Dominion's Lower Dividend and New Business Mix Improve Safety Profile; We Plan to Hold Our Shares
Dominion made its dividend cut official this week, reducing its fourth-quarter payout by 33% after closing a deal to sell its natural gas transmission and storage business.
As we discussed in early July when this news was announced, we are upgrading Dominion's Dividend Safety Score to Safe with the lower dividend now in place.
Without its midstream business, Dominion will generate 85% to 90% of its earnings from regulated utility operations, up from 70% to 75% previously.
The company's scale (over $10 billion in annual revenue), geographical diversity (utility operations span nearly 10 states), and large and growing (1.8% per year) customer base add to the strengths of this stable business.
As we discussed in early July when this news was announced, we are upgrading Dominion's Dividend Safety Score to Safe with the lower dividend now in place.
Without its midstream business, Dominion will generate 85% to 90% of its earnings from regulated utility operations, up from 70% to 75% previously.
The company's scale (over $10 billion in annual revenue), geographical diversity (utility operations span nearly 10 states), and large and growing (1.8% per year) customer base add to the strengths of this stable business.
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From a financial perspective, Dominion's projected payout ratio in the year ahead now sits at a healthier level near 70%, down from the mid-80s% in recent years and its lowest level since 2014.
The company also maintains a solid BBB+ credit rating with a positive outlook from Standard & Poor's, recognizing Dominion's improved business mix.
By focusing on its higher-growth utility businesses and clean energy investments, Dominion expects to deliver long-term earnings and dividend growth rates of 6.5% and 6%, respectively.
Management reaffirmed these targets on November 5, keeping Dominion's growth profile aligned with the highest valued companies in the utilities sector.
We hold shares of Dominion in our Top 20 Dividend Stocks and Conservative Retirees portfolios.
When the asset sale and dividend cut were announced in July, we said we planned to maintain our position in our Top 20 portfolio but were open to replacing Dominion with a higher-yielding idea in our Conservative Retirees portfolio.
While Dominion's yield is slightly below our portfolio's 3.5% to 4.5% target range, we believe the firm's utility businesses will be strong long-term performers and enable Dominion to deliver dividend growth that exceeds the portfolio's average.
Coupled with management's solid track record of creating value for shareholders and the firm's increased alignment with the clean energy trend, we have decided to hold our shares in both portfolios.
Dominion's share price is higher than where it closed the day before announcing its divestiture and dividend cut in July, and we expect the business to continue growing in value in the years ahead.
The company also maintains a solid BBB+ credit rating with a positive outlook from Standard & Poor's, recognizing Dominion's improved business mix.
By focusing on its higher-growth utility businesses and clean energy investments, Dominion expects to deliver long-term earnings and dividend growth rates of 6.5% and 6%, respectively.
Management reaffirmed these targets on November 5, keeping Dominion's growth profile aligned with the highest valued companies in the utilities sector.
We hold shares of Dominion in our Top 20 Dividend Stocks and Conservative Retirees portfolios.
When the asset sale and dividend cut were announced in July, we said we planned to maintain our position in our Top 20 portfolio but were open to replacing Dominion with a higher-yielding idea in our Conservative Retirees portfolio.
While Dominion's yield is slightly below our portfolio's 3.5% to 4.5% target range, we believe the firm's utility businesses will be strong long-term performers and enable Dominion to deliver dividend growth that exceeds the portfolio's average.
Coupled with management's solid track record of creating value for shareholders and the firm's increased alignment with the clean energy trend, we have decided to hold our shares in both portfolios.
Dominion's share price is higher than where it closed the day before announcing its divestiture and dividend cut in July, and we expect the business to continue growing in value in the years ahead.
