Dominion Energy (D +0.10%) has a history of making investments that grow shareholder value. That's been evident over the last decade, as the utility has generated a more-than-250% total return, which has outperformed the S&P 500's nearly 240% total return over that time frame.
One of the company's more recent success stories is the redevelopment of Cove Point into a liquefied natural gas (LNG) export terminal. That project has generated steady cash flow since coming online last year, enabling the company to continue growing its dividend, which now yields 4.5%. The utility is now further cashing in on this investment by selling a stake to a private equity fund managed by Brookfield Asset Management (BAM +0.27%). That deal will give Dominion the cash to continue expanding its operations and dividend in the coming years.
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Shining a spotlight on Dominion's value-creating capabilities
Dominion has agreed to sell a 25% stake in Cove Point to one of Brookfield Asset Management's infrastructure funds for slightly more than $2 billion. Cove Point's assets include LNG import and export capabilities, storage capacity, and a 136-mile pipeline connected to the country's interstate gas pipeline system. The facility currently provides gas services to customers in the U.S. as well as those in India and Japan.
That deal price gives Cove Point an implied enterprise value of $8.22 billion. That's noteworthy considering that Dominion spent only $4.1 billion to transform Cove Point into an LNG export facility, which it completed last year. As such, the deal "highlights the compelling intrinsic value of Cove Point," according to CEO Thomas Farrell.
What will Dominion do with all that cash?
While Dominion will lose a quarter of the cash flow Cove Point was producing, the transaction supports the company's earnings growth plan. That's because the proceeds will significantly reduce the need to sell stock to help finance the company's long-term growth strategy.
This past March, Dominion outlined its five-year expansion plan. Overall, the company expects to invest $26 billion through 2023. That spending level would grow its earnings per share by about 5% per year through 2023. That growth rate would also allow the company to increase its dividend by a 2.5% annual rate, while also reducing its payout ratio. In the company's view, that metric would fall from 87% of earnings per share this year to a more comfortable level in the low 70% range in the future. That would put it much closer to the 69% average of its utility group peers.
Because Dominion pays out such a large portion of its cash flow in dividends, it needs outside financing to bridge the gap between cash flow and its investment spending. In the company's estimation, that gap is about $3 billion per year. It has enough debt capacity to cover about $2 billion of that while maintaining its current investment-grade credit rating. That leaves it with around $1 billion of annual equity needs, roughly $300 million of which it expects to cover as some investors reinvest their dividends into the company's stock. This sale, meanwhile, will cover some of that remaining gap so that it likely won't need to sell any more stock for the next few years. By avoiding that dilution, it increases the probability that Dominion's stock can increase in value at around the same pace as it grows earnings, or by about 5% per year. Add in the 4.5%-yielding dividend and the company could potentially generate total annual returns of around 10%.
Another smart move by the utility
Dominion's investment in Cove Point turned out to be a brilliant move as it has created tremendous value for its investors. That's evident in the sale of a minority stake to Brookfield. Now the company can use that cash infusion to create more value for its shareholders by investing it in additional expansion projects. That sets Dominion up to continue growing its dividend, which makes it a solid stock for retirement-focused investors to consider owning.
