Uncertainty is one thing that Wall Street really doesn't appreciate. So when Dominion Energy (D -1.02%) announced in late 2022 that it was undergoing a business review, investors started to dump the stock.
During the company's recent third-quarter 2023 earnings call, management outlined what it had done so far and, more importantly, the final step in the review process. Investors cheered the news with a stock rally.
Here's why it might be worth buying this newly streamlined utility now.
No news was not good news for Dominion shareholders
Dominion Energy has been overhauling its business for more than a decade. At one point it even owned oil-producing assets in its portfolio, which is a very volatile industry. It has slowly pared the portfolio down. The first step was getting out of oil production. Then it sold off most of its midstream energy assets, a move that came with a dividend cut given the size of the midstream business it exited.
At that point, the company led investors to believe that it was in a stable place from which it could start to grow. That included a goal of steady dividend increases. In late 2022, that plan was dumped and management announced yet another business overhaul. Only this time it was to be a top-to-bottom business review with an unspecified completion date and limited insight into management's goals. Understandably, that didn't sit well with Wall Street.
While this review was still ongoing (and it still isn't over just yet), the company started to sell off major assets. Specifically, it jettisoned a liquefied natural gas export facility and then three natural gas distribution utilities. But it still hadn't told investors what the end goal was and the stock price continued to decline.
There's finally an end in sight
After the noted asset sales are complete, Dominion Energy will basically be a simple regulated electric utility. The final step in the review is finding a financial partner for the company's offshore wind development project in Virginia. That's a pretty reasonable thing to do and it shouldn't produce any shocking business changes. This was the key takeaway from the company's third-quarter 2023 earnings update. Investors reacted by bidding the stock higher. You could also look at it as breathing a sigh of relief since, basically, the uncertainty is just about over.
The question for investors now is whether or not Dominion Energy is worth buying. It might be if you don't mind being a little early. The reason is that management has, again, stated that the dividend is going to be maintained at the current level. Its dividend yield of 5.9% is toward the high end of the utility sector. The problem is that the dividend isn't likely to grow anytime soon, as the company looks to pay down debt and reduce its payout ratio below 70%.
However, over the long term, there's material opportunity. This is because Dominion, like many other utilities, is seeking to focus on regulated investments in its remaining operations. When regulators approve a project, they basically approve a return on that investment, so this type of spending is fairly safe and predictable. The linchpin is that the energy transition from carbon fuels toward cleaner alternatives provides a massive runway for such spending. There won't be a final projection for capital spending until the review is complete, but the offshore wind farm noted above alone is a $10 billion investment.
Basically, buying now gets you an attractive yield and a seat at the table when dividend growth resumes in the future. A return of dividend growth will likely lead to a reevaluation of the stock in a positive direction.
Dominion won't be a work in progress much longer
To describe Dominion Energy's review process as frustrating would be an understatement. It probably would have been better if management had just started to sell assets without talking about the review publicly. But what's done is done and, well, the review is nearly over and far better defined today than it was when it started.
Dominion appears to be working toward becoming a much stronger and predictable business. And one with a long runway for growth as the world shifts toward clean energy. A high yield and the opportunity for Wall Street to revalue the shares higher is probably worth close consideration for more aggressive investors. Waiting for dividend growth to resume might leave you behind the turnaround curve.
