Dominion Vitality’s Dividend Is Protected, however Will It Final?

Dominion Vitality (D 1.03%) traders collectively breathed a sigh of reduction after the corporate introduced on its This fall 2022 earnings name that it had no intention of chopping its dividend. The corporate already lower its dividend by round a 3rd in 2020.  

The larger situation is that Dominion Vitality’s inventory is hovering round a 10-year low. The depressed inventory value, even when factoring in a decrease dividend, has pole-vaulted Dominion’s yield to a large 4.5%. 

Let’s decide if the corporate’s dividend is protected going ahead and if the languishing dividend stock is value shopping for now.

Picture supply: Getty Photos.

Dominion Vitality’s enterprise is doing higher than it appears

There isn’t any sugar-coating the truth that Dominion Vitality has been the second worst-performing main U.S.-based regulated electrical utility (behind PG&E) during the last decade. An excellent chunk of the underperformance has to do with declining income and a strategic shift away from coal and oil (and to some extent pure fuel) towards renewable power. The transition has concerned write-downs and a few sloppy promoting. For instance, Dominion’s $9.7 billion energy transmission asset sale to Berkshire Hathaway in 2020 was ill-timed. But when we take a look at Dominion’s operations alone, its efficiency has really been fairly good. 

Dominion Vitality reported 2022 earnings per share (EPS) of $1.09 — giving the corporate a lofty price-to-earnings ratio of 53. However dig deeper, and you discover that Dominion achieved working earnings of $4.11 per share in 2022 — a 6.5% enhance in comparison with 2021. Based mostly on working earnings of $4.11, the inventory would have a P/E ratio of 14. 

Dominion’s working earnings present a greater learn on how the enterprise is doing, whereas internet earnings and EPS consider write-downs and present the true revenue of the corporate for calendar yr 2022. Dominion recorded a staggering $3.1 billion in pre-tax internet losses for 2022 principally associated to impairments, asset retirements and losses from asset gross sales, numerous prices and charges, storm damages, and restoration prices. 

Make no mistake, these are actual losses that Dominion is incurring. However they don’t seem to be recurring losses — which is an effective signal for the longer term well being of the enterprise.

Dissecting the dividend

A key nugget from the Dominion Energy Q4 2022 earnings call is the corporate’s commentary on its dividend. Dominion mentioned that its aim is to realize a payout ratio of 65% with out chopping the dividend. Put one other approach, Dominion does not plan on decreasing the dividend, nevertheless it additionally does not plan on elevating it till its income enhance.

The payout ratio is solely the entire annual dividend funds divided by annual earnings. If we take Dominion’s 2022 dividends paid of $2.672 per share and divide it by its EPS of $1.09, the payout ratio is 245%. But when we take the 2022 dividends paid and divide it by the working earnings of $4.11 per share, we discover that the payout ratio could be in line at precisely 65%.

In sum, the corporate’s operations are doing positive and may assist its present dividend. The low internet earnings and excessive P/E ratio are a results of one-off losses.

The place to go from right here

The funding thesis for Dominion Vitality is pretty simple. The corporate must show to traders that its enterprise transformation will repay in the long run. And within the meantime, it’s guaranteeing that traders are rewarded for his or her persistence by way of a large dividend.

The danger profile for Dominion Vitality is way completely different from different corporations which might be investing in costly multi-decade renewable power tasks. As a regulated electric utility, Dominion Vitality has a large moat and works straight with state governments and businesses, which set methods and charges to supply residents with dependable electrical energy. In trade, Dominion Vitality does not have to fret as a lot about competitors and is compensated for its costly infrastructure investments.

The corporate is on monitor to finish the development of one of many largest deliberate offshore wind tasks within the U.S. by year-end 2026. It’s drastically decreasing emissions throughout its asset portfolio. Dominion has additionally already lower its enterprisewide CO2 emissions by 44% since 2005 and plans to cut back them by 70% to 80% relative to 2005 by 2035, and by 100% by 2050.

This power transition has confirmed pricey for Dominion and its shareholders, with inconsistent income, unexpected dividend cuts, ill-timed asset gross sales, and unproven venture profitability. Nevertheless, the corporate’s operations are sturdy, and the worst may very well be over for Dominion if administration exhibits that its wind power investments will profit shareholders. Within the meantime, traders ought to proceed to take a “show it” method towards Dominion administration, given its poor capital allocation monitor document. 

For traders who imagine within the long-term development of renewable power, Dominion Vitality’s 4.5% yield is a large incentive that pays these prepared to attend for the multi-decade funding thesis to play out.