Is It Too Late to Buy High-Yield Dominion Energy Stock?

Dominion Energy (D 0.05%) has been on a long journey, but it appears to be nearing the end of the effort. That’s a good thing for investors and likely one of the reasons why the stock is up 15% or so over the past year. However, the shares remain 35% below their 2020 highs, and the dividend isn’t expected to be increased for a little while as management focuses on paying down debt.

Here’s a quick look at why there’s still time to buy this high-yield utility stock.

A long and winding path

Dominion Energy was once a very different company, with assets that spanned from energy production to pipelines to electric and natural gas utilities. Over the past couple of decades, it has been trimming out assets to simplify its operations. The last couple of years have been particularly difficult on investors, with the sale of the company’s pipelines business to Berkshire Hathaway resulting in a dividend cut.

Image source: Getty Images.

But that wasn’t the worst of it. After the dividend cut, management said it was ready to start growing the business again, including the dividend. That didn’t last very long, with just one dividend increase before another big corporate overhaul was announced. This time, however, management didn’t surprise investors with an asset sale — it simply told investors that it was reviewing the business.

After leaving shareholders in limbo for about a year or so, the company started to sell assets, the biggest being the sale of three regulated natural gas utilities to Canadian midstream giant Enbridge. The cash from the sale is expected to be used to pay down debt and invest in the business.

At this point, Dominion has whittled itself down to just a regulated electric utility operation. But that is likely to be a good thing for investors, which is a key reason why the stock has risen roughly 15% or so over the past year. That said, the yield remains relatively high at 4.7%. That compares to 3% for the average utility, using Utilities Select Sector SPDR ETF as a proxy.

D data by YCharts

Where does Dominion go from here?

As the chart shows, Dominion has deeply lagged the average utility. And, as far as it goes, the stock’s recent gains are roughly in line with the broader industry. So all in, there’s a gap to close, and that suggests that there’s still time for income investors to buy this high-yield utility. If management is right about the future, it seems likely that the shares will continue to close the gap with peers.

For dividend investors, the first big step is going to be debt reduction. That’s happening right now, with the last of the three natural gas utility sales expected to be completed in the third quarter.

After that, management plans to focus on earnings. It believes it can achieve 5% to 7% earnings growth per year, on average, through at least 2029. That would be a pretty respectable showing in the utility sector.

Driving that growth will be the company’s five-year capital investment plan, which totals roughly $43 billion. Dominion has fairly strong relationships with regulators, is investing in a large offshore wind development, and has notable demand drivers in the regions it serves, including from data centers.

Earnings growth, in turn, will lower Dominion Energy’s dividend payout ratio, which is currently elevated relative to peers. Once the payout ratio is back in line with peers, dividend growth is expected to resume at a pace roughly equal to earnings growth, or between 5% and 7% a year. That would be a very attractive dividend growth rate for a utility.

Getting in ahead of the best news

A return to dividend growth will be the final step in Dominion’s overhaul. After that, the stock is likely to be afforded a higher multiple on Wall Street. So despite the recent stock advance, investors buying now have a chance to collect an above-average yield and the opportunity for more upside as the company continues to progress with its overhaul plan.