Dominion Energy's 88% Data Center Demand Spike Could Get the Dividend Growing Again

Core Viewpoint - Dominion Energy is currently offering a high dividend yield of 4.8%, significantly above the average utility yield of 2.8%, but has faced challenges in maintaining consistent dividend performance [1] Business Transformation - Over the past few decades, Dominion Energy has shifted its focus from oil production to more stable cash-generating assets, including electric utilities, natural gas utilities, and energy pipelines [2] - In 2020, Dominion sold its energy pipeline business to Berkshire Hathaway, which necessitated a dividend cut due to the loss of income-producing assets [3] Dividend Management - After the sale of its pipeline business, Dominion briefly increased its dividend but then conducted a strategic review, which delayed further increases [4] - The company maintained its dividend post-sale of natural gas utilities to Enbridge in September 2023, but indicated that the dividend would remain static until the balance sheet was strengthened [6] Financial Metrics - Dominion's balance sheet is solid with an investment-grade rating, but the dividend payout ratio remains high at 96% for 2024, which is expected to decrease to below 80% by 2025 if earnings targets are met [8][9] - The company aims for a payout ratio below 70% before considering any dividend increases [9] Market Opportunities - The demand for commercial power, particularly from data centers, is projected to grow significantly, increasing from 48% to 62% of Dominion's business over the next decade [10] - An 88% increase in contracted capacity from data centers within six months in 2024 highlights the growing demand for power to support AI technology [11] Future Outlook - There is potential for Dominion to restore dividend growth as it meets financial targets, particularly given the accelerating demand from data centers in Virginia [12][13] - Management has expressed confidence in their ability to capitalize on the growing data center market, indicating a positive outlook for future dividend increases [13]