Dominion Energy: Stock Remains Value Trap With Few Near-Term Catalysts

Dominion Energy D trades at one of the biggest discounts to our fair value estimate among all U.S. utilities we cover, but we see few near-term catalysts that will close that discount. Dominion trades at a 15% discount to our fair value estimate and a 26% discount to the utilities sector average 17.1 price/earnings as of May 31. We currently view the utilities sector as 5% undervalued.

We are maintaining our $59 fair value estimate and narrow moat rating.

We believe Dominion’s 5.4% dividend yield—a 170-basis-point premium to peers—suggests the market is concerned about the dividend payout. Management has promised to maintain its dividend as part of its strategic review, but the company must achieve attractive valuations for potential asset divestitures in an increasingly challenging macroenvironment to maintain its current payout. We don’t assume a dividend cut in our forecast. Dividend policy has no effect on our fair value estimate.

Most recently, Eversource’s sale of its undeveloped offshore wind acreage and write-off of about 10% of its investment suggests weak market pricing for offshore wind projects. This makes the sale of an equity investment in Dominion’s offshore wind project look less attractive. Some utilities also are experiencing a weaker market for natural gas distribution utilities, another potential source of equity for Dominion.

Dominion has significantly underperformed its peers since management initiated the strategic review in November. Our Medium Morningstar Uncertainty Rating highlights the wide range of potential outcomes from the strategic review.

With the sector trading lower on higher interest rates and persistent inflation concerns, we think there are better alternatives that trade at similar or greater discounts to our fair value estimates. Our top picks in the sector remain Entergy, NiSource, American Electric Power, and Duke Energy.