Dominion Energy (D 1.10%) investors collectively breathed a sigh of relief after the company announced on its Q4 2022 earnings call that it had no intention of cutting its dividend. The company already cut its dividend by around a third in 2020.
The bigger issue is that Dominion Energy's stock is hovering around a 10-year low. The depressed stock price, even when factoring in a lower dividend, has pole-vaulted Dominion's yield to a sizable 4.5%.
Let's determine if the company's dividend is safe going forward and if the languishing dividend stock is worth buying now.
Image source: Getty Images.
Dominion Energy's business is doing better than it seems
There's no sugar-coating the fact that Dominion Energy has been the second worst-performing major U.S.-based regulated electric utility (behind PG&E) over the last decade. A good chunk of the underperformance has to do with declining profits and a strategic shift away from coal and oil (and to some extent natural gas) toward renewable energy. The transition has involved write-downs and some sloppy selling. For example, Dominion's $9.7 billion energy transmission asset sale to Berkshire Hathaway in 2020 was ill-timed. But if we look at Dominion's operations alone, its performance has actually been quite good.
Dominion Energy reported 2022 earnings per share (EPS) of $1.09 -- giving the company a lofty price-to-earnings ratio of 53. But dig deeper, and you find that Dominion achieved operating earnings of $4.11 per share in 2022 -- a 6.5% increase compared to 2021. Based on operating earnings of $4.11, the stock would have a P/E ratio of 14.
Dominion's operating earnings provide a better read on how the business is doing, whereas net income and EPS factor in write-downs and show the true profit of the company for calendar year 2022. Dominion recorded a staggering $3.1 billion in pre-tax net losses for 2022 mostly related to impairments, asset retirements and losses from asset sales, various costs and fees, storm damages, and restoration costs.
Make no mistake, these are real losses that Dominion is incurring. But they aren't recurring losses -- which is a good sign for the future health of the business.
Dissecting the dividend
A key nugget from the Dominion Energy Q4 2022 earnings call is the company's commentary on its dividend. Dominion said that its goal is to achieve a payout ratio of 65% without cutting the dividend. Put another way, Dominion doesn't plan on reducing the dividend, but it also doesn't plan on raising it until its profits improve.
The payout ratio is simply the total annual dividend payments divided by annual earnings. If we take Dominion's 2022 dividends paid of $2.672 per share and divide it by its EPS of $1.09, the payout ratio is 245%. But if we take the 2022 dividends paid and divide it by the operating earnings of $4.11 per share, we find that the payout ratio would be in line at exactly 65%.
In sum, the company's operations are doing fine and can support its current dividend. The low net income and high P/E ratio are a result of one-off losses.
Where to go from here
The investment thesis for Dominion Energy is fairly straightforward. The company needs to prove to investors that its business transformation will pay off in the long term. And in the meantime, it is ensuring that investors are rewarded for their patience through a sizable dividend.
The risk profile for Dominion Energy is far different from other companies that are investing in expensive multi-decade renewable energy projects. As a regulated electric utility, Dominion Energy has a wide moat and works directly with state governments and agencies, which set strategies and rates to provide citizens with reliable electricity. In exchange, Dominion Energy doesn't have to worry as much about competition and is compensated for its expensive infrastructure investments.
The company is on track to complete the construction of one of the largest planned offshore wind projects in the U.S. by year-end 2026. It is drastically reducing emissions across its asset portfolio. Dominion has also already cut its enterprisewide CO2 emissions by 44% since 2005 and plans to reduce them by 70% to 80% relative to 2005 by 2035, and by 100% by 2050.
This energy transition has proven costly for Dominion and its shareholders, with inconsistent profits, unforeseen dividend cuts, ill-timed asset sales, and unproven project profitability. However, the company's operations are strong, and the worst could be over for Dominion if management shows that its wind energy investments will benefit shareholders. In the meantime, investors should continue to take a "prove it" approach toward Dominion management, given its poor capital allocation track record.
For investors who believe in the long-term growth of renewable energy, Dominion Energy's 4.5% yield is a sizable incentive that pays those willing to wait for the multi-decade investment thesis to play out.
