Sunday, July 5, 2020

Dominion Energy (D) Cuts Dividends

I just learned that Dominion Energy (D) is going to cut annual dividends to $2.50/share, from $3.76/share. This ends an 18 year track record of annual dividend increases.

The company is selling assets to Berkshire Hathaway.

Proceeds will be about $3B as the deal includes the assumption of $5.7B in debt and taxes.

The proceeds of the asset sale will be used to buy back stock.

Dominion Energy is disposing of its Gas Transmission & Storage segment assets.

That includes more than 7,700 miles of natural gas storage and transmission pipelines and about 900 billion cubic feet of gas storage that Dominion currently operates.

This is from the press release that was just issued:

Dominion Energy is revising its 2020 operating earnings guidance. The company now expects 2020 operating earnings of $3.37 to $3.63 per share. The company's previous guidance was $4.25 to $4.60 per-share. 

Dominion Energy expects 2021 operating earnings per share to grow around 10 to 11 percent over 2020, reflecting the full-year impact of planned share repurchases, and by about 6.5 percent annually starting in 2022, off a 2021 base. This represents a 1.5 percentage point, or approximately 30 percent, increase from previous long-term earnings per share growth guidance. 

The company now expects to target an approximately 65 percent payout ratio to be effective upon completion of the transaction. This new payout ratio implies a 2021 dividend payment of around $2.50 per share. The projected reduction in the annual dividend reflects the absence of income from the divested assets and a revision to the company's target payout ratio to align with best-in-class industry peers.

Beginning in 2022, the company expects annual dividend-per-share increases of approximately 6 percent per year.  This represents a significant increase from previous long-term dividend per-share growth guidance of 2.5 percent. 

For 2020, the company has made two quarterly payments of 94 cents per share in March and June. The company expects to make an additional payment of 94 cents per share in September and currently expects a fourth payment in December 2020 of approximately 63 cents reflecting the expected timing of transaction closing.

The company is going to be earning about a full $1/share less than originally expected ( The actual loss in earnings power per year 97 cents/share - $1.23/share). The company had 838 million shares as of 3/31/2020. This means that Dominion energy is losing roughly $800 million in earnings power, while receiving less than $10 billion in "value" from Berkshire Hathaway. Value is derived by assumption of debt in the amount of $5.7B and pre-tax cash proceeds in the amount of $4B.

This is a P/E of 12.5 - 13 for the assets that Buffett is acquiring. It looks to me that this deal is not a good one for Dominion shareholders. I do not understand why a company would voluntarily impair its earnings power, in order to sell those assets at a low price, and then have to reduce dividends to shareholders.

It is odd that the sale of these assets will result in reduction of earnings per share by $1 per year. It is also interesting that Dominion is losing almost $1 billion to taxes. This comes out to $1.25/share. The debt reduction is $5.70 billion, and pre-tax proceeds are at $4 billion ( $3 billion after-tax).

Dominion Energy has been unable to grow earnings per share for quite some time however. This is the reason why I haven't added to my position for over 6 years. Wihout growing earnings per share, you cannot grow dividends per share or grow intrinsic value.

Dominion last raised dividends in December by 2.50% to 94 cents/share. This was a very slow dividend increase, which was in stark contrast to the high raises in the years before. This is what I mentioned in my review last year:

"The earnings history over the past decade has been spotty, due to one-time adjustments for which the numbers have to be corrected for ( and which won’t be done for the purposes of this weekly review).
Dominion Energy is expected to generate $4.20/share in 2019.

The stock seems richly valued at 19.25 times forward earnings but yields 4.60%. The forward payout ratio is at 89.50%, which is a little high for my liking. Dividend growth may disappoint given the high payout ratio, unless the company manages to grow its earnings per share."

The other announcement is that Dominion and Duke Energy announced the cancelation of the Atlantic Coast Pipeline ("ACP") due to ongoing delays and increasing cost uncertainty which threaten the economic viability of the project. Recent public guidance of project cost has increased to $8 billion from the original estimate of $4.5 to $5.0 billion. In addition, the most recent public estimate of commercial in-service in early 2022 represents a nearly three-and- a-half-year delay with uncertainty remaining. That project was announced in 2014, so it's cancellation surely is going to cut into future profitability. (Source)

Contrary to popular sentiment, utility stocks tend to cut dividends quite often. I realized that when I researched the histories of companies in the Dow Jones Utility Average a few years ago. Check my article:

I own some shares in my personal account, which I may end up selling on Monday. I would like to initiate a position in Nextera (NEE), but the valuation is a little high for my taste. Otherwise, Con Edison (ED) is not a bad choice today for decent current income, though the future dividend growth would be less than 3%/year. A lot of folks like Southern Company (SO), but this one has been unable to grow earnings per share over the past decade either. Plus, it has some cost overruns in a project that may not be completed.

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