Here’s Why This High-Yield Dividend Stock’s Earnings Will Look Much Better Soon

Dominion Energy (D 2.93%) has a 5.7% dividend yield, well above the market average of around 1.5% and the average utility yield of 3.6%, using Vanguard Utilities ETF as a proxy. But there’s a reason for that relatively high yield. Here’s what’s going on and why generally accepted accounting principles (GAAP) are making things worse right now.

Dominion is changing again

Dominion Energy has been simplifying its business for well over a decade. It started with a proceed away from oil production. Then, the giant U.S. utility decided it would get out of the midstream sector, selling a material pipeline business to Berkshire Hathaway. That proceed, which occurred in 2020, was accompanied by a dividend cut, given the scale of the business being sold.

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The utility’s management promised at that point that dividend growth would be the big story for years into the future. That didn’t happen, though, because in late 2022 the company announced that it was commencing a top-to-bottom business review. That review is still ongoing, but the real problem was that, for roughly a year, the company left investors with little clue as to what it was doing. Wall Street hates uncertainty, and the stock fell steadily while management remained largely silent about its progress.

That said, Dominion has been making some changes. Most notably, it’s selling assets. The latest deal was an agreement to sell three natural gas utilities to Canada’s Enbridge. The total value of the sale is $14 billion, which includes an all-cash purchase price of $9.4 billion and the assumption of debt. This is where things get a little tricky.

Three discontinued operations to go

Dominion has now stated that it has one more transaction to go before it will be done with its business review, finding a partner for an offshore wind project. Investors can now see the end of the tunnel here, noting that finding a partner is likely to be less of an issue than selling off big chunks of the business. However, there’s a notable problem: GAAP.

Dominion knows the three natural gas utilities are going to be sold, so they have to put them into discontinued operations. There’s nothing unusual about that. However, a notable goal of the sale is to raise cash for debt reduction at the corporate level (the debt at the utilities follows the utilities). That corporate-level debt has to stay on the balance sheet until it is paid off because it is not directly associated with the three utilities being sold.

This means that the income from the natural gas utilities is effectively being pulled out, but interest expenses that will eventually be reduced won’t drop until after the deals are completed. This is no small issue, noting that the company expects the asset sales to be a material factor in an eventual $0.50 per share benefit to earnings from interest savings. The sales are expected to be staggered through 2024, with the regulatory approval process a big unknown with regard to the actual timing. In other words, there’s likely to be another six to 12 months of overhang on the income statement from interest expenses that are eventually going to go away once the sale proceeds are received and corporate-level debt gets paid down.

There’s a silver lining on Dominion’s cloud

While GAAP is meant to help investors have a clearer picture of a company’s earnings, it can muddy the waters a little when unusual events unfold. Dominion’s sale of three large utility assets is an example, and there’s no easy way to resolve the problem other than to explain the issue to investors and hope they comprehend. But that’s a potential opportunity right now for more aggressive investors who are willing to step in while this transaction plays out. Indeed, you can collect a large yield (management has stated that the dividend is safe) with the knowledge that financial results will start to look a lot better and fairly quickly once the gas utility sale is complete and the expected debt paydown occurs.