Utility Nukes: The U.S. Isn’t Japan, and Dominion Looks Particularly Undervalued

Here’s a question one rarely asks about utility stocks: are they safe?

With the ongoing nuclear crisis in Japan, the profit potential of major U.S. electric utilities has seldom been so uncertain. Nuclear power operators – i.e., most of the major U.S. power producers – face renewed safety concerns that may stifle growth.

No one knows yet whether old plants will require expensive retrofits, or if fear will put an end to nuclear expansion. Regulatory cost for all of these companies almost certainly will rise. That’s why shares in the sector are down since the March 11 disaster.

D, SO, ETR, EXC, SPY Chart by YCharts

But for long-term value investors, this sector is too attractive to ignore. YCharts Pro lists many of the major electric companies as undervalued. Dividend yields are ranging 4% to 5%, and numerous companies have reasonable debt loads and plenty of cash. With any kind of economic recovery, revenues for these utilities will rise.

We set out to find one of these undervalued, large cap power generators that could best weather the nuclear uncertainty, despite nuclear holdings. We quickly honed in on Dominion Resources (D). YCharts Pro considers it an attractive large cap value.

Dominion provides power mainly to Virginia and northward through New York state, as well as to parts of the Midwest. About 42% of its generating mix comes from nuclear power; slightly more from coal; and most of the rest from natural gas. The company owns the nation’s largest natural gas storage system.

None of Dominion’s seven operating nuclear reactors uses the questionable boiled-water system that led to the problems in the Japanese plants. However, one of its permanently-closed reactors on Long Island Sound did, and spent fuel rods remain on site. The Japan crisis already has led to renewed calls for the company to dispose of this radioactive waste elsewhere.

The company also still intends to move forward with plans to request regulatory approval to build a third reactor at its nuclear power station in Louisa County, Va. However, even before the earthquake, Dominion stressed it had no immediate plans to actually build.

Current events aside, Dominion is an extremely attractive company from an investment perspective. Its operating earnings grew 35% between 2006 and 2010, and its share price gained almost 30%. Its return on equity outstrips most other major power companies.

D Stock Chart by YCharts

Dominion recently announced a new dividend policy that will give 60% to 65% of operating earnings to shareholders. Dominion expects earnings growth of 5% to 6% a year starting 2012. Right now, its dividend yield is better than most other generating companies.

D Stock Chart by YCharts

Finally, Dominion shares are cheaper than those of other utilities now, with a price earnings ratio much lower than its shares normally trade.

D Stock Chart by YCharts

Unlike some other power companies, Dominion is not relying on expanding its nuclear capacity to increase earnings in the next five years. Dominion’s exposure to new regulations is more limited than that of other power giants, such as Excelon (EXC) or Southern Company (SO), because it operates none of the Japanese-type systems. Dominion probably will have to clean up the waste at its Long Island Sound plant, but this possibility was known long before March 11.

It seems unlikely that any new regulation will be so onerous that it seriously hurts earnings for these companies long-term. The Obama administration and most of Congress do not want to deter companies from expanding this source of clean power. They support the nuclear industry with both money and rhetoric.

So is it safe to make a long-term investment in a utility stock now? Probably. It’s just not the widows and orphan fund it once was.