Selling Dominion Energy (D)
On July 5 an announcement came out that Dominion Energy (D) was selling its gas transmission and storage segment to Berkshire Hathaway (BRK). This would be an all-cash deal valued at $9.7b. BRK would be assuming $5.7b in debt and D announced that the actual cash received would be about $3b and would be used to buy back shares. The deal is expected to close in the 4th quarter.
The announcement included two key metrics. One is that new D's earnings would decrease from $4.25-$4.60 to $3.37-$3.63 per share. The midpoints of these two numbers are $4.425 and $3.50, respectively, and what I used in my subsequent math.
The second metric is they are targeting a 65% dividend payout ratio. In doing the math I came up with their reducing the expected annual dividend from $3.76 to $2.275 per share. As an aside, this is why it's important to run your own numbers. The announcement said they expected the dividend to be about $2.50 per share. $2.50 out of $3.50 is actually a payout ratio of 71.4%. For them to pay $2.50 using a payout ratio of 65%, earnings would need to be about $3.85, outside the projected range provided by the company.
I don't want to accuse D of deliberately misleading people in the announcement so I'll say that evidently nobody at the company knows how to use a calculator or run a spreadsheet. Or they use different numbers to calculate payout ratio than what is normal.
So yes, D underwent shrinkage.
Sorry folks, been watching a lot of Seinfeld lately.
OK, but the company is reducing debt by $5.7b. This is a good thing, right? In looking at the company's balance sheet, the latest figure for long-term debt is $31.93b. The $5.7b BRK is assuming is 17.85% of that. So this is the level of debt reduction.
What does all this say to me? I think the best way to look at it is with a table.
| Metric | "Old" D | "New" D | Change |
| EPS | $4.425 | $3.50 | -20.9% |
| LT Debt | $31.93b | $26.23b | -17.85% |
| Payout ratio | *87.1% | 65% | -22.1% |
| Annual dividend/share | $3.76 | $2.275/$2.52 | -$1.485 (39.49%)/-$1.24 (33%) |
| 5-year dividend growth rate | 8.87% | 6% | -2.87% |
*This is the figure I used at the time, SA now has 107.42%.
I think debt should really be measured against cash flows, not earnings but the company didn't provide this so we use the tools we are given. I briefly looked at the segments from the last ER and thought about calculating this out but decided that it wouldn't change the overall impact of D reducing debt by 17.85% while reducing earnings by 20.9% - D's overall debt situation is relatively unchanged.
In the end what I decided was based on this:
- D may be a better company through this sale. But nobody can say for sure until the new company has been in existence for a while.
- Even if D is a better company, a company generating 20% less in cash flows and revenues is worth less. It's a smaller company. I'm not gonna pay more - or even the same - for the 12oz soft drink than for the 16oz soft drink. To me 80% of a company trading in the low 80's should be worth in the mid-60's.
- D's dividend will be reduced by 30-40%.
- The dividend numbers D provided in the announcement don't add up.
Once I mixed all of this together I decided I wasn't interested in owning a company that would soon be worth 80% less than it is now and paying me substantially less in income. So I sold.
As proof that I suck at selling I waited a day to be able to run numbers and sold it at $72.82 rather than the $80 it was trading at early the day after the announcement - or the $80 it soon returned to.
I briefly debated waiting until I received one more $.94 quarterly dividend but dropped that idea quickly. Once I decided I didn't want to own it any more I made that a reality. I don't always get rid of things I no longer want this quickly - I still own a bunch of REITs in my Roth that I know I don't want long-term. But in my taxable account I decided to quickly re-deploy my D into other income-producing companies.
I'm not complaining about D. My buys all took place between May 7 and June 6, 2018 at a price of $61.69-$65.69, average purchase price of $63.59. With dividends my cost in the stock was $55.99. So I made about 30% in two years on it. Would I have liked to have sold at $80 and earned over 40% on it? Sure - but when it comes to selling for the most part when I decide I don't want to own a company any longer I decide to make it so I don't own it any longer. Plus I'm useless at predicting near term stock price movement.
What I Bought
I'll spend less time on the buys. With the proceeds I picked up:
- 7/7/20 - Duke Energy (DUK) at $79.56.
- 7/7/20 - AbbVie (ABBV) at $98.74.
- 7/8/20 - MSC Industrial (MSM) at $70.00.
- 7/24/20 - Exxon-Mobil (XOM) at $43.50
Duke is the only new position. I've liked it for a while and didn't want to own just one utility - NextEra Energy (NEE) - so it was my first buy. The others were all adds to existing positions. Since XOM is recent and as it's on my mind I'll mention that while I consider its dividend to be somewhat at risk, the combination of oil staying at $40 for a while, the latest Baker-Hughes Rig Count - thank you Chowder - and the fact that Saudi Arabia has taken a pretty firm stand to support oil prices all played into it.
The Result
In the end I unexpectedly increased my dividend income, not just over the new D projection but over what I was receiving from old D. I did use some received dividends in the buys and haven't separated those from the equation but most of my dividend increase came from the D proceeds. This wasn't a huge gain. I increased my projected annual dividend income by about 1%. But every little bit helps.
So this is what I did and why. Not saying it's right or wrong for anyone else but I think it was right for me.
Happy investing everyone!