Using the Dividend Discount Model, Dominion Energy fair value estimate is US$44.64
Current share price of US$51.53 suggests Dominion Energy is potentially trading close to its fair value
The US$52.01 analyst price target for D is 17% more than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Dominion Energy, Inc. (NYSE:D) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Crunching The Numbers
As Dominion Energy operates in the integrated utilities sector, we need to calculate the intrinsic value slightly differently. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We then discount this figure to today's value at a cost of equity of 6.1%. Relative to the current share price of US$51.5, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= US$2.7 / (6.1% – 2.4%)
= US$44.6
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Dominion Energy as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.1%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Dominion Energy
Strength
Earnings growth over the past year exceeded the industry.
Dividend is in the top 25% of dividend payers in the market.
Dividend information for D.
Weakness
Interest payments on debt are not well covered.
Expensive based on P/E ratio and estimated fair value.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Threat
Debt is not well covered by operating cash flow.
Dividends are not covered by earnings.
Annual earnings are forecast to grow slower than the American market.
Is D well equipped to handle threats?
Looking Ahead:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Dominion Energy, we've compiled three essential items you should consider:
Risks: Case in point, we've spotted 3 warning signs for Dominion Energy you should be aware of, and 2 of them are a bit concerning.
Future Earnings: How does D's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
我們應該注意的是,估值的方法有很多種,就像DCF一樣,每種技術在特定的情況下都有其優點和缺點。對於那些熱愛股權分析的學習者來說,這裏的 Simply Wall St 分析模型可能是一些感興趣的內容。
數據統計
鑑於 Dominion Energy 從事綜合公用事業行業,我們需要略微不同的計算內在價值的方法。我們利用每股股份的分紅派息來代替估算困難並且通常不會由行業分析師報告的自由現金流。除非公司將大部分自由現金流作爲股息支付,否則這種方法通常會低估股票的價值。我們使用Gordon Growth模型,假設股息將以能夠持續增長的速度永久增長。股息預計會以10年期政府債券收益率5年平均增長速率2.4%的年增長率增長。我們使用6.1%的權益成本率將這個數字貼現回今天的價值。相對於當前的股價US$51.5來說,該公司似乎在公允價值左右。任何估算中的假設都會對估值產生很大影響,所以最好將其視爲粗略估計,而不是精確到最後一分錢。
每股股息 = 期望股息 / (折現率-永久增長率)
= US$2.7 / (6.1% – 2.4%)
= US$44.6
重要假設
我們需要指出,貼現現金流最重要的輸入變量是貼現率和實際現金流量。如果您不同意這些結果,請自己計算並在假設上玩弄。DCF還沒有考慮行業的可能循環性,或者公司未來的資本需求,因此未能全面展現公司的潛在表現。鑑於我們正在研究 Dominion Energy 作爲潛在股東,我們使用權益成本率作爲折現率,而不是帶有債務的資本成本(或加權平均資本成本WACC)。在這個計算中,我們使用了6.1%,這是基於0.800的槓桿β計算得來的。β是股票相對於整個市場的波動性的度量。我們從全球可比公司的行業平均β中獲得我們的β,範圍在0.8和2.0之間,這是一個穩定業務的合理範圍。