Dominion Energy’s Dividend Cut Shows the Danger of High Debt

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For utilities, especially ones with regulated businesses like electricity transmission, dividend cuts are rare—even in challenging times like those brought on by Covid-19.

One exception is

Dominion Energy

(ticker: D). The company, based in Richmond, Va., cut its payout early last month in declaring a fourth-quarter dividend of 63 cents a share, down 33% from 94 cents previously. The stock, which yields 3.4%, has returned about minus 6% this year.

Although Dominion is lowering its debt load and retains an investment-grade credit ratings, the dividend cut is a cautionary tale. “The bottom line was that Dominion got overextended,” says John Bartlett, a portfolio manager and analyst at Reaves Asset Management.

Funded by a lot of debt, Dominion in recent years acquired various natural-gas pipelines and storage facilities as part of its growth strategy. As of Sept. 30, the company’s long-term debt totaled about $33.1 billion, compared with about $15.8 billion at the end of 2010.

Another dynamic in the dividend cut: In July, Dominion and

Duke Energy

(DUK) announced the cancellation of the multibillion-dollar Atlantic Coast Pipeline project that was launched in 2014, citing “ongoing delays and increasing cost uncertainty.” As part of its growth strategy, Dominion had used a master limited partnership to house some of its gas-pipeline and storage assets. Many MLP stocks, however, began to take a hit in 2014 as energy prices went south. From late July 2014 through Dec. 7 of this year, the Alerian Natural Gas MLP index returned about minus 43%.

By early 2019, the MLP had been merged with Dominion Energy, which cited “sustained disruptions to MLP equity capital markets and the value of our MLP.” Another setback came in March 2018 when the Federal Energy Regulatory Commission voted “to disallow certain income-tax allowances” for MLPs, according to The Wall Street Journal.

Meanwhile, in early July, Dominion announced that it would divest itself of most of its storage and gas-transmission assets, notably pipelines, to

Berkshire Hathaway

Energy for $9.7 billion. The move, which coincided with the cancellation of the Atlantic Coast Pipeline, is part of a strategy on Dominion’s part to have a lot more of its business focused on regulated activities such as electricity generation and transmission.

It’s a repositioning that other utilities have made, as well, including

American Electric Power

(AEP). An underpinning of such a strategy is that investors seem to prefer regulated utility businesses, given that they can often count on more-reliable returns from those businesses versus more volatile endeavors like merchant power.

The deal’s nearly $10 billion price tag includes Berkshire Hathaway Energy assuming nearly $6 billion of debt, thereby cutting Dominion’s leverage. Another positive from the deal for Dominion is that it expects to repurchase about $3 billion of its common stock by year’s end.

Included in the asset-sale announcement was the dividend cut. “Now we’re selling 20% of the company’s business with the cash flows that come with it. So, that was going to necessitate a cut in the dividend,” said Thomas Farrell, the company’s CEO at the time. He has since been succeeded as CEO and is now executive chairman.

“We believe our revised dividend payout ratio is perfectly aligned with the highest-valued utility companies in the country and better reflects our current business mix,” Dominion said in a statement to Barron’s.

Late last year, Dominion’s board cut the annual dividend growth rate to 2.5% from 10%.

Under the since-lowered dividend, the company is expected to pay out an estimated $2.50 a share in 2021, down from about $3.45 this year. It aims to increase its dividend at a 6% annual clip. The lower dividend would reflect a payout ratio of about 65%, down from 87% last year and more in line with peers.

“The parable here is that the companies that don’t have too much debt tend not to get in trouble,” Bartlett says. Still, he adds, “the future looks pretty good there.”

Turning Bullish on Aristocrats

Lindsey Bell, chief investment strategist at Ally Invest, is turning bullish on dividend stocks.

“They may have been the market underdogs this year, but a comeback may already be brewing,” she wrote in a recent note.

Bell points out that the S&P 500 Dividend Aristocrats jumped 12% in November, dividends included—their best monthly performance since April 2009. Those 65 companies have paid out a higher dividend every year for at least 25 straight years.

Dividend stocks, she adds, look promising given the timing of the economic cycle. Bell noted that after the last three economic recessions, Aristocrats outperformed the broader market by at least four percentage points in the first year of each recovery.

Although they have gained some momentum lately, the Aristocrats still trail the S&P 500 index year to date. As of Dec. 8, they had returned 8.4%, compared with 16.6% for the broader market.

But looking ahead, Bell says, “the November performance could be a wake-up signal to investors that the tide is changing.”

TJX to Bring Back Its Dividend

Discount retailer

TJX Cos.

(TJX) plans to reinstate its quarterly dividend after a pandemic pause.

The company said this past week that it will pay a quarterly dividend of 26 cents a share on March 4 of next year to shareholders of record as of Feb. 11, 2021. That would be a 13% boost. Its last quarterly payment, of 23 cents, was announced about a year ago.

The company hadn’t declared any dividends since late last year due to the pandemic.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com



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