Stock Analysis

Dominion Energy, Inc.'s (NYSE:D) Intrinsic Value Is Potentially 72% Above Its Share Price

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NYSE:D
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In this article we are going to estimate the intrinsic value of Dominion Energy, Inc. (NYSE:D) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Dominion Energy

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF ($, Millions) -US$2.83b -US$3.17b -US$3.25b US$2.12b US$2.90b US$3.66b US$4.36b US$4.97b US$5.48b US$5.91b
Growth Rate Estimate Source Analyst x3 Analyst x3 Analyst x2 Analyst x1 Est @ 36.88% Est @ 26.4% Est @ 19.06% Est @ 13.92% Est @ 10.33% Est @ 7.81%
Present Value ($, Millions) Discounted @ 5.3% -US$2.7k -US$2.9k -US$2.8k US$1.7k US$2.2k US$2.7k US$3.0k US$3.3k US$3.4k US$3.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$12b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 5.3%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$5.9b× (1 + 1.9%) ÷ (5.3%– 1.9%) = US$178b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$178b÷ ( 1 + 5.3%)10= US$106b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$117b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$81.8, the company appears quite good value at a 42% discount to where the stock price trades currently. 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.

dcf
NYSE:D Discounted Cash Flow September 5th 2022

The 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 5.3%, 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.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess 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?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Dominion Energy, there are three important elements you should assess:

  1. Risks: For example, we've discovered 5 warning signs for Dominion Energy (2 can't be ignored!) that you should be aware of before investing here.
  2. 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.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

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.

Valuation is complex, but we're helping make it simple.

Find out whether Dominion Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NYSE:D

Dominion Energy

Dominion Energy, Inc. produces and distributes energy in the United States.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation3
Future Growth1
Past Performance0
Financial Health2
Dividends3

Read more about these checks in the individual report sections or in our analysis model.

Fair value second-rate dividend payer.