Cheap Stocks: Dominion Resources

Posted Dec 8th 2008 3:10PM by Elizabeth Harrow
Filed under: S and P 500, Stocks to Buy

This post is part of a series featuring bargain stocks that are worth a look now. See more Cheap Stocks.

In addition to old standbys like consumer staples, utility stocks are a proven favorite during times when your portfolio needs a defensive touch. Among utilities, Virginia-based Dominion Resources (NYSE: D) stands out for its solid price action, its exposure to natural gas, and its heavy potential for future upgrades.

While natural gas might not seem terribly thrilling, many analysts expect it to be a hot commodity in the coming years. It's a plentiful resource in North America, and no less an energy tycoon than T. Boone Pickens is banking on a natural-gas boom. With 1.1 trillion cubic feet of oil and natural gas reserves, Dominion looks poised to capitalize on a shift toward this source of energy.

The utility firm already seems to be thriving, in fact. In its October 30 earnings report, the company exceeded analysts' profit expectations by 4 cents per share, and offered upbeat guidance for fiscal 2008 and 2009.

For value investors, though, the third-quarter report contained even more good news. Thomas Farrell II, Dominion's president, chairman, and CEO, stated, "Given its confidence in the strength of our company's earnings and business model, the board of directors recently declared our fourth-quarter dividend and reconfirmed our dividend policy to sustain increases in 2009 and 2010 that will allow us to reach our targeted 2010 payout ratio of 55%."

From a technical perspective, the shares of Dominion are holding up well. The stock is perched atop support from its ascending 80-month moving average, which previously contained D's lows in late 2002. Despite finishing a hair's breadth below this trendline in October, the shares easily pulled back atop their 80-month in November. This suggests that support from this long-term moving average remains strong.

Despite its enviable price action, analysts are overwhelmingly bearish on D. Thomson Financial calculates the average 12-month price target as $37.59, a modest premium of just 2.1% to the stock's closing price on November 30. Meanwhile, Zacks reports eight Hold ratings and two Sells, compared to just three Strong Buys. Any upgrades or price-target increases from this skeptical group could help Dominion extend its uptrend.

Meanwhile, the shares are trading at a discount to their five-year average price/earnings ratio of 19.6. At the end of November, D's p/e ratio was a comparatively slim 11.95.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

Tags: cheap stocks, d, dividend, dominion resources, natural gas, T. Boone Pickens, Thomas Farrell, utilities sector, utility

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Reader Comments (Page 1 of 1)

12-18-2008 @ 10:19PM

Lawrence MacDonald said...

Does this upbeat analysis take into account the impact on Dominion of either cap-and-trade carbon prices or carbon taxes? Dominion produced more than 64 million tons of CO2 last year, and expects that to rise to 71 million tons in the future, with renewable energy still accounting for less than 2 percent of its power. If carbon is priced at just $10 per ton -- and many people think the charges will be higher -- will Dominion be able to pass along all $640 million in increased costs to its consumers? Won't some of us cut back on usage as a result? I think Dominion looks like a bad bet.