14 BARRON’S November 22, 2021
stocks are often considered bond prox-
ies. TheUtilities Select Sector
SPDRexchange-traded fund (ticker:
XLU) had a one-year return of about
6% as of Nov. 17. Dominion’s (D) return
in the same period was a negative 7%.
“Utility investors have very long
memories,” says Jeremy Tonet, who
covers North American utilities for J.P.
Morgan. “It takes a period of execution
to move past historical views. We think
that has fed into some of the malaise in
the stock price.” Tonet rates Dominion
Overweight with a price target of $88,
versus about $75 recently.
Based in Richmond, Va., Domin-
ion’s portfolio includes utilities in
Virginia, North Carolina, and South
Carolina. Those units contribute
about 70% of its operating earnings.
Another 17% comes from natural-gas
distribution in six states. It also has
several nuclear-power plants and a
50% stake in a natural-gas liquefac-
tion facility in Maryland.
The market isn’t giving Dominion
credit for some solid attributes,
including the company’s annual
earnings-per-share growth target of
6.5% through at least 2025. Throw in
a dividend yield of about 3.4%, and
a 10% annual return is possible if
the company meets its goals.
Another plus for Dominion is that
about 90% of its operating earnings
come from state-regulated utility oper-
ations, providing some reliability to the
company’s expected returns on capital.
Environmental, social, and gover-
nance, or ESG, considerations have
become intertwined with the com-
pany’s future. Dominion has commit-
ted to achieving net-zero carbon-
dioxide and methane emissions from
its power generation and gas infra-
structure by 2050, helped by a multi-
billion-dollar buildout of various
renewable-energy assets such as
offshore wind.
In J.P. Morgan’s most recent ranking
of utilities on environmental issues,
“Dominion was one of the top names as
far as green rate of change,” says Tonet.
A little more than half of the utility’s
five-year $32 billion capital-growth
spending plan is earmarked for zero-
carbon generation and energy-storage
projects, including solar panels, battery
storage, and offshore wind.
Dominion is aiming to complete an
estimated $10 billion wind farm some
30 miles off the coast of Virginia by
the end of 2026—a project the com-
pany says will generate enough energy
to power up to 660,000 homes. Bobby
Edemeka, a portfolio manager at the
PGIM Jennison Utilityfund, which
owns Dominion, calls it “one of the
more attractive investment opportuni-
ties” among regulated U.S. utilities.
Regulated utilities such as Domin-
ion typically rely on state utility com-
missions to approve rate increases,
which hinge on an operator’s “rate
base”—essentially, the prudent invest-
ments it makes in its grid and other
assets, minus any depreciation. A util-
ityisallowedtoearnarateofreturn
on its asset base.
“Their renewable-energy growth is
going to be 100% regulated, which is
something that most of the utilities
can’t say,” says Edemeka, noting that
regulation reduces risk.
The Virginia Clean Economy Act,
passed in 2020, calls for utilities to
retire electric-generating units in the
state “that emit carbon as a byprod-
uct of combusting fuel to generate
electricity”—a coal-fired plant, for
example. It also requires Dominion to
have offshore wind projects capable of
generating 5,200 megawatts by 2034.
Amegawattisaunitofpowerequal
to one million watts.
Dominion has simplified its busi-
ness mix by selling off assets, includ-
ing a big chunk of its natural-gas
transmission and storage assets to
Berkshire Hathaway Energy in a deal
initially valued at about $10 billion
last year. The Questar Pipeline piece
was eventually scuttled amid antitrust
concerns and is now being acquired
bySouthwest Gas Holdings(SWX).
While Dominion’s retooling to fo-
cus on regulated utilities makes sense,
it has had an unpleasant consequence.
When it sold its gas assets last year,
the accompanying cash flow went out
the door—and led Dominion to slash
its quarterly dividend to 63 cents a
share from 94 cents. Still, Dominion
has said it plans to boost its dividend
at a 6% annual clip in the future.
A recent overhang for the stock
was a triennial review with the state
of Virginia. The most recent settle-
ment, which includes a proposed
return on equity of 9.35% for Domin-
ion, compared with 9.2% previously,
should help the stock price eventually.
Meanwhile, the stock recently
traded at 18.3 times the FactSet con-
sensus 2022 profit estimate of $4.11, in
line with its five-year average. Akers
of Wells Fargo expects Dominion to
command a modest premium multiple
to its mid-cap and large utility peers,
helped by “that clean energy story.”B
AUtilityRetools,Relying
OnRegulationforGains
Virginia’s Dominion Energy is refocusing on businesses that subject it to state regulation—
along with more-reliable returns. That could be a good thing for patient investors.
Dominion
plans to
complete a
$10 billion
wind farm
some 30
miles off
the coast of
Virginia by
the end of
D
ominion Energy,alarge
electric and natural-gas
utility, slashed its divi-
dend last year, and the
stock has lagged behind
its peers in the ho-hum
utility sector.
That hardly sounds like the mak-
ings of a bullish case for any stock, but
investors may be overlooking an entic-
ing opportunity.
“Dominion is well positioned to
benefit from some of the secular
trends that are impacting the entire
sector—the main one being clean
energy and decarbonization,” says
Sarah Akers, senior equity analyst
at Wells Fargo Securities, which rates
the stock Overweight.
Utilities haven’t done well in 2021—
partly due to worries about inflation
and rising interest rates, as these
By LAWRENCE C. STRAUSS
Dominion Energy Key Data
Headquarters Richmond, Va.
Recent Price $75.
52-Week Change -7.0%
2022E Net Income(bil) $3.
2022 EEPS $4.
2022 EP/E 18.
Market Value:(bil) $62.
Dividend Yield: 3.4%
E=estimate. Source: FactSetStates of Play
Portfolio includes utilities in Virginia,
North Carolina, and South Carolina.
Courtesy of Dominion EnergyA wind turbine at the Virginia
Wind Energy Area, left, leased
by Dominion Energy.