About the Editor

Josh Peters 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.

Josh is senior portfolio manager for Morningstar Investment Management LLC, a federally registered investment adviser and a wholly-owned subsidiary of Morningstar,Inc. At Morningstar, Josh has specialized in dividend investing and created the DividendInvestor newsletter in early 2005.

Josh holds a BA in economics and history from the University of Minnesota Duluth and is a CFA charterholder. Josh is also the author of "The Ultimate Dividend Playbook", a book released by John Wiley & Sons in January 2008.

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
Josh Peters, CFA
Editor, Morningstar DividendInvestor
Senior Portfolio Manager, Dividend Select Portfolios
Josh Peters 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
Goodbye Josh, Welcome Michael -- The Week in Dividends, 2016-12-02

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.

This is a tough update to write, as Josh Peters, who has been at the helm of DividendInvestor since its inception in 2005, has left Morningstar for another investment management opportunity. A farewell message from Josh is below.

But I couldn't happier to introduce Michael Hodel, CFA, as Morningstar Investment Management LLC's new portfolio manager for the Dividend strategy. Michael is a Morningstar veteran (18 years!) with an impressive history within Morningstar, Inc.'s equity research department, where he has served in a number of senior roles, most recently as head of the Economic Moat committee.

Michael knows the Morningstar approach to stock research and security selection inside out, and I can't think of a better person to take the reins from Josh. You'll be hearing much more from Michael in the cover story of the next issue of DividendInvestor, but I can assure you that the objective of the Dividend Select portfolios remains unchanged: to seek value from the receipt of cash dividend payments and, over the long run, via capital appreciation that can be encouraged by dividend increases.

A Note from Josh
The time has come for me to bid you all a fond farewell. For the last 12 years, I've had the second-best job I could imagine. The only thing that could have lured me away was the opportunity to manage a mutual fund. In an unexpected and rapid turn of events, just such an opportunity recently arose and I couldn't turn down the chance to fulfill that lifelong goal.

DividendInvestor is a product of many hands; mine is the only pair leaving. In addition to leaving behind Morningstar's roughly 100 equity analysts, I am delighted to state that responsibilities for Morningstar Investment Management LLC's Dividend strategy are passing into excellent hands. David Harrell has already assumed most of the newsletter's writing tasks with insight and grace, and I'm deeply grateful for his help in putting together the last several issues. Effective December 1, Mike Hodel has taken the reins as manager of the DividendInvestor portfolios. I've known Mike since 2000 and found him to be an insightful analyst, a sage manager as chairman of Morningstar, Inc.'s Economic Moat committee, a passionate personal investor, and an all-around great guy.

I have been honored and humbled by the support of thousands of DividendInvestor subscribers since the publication launched in January 2005. There is a certain risk in this business of regarding investments and returns as abstractions, but I've never forgotten that there was real money--real opportunities, real risks, and real people's futures--on the line each day. I have no doubt the same spirit of practical and prudent service will continue to drive Morningstar's Dividend strategy for many years to come.
-- Josh Peters, CFA

I realize, of course, that this is surprising news, especially for those of you who have followed Josh's approach and insight for a number of years. But I'm looking forward to working with Michael and urge everyone to welcome him aboard.

In portfolio-related news, Wells Fargo WFC announced on Thursday that it is formally separating its chairman and CEO roles, and an updated analyst report for AmeriGas Partners APU is below.

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor

News and Research for Dividend Select Portfolio Holdings

New Morningstar Analyst Report for AmeriGas Partners
by Andrew Bischof, CFA  | 12-01-16

Investment Thesis
AmeriGas is the nation's largest retail propane distributor and has the hallmarks of a great business despite a flat to negative growth outlook for propane. Returns on capital have been strong despite a declining usage base. High switching costs for customers, delivery economies of scale, and a wide footprint allow AmeriGas to roll up smaller competitors efficiently. This is even more critical now that the business has expanded and conservation bites into a larger base.

AmeriGas' proven ability to add value from acquisitions will help drive a continued rebound in cash flows. Significant headwinds from the unusually warm 2016 winter hurt prior-year results and stretched AmeriGas' distribution coverage. AmeriGas will need to improve per-gallon margins and find value-accretive acquisitions to support modest annual distribution growth target while maintaining an average distribution coverage above 1.1 times. We project annual 4% EBITDA growth from 2016-21.

AmeriGas' expanded size will make it more difficult to offset internal volume declines, which we estimate at 2.5% per year, and there's a risk the company won't find suitable targets to achieve the growth and performance necessary to drive distribution growth. But management has a very impressive track record, and the industry remains highly fragmented. Investors comfortable with the tax implications of a master limited partnership should give AmeriGas a hard look when shares trade below fair value.

Our fair value estimate for Amerigas is $48 per unit.

We forecast 30 million gallons per year in acquisitions outside the Heritage volumes, and project 2.5% average per-gallon margin growth per year in 2017-21. We think it will be difficult for AmeriGas to maintain volumes, but the company has ample pricing power to compensate, as demonstrated by 5% growth in per-gallon gross margins during the past five years. We project 1.5% growth in operating expense per gallon through 2021 as the firm has demonstrated its ability to keep these expenses in check, supporting returns on invested capital.

We assume a 9% cost of equity and an 8.4% weighted average cost of capital in our discounted cash flow valuation. Our cost of equity assumption is in line with the rate of return we expect investors will demand of a diversified equity portfolio, reflecting AmeriGas' average degree of operating leverage and the balance between a lower sensitivity to the economic cycle and a high exposure to weather-driven product usage.

Risks to AmeriGas' performance include warm weather and high propane prices, both of which dampen demand. Exorbitant energy prices also increase the likelihood of customers becoming delinquent in their payments. The firm has a decent amount of financial leverage, making it vulnerable if weather or prices remain unfavorable for an extended period. Another concern is whether management can keep costs low after hitting synergy targets from recent deals. Given its increased size, there is a risk that AmeriGas will struggle to find enough targets to offset internal declines. Finally, any shortcomings from its hedging program could result in severely depressed profits, though the company is conservative on this front.

Historically, AmeriGas' leverage with customers and pricing power has been impressive, but we are wary of a shift in consumer attitude if propane prices remain high and distributor margins continue to expand. The dramatic drop in wholesale prices along with oil's fall has eased the pressure on this front. Opaque pricing practices have led to some lawsuits in the past. While these may not force material changes, there is a chance that distributors will have to be more clear with their pricing, which could erode their ability to retain customers over cheaper competitors.

Overall, we assign AmeriGas a Standard stewardship rating. From a strategic perspective, AmeriGas' management team has proved adept at managing in a tough and competitive industry, generating excellent returns on invested capital despite declining volumes and successfully executing on growth through acquisition. The company has walked a delicate balance between squeezing customers to grow margins and maintaining a moderately positive reputation with customers.

AmeriGas' general partner, which is responsible for managing the limited partnership, is owned by utility conglomerate UGI. CEO Jerry Sheridan, who had previously served in both the COO and CFO roles at AmeriGas, has done an excellent job of managing AmeriGas' steady, high-ROIC cash flow machine. We don't love that management is compensated with UGI rather than AmeriGas stock. Further, because of its structure as a master limited partnership and UGI's stake, unitholders have minimal influence in the future of the company.

AmeriGas Partners is the largest retail propane marketer in the United States. The company sells about 1.5 billion gallons of propane annually to 2.4 million customers across a diverse footprint in all 50 states. AmeriGas also sells, installs, and services propane appliances, including heating systems. The general partner is AmeriGas Inc., which is a wholly owned subsidiary of UGI.

Financial Health
Like its close competitors, AmeriGas carries a fair amount of leverage. Storage tanks--the lion's share of physical assets--aren't as attractive as collateral. Total debt/EBITDA was 4.4 times at the end of 2016, and we expect continued improvement through our forecast, averaging 3.6 times through 2020.

At year-end fiscal 2016, AmeriGas' total debt/capital stood at 71%. We expect that figure to grow modestly through our explicit forecast period. AmeriGas pays out more in distributions than the firm earns in income, meaning it will have to issue new units to maintain a stable degree of leverage on its balance sheet. We expect Amerigas distribution coverage will remain above 1.0 through our forecast, assuming normal weather.

©2016 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.

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.

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

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