. But over the past 12 months, Dominion Resources, Inc. (NYSE:D)’s actually burned cash — and, indeed, it’s been a consistent cash burner since way back in 2002. (This fact lends itself to all sorts of wild imaginings about how the company really generates its electricity — but I’ll leave those aside for now).
What’s significant here is that, despite a consistent failure to generate real cash profit from its business, Dominion Resources, Inc. (NYSE:D) shares have held up well, and indeed climbed pretty steadily over the past decade — a fact that’s been helped by the company’s continued payouts of strong dividends, which currently yield about 3.9%.
JPMorgan seems to think the company will be able to keep this game running, and maybe even improve its business, now that Dominion Resources, Inc. (NYSE:D) has won permission from the U.S. Department of Energy to begin running liquefied natural gas exports out of its Cove Point LNG facility on the Chesapeake Bay.
Are they right? I don’t think so. Personally, if looking for a good, dividend-paying utility play, I’d be more inclined to invest in something like Duke Energy Corp (NYSE:DUK), which at least produces a free cash flow-positive year every now and again, helping it to pay out even bigger dividend checks than Dominion produces (and at a trailing P/E of only 23, to boot). But to each his or her own.
The article Friday’s Top Upgrades (and Downgrades) originally appeared on Fool.com is written by Rich Smith.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Dominion Resources, Under Armour, and Vodafone. The Motley Fool owns shares of Under Armour.
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