About the Editor

Michael Hodel is the editor of Morningstar DividendInvestor, a monthly newsletter that focuses on dividend income investment strategy. For illustration purposes, issues highlight activities pertaining to a Morningstar, Inc. portfolio invested in accordance with a current income and income growth from stocks strategy.

Michael is portfolio manager for Morningstar Investment Management LLC, a federally registered investment adviser and a wholly-owned subsidiary of Morningstar,Inc. At Morningstar, Mike was a technology strategist for Morningstar, responsible for telecommunications research. He also served as chair of Morningstar's Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar. He joined Morningstar in 1998.

Hodel holds a bachelor's degree in finance, with highest honors, from the University of Illinois at Urbana-Champaign and a master's degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation.

 
Investment Strategy

Dividends are for everyone regardless of age. The outcome of owning dividend-yielding stocks is the key variable-higher-yielding stocks with safe payouts being less risky while affording investors who don't need current income the ability to reinvest/reallocate the capital.

The goal of the Dividend Select Portfolios is to earn annual returns of 8% - 10% over any three-to-five year rolling time horizon. We further seek to minimize risk, as defined by the probability of a permanent loss of capital. For our portfolio as a whole, this goal is composed of:

3% - 5% current yield
4% - 6% annual income growth

 
About Josh Joshs Photo
Michael Hodel, CFA
Editor, Morningstar DividendInvestor
Portfolio Manager, Dividend Select Portfolios
Michael Hodel is the editor of Morningstar DividendInvestor, a monthly newsletter that focuses on dividend income investment strategy. For illustration purposes, issues highlight activities pertaining to a Morningstar, Inc. portfolio invested in accordance with a current income and income growth from stocks strategy.
Featured Posts
Dividend Hikes for Lamar and Genuine Parts -- The Week In Dividends 2017-02-24

DividendInvestorâ„  focuses on the activities of portfolios of Morningstar, Inc. that are invested in accordance with the Dividend Select strategy. These portfolios are managed by Morningstar Investment Management LLC, a registered investment adviser, who manages other client portfolios using these strategies.

From the DividendInvestor news file this week:

It was a relatively eventful week for holdings in Morningstar's Dividend Select portfolios. Kraft Heinz KHC withdrew its bid for Unilever UL over the weekend, which sent shares of other packaged goods companies--including Dividend Select holding General Mills GIS--back up following a brief swoon late last week when news of the bid first surfaced.

On Tuesday, Genuine Parts GPC reported earnings. The stock price took a bit of a hit due to management's weak earnings-per-share guidance for 2017. The firm also announced 2.6% increase in its quarterly dividend, however, bringing the quarterly rate to $0.675 and forward yield to 2.7% as of today's close. Also on Tuesday, United Parcel Service UPS held its annual analyst day and provided guidance through 2019 that appears broadly in line with Morningstar analysts' expectations. The stock price was initially up, but subsequently dropped due to an analyst downgrade and finished the week roughly unchanged.

Southern Company SO reported earnings on Wednesday, with management reaffirming its 2017 expectations and 5% long-term EPS growth target. Welltower HCN reported decent earnings for the fourth quarter of 2016, but Morningstar reduced its fair value estimate for the firm from $76 to $71, based on weakness in the senior living market.

On Thursday, Lamar Advertising LAMR followed through on its pledge to raise its annual payout to $3.32 per share. The $0.83 quarterly payout is up 9.2% versus the prior rate, which translates into a 4.5% forward-looking yield as of today's close. As noted in the February issue of DividendInvestor, Lamar has one of the best balance sheets among its peer group, and the firm is passing along increases in its adjusted funds from operations directly to shareholders via dividend hikes.

Realty Income O reported fourth-quarter and full-year 2016 results in line with expectations, as did Alliant Energy LNT, with full-year results that were consistent with the expectations of Morningstar analysts.

Please see new analyst notes below for Alliant, Genuine Parts, Realty Income, Southern Company, and Welltower, along with a general note on oil prices.

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor


News and Research for Dividend Select Portfolio Holdings

Regulatory Activity Key for Alliant Energy in 2017-18
by Andrew Bischof, CFA | 02-24-17

We are reaffirming our $34 per share value estimate after Alliant Energy reported full-year operating earnings of $1.88 compared with $1.79 in the year-ago period. Full-year results were consistent with our expectations. Management initiated 2017 EPS guidance of $1.92-$2.06, in line with our $2.01 estimate. We forecast 6.8% annual earnings growth through 2020, in line with management's 5%-7% target.

Alliant's Interstate Power & Light utility will seek recovery for key investments, particularly the company's Marshalltown generation station and renewable energy additions. Importantly, IPL will receive interim rates with a 10% base allowed return on equity and earn an 11% allowed ROE on the approved Marshalltown facility. New rates would be implemented in the first quarter of 2018, and we expect continued constructive regulatory treatment in Iowa.

Alliant's Wisconsin Power & Light utility received a supportive decision for its 2017-18 retail rate review, with a $9 million annualized rate increase at its retail electric and gas units. The decision allows for rate base increases in 2017 and 2018 with an allowed 10% return on equity, above recent allowed ROE granted to other U.S. utilities. This continues to support our view that Wisconsin remains one of the most constructive regulatory jurisdictions for utilities.

Alliant Energy modestly increased its 2017-20 capital program $200 million to $5.6 billion due to renewable energy spending in Iowa. Alliant Energy had previously received approval at IPL for its proposed 500 megawatt wind additions in Iowa, with a $1,830 per kilowatt cost cap and 11% allowed return on equity. The additional spending does not have a material effect on our fair value estimate but supports our earnings growth outlook.

Genuine Parts' Outlook Unchanged After On-Track Fourth Quarter, Soft 2017 Guidance
by Zain Akbari, CFA | 02-20-17

Our $87 per share fair value estimate for narrow-moat Genuine Parts should not change significantly after it reported on-track fourth-quarter earnings, though management's 2017 guidance disappointed. We anticipate that an adjustment related to the time value of money should largely offset the impact of any modest softening in our short-term outlook, with our long-term expectations (calling for 5% top-line expansion and an 8% average operating margin through 2025) still intact.

In 2016, Genuine Parts posted $15.3 billion in revenue and $4.59 per share of diluted EPS, consistent with our targets, though its 2017 guidance--3%-4% sales growth and $4.70-$4.80 diluted EPS--lags our respective expectations of 4.2% and $4.94 (adjusted for share repurchases). Despite a modest decline after the earnings announcement, we still believe the stock is trading above its fair value. We suspect the discrepancy is due to our more modest view of the firm's ability to drive long-term operating margin growth beyond the high single digits, particularly given its exposure to the declining office product segment, as well as structural limits to its automotive unit's ability to capture more lucrative DIY sales (owing in part to GPC's store base, which is skewed to favor commercial clients).

The quarter featured signs of a turnaround in the industrial unit (about 30% of 2016 sales), with the 4% revenue uptick representing GPC's strongest performance since 2014. We anticipate that favorable macroeconomic factors should lead the unit to return to top-line growth in 2017 for the first time since 2014, an outcome that would strengthen a unit that features considerable competitive advantages born of GPC's reputation for a high standard of service, as well as the firm's more favorable cost position versus subscale peers. In the long term, we continue to expect 4.5% segment top-line growth per year against an 8.5% stabilized operating margin (versus 2016's 7.3%), driven largely by cost leverage.

Realty Income Reports 2016 Results; A Premium Valuation for Stable Operations
by Edward Mui | 02-23-17

Realty Income reported fourth-quarter and full-year 2016 results in line with our expectations for the steadily performing company. We are maintaining our $51 per share fair value estimate and no-moat rating. Economic occupancy levels were marginally down year over year, to 98.9% from 99.2%, while same-store rents increased 1.2% for the year, mainly on modest contractual increases. The company's appetite remained strong for acquisitions, investing $1.86 billion for the year and $786 million for the quarter, record volumes for Realty Income, at a blended 6.3% capitalization rate for the year, also historically low. Management expects similar activity in 2017, with another $1 billion in currently identified potential acquisitions, fueling guidance of roughly 5.2% adjusted funds from operations per share growth.

Despite positive balance sheet and portfolio health, Realty Income remains the most expensive REIT under our coverage at approximately 1.2 times our fair value estimate. Management has expressed that the acquisition environment "remains a very efficient marketplace," in line with our view that there is virtually no room to find especially good, value-accretive deals. In addition, overall market investment-grade property capitalization rates have ranged from 5% to high-6%, consistent with the firm's recent acquisitions as fourth-quarter purchases averaged a historically low 6.1%. Given that shares trade at an even lower, implied 5% capitalization rate, we think investors continue to pay a premium for the steady operating performance the firm's diversified, triple-net leased assets deliver. However, we also believe these assets, which generally have especially long-term leases with particularly modest rent growth, are acutely vulnerable to the potentially increasing interest rate and inflationary environment when it comes to valuation. We think investors should be cautious about this dynamic, or be comfortable contributing to the firm's low cost of equity.

Southern Reports Strong 2016 Results
by Charles Fishman, CFA | 02-22-17

We are reaffirming our $48 per share fair value estimate and stable, narrow moat ratings for Southern Company after it reported strong 2016 earnings, reaffirmed 2017 guidance, and provided updates on its two major generation projects. Earnings in 2016 excluding special items were $2.89 per share, equal to 2015 results and above our estimate of $2.84. Results were $0.01 below the consensus estimate.

Southern reaffirmed its 2017 earnings guidance of $2.90-$3.02 per share, and our $2.97 estimate is unchanged. The company also reaffirmed its five-year 5% annual EPS growth rate, above our more conservative 4% assumption. We expect dividend increases in line with our annual earnings growth assumption.

We are reaffirming our outlook regarding the financial impact from the Kemper (Mississippi) integrated gasification plant and Vogtle (Georgia) nuclear plant projects after management's updates. Management's comments on the financial struggles of Toshiba, parent of Vogtle contractor Westinghouse, are consistent with our thoughts. Southern management believes it is unlikely Toshiba will walk away from Vogtle due in large part to the significant guarantees provided by the company that is 20%-owned by the Japanese government. Management also believes it has significant contingency plans to take over the project if Toshiba does file bankruptcy. Although Toshiba-Westinghouse remains a concern, we believe the risks are manageable.

Kemper is also a concern. Upcoming rate cases will determine how much of the cost overruns will be borne by shareholders versus customers. We also believe these risks are manageable due in large part to the strong regulatory and government relationships management has built over many years.

Welltower Reports 2016 Results; Cleaning Up With Extra Prudence Into 2017
by Edward Mui | 02-22-17

Welltower reported fourth-quarter and full-year 2016 results, achieving 3% overall same-store net operating income growth across the portfolio and none of its segments below 2.4%. However, we are lowering our fair value estimate to $71 per share from $76 because of an updated outlook for moderating performance of the company's seniors housing operating portfolio, partially offset by savings on general and administrative expenses. Despite being relatively insulated, Welltower predicts its same-store seniors housing operating portfolio income growth to modestly slow to 1.5%-3.0% in 2017 from continued outsized operating expense increases and new supply effects, which management believes may start to subside by 2018. The firm's outpatient medical office portfolio is expected to remain a steady performer in 2017, as is Welltower's triple-net portfolio, including senior housing and post-acute assets. Management guidance calls for 2%-3% same-store income growth and improved operator coverage, momentum that positions the firm well, in our view.

After closing the remainder of previously announced asset sales at the beginning of the year, Welltower will still have a full plate with its core business. With even more uncertainty about healthcare reform, active asset and portfolio management will play an even greater role in the firm's performance. Welltower has made it clear that this includes a strategy that focuses on building deep relationships with premier operators and service providers. Not only have existing relationships provided the firm with the majority of its investment opportunities, often off-market, but partnerships with leading regional providers create an opportunity for Welltower to be a preferred real estate partner in a more interconnected, coordinated healthcare system where we think the strong will only get stronger. Although any reform of the Affordable Care Act is still unclear, we believe this quality-based strategy will prove prudent in any scenario.

Danger Zone: Coming Shale Growth Poses Major Risks to Oil Prices
by Stephen Simko, CFA | 02-22-17

OPEC's production cuts and strong demand growth have 2017 crude fundamentals in their best shape since oil prices crashed two years ago. The consensus outlook is that fundamentals are now strong enough to remain healthy even after OPEC's cuts lapse. This might have been possible a few months ago, but the odds of this scenario playing out have markedly worsened since. The reason is that major increases in shale activity now have U.S. production firmly on a path of rapid growth, even if rig counts don't increase further. This growth plus the eventual supply increases from OPEC is likely more than enough to erase any market tightness and throw crude markets back into oversupply.

What's obvious by now is that current oil prices provide economics that are very attractive to the major U.S. shale producers. This has created the conditions that will allow tight oil to grow rapidly and is a reality that even looming cost inflation will not change. Unless shale producers become more disciplined or OPEC resigns itself to permanently ceding share to the U.S., oil markets have major problems looming. Neither of these is likely to occur.

Nonetheless, there remains a good chance that oil prices could rise in the coming months if OPEC compliance remains high or production cuts are extended. Because surging shale output won't truly begin to move the supply needle until the second half of the year, these would allow for further inventory draws. This could bolster the perception that oil market fundamentals are improving. In reality, oil prices above current levels at any point in the coming months would in fact be pouring gasoline on the flames since it would certainly encourage even higher levels of U.S. shale investment. Nothing is certain in the world of oil, but clouds appear to be gathering on the horizon. We our maintaining our forecast for strong oil prices in 2017, with West Texas Intermediate averaging $58 per barrel, followed by a meaningful pullback to $45 in 2018.


©2017 Morningstar, Inc. All rights reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. The information contained in this document is the proprietary material of Morningstar, Inc. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, Inc., is prohibited. All data presented is based on the most recent information available to Morningstar, Inc. as of the release date and may or may not be an accurate reflection of current data.  There is no assurance that the data will remain the same.

Disclosure:
The commentary, analysis, references to, and performance information contained within Morningstar® DividendInvestorâ„ , except where explicitly noted, reflects that of portfolios owned by Morningstar, Inc. that are invested in accordance with the Dividend Select strategy managed by Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc.  References to “Morningstar” refer to Morningstar, Inc. 

Opinions expressed are as of the current date and are subject to change without notice. Morningstar, Inc. and Morningstar Investment Management LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use.  This commentary is for informational purposes only and has not been tailored to suit any individual. 

The information, data, analyses, and opinions presented herein do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Please note that references to specific securities or other investment options within this piece should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment.

This commentary contains certain forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.   

Investments in securities are subject to investment risk, including possible loss of principal.  Prices of securities may fluctuate from time to time and may even become valueless.  Securities in this report are not FDIC-insured, may lose value, and are not guaranteed by a bank or other financial institution. Before making any investment decision, investors should read and consider all the relevant investment product information.  Investors should seriously consider if the investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision. There can be no assurance that any financial strategy will be successful.

Common stocks are typically subject to greater fluctuations in market value than other asset classes as a result of factors such as a company's business performance, investor perceptions, stock market trends and general economic conditions.  

All Morningstar Stock Analyst Notes were published by Morningstar, Inc. The Week in Dividends contains all Analyst Notes that relate to holdings in Morningstar, Inc.'s Dividend Select Portfolio. Morningstar’s analysts are employed by  Morningstar, Inc. or its subsidiaries.  In the United States, that subsidiary is Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Commission.

David Harrell may own stocks from the Dividend Select and Dividend Select Deferred portfolios in his personal accounts.

 
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