For utilities, particularly ones with regulated companies like electrical energy transmission, dividend cuts are uncommon—even in difficult occasions like these introduced on by Covid-19.
One exception is
(ticker: D). The corporate, based mostly in Richmond, Va., minimize its payout early final month in declaring a fourth-quarter dividend of 63 cents a share, down 33% from 94 cents beforehand. The stock, which yields 3.4%, has returned about minus 6% this yr.
Though Dominion is reducing its debt load and retains investment-grade credit score rankings, the dividend minimize is a cautionary story. “The bottom line was that Dominion got overextended,” says John Bartlett, a portfolio supervisor and analyst at Reaves Asset Administration.
Funded by a whole lot of debt, Dominion lately acquired numerous natural-gas pipelines and storage services as a part of its progress technique. As of Sept. 30, the corporate’s long-term debt totaled about $33.1 billion, in contrast with about $15.Eight billion on the finish of 2010.
One other dynamic within the dividend minimize: In July, Dominion and
(DUK) introduced the cancellation of the multibillion-dollar Atlantic Coast Pipeline challenge that was launched in 2014, citing “ongoing delays and increasing cost uncertainty.” As a part of its progress technique, Dominion had used a grasp restricted partnership to accommodate a few of its gas-pipeline and storage belongings. Many MLP stocks, nonetheless, started to take a success in 2014 as power costs went south. From late July 2014 by means of Dec. 7 of this yr, the Alerian Pure Fuel MLP index returned about minus 43%.
By early 2019, the MLP had been merged with Dominion Vitality, which cited “sustained disruptions to MLP equity capital markets and the value of our MLP.” One other setback got here in March 2018 when the Federal Vitality Regulatory Fee voted “to disallow certain income-tax allowances” for MLPs, in line with The Wall Street Journal.
In the meantime, in early July, Dominion introduced that it will divest itself of most of its storage and gas-transmission belongings, notably pipelines, to
Vitality for $9.7 billion. The transfer, which coincided with the cancellation of the Atlantic Coast Pipeline, is a part of a technique on Dominion’s half to have much more of its enterprise targeted on regulated actions corresponding to electrical energy era and transmission.
It’s a repositioning that different utilities have made, as nicely, together with
American Electrical Energy
(AEP). An underpinning of such a technique is that buyers appear to want regulated utility companies, provided that they will usually rely on more-reliable returns from these companies versus extra unstable endeavors like service provider energy.
The deal’s almost $10 billion price tag contains Berkshire Hathaway Vitality assuming almost $6 billion of debt, thereby reducing Dominion’s leverage. One other optimistic from the deal for Dominion is that it expects to repurchase about $Three billion of its widespread stock by yr’s finish.
Included within the asset-sale announcement was the dividend minimize. “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,” mentioned Thomas Farrell, the corporate’s CEO on the time. He has since been succeeded as CEO and is now government 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 mentioned in an announcement to Barron’s.
Late final yr, Dominion’s board minimize the annual dividend progress price to 2.5% from 10%.
Beneath the since-lowered dividend, the corporate is predicted to pay out an estimated $2.50 a share in 2021, down from about $3.45 this yr. It goals to extend its dividend at a 6% annual clip. The decrease dividend would replicate a payout ratio of about 65%, down from 87% final yr and extra consistent with friends.
“The parable here is that the companies that don’t have too much debt tend not to get in trouble,” Bartlett says. Nonetheless, he provides, “the future looks pretty good there.”
Turning Bullish on Aristocrats
Lindsey Bell, chief funding strategist at Ally Make investments, is popping bullish on dividend stocks.
“They may have been the market underdogs this year, but a comeback may already be brewing,” she wrote in a latest notice.
Bell points out that the S&P 500 Dividend Aristocrats jumped 12% in November, dividends included—their greatest month-to-month efficiency since April 2009. These 65 firms have paid out a better dividend yearly for at the least 25 straight years.
Dividend stocks, she provides, look promising given the timing of the financial cycle. Bell famous that after the final three financial recessions, Aristocrats outperformed the broader market by at the least 4 proportion points within the first yr of every restoration.
Though they’ve gained some momentum these days, the Aristocrats nonetheless path the S&P 500 index yr up to now. As of Dec. 8, that they had returned 8.4%, in contrast with 16.6% for the broader market.
However trying forward, Bell says, “the November performance could be a wake-up signal to investors that the tide is changing.”
The corporate mentioned this previous week that it’ll pay a quarterly dividend of 26 cents a share on March Four of subsequent yr to shareholders of report as of Feb. 11, 2021. That will be a 13% increase. Its final quarterly cost, of 23 cents, was introduced a couple of yr in the past.
The corporate hadn’t declared any dividends since late final yr because of the pandemic.
Write to Lawrence C. Strauss at [email protected]