TITLE: Dominion Energy's Dividend: A Trap for AI-Chasing Investors?
Dominion Energy, Inc. (NYSE:D) is slated to pay a dividend of $0.6675 on December 20th, translating to an annual yield of roughly 4.5%. At first glance, that yield might seem attractive, particularly in a market where AI hype is driving valuations to nosebleed levels. But before income-seeking investors jump in, a closer look at Dominion's financials is warranted.
The Dividend's Shaky Foundation
The sustainability of Dominion's dividend is questionable. The current payout ratio is high, meaning the company is paying out a large chunk of its earnings as dividends. More concerning is the fact that Dominion isn't generating positive free cash flow. (Free cash flow, for those unfamiliar, is the cash a company generates after accounting for capital expenditures.) Paying dividends without sufficient free cash flow is like robbing Peter to pay Paul – unsustainable in the long run.
One source suggests that earnings per share (EPS) are projected to grow by 31.2% next year, which could bring the payout ratio down to a more comfortable 66%. However, projections are just that – projections. They're based on assumptions that may or may not hold true. What happens if that growth doesn't materialize? What if interest rates continue to rise, impacting Dominion's borrowing costs? These are questions that need answering.
And this is the part of the report that I find genuinely puzzling. A separate article touts Dominion as a key player in the AI energy boom, claiming it owns "critical nuclear energy infrastructure assets." The article pitches Dominion as a debt-free company sitting on a "war chest of cash." There's a clear discrepancy here. One source paints a picture of a company struggling to maintain its dividend, while the other portrays it as a cash-rich beneficiary of the AI revolution. Which is it?
Volatility and Growth Concerns
Dominion's dividend history is also cause for concern. The dividend has been cut at least once in the past decade. Since 2015, the annual dividend has increased from $2.40 to $2.67, an annual growth rate of about 1.1%. Modest growth, yes, but hardly enough to inspire confidence, especially given the past cuts. A 1.1% growth rate barely keeps pace with inflation (which, let’s be honest, has been substantially higher than 1.1% in some of those years). Dominion Energy (NYSE:D) Is Due To Pay A Dividend Of $0.6675
While Dominion has seen EPS growth of 12% per year over the last five years, the high payout ratio limits the potential for future dividend increases. The company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth. In simple terms, they're already paying out too much of what they earn.
Now, let's consider the AI narrative. The article promoting Dominion as an AI play states that the company is "completely debt-free." However, Dominion's most recent balance sheet (which I had to pull separately – details on their debt are surprisingly absent from these promotional articles) tells a different story. While they may have significant cash reserves, they also carry a substantial amount of debt (we're talking billions, not millions). The claim of being "completely debt-free" is, shall we say, a generous interpretation of the facts.
The AI Hype vs. Reality
The article pushing the AI angle is classic marketing hyperbole. It preys on the fear of missing out (FOMO) and promises a potential 100+% return within 12 to 24 months. It uses buzzwords like "AI," "Trump tariffs," and "nuclear energy" to create a compelling narrative. But where's the hard data to back up these claims?
The "toll booth" analogy, where Dominion supposedly collects fees on every drop of exported LNG, is particularly misleading. While Dominion does have a role in LNG exports, it's not a toll booth operator. It's a participant in a complex market with numerous players. The idea that they're passively collecting fees is a gross oversimplification.
The claim that Dominion is trading at less than 7 times earnings, excluding cash and investments, also needs scrutiny. While the price-to-earnings (P/E) ratio may be low, it's crucial to consider the quality of those earnings. Are they sustainable? Are they growing? Given the concerns about the dividend's sustainability, I'm inclined to believe that the earnings are not as robust as the AI article suggests.
A Smoke and Mirrors Game?
Dominion Energy presents a mixed picture. On the one hand, it offers a seemingly attractive dividend yield. On the other, its dividend history is volatile, its payout ratio is high, and its free cash flow is concerning. The AI narrative adds another layer of complexity, but the claims made in the promotional article appear to be overblown and lack sufficient data support. The company may well benefit from the increased energy demands of AI, but not to the extent being advertised.
The Data Just Doesn't Stack Up.
Dominion's dividend may be a trap for investors blinded by the allure of AI. While the company may have some exposure to the AI energy boom, the financial data suggests that its dividend is not as safe or sustainable as it appears. Investors should proceed with caution and conduct their own thorough due diligence before investing. A 4.5% yield isn't worth the risk of a dividend cut, especially when there are more stable and reliable income-generating assets available.
