Dominion Energy Stock: A Dividend Reduction Is Always Disappointing
Dominion stock has been one of my favorite dividend stock holdings.
Why? During the recent past, the Dominion dividend represented one of the best combinations of current dividend income and dividend growth to fund my living expenses.
But with recent news, Dominion stock is quickly falling from my list of favorites. So let’s put the Dominion Energy stock dividend under the microscope. And work through a Dominion stock analysis.
Does the Dominion stock dividend still measure up to my high expectations? Is Dominion Energy stock a good investment?
We will answer these questions and more. Since Dominion stock is one of the many holdings in the Dividends Diversify model dividend stock portfolio.
Dominion Energy: Company Background
Dominion Energy is one of the largest producers and transporters of energy in the United States utility sector. Headquartered in Richmond, Virginia, they have nearly 7.5 million customers in 18 states. Assets are approaching $100 billion focused on:
- Electric generation, transmission, and distribution
- Natural gas storage, transmission, distribution, and import/export services
- Solar energy generation
Dominion has 3 primary operating segments.
First of all, the Power Delivery Group distributes electricity to North Carolina and Virginia.
The Gas Infrastructure Group distributes, transmits, and stores natural gas to both residential and industrial customers. Service territories include Ohio, the Southeastern United States, and the Rocky Mountain region.
Dominion recently announced that they are abandoning and/or selling off their natural gas transmission and storage network.
Finally, the Power Generation Group manages the company’s fleet of power generating stations. Power sources include renewables like water, wind, and solar. And more traditional power sources like nuclear, gas, coal, and oil.
Dominion stock trades under the ticker symbol “D” on the New York Stock Exchange. So if I may refer to Dominion stock as “D stock” for short.
Business Risks That Could Have An Impact On The Dominion Dividend
First of all, regulatory relations have traditionally been positive for Dominion. But the political winds can always shift and limit pass-through of costs plus a fair profit on growth projects.
Furthermore, cost overruns and delays associated with the Atlantic Coast Pipeline (ACP) project may continue. This 600-mile underground pipeline is an interstate natural gas transmission pipeline meant to serve multiple public utilities and their growing energy needs in Virginia and North Carolina.
The risks surrounding the ACP have been realized. Dominion is abandoning the project.
Finally, with the SCANA acquisition complete, Dominion’s ability to realize merger savings.
Facts & Figures Regarding the Dominion Stock Dividend
First of all, let’s understand everything we need to know about the Dominion dividend.
What Is Dominion’s Dividend Rate Per Share?
Dominion stock pays an annual forward dividend of $3.76 per share. Based on the recent stock price, that dividend payout temporarily puts the Dominion stock dividend yield at 5%.
Unfortunately, management announced the Dominion dividend rate will be reduced to about $2.50 per share in 2021.
The reduction should not have been a big surprise. Given the company’s high dividend payout ratios at the time of the announcement.
How Often Does Dominion Energy Pay Dividends?
Dominion pays its dividend every 3 months or 4 times per year. Each quarterly dividend payment is 94 cents per share. In 2021, management announced the quarterly payment will be reduced to about 63 cents per share.
In What Months Does Dominion Pay Dividends?
Dominion Energy dividends are paid on or around the 20th day in the following months: March, June, September, and December.
When Is The Ex-Dividend Date For Dominion Stock?
For an investor to receive Dominion’s next dividend payment, they need to complete their purchase of Dominion stock by the ex-dividend date.
At the beginning of the article, I mentioned that Dominion’s dividend growth has been impressive. So let’s put some numbers behind that next.
Dominion Stock Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
The historical trend of dividend increases has been impressive. In contrast, for 2020, Dominion announced its dividend would increase by only 2.5%. Subsequently, management has announced the dividend will be reduced.
Dominion Dividend History
I was disappointed with the last dividend increase. But on a more positive note, management has increased the Dominion dividend for 17 consecutive years. However, a reduction to the dividend expected later this year will end this streak.
We will take a look at the business fundamentals in a moment. They may explain what’s going on with the dividend.
But first a quick review about what we have learned about the Dominion Energy Dividend.
What Has Made Dominion Energy Stock A Good Investment?
Hopefully, you are starting to see why Dominion Energy was one of my favorite dividend stocks. Specifically,
- Dividend yield of approximately 5%
- 8-9% annual dividend growth over the past 7 years
- 17 consecutive years of dividend increases
Related: Duke Energy dividend stock analysis
Let’s move on to the business fundamentals now. They will tell a story of a dividend at risk.
Dominion Energy Historical Revenue Trend
Until 2019, revenue held in a pretty tight range. This is typical for a regulated utility stock.
In contrast, since 2018, revenues are increasing by a sizeable amount. This is partly due to the acquisition of SCANA that closed early in 2019.
Okay. So far, so good. It’s great to have a growing revenue stream. But, what do earnings look like?
Dominion Stock Dividend Payout Ratio & Earnings Per Share
Earnings per share have grown over the long run as the company invests in capital improvement projects. The cost of these projects plus a profit margin is then passed on to their customers. This is the essence of a regulated utility business model.
But, the dividend payout ratio is high. It is projected at more than 90% of
A lower dividend payout ratio is usually better for the investor. It allows the company to maintain the dividend during difficult times. Or increase it even when earnings are not growing.
Regulated utilities typically have higher dividend payout ratios. But Dominion’s dividend payout ratio was clearly getting too high for management to tolerate.
Here’s how I know…
Dominion Dividend Policy & Projected Dominion Dividend Growth
In a recent press release, Dominion management states:
The company now expects to target an approximately 65 percent payout ratio…
This new payout ratio implies a 2021 dividend payment of around $2.50 per share. The … annual dividend reflects the absence of income from the divested natural gas assets and a revision to the company’s target payout ratio to align with best-in-class utility industry peers.
Beginning in 2022, the company expects annual dividend-per-share increases of approximately 6 percent per year. This represents a significant increase from previous long-term dividend per-share growth guidance of 2.5 percent.
Wrapped up in that comment is a clear cut dividend growth policy statement. It provides support for a long term Dominion stock dividend growth forecast of 6.0%.
Dominion Energy Credit Rating & Balance Sheet
Moody’s and S&P rate Dominion long term bonds Baa2 and BBB, respectively. Their ratings represent “investment grade moderate credit risk” evaluations.
Also, Dominion’s debt to equity ratio stands at 1.1 times.
Dominion is like other utility companies. They are very capital intensive and need both debt and equity financing to support their business and grow.
Dominion’s balance sheet and financial position are acceptable to me. It is in line with other regulated utilities.
Dominion Dividend Safety
Taking into account Dominion’s dividend metrics, business fundamentals, and financial position, I judge Dominion’s new 2021 dividend rate to be safe. When I say safe, I mean it is unlikely to be reduced in the foreseeable future. I doubt they will need to reduce it again anytime soon.
The Utility Forecaster investment newsletter covers utility stocks very closely. They give the Dominion dividend a safety score of 3 out of a possible 8. I suspect with the new lower dividend rate, that this safety score will be revised higher.
Dominion Stock Valuation
Let’s look at Dominion stock value from several different angles.
Dominion Dividend Discount Model
First, let’s use a single-stage dividend discount model to calculate a fair value for the Dominion stock price. The model considers several of the factors discussed thus far. Specifically,
- 2021 dividend payment – $2.50 per share
- My estimated long term dividend growth rate – 6%
- My desired annual return on investment – 9%
Using these assumptions, the Dominion dividend discount model calculates the fair value at $83 per share.
Morningstar Fair Value Estimate of Dominion Stock
The investment research company, Morningstar, estimates the fair value of Dominion stock at $86 per share. I’m sure this will be reevaluated given the new business strategy.
Utility Forecaster Investment Newsletter
Utility Forecaster recently had a buy limit price on Dominion stock at $86 per share. I’m looking forward to seeing what Utility Forecaster has to say about the company’s exit from natural gas transmission and storage.
Dominion Energy Stock Forecast
I’ve used several different valuation methods for Dominion stock. They indicate to me that this dividend stock is trading near its fair value right now. Perhaps it is slightly undervalued with all the bad news coming out recently.
With 6% projected earnings growth, I could see Dominion stock trading in the low 100’s in the next 5 years. Couple that share price appreciation with a 3%+ dividend yield and an investor has potential for a 10% total return.
Of course, nothing is guaranteed. Do your research and invest at your own risk.
Dominion Stock & Dividend Analysis Wrap Up
Here are a few take away points from this analysis of Dominion stock and the Dominion dividend:
- New dividend yield near 3.3%
- A very disappointing dividend reduction
- 6% projected longer-term earnings and dividend growth
- Not the powerful combination of high dividend yield and high dividend growth it used to be
- Potential for 8-10% long term total returns
Dominion stock is one of my largest holdings. It was one of my original purchases when I established my dividend stock portfolio more than 15 years ago. It has been a rewarding dividend growth stock investment. But the recent dividend reduction announcement is very disappointing.
Because of its size in my portfolio, I won’t be adding to my shares at this time. Right now, I want to watch how their business transition away from natural gas progresses.
Further Reading About Dividend Stocks Like Dominion
- Southern Company stock and dividend analysis
- Wisconsin Energy Group: A slow & steady stock
- AEP: one of the most consistent stocks for investment dollars
- Higher-income dividend stock alternatives
- How to invest in utility stocks
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