Dominion's Strategic Review Nears End; Firm Remains Committed to Dividend Despite Rising Payout Ratio
Dominion Energy, the century-old utility provider with operations in Virginia, the Carolinas, Ohio, and Utah, is nearing completion of a year-long strategic review aiming to unlock shareholder value and create a higher-quality earnings stream.
As part of the review, Dominion agreed this summer to sell its remaining interest in the Cove Point gas liquefaction facility (nonregulated income) to Warren Buffett's Berkshire Hathaway for $3.3 billion (after-tax).
Proceeds from the sale will be used to strengthen Dominion's BBB+ rated balance sheet by reducing some of the firm's $49 billion debt load.
Outside of this transaction, few details have been shared about the strategic review – but many analysts assume Dominion may announce more divestitures after management recently withdrew earnings guidance for the year.
Management stated it would share the results from the business review by the end of this quarter at a yet-to-be-scheduled analyst day.
Dominion in early August reiterated a commitment to maintain the current dividend as part of the review process, too.
Still, it's hard to imagine an outcome involving divestitures that won't push the firm's already above-target (near 65%) payout ratio higher (limiting future dividend growth) or stretch the balance sheet further (if divestment proceeds prioritized share buybacks over deleveraging).
Source: Simply Safe Dividends
To better reflect the near-term uncertainty tied to the firm's strategic review and the increased likelihood of a higher payout ratio, we are downgrading Dominion's Dividend Safety Score from 80 to 70 within our Safe bucket.
We plan to maintain our small stake in Dominion in our Top 20 Dividend Stocks and Conservative Retirees portfolios until the strategic review concludes. Depending on the outcome, we will reevaluate our position.
For now, shares of Dominion appear to have reasonably low expectations. With a forward P/E ratio of 14.3, Dominion's stock trades at a nearly 15% discount compared to the utility sector's average multiple (16.4) and near its cheapest level in the last five years.
Source: Simply Safe Dividends
Hopefully, the outcome of management's strategic review can begin inspiring more confidence in the company, which owns an attractive collection of assets including electric utilities, gas distribution, and regulated renewables.
We'll watch for updates on the review and plan to provide an update as soon as new information is available.
