Dominion Energy, Inc. (D) is a power and energy company, which provides electricity and natural gas to homes, businesses, and wholesale customers. It operates through the following business segments: Dominion Energy Virginia, Gas Distribution, Dominion Energy South Carolina, Contracted Assets, and Corporate and Other.
Shares of Dominion Energy have gains of about 3.5% in 2021 (not including dividends). I am bearish on D stock. A declining sales growth is among the top key risk factors to consider now.
Starting with sales growth over the past five-year period, Dominion Energy has not had steady revenue growth. In 2017, 2018, 2019, and 2020, the revenue growth reported was 7.2%, -11%, 28.6% and -1.6% respectively. For the last twelve months ended September 30, 2021, revenue growth was -3.1%.
A positive thing to note for low-volatility investors is that Dominion Energy stock has a 52-week range of $67.85-$81.08 and a low beta of 0.42. In 2021, the stock moved in a tight range, and in the absence of any major catalysts, this range may continue in 2022. For sure, the weak sales growth does not help for what technical analysis traders are waiting for, a potential breakout of the stock.
Issuing new debt with a weak free cash flow trend is another red flag. As of the most recent quarter, Dominion Energy had long-term debt of $34.8 billion on its balance sheet, higher than the figure of $34 billion in 2020.
At the same time, the free cash flow trend for 2016-2021 (trailing 12 months for 2021) has been very weak. In five of these six years, Dominion Energy had a negative free cash flow, and the last time it reported a positive figure of $368 million was in 2018.
Turning to profitability, the net income margin declined from 23.8% in 2017 to -2.8% in 2020 and has since rebounded to 19.3%. Other key ratios, such as ROE and ROA, have declined to reflect a weakness in profitability and financial performance.
The overall financial strength of Dominion Energy is poor not only because of its debt-to-equity ratio of 1.53 but because the company is having liquidity issues with a current ratio and quick ratio of 0.70 and 0.17, respectively.
Dominion Energy has an Altman Z-score of 0.8, placing it in the distress zone. This implies a bankruptcy possibility in the next two years. The firm's debt is not well covered by operating cash flow.
Dividend History: Bad News and Good News
Investors relying on a stable dividend as a source of generating income should know that Dominion Energy's dividend history hasn't been the best. The current stock dividend yield is close to a 10-year low and the dividend was cut last year.
As of March 2020, the dividend yield for Dominion Energy has been declining after reaching a high value of 6.22% compared to the forward dividend and yield of $2.52 and 3.25%, respectively.
On the positive side, the board of directors of Dominion Energy recently approved a dividend hike for 2022. The company announced a dividend of $2.67 per share of common stock, a 6% increase above the 2021 dividend rate of $2.52 per share. Subject to board declaration in January, the first quarterly dividend of 66.75 cents per share will be payable in March 2022.
In Q3 2021, Dominion Energy reported EPS GAAP of $0.79 (a miss by -$0.25) and revenue of $3.18, a miss by -$729.1 million. The company has narrowed its full-year 2021 operating earnings guidance range to $3.80 to $3.90 per share.
Valuation
Dominion Energy stock is relatively overvalued based on its P/E ratio (24.4x) compared to the U.S. integrated utilities industry average (22.7x) and based on its PEG ratio (2.8x).
Wall Street's Take
Turning to Wall Street, Dominion Energy has a Moderate Buy consensus rating, based on four Buys and three Holds assigned in the past three months.
The average Dominion Energy forecast of $82.43 implies 5.9% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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