Coca-Cola KO increased its quarter dividend rate to $0.42 from $0.41, a 2.4% increase, starting with the dividend that will be paid on April 1. Genuine Parts GPC raised its quarterly rate to $0.815 from $0.79, a 3.2% increase, for its April 1st dividend. And Omnicom's OMC next dividend, paid on April 8, will reflect a 7.7% raise, as its quarterly rate is rising to $0.70 from $0.65. Based on today's closing prices, the three stocks now have forward yields 3.4%, 3.2%, and 4.1%.

Please see new analyst notes and updates below from Morningstar Research Services for Caterpillar CAT, Compass Minerals CMP, Dominion Energy D, Enterprise Products Partners EPD, Genuine Parts, McDonald's MCD, Omnicom, Ventas VTR, and Wells Fargo WFC.

Best wishes,

David Harrell
Editor, Morningstar DividendInvestor

Caterpillar's Strengthening End Markets Should Boost Sales and Margin Expansion Opportunities
by Dawit Woldemariam | Morningstar Research Services LLC | 02-18-21

After taking a fresh look at Caterpillar, we've increased our fair value estimate to $158 per share from $154 to reflect stronger end-market performance over the next five years, particularly in construction and energy markets. In construction, we expect Caterpillar will benefit from increased infrastructure spending in the U.S. There is significant pent-up road construction demand, with many urban roads in relatively poor condition. U.S. legislation to address aging infrastructure is likely in the near term, as both sides of the political aisle have presented plans. In energy, we think oil and gas capital expenditures will increase, improving from COVID-19 lows. That said, we think mining capital expenditure growth will be limited, as fixed asset investment growth in China will likely be slower than in years past.

Caterpillar benefits from a wide economic moat, underpinned by intangible assets and switching costs. The company consistently provides incredibly reliable, high-quality products, while offering the lowest total cost of ownership. Its products employ better efficiency for customers compared with competitors, allowing them to spread higher upfront costs over longer equipment lives. Additionally, its exclusive dealer network reduces machine down-time by giving customers priority on proprietary aftermarket parts and services. Caterpillar's opportunities to improve its competitive positioning are about evenly balanced with potential threats, resulting in a stable moat trend rating.

We think Caterpillar will see a healthy recovery in 2021, increasing sales by about 17% year over year, largely due to strengthening end markets. We expect operating margins will improve to 13%, benefiting from positive sales mix (increased sales of high-feature equipment) and higher-margin aftermarket sales. Longer term, we project Caterpillar to grow sales approximately 9% to nearly $61 billion in 2025, with our midcycle operating margin coming in at nearly 15%.

Compass Shares Plunge on Fourth-Quarter Results and Guidance; We See Value and Maintain $80 FVE
by Seth Goldstein, CFA | Morningstar Research Services LLC | 02-17-21

Compass Minerals' operational turnaround is still a work in progress as it reported disappointing fourth quarter results. Lower salt prices and volumes combined with lower prices and higher unit production costs in the North American fertilizer business weighed on profits as adjusted EBITDA declined over 31% year on year. We had largely expected the lower profits as Compass had previously reported fourth quarter salt volumes and its expectation for deicing salt price changes in the 2020-21 winter. With our long-term outlook intact, we maintain our $80 per share fair value estimate and wide moat rating for Compass Minerals.

Compass shares were down nearly 8% on the day as the market renews its skepticism for the company's turnaround plan. However, we remain optimistic that salt profits will be fully restored. As such, we view shares as attractive with the stock trading firmly in 4-star territory.

Our optimism for the salt business comes from our view that Compass will be able to continue to reduce unit production costs, leading to profit margin expansion over the next several years. During the fourth quarter, we calculated a 4% decline in unit costs versus the prior year quarter, which marks the third straight quarter of a unit cost decline.

We expect prices for the 2021-22 winter will rise due to more favorable winter weather so far this year. Deicing salt price movements tend to be determined by the harshness of the previous winter. Following the mild winter in 2019-20, prices fell as producers were left with excess salt inventories. However, following a normal or harsher winter, prices tend to rise. Further, one of Compass' competitors recently announced it will permanently shut down a salt mine, which should reduce supply. As such, we expect higher prices and further cost reductions will boost salt EBITDA margins to the low-30% range in 2022.

Offshore Wind and Solar Drive Dominion Energy's Earnings Growth; Reaffirming Fair Value Estimate
by Charles Fishman, CFA | Morningstar Research Services LLC | 02-16-21

We are reaffirming our $81 per share fair value estimate after Dominion Energy reported in-line 2020 earnings, established a 2021 earnings guidance range with a midpoint slightly lower than our estimate and consensus, and rolled forward its 6.5% long-term EPS growth target by one year. This was the first detailed long-term guidance since the announced sale of the midstream assets to Berkshire Hathaway Energy last year.

We had forecast strong earnings growth for Dominion Energy Virginia in 2023 and 2024, as investments in offshore wind and solar were recognized in rates. Management has targeted over $11 billion of renewable energy investments over the next five years. The impact was stronger than anticipated, and we now estimate annual earnings growth over 10% versus our previous 7.5% estimate ending in 2024. We project DVE will contribute 62% of consolidated operating earnings in 2025 versus 58% last year.

The story was similar for the Gas Distribution segment. Management has targeted $6.5 billion of capital investment, of which about two-thirds is growth. We estimate this will drive 10% annual earnings growth over the next five years, up from our previous 6.2% estimate. We project the segment will contribute 18% of consolidated operating earnings in 2025, 100 basis points higher than 2020.

Partially offsetting the stronger growth of Dominion's two largest segments were Dominion Energy South Carolina and Contracted Assets. We now estimate these segments' earnings will grow 3.7% and 4% annually, respectively, versus our previous estimates of 4.5% and 5%. In addition, management's new five-year plan has more parent-level financing, increasing Corporate earnings drag.

Our $4.95 EPS estimate for 2025 implies 6.5% annual EPS growth, in line with management's target. Although we have adjusted the growth rates of Dominion's four operating segments and the parent drag, the changes were for the most part offsetting and our fair value estimate was unchanged.

Petrochemical Growth Opportunity for Enterprise Products Partners
by Stephen Ellis | Morningstar Research Services LLC | 02-17-21

It may be too early to call Enterprise Products Partners' oil and gas businesses "legacy" businesses, but perhaps that day is coming. The prospects for midstream investors are potentially unnerving, and we think the better management teams are laying the groundwork for future growth that fully incorporates the rise of renewables and ongoing energy transition, a term that even Enterprise reluctantly acknowledges. While Enterprise remains on the offense with its oil and gas efforts, we think its petrochemical business offers some of the best near- to medium-term growth prospects as the partnership plans to expand the gross operating margin for the business to $1.3 billion in 2024 from an estimated $764 million in 2020. We think this growth opportunity is unique within our U.S. midstream coverage, as no other firm has petrochemical investments. The growth doesn't come without risks, as there are ample environmental, social, and governance considerations, which Enterprise must manage better, in our view, but we think the upside is certainly compelling.

If investors start to value Enterprise's petrochemical growth similar to commodity chemical valuations, we believe the additional upside to Enterprise's valuation would be about $5 per unit, or 18%.

Enterprise faces new ESG risks with a shift toward petrochemicals. Analysis by Sustainalytics (a Morningstar company) points to a large ESG risk-management gap between Enterprise Products Partners and chemical peer Dow. As a result, we believe Enterprise must improve its ESG risk-management approach, particularly around employee and operational safety, as well as carbon emissions management.

Enterprise's hydrogen business could offer new growth opportunities as governments pursue renewable hydrogen efforts, and Enterprise is better positioned than most to capture these growth opportunities.

Solid End to 2020, Lackluster 2021 Guidance Do Not Alter Our Long-Term View of Genuine Parts
by Zain Akbari, CFA | Morningstar Research Services LLC | 02-17-21

Our $95 per share valuation of narrow-moat Genuine Parts should not change much after the company posted stronger-than-expected fourth-quarter earnings offset by soft 2021 guidance. With the deviations from our targets reflecting transitory pandemic-related factors, our long-term outlook is intact (low- to mid-single-digit top-line growth, mid- to high-single-digit adjusted operating margins). We suggest investors await a greater margin of safety.

For the year, Genuine Parts reported $16.5 billion in sales and $5.27 in adjusted diluted EPS, the latter of which beat our $5.12 target as the automotive and industrial segments saw greater-than-expected margins (we underestimated the company's ability to cut costs further as COVID-19 case counts rose). Management set 2021 guidance of 4%-6% sales growth and adjusted diluted EPS of $5.55-$5.75. Our prior forecasts were at the top end of the revenue guidance and at $5.94 by the latter metric. We suspect the EPS differential stems from a different take on the speed with which the roughly $300 million in temporary cost cuts Genuine Parts made in 2020 will reverse as conditions normalize.

We are encouraged by signs of normalization in the domestic automotive unit, which returned to growth after many challenges in a 2020 that saw industry do-it-yourself sales spike. With around 80% of its normalized domestic automotive revenue coming from the professional unit (and exposure to heavy-duty and municipal vehicle fleets), Genuine Parts has been least suited to capitalize on the pandemic's DIY tailwind. The segment overall (roughly two thirds of the firm's sales) should recover as the economy normalizes, with our 2021 sales forecast consistent with management's 4%-6% growth target.

The industrial unit should also rebound in 2021 as the economy normalizes and client capital projects deferred during the pandemic are resumed. Consequently, we suspect management's 3%-5% sales growth target for the segment could prove conservative.

McDonald's Shares Look Compelling as Digital Initiatives, Drive-Thru, and Delivery Drive Recovery
by Sean Dunlop | Morningstar Research Services LLC | 02-16-21

We maintain the core elements of our thesis regarding wide-moat McDonald's, but are modestly lowering our fair value estimate to $231 from $236 per share as we incorporate slower refranchising activity and unit growth in the back half of our forecast. Nonetheless, we remain impressed by management's agility during the pandemic, and believe that the firm's competitive position has stabilized on the back of improving market share, transaction volume, and average check size. While we acknowledge that competitive headwinds persist, the firm has addressed the biggest menu quality concerns that saw its share in the United States limited-service restaurant market fall from 16.6% in 2012 to 14.5% in 2016, and we highlight a renewed focus on leveraging marketing and technology investments while simplifying menu offerings represents a return to the company's core competencies.

Our wide moat rating is supported by the firm's brand intangible asset, demonstrated through pricing power (with average check increasing more quickly than food and labor cost inflation), a healthy network of franchisees, with nearly 20% cash-on-cash returns (as we calculate them) outpacing most publicly-traded QSR peers, and successful international replication, with the company operating more than 25,000 non-U.S. stores across 118 countries, some 65% of the company's store footprint.

We believe that the firm also maintains a cost advantage, with $93 billion in systemwide sales in 2020 nearly doubling the sales of its closest competitor, Yum Brands. The firm's scale allows it to benefit from lower procurement costs, fixed-cost leverage in general and administrative spending, and lower pricing on third-party delivery platforms.

While near-term headwinds persist and we anticipate an uneven recovery, McDonald's drive-thru penetration (65% of global stores) and delivery enablement (75% of global stores) should allow it to weather the storm, driving nearly 10% average top-line growth the next two years.

Strong Q4 Results Further Support Our Expectation of a Turnaround in the Omnicom Stock
by Ali Mogharabi | Morningstar Research Services LLC | 02-18-21

Omnicom's fourth-quarter results beat our expectations along with the FactSet consensus estimates as impact of the pandemic is slowly lessening. While the firm did not generate organic growth in any of its markets, it expects the easier comps in the second quarter along with an economic recovery in the second half of 2021 to drive full-year organic growth, in line with our projections. The firm's 7.7% increase in the quarterly dividend payout for in 2021, yielding around 4% at the current stock price, further demonstrates management's confidence. We did not make significant changes to our model and plan to slightly increase our $79 fair value estimate. At current levels, the stock remains attractive as expectations of an economic recovery are not yet priced in.

Total revenue came in at $3.8 billion, down 9.3% year over year as the slight tailwind from foreign exchange rates was more than offset by an organic revenue decline of 9.6% and a 0.5% decline from dispositions. The year-over-year organic revenue decline improved from the previous quarter in all regions except in Europe (due to the second surge in COVID-19 cases and additional lockdowns that followed) and the Middle East and Africa (decline in demand for and revenue from projects). We expect a gradual return to organic growth in all markets during 2021 to be driven by the continuing increase in vaccinations and the economic recovery that will likely follow.

Ventas Outperforms in Q4 on Receipt of Grants to Offset Increased Senior Housing Operating Costs
by Kevin Brown, CFA | Morningstar Research Services LLC | 02-18-21

Fourth-quarter results for no-moat Ventas were well ahead of our expectations. However, results included a $34 million grant from the department of Health and Human Services, or HHS, so excluding that nonrecurring event, results were much closer to our estimates, which gives us confidence in our $57 fair value estimate. Same-store occupancy for the senior housing portfolio saw another sequential decline, down 90 basis points to 79.1% in the fourth quarter. Average rental rates declined 3.3% year over year, leading to a same-store revenue decline of 12.8% that was in line with our estimate of a 13.1% decline. However, the HHS grant in the fourth quarter caused same-store operating expenses to decline 7.4% and same-store net operating income to decline only 24.7%, far better than our estimate of a 36.2% decline. Excluding the grant, same-store expenses would have been up 2.2% and same-store NOI would have been down 41.2% in the fourth quarter.

The triple-net senior housing portfolio also saw same-store NOI declines, down 10.0% in the fourth quarter. Meanwhile, the medical office and life science portfolios continue to report growth with same-store NOI up 0.7% and 10.6%, respectively. Combined, Ventas reported a total company same-store decline of 11.8%, slightly better than our estimate of a 13.5% decline. While Ventas saw a similar 13.8% year-over-year decline to normalized funds from operations of $0.83 for the quarter, the grant caused normalized FFO to improve 10.1% compared with the third quarter's $0.75. Removing the 9-cent impact from the HHS grant and another 4-cent impact from one-time fees and grants collected by Ventas' unconsolidated entities, Ventas reported normalized FFO excluding one-time revenue of $0.70, which was in line with our estimate for the fourth quarter.

Press Reports Wells Fargo Has Received Regulatory Approval for Its Overhaul Plans
by Eric Compton, CFA | Morningstar Research Services LLC | 02-17-21

Bloomberg has reported that, according to people with knowledge of the matter, Wells Fargo has received private, internal acceptance from the U.S. Federal Reserve for its proposed internal overhaul. This is a big step forward for the bank and shares have, unsurprisingly, jumped on the news while most of the other bank peers we cover are down today. Bloomberg had reported in December that some executives have privately said that they think the asset cap may be lifted by the end of 2021 while certain regulators expect something closer to a 2022 release date. When we last changed our expectations for Wells' asset cap, back in March 2020, we updated our expectations to having the asset cap last into 2022. It appears things are largely playing out along that timeline, with some potential for a 2021 lift. With initial approval given for Wells' plans, Wells still has several more steps left in getting the asset cap lifted. Wells needed to submit plans to address board effectiveness and the risk management program, get them approved (the step ostensibly just completed), adopt and implement said plans, complete a third part review, and then receive the final approval of regulators.

We would keep our optimism around timing in check when it comes to Wells, as we've made that mistake before, but we are pleased that this confirms that a 2022 lift is not unrealistic. This also confirms that the bank does appear to be making real progress, something which was lacking as the bank largely spun its wheels from 2016 to 2019. We will not be updating our fair value estimate of $45 for the wide-moat company based on the news, as these developments were already part of our thesis.

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