Dominion Announces Strategic Business Review, Reiterates Commitment to Dividend

Earlier this month, Dominion Energy announced plans to conduct a top-to-bottom business review to ensure the utility is best positioned to create long-term shareholder value.

Management seems frustrated with the company's lagging share price, which has underperformed the broader utility sector by almost 50% since July 2020, when Dominion announced the divestiture of its midstream energy business and slashed the dividend by 33%.

Before that abrupt and unexpected move, Dominion had traded in line with other utility firms for at least the prior decade.

Investors have reacted negatively to the announced strategic review, suggesting management has yet to regain shareholder confidence following the surprise 2020 dividend cut.

This lack of trust seems to have contributed to Dominion's stunted stock price, as the firm's predictable earnings stream, generated primarily by regulated utilities (90%), and healthy dividend coverage should be attractive features for most income investors.

Further boosting confidence around the utility's conservative payout should be Dominion's BBB+ rated balance sheet and favorable regulatory environments in the firm's service areas, including Virginia and the Carolinas. 

While news of the strategic business review has grabbed our attention, management stated, "We are not reviewing options which would negatively affect our current dividend."

Because of this statement and the fact the dividend remains well covered, even in the event of a moderate asset divestiture, we are reaffirming Dominion's Safe Dividend Safety Score.

But we will reassess our stance when details about the utility's business review are shared either during the firm's subsequent earnings call in February 2023 or possibly during a yet-to-be-scheduled investor day "later this year."

Outside of possibly announcing some strategic cost-saving measures, Dominion may consider divesting some non-core unregulated assets, which collectively account for 10% of profits.

If that's the path forward and Dominion was to sell all non-regulated businesses, the firm's payout ratio would rise from 65% to around 75% – a still manageable level.

And cash generated from asset sales could be used to reduce more costly variable-rate debt, which could boost earnings slightly.

Overall, while we don't expect a significant change at the firm that would impact the dividend, we understand the increased risks when a company enters a "strategic review" of the business.

For now, we're comfortable with this added uncertainty and plan to maintain our Dominion position in our Conservative Retirees portfolio.

The stock could continue trading at a depressed valuation until investors have clarity on management's long-term plan for the business. The latest guidance called for around 6% annual EPS and dividend growth through 2026, but that could be subject to change.

We will update our thoughts when details about the review are shared.