Energy Business

Why Dominion Is Still a Stock to Buy After Its Unit Sale to Warren Buffett

Last Sunday, Dominion Energy Inc. (NYSE: D) made what can only be called a blockbuster announcement. First of all, the company sold its natural gas pipeline and storage business to the energy subsidiary of Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) for $9.7 billion, including $5.7 billion in debt.

Dominion also announced that it and its partner, Duke Energy Corp. (NYSE: DUK), were canceling their Atlantic Coast Pipeline project. Topping off the day, Dominion also announced a cut to its dividend payment, along with a $3 billion share buyback once the transaction with Berkshire Hathaway is completed.

The stock price dropped more than 9% on Monday and trailed somewhat lower in the late morning Tuesday. Why, then, do analysts seem more favorably disposed to all the changes at Dominion?

One thing Dominion gives up in the sale of its natural gas business is around $925 million in annual operating cash flow. That’s also the amount that will no longer be available to investors through dividend payments.

The resulting 33% cut to the dividend payout, while painful now, won’t last forever, says Argus, which forecasts total annual returns of 9% to 10% over the next five years. Dominion’s management forecasts earnings per share (EPS) for 2020 to fall from a previous range of $4.25 to $4.60 to a new range of $3.37 to $3.63 and guided 2021 EPS to a range of $3.85 to $3.90. Dominion expects long-term annual growth of 6.5%.

Citing Dominion’s “strong cash flow, improved financial position, and annual dividend increases,” Argus believes the stock offers value to long-term investors.

Argus maintained its Buy rating on the stock but lowered its price target from $87 to $80, commenting that the “new business plan will focus on its higher-growing regulated utilities business as well as renewable energy, which the market tends to attach a premium valuation toward.”

Not all analysts agree with Argus. Credit Suisse, for example, cut its rating on the stock from Outperform to Neutral with a price target of $75 a share.

Analysts at Mizuho were even a bit gloomier on Dominion, dropping its rating from Neutral to Underperform with a $68 price target.

On the plus side, Dominion’s debt ratings were maintained at both S&P and Moody’s. S&P Global Ratings maintained its investment grade (BBB+) credit rating and BBB rating on Dominion’s senior unsecured debt. S&P also raised its outlook from stable to positive.

At Moody’s, the firm’s analysts called Dominion’s actions “credit positive” because the moves “refocus the company on its core, lower-risk utility businesses, keep key cash flow to debt ratios steady and materially reduce carbon and methane emissions risk.” Moody’s also gives Dominion an investment grade rating (Baa2) and a stable outlook.

Moody’s also noted that the dividend cut was “credit positive” because it reduces future free cash flow demands (no more Atlantic Coast Pipeline spending) and reduces the need for increased debt (again, that costly pipeline). Moody’s commented that the pipeline cancellation limits Dominion’s remaining obligation to around $1 billion.

Dominion’s stock traded up about 0.6% shortly before noon Tuesday, at $74.06 in a 52-week range of $57.79 to $90.89. The consensus price target on the stock is $84.15.

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