A Grand Record
Dominion Energy has increased its dividend annually for 16 consecutive years. Before proceeding, you should know that it is not intended to break this strip. Dividend growth over the last decade has averaged almost 8% per annum. More recently, dividend growth was around 10%.
Source: Getty Images.
This growth rate is over. Dominion expects dividend growth to slow to around 2.5% by 2020 and stay at that level for at least a few years. To be fair, this is enough to keep up with the recent low inflation growth. As long as inflation does not reach the historical average (closer to 3%) or higher, the purchasing power of the Dominion dividend will continue to increase over time. And with such a high return compared to competitors, it's difficult to complain if you want to get as much revenue out of your portfolio as you can today.
But you can not enter or stay here if you already own Dominion's shares, without asking, "Why the sudden slowdown in the dividend?" The answer is not very good, but not bad either.
Fixing an Interruption
Dominion has been changing gears for a number of years, moving his business more and more toward fortune with regulated or fee-based structures. The portfolio has moved strongly, including the sale and acquisition of assets. In fact, 2018 and 2019 were quite active years. Dominion bought a smaller, financially troubled utility company SCANA and acquired its controlled midstream partnership (both agreed last year but completed in 2019).
At this time Dominion has a relatively high return and a relatively high leverage compared to competitors. With EBITDA around 6.4x at the end of the first quarter, it is slightly higher in the industry. That is a cause for concern, but now Dominion's payout ratio has increased from 70% in 2016 to almost 90% in 2019. The average for the floor space is now around 70%.
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"data-reactid =" 40 "> Leverage is a problem for Dominion Energy
D Financial debt to EBITDA (TTM) chart
D YCharts data on debt versus EBITDA (TTM).
Dominion substantially lowers dividend growth to around 2.5% to provide some financial leeway (maintaining the investment grade rating and reducing the payout ratio to 70%, which will take several years to complete) Since dividend growth is expected to be about half of the company's projected earnings growth rate of 5%, note that the utility will have $ 26 billion of capital growth plans between 2019 and 2023 to support this growth, with 5% appearing However, a 50% increase in the dividend means that achieving the 70% range is a slow and steady process – no overnight success. (Doing this overnight would result in a dividend cut and investors would pull out generally, avoid them.)
Ultimately, Dominion slows dividend growth m to make sure that it remains a large source of income. A relatively high leverage combined with a high and still growing payout ratio is a recipe for a dividend cut if nothing changes. Management is now proactively changing dividend growth rates to ensure that high-income investors who rely on the high return of the utility are not disappointed later.
Not good news, but not bad
For investors, because of the rapid dividend growth in recent years, the slowdown in dividend growth means that you need to re-evaluate your investment. Another higher-growth company like NextEra Energy may be the better choice today. For those interested in maximizing revenue from their portfolios, Dominion remains a solid option. The high returns, the slow and steady growth forecasts (for dividends and profits) and the clear goal of strengthening dividend capacity by lowering the payout ratio are seen as long-term positive results.
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<p class =" Canvas Atom Canvas Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm "type =" text "content =" Reuben Gregg Brewer owns shares in Dominion Energy, Inc. The Motley Fool recommends Dominion Energy, Inc. and NextEra Energy. The Motley Fool has a disclosure policy. "data- reactid = "70"> Reuben Gregg Brewer owns shares in Dominion Energy, Inc. The Motley Fool recommends Dominion Energy, Inc and NextEra Energy. The Motley Fool has a disclosure policy.