Dominion Energy (D 1.58%) is one of the largest regulated utilities in the United States. It offers a generous dividend yield of 5.3%, well above the industry average of 3.1%, using the Vanguard Utilities Index ETF as a proxy. There are a number of reasons for the yield difference, but right now the most important is the uncertainty tied to Dominion's decision to do a strategic business review. Some history will help here.
A long time coming
At one point in Dominion Energy's history, its business was a lot more diversified, spanning from oil fields to electricity generation. The company decided that it wanted to simplify and, notably, become a more predictable business. So, it exited more volatile operations.
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The big move was getting out of the oil patch, where financial results can vary greatly along with oil prices. However, Dominion also decided to sell its merchant generation assets in the electricity space. Like oil, electricity price volatility could lead to big profits or losses in the merchant power business. What was left behind was basically a regulated utility and energy infrastructure (pipelines) assets that were driven by long-term contracts.
Changes in the midstream sector resulted in less growth opportunity for pipelines, which had become increasingly hard to build. So, a couple of years ago, Dominion made the decision to sell most of that business, as well. Given the size of the midstream operation, Dominion cut its dividend by a third, taking the quarterly payment from $0.94 per share to $0.63.
At this point, Dominion is almost entirely a regulated utility. The other assets it owns are relatively tiny, including a liquified natural gas export facility. Most importantly, after the sale of its midstream business and dividend cut, management stated that it was expecting to grow the business and the dividend. That goal was backed by a long-term capital investment plan, including shifting toward cleaner energy alternatives like wind power.
A wrench in the works
And then, in late 2022, Dominion threw that plan out, too, as it announced yet another strategic review. The big goals of the review are for the company to remain a "premier" state-regulated utility, maintain an "industry leading" capital investment profile (with a focus on clean energy), maintain the company's financial strength and dividend, and be a company that "[d]emonstrates commitment to shareholder value enhancement and to transparency."
Two quarters into the review, the company has provided virtually no material update. Given the uncertainty this leaves, investors have sold the stock. That explains the relatively lofty yield.
There are two big-picture problems here that long-term investors need to think about. The first is that, after so many corporate overhauls, it's starting to look like management doesn't really have a handle on what it wants the company it is running to look like. That's not a positive.
The second problem is that, given that so much has been sold off already, what exactly is left to jettison? The liquified natural gas terminal seems like an obvious sale, but beyond that there's not much. And the effect of this review is likely to be only on the fringes of the business. The most material changes seem like they have already been made.
In other words, this seems like something of a tempest in a teapot, with management making a big deal out of something that really didn't need to be such a big deal. The lack of material updates simply muddies the waters in a way that might make investors question the level of trust they've placed in this management team.
What comes next
At this point, management is saying that it will provide another update during the second quarter. Given the past updates, investors probably shouldn't expect much additional information. Then, in the third quarter, a full year after announcing the review, the company should provide a plan. That's too long a time with too little information, and investors are making their displeasure very clear based on the stock price decline.
Dominion's core regulated utility business is substantive and strong, but another business overhaul is not a positive statement about management's grasp on the company. As a shareholder myself, I'm disappointed and on the lookout for a replacement investment.
