Dominion Energy Earnings: Strategic Review Drags On; Lowering Fair Value Estimate to $46

We are lowering our Dominion Energy D fair value estimate to $46 per share from $56 after the company reported third-quarter operating earnings of $0.77 per share, down from $0.99 in same year-ago period. Our narrow moat and medium uncertainty rating are unchanged.

We reduced our 2023-24 earnings estimates after incorporating management’s business updates. We also lowered our expectations for long-term returns and growth to in line with other utilities. These adjustments were responsible for our fair value reduction.

Management guided to $2.10 EPS for 2023, which adjusts for the discontinued operations of the sale of the remaining interest of Cove Point and pending sale of its gas distribution businesses. Management suggested normal weather and interest cost savings after paying down debt with sale proceeds would have boosted earnings to near $2.90 per share.

Dominion again delayed the conclusion of its strategic review. Originally, the strategic review was set to be completed by third-quarter earnings. Since management announced the strategic review last November, Dominion stock is down over 30%, significantly underperforming the Morningstar US Utilities Index.

Management continues to market a noncontrolling equity financing stake in its regulated offshore wind project but doesn’t expect the sale process to conclude until late this year or early 2024. Based on deteriorating economics in other offshore wind projects, we think completing a sale at a suitable valuation will be difficult.

Earnings in 2024 are highly uncertain. Management said that it will provide only 2025 earnings guidance at the end of the strategic review.

While management said it is committed to the dividend, we continue to believe a cut is possible. Dominion currently yields 6.5%, a 270-basis-point premium to the sector median yield, and its payout ratio will be over 90% based on adjusted 2023 earnings, well above what we consider a secure payout ratio.