What happened
2020 was a dreary year for utility stocks, with the Dow Jones Utility Average Index ending up 1.6% in the red. Shares of Dominion Energy (D 2.62%) fared even worse, shedding 9.2% in 2020, according to data provided by S&P Global Market Intelligence. Two major developments put tremendous pressure on the stock.
So what
Dominion shares bounced back sharply after crashing alongside the broader stock market in March, but they failed to sustain the momentum. The first big blow came in the month of July, when the utility and partner Duke Energy canceled their long-drawn, multi-billion dollar Atlantic Coast Pipeline project because of cost and time overruns.
The same day, Dominion announced the sale of its gas storage and transmission segment to Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) for $9.7 billion, including debt worth $5.7 billion, in a bid to become a pure-play regulated utility. Although Dominion highlighted how the deal will help it improve its balance sheet among other things, investors were miffed for one big reason: a dividend cut.
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You see, as a result of the above two developments, Dominion slashed its 2020 operating earnings per share guidance and projected a 28% cut in its dividend by the end of the year. That was a remarkable deviation for a company that had increased its dividends for 16 consecutive years.
Dominion assured it will start growing its dividend again in 2022, but investors were focused on the near term. To make matters worse, the company finally cut its dividend by 33% in November, and that sent the stock even lower.
Now what
A dividend cut is sure to annoy income investors, but it's a near-term loss for long-term gains. The Berkshire Hathaway deal should help Dominion pare down debt worth nearly $6 billion and give it $3 billion in cash to repurchase shares. And while the stock's annual dividend of $2.52 per share is expected to remain steady this year, management projects annual dividend growth of 6% beginning 2022. That should give investors in Dominion Energy some respite even as they enjoy the stock's current yield of 3.5%.
