Dominion Energy (D -1.02%) is up 24.1% from its 52-week low -- which sounds like a lot until you realize the stock is still down 17.9% over the last year and 36.8% over the last five years compared to impressive gains in the S&P 500.
Still, the comeback is a big move in a short period of time from a stodgy, reliable, dividend-paying utility. But Dominion has been anything but that -- cutting its dividend in late 2020 and only slightly raising it since then.
So how could a company that has disappointed investors through capital losses and lower dividend income be a good investment? The answer lies not in where Dominion Energy has been but in where it is going. Here's why the future looks promising for this utility stock.
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Twists and turns
For the last four years, Dominion has been on an asset-selling spree. In September, Enbridge announced a $14 billion acquisition (including debt) of three natural gas utilities from Dominion Energy. A few months prior, Dominion sold its remaining 50% non-controlling interest in Cove Point LNG to Berkshire Hathaway Energy (BHE). In 2020, Dominion sold $9.7 billion in energy transmission assets to BHE.
The idea behind the asset sales was to make the company less reliant on volatile fossil fuel industries and transition toward renewables and regulated utility functions. The problem is that Dominion didn't do a good job communicating its intentions to investors, leaving them to connect the dots to try to figure out what the new company would look like once the dust settled.
To be fair, Dominion did a good job of setting clear emissions reduction goals. The company had spent years transitioning from coal to natural gas and was now transitioning from gas to renewables. There was little doubt about the company's multidecade plan, but plenty of question marks surrounded the short and medium terms.
A turnaround in the making
Dominion's Q3 2023 earnings presentation clarified what investors can expect from the business for the rest of the year, in 2024, and even in 2025.
Its estimated 2023 earnings are $2.10, giving the company a 23 price-to-earnings (P/E) ratio. Factoring in $0.80 per share in adjustments -- namely $0.50 from interest expense savings from pending asset sales -- would bring 2023 earnings to $2.90 -- giving Dominion an adjusted P/E ratio of 16.6. That's a much more realistic valuation for a low-growth utility business.
The earnings presentation also provided insight into Coastal Virginia Offshore Wind (CVOW) -- Dominion's utility-scale wind energy megaproject. The company wants to find a noncontrolling equity financing partner by the end of 2023 or early 2024 to take some of the burden off of the project's cost. Dominion expects to reach $3 billion on total project investment by year-end compared to a total current capital budget of $9.8 billion. Construction is expected to be completed by the end of 2026.
The project is decently efficient as far as offshore wind goes, with an estimated levelized cost of electricity of $77 per megawatt-hour (MWh). For context, the International Renewable Energy Agency estimates that 2022 levelized cost of electricity for offshore wind was $81 per MWh compared to $33 for onshore wind, $49 for solar PV, and $61 for hydropower.
On Oct. 31, the Biden administration approved the 2.6 GW project, which is currently the largest approved offshore wind project in the U.S. It's even more massive when put into the context of the administration's 2030 goal of 30 GW of installed offshore wind capacity -- meaning CVOW alone would make up about 9% of the 2030 goal.
CVOW is expensive, but landing a partner and completing the project on time will reduce the financial burden while giving Dominion a cleaner source of electricity for its customers.
A reliable dividend
Dominion reassured investors that it is "100% committed to its current dividend" and is targeting a payout ratio in the 60% range over time. That's a healthy target that allows earnings to support dividend payments without making the dividend too straining on the business.
Dominion is likely years away from a dividend raise. As mentioned, its forecast 2023 adjusted earnings per share are $2.90, while its dividend sits at $2.67 per year. The current payout ratio on adjusted earnings is 92%. So earnings are going to have to increase by quite a bit before it can justify a raise. In the meantime, the existing dividend appears safe, and that's good enough, considering the stock yields 5.4%.
Dominion is worth buying now
Dominion deserved to fall, given its murky outlook. But now, Dominion is on track to look like a much better company.
The valuation could look reasonable very soon. The dividend is solid and has room to grow once earnings improve. And the utility is becoming safer and more dependent on clean energy, which is the right long-term move even if Dominion mishandled some of the steps to getting there.
