The idea that utilities are a super-safe value and income investment has been around forever; or at least since shortly after Thomas Edison invented the lightbulb.
The concept behind this thinking is pretty easy to comprehend; utilities sell products that almost every needs, they have a practical monopoly and they generate a lot of float. The float comes from the monthly bills that customers have to pay if they don’t want service turned off.
That’s why Warren Buffett owns a batch of utilities including the Northerngrid in England, Pacificorp and NV Energy in Nevada. Many income and value investors follow the same strategy by buying utilities like Dominion Resources (NYSE: D) for their portfolio.
Lots of Value at Dominion
Dominion serves more than six million customers in four states; Virginia, Ohio, North Carolina, and West Virginia, with 14,400 miles of natural gas lines and 6,500 miles of power lines. It serves a growing region of the country; Virginia and North Carolina regularly appear on lists of the fastest-growing states.
More importantly the threats to its business are long term and somewhat hypothetical. It will take years for battery storage and rooftop solar to become an economical alternative to the grid, even with Elon Musk merging Tesla (NASDAQ: TSLA) and SolarCity (NASDAQ: SCTY).
Even if those solutions work, most of those who use them will still be partially reliant upon the grid. Some of Musk’s other projects such as the electric cars, might even be good for Dominion by increasing demand for one of its products: electricity.
A Widows and Orphans Stock
All this makes Dominion what old-time Wall Street guys called a “widows and orphans stock.” That term describes an equity which is so safe widows and orphans can rely on it for income.
Yet investors will ask the big and most important question: is Dominion Resources making money?
The answer to that is, Dominion posted some pretty impressive numbers on June 30, 2016 including:
- $11.05 billion in revenue.
- $1.926 billion in net income.
- A profit margin of 17.4%.
- Total assets of $61.37 billion.
- Cash and short-term investments of $377 million.
- $2.917 billion in cash from financing.
- $4.333 billion in Cash from operations.
All this was achieved in spite of a negative free cash flow of -$837 million. So it’s pretty impressive, but there is a big problem at Dominion.
Dominion Resources’ Incredibly Shrinking Revenues
The company’s revenues have been shrinking for some time. Dominion reported revenues of $13.06 billion in June 2014; that fell to $12.15 billion in June 2015, and $11.05 billion in June 2016.
Dominion resources’ revenues shrank by $2.01 billion in just two years. That number alone makes me wonder if the company’s business is sustainable on a long-term basis.
Strangely enough it might be because the income has been going up as the revenues fall at Dominion. The company reported a net income of $247 million in June 2013; that grew to $1.538 billion in June 2014, $1.721 billion in June 2015 and $1.926 billion in June 2016.
Dominion is making more money even though it is doing less business. That looks like a value investment to me. The company can still generate a lot of float, on less revenue which also makes it an income investment.
A Good Income Investment at Dominion
Dominion’s shares are still paying off for investors in a good way. The company offered a dividend yield of 3.77% on October 21, 2016. More importantly that dividend yield has not fallen below 3% in the five years since October 17, 2016.
That makes Dominion a reliable dividend investment that paid investors 70¢ a share on August 31, 2016. That dividend has been paid out steadily for every quarter since November 2011, according to the data provided by our friends at ycharts.
The dividend has also been going up steadily for some time. It was 52.7¢ in 2012, 56.3¢ in 2013, 60¢ in 2014 and 64.7¢ in 2015. That means the dividend has been going up by about 4¢ a share each year.
Dominion shareholders were also rewarded with a return on equity of 14.86% on June 30, 2016. That means investors received both share value and dividend income.
Dominion demonstrates that utilities still pay off for investors. If you’re looking for a utility stock to add to your portfolio, Dominion Resources would be a great choice. It offers a good dividend and a nice return on equity.