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
Some Thoughts on Compass Minerals -- The Week In Dividends 2017-03-24

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:

We've had a number of requests for an update on Compass Minerals CMP. Here are some current thoughts from Michael Hodel, the portfolio manager of Morningstar's Dividend Select portfolios:

Compass Minerals has been the clear laggard in the Dividend Select portfolios thus far in 2017, with the stock down about 16%. It's no secret why the shares have taken a pounding: winter has failed to pound much of the upper Midwest for the second consecutive year. Highway deicing salt inventories look to remain elevated, punishing sales volume and pricing. Compass is now the cheapest stock relative to Morningstar's fair value estimates in the portfolios.

Here in Chicago, a record first snow fall in December was followed by the lowest January/February total on record (less than one inch!). This chart plots the total cumulative snowfall across five major cities around the Great Lakes (Chicago, Milwaukee, Detroit, Minneapolis, and Toronto) against Compass' deicing salt shipments for each season since the firm came public. While this measure of the weather isn't perfect (it ignores timing, ice accumulation, etc.), it does provide a strong indication that this year's weather will not be kind to Compass' salt business. Climate change may be a contributor to the low snow totals this year, but I am inclined to believe cyclical patterns are the bigger factor. After all, the prior record low January/February snow totals in Chicago were set in 1931 and 1922.

At 4.3%, Compass' yield is as high as it's been in more than a decade, which I think likely reflects the other side of the firm's business: fertilizers. Compass acquired its way into the Brazilian market via a two-step deal as completed in late 2016. This purchase and heavy capital spending over the past couple years have caused the firm's debt load to increase substantially, from about $360 million, net of cash, at the end of 2014 to $1.2 billion currently. The agricultural commodity market isn't hot either, which has caused profitability in this segment to sag considerably. Additional leverage and weak results are a recipe for horrible stock price performance.

In my view, the salt business remains as well positioned as ever, despite the recent "bad" weather. The U.S. fertilizer business is also solid. The Brazilian deal, however, looks like an unforced error to me. While a strong rebound in the Brazilian economy and/or currency could drive strong growth, I don't think it was worth the debt, and resulting increase in volatility around cash flow, taken on. Compass doesn't face any near term liquidity issues, so I am happy to sit tight and wait for better conditions. But my enthusiasm for the stock is limited.
-- Michael Hodel, CFA, 03-24-17

In other news, Ventas VTR issued $800 million in new debt at very attractive rates this week, with a 3.85% interest rate on the 10-year portion. The new debt gives the firm capital to fund a loan made to a partner that is acquiring hospital properties, which should generate a nice spread and provide an opportunity to do additional asset deals in the future.

General Mills GIS released third-quarter results this week that were in line with the firm's updated outlook from last month -- please see a new analyst note from Erin Lash below. Also below is a general note on utilities, which mentions multiple Dividend Select portfolio holdings.

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor


News and Research for Dividend Select Portfolio Holdings

Tepid Sales Trends Persist in General Mills' 2Q; Shares Fairly Valued
by Erin Lash, CFA | 03-21-17

General Mills' third-quarter results (a 5% decline in organic sales, a 20-basis-point uptick in adjusted gross margins to 35%, and a 100-basis-point increase in adjusted operating margins to 16.9%) generally aligned with the updated outlook provided last month. As has been the case, management again attributed the bulk of the retraction to lackluster sales within its yogurt and soup operations--which we estimate in combination account for around one fifth of its total sales--as evidenced by the 7% top-line erosion (driven by a 9% shortfall in volumes) of the North American retail segment (two thirds of sales).

Beyond ensuring that new products are aligned with evolving consumer trends in the face of intense competitive pressures, we still think its tepid sales performance is being hampered by the decision to ratchet back brand marketing--media and advertising spend slipped 8% in the third quarter, following a 20% drop in the second quarter. As we've articulated previously, we portend that a pullback in brand spending has artificially inflated profit levels across the industry, and we viewed recent outsize profit gains as unsustainable. From our vantage point, firms throughout the space will need to bolster brand spending to offset intense competition (while also ensuring that its brand intangible assets persist longer term), a sentiment to which General Mills has provided credence. In this vein, our forecast calls for marketing to exceed 5% of sales the next 10 years, 40 basis points north of its average the past three years.

While we intend to review our assumptions, we don't foresee a change to our $58 fair value estimate or our longer-term outlook--sales gains of 3% and operating margins around 20%, about 400 basis points above the historical five-year average (reflecting efforts to extract inefficiencies). Shares trade in line with our valuation, and we'd suggest investors await a larger margin of safety before building a position in this narrow-moat name.

President Trump Can't Thwart Utilities' Green Progress
by Andrew Bischof, CFA | 03-21-17

Anti-environment rhetoric might be trending now, but even our most conservative forecasts for the next eight years show U.S. renewable energy capacity doubling, gas continuing to steal power generation market share from coal, and carbon emissions falling near Obama administration-era targets.

Utilities' pent-up infrastructure investments could usher in a golden age of growth while President Donald Trump is in office. We forecast annual earnings and dividend growth hitting 8% for some utilities with constructive state regulatory relationships supporting new renewable energy, transmission, and distribution investment. At the federal level, we expect the Federal Energy Regulatory Commission, Secretary of State Rex Tillerson, Treasury Secretary Steve Mnuchin, and Energy Secretary Rick Perry will influence utilities policy more than Trump.

During the next four to eight years, we expect state renewable portfolio standards will keep U.S. renewable energy growth in line with that achieved during the Obama presidency. Supportive tax policy, pro-manufacturing initiatives, and companies trying to reduce their carbon footprint represent upside to our base forecast. Furthermore, we expect gas generation efficiency improvements and low-cost gas to continue making it difficult for aging coal generators to compete. Our forecasts show renewable energy and gas generation growth should keep carbon emissions falling toward targets in the U.S. Clean Power Plan and the Paris Agreement despite Trump's efforts to abandon both.

Best positioned are large-cap utilities with good regulatory relationships. Dominion Resources, Duke Energy, American Electric Power, and Southern Co. have billions of dollars to invest in gas and electric infrastructure. NextEra Energy and Xcel Energy should widen their lead as the top U.S. renewable energy companies. On average, we expect these six utilities to increase earnings and dividends 6% annually at least through the next election cycle. 

©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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