Calculating the intrinsic value of Dominion Energy, Inc. (NYSE:D)

Key findings

• Using the dividend discount model, the fair value of Dominion Energy is estimated at $44.64.
• Dominion Energy’s share price of $49.21 suggests that the price is at a similar level to its estimated fair value.
• The analyst price target of $52.08 for D is 17% above our fair value estimate

Does the July stock price of Dominion Energy, Inc. (NYSE:D) reflect its actual value? Today we will estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to their present value. Our analysis will use the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

We would like to point out that there are many ways to value a company and that each method, like DCF, has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for Dominion Energy

The calculation

We need to calculate Dominion Energy’s value a little differently than other stocks because it’s an integrated utility company. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and often not reported by analysts. This often underestimates a stock’s value, but it can still be good as a comparison to competitors. It uses the “Gordon Growth Model,” which simply assumes that dividend payments will continue to grow forever at a sustainable growth rate. For a number of reasons, it uses a very conservative growth rate that cannot exceed that of a company’s gross domestic product (GDP). In this case, we used the 5-year average 10-year Treasury yield (2.4%). The expected dividend per share is then discounted to today’s value using a cost of equity of 6.1%. Compared to the current share price of $49.2, the company appears to be about fair value at the time of writing. Since the assumptions of a calculation have a major impact on the valuation, it is better to consider it as a rough estimate and not accurate to the last cent.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= 2.7 USD / (6.1% – 2.4%)

= 44.6 US dollars

The assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. If you disagree with these results, try the calculation yourself and play with the assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we are looking at Dominion Energy as prospective 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 takes debt into account. In this calculation, we used 6.1% which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Dominion Energy

Looking ahead:

Valuation is only one side of the coin when developing your investment thesis and ideally shouldn’t be the only analysis you examine for a company. The DCF model is not a perfect tool for stock valuation. Instead, a DCF model is best used to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, making a small adjustment to the terminal value growth rate can dramatically change the overall result. For Dominion Energy, we’ve compiled three other aspects you should examine:

1. Risks: For example, we discovered 3 warning signs for Dominion Energy (2 are a bit unpleasant!) that you should know before investing here.
2. Future income: How does D’s growth rate compare to its competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS The Simply Wall St app runs a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, just search here.

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This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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