About the Editor

David Harrell 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.

David served in several senior research and product development roles and was part of the editorial team that created and launched Morningstar.com. He was the co-inventor of Morningstar's first investment advice software. David joined Morningstar in 1994. He holds a bachelor's degree in biology from Skidmore College and a master's degree in biology from the University of Illinois at Springfield.

Our Portfolio Manager

George Metrou is an equity portfolio manager for Mornigstar Investment Management. Metrou joined the team as a portfolio manager in August 2018. Before joining Morningstar Investment Management, he was an equity portfolio manager with Perritt Capital, and as a portoflio manager with Perritt Capital Management. Prior to that he served as Director of Research and as an equity analyst at Perritt Capital, and as a portfolio manager with Windgate Wealth Management. He holds a Bachelor's degree in finance form DePaul University, and 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 Editor's Photo
David Harrell
Editor, Morningstar DividendInvestor
David Harrell 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
An Update from George Metrou on CenterPoint and Lloyds -- The Week in Dividends 2020-04-03
From the DividendInvestor news file this week:

First, an update from Dividend Select portfolio manager George Metrou:


Dividend cuts have been roiling the dividend paying corner of the equity markets for the past few weeks. There have been announcements to reduce or fully eliminate the dividend from heavy weights such as Boeing BA, Ford F, and Marriot MAR, cruise lines and airlines broadly, as well numerous retailers such as Macy's M, Nordstrom JWN, and Gap GPS. Not to mention a myriad of smaller firms from various industries, such as REITs, energy, and others. Until this week, the Dividend Select portfolios had been spared. Unfortunately, we have now had two announcements of dividend cuts or suspensions. On Wednesday evening, CenterPoint Energy CNP reduced its quarterly dividend from $0.29 to $0.15 after its partially owned midstream energy subsidiary Enable ENBL reduced its own distribution. The Enable cashflow provided the buffer of earnings above the utility company's earnings to pay its dividend at a reasonable 75% payout. While I had previously believed CenterPoint's dividend was secure even without the Enable cashflow, management seems to have taken the crisis as an opportunity to severely cut the payout, which they now target at 50-55% of earnings, well below the typical utility payout of 70-80%. This was followed by the announcement at Lloyds Banking Group LYG, which was told to suspend payments in 2020, as were all UK banks, by the UK banking regulator.

While these cuts are unfortunate, I don't expect the overall level of portfolio income to be reduced materially. First, numerous holdings have announced raises over the past few months that will continue to be paid, providing some lift to the portfolio income in 2020. And second, I came into this period with a decent amount of cash in the portfolio. That cash wasn't earning much income, and certainly won't be going forward with rates at 0%. It has partially been put to work with the purchases I made two weeks ago, and I expect to find additional opportunities. As that low-yielding cash gets turned into income generating equity, the portfolio will receive an additional bump in income. Overall, the goal is always to find secure dividend streams, income that will stand up to a recession. Unfortunately, it's become clear that this is no ordinary recession. The crisis impacting the economy today is unlike anything we've seen before. Never before have the engines of commerce been purposefully and meaningfully slowed. While I think many of the large, mature, wide-moat, low-uncertainty holdings held in these portfolios will meet the economic challenges facing them, it's clear other may be more vulnerable to the most acute impacts reverberating through the economy.

Please see new analyst notes and updates below from Morningstar Research Services for CenterPoint Energy, Compass Minerals CMP, FirstEnergy FE, and Pfizer PFE. Several portfolio holdings are discussed in a note about Permian oil differentials that is also included below.

Also this week, Morningstar equity analysts published their Q2 Equity Market Outlook overview. You can download it here.

Best wishes,

David Harrell
Editor, Morningstar DividendInvestor

 


News and Research for Dividend Select Portfolio Holdings

CenterPoint Cuts Dividend and Lowers 2020 Capital Expenditures
by Charles Fishman, CFA | Morningstar Research Services LLC | 04-02-20

We are reducing our CenterPoint Energy fair value estimate to $24 per share from $25.50 after COVID-19-related issues forced the company to slash its dividend and lower its 2020 capital expenditure target by $300 million. CenterPoint cut its dividend to an annual rate of $0.60 per share from $1.16 after 53.7%-owned Enable Midstream Partners announced that it would reduce its common unit distribution by 50%.

We had assumed about a 10% cut in Enable's distribution due to the dramatic decline in commodity prices, but not to the level to which it will be cut this quarter. The reduction will lower cash flow to CenterPoint by approximately $155 million on an annual basis. We believe the reduction in cash flow from Enable, supply-chain disruptions, and staffing issues due to the impact of COVID-19 will make it difficult for CenterPoint to fully execute our five-year $13.6 billion estimated capital investment plan. Thus, we lowered our estimate by about 9%, to $12.5 billion. The reduction in investment lowers rate base growth and reduces our 2024 EPS estimate by $0.10, to $1.47.

On a positive note, regulatory actions by the Public Utility Commission of Texas, we believe the first in the country, should reduce the amount of unrecovered costs associated with COVID-19. Costs due to the suspension of disconnects for nonpayment can now be collected in a surcharge. In addition, PUCT issued an accounting order allowing Houston Electric to defer for recovery in a future rate case other costs associated with the pandemic.

The action by PUCT will help mitigate some of the COVID-19 earnings pressure, but we don't believe the drop in electricity demand will be immediately recovered. The stay-at-home order for the Houston area has been extended to April 30, significantly reducing commercial and industrial electricity demand. Thus, we have lowered our 2020 EPS estimate to $1.21 from $1.35.

We Continue to Forecast Compass Minerals' Profit Recovery in 2020
by Seth Goldstein, CFA | Morningstar Research Services LLC | 03-30-20

We are maintaining our $81 per share fair value estimate after reviewing our near-term assumptions for Compass Minerals in the wake of the economic impact of the COVID-19 pandemic. Our wide moat rating is also unchanged.

At current prices, we view Compass Minerals as significantly undervalued, with shares trading in 5-star territory. Compass shares have traded off in excess of the broader market decline, as investors are concerned about the company's elevated leverage. However, we view Compass' salt and fertilizer businesses as relatively more insulated from an economic slowdown. We continue to expect companywide profits to materially rebound as the Goderich salt mine continues to increase production, reducing unit production costs. As such, Compass should generate enough cash flow to meet its debt obligations in the near term.

Compass' salt business, which generates over 70% of profits, is relatively insulated from economic disruptions. This is because roughly 80% of salt sales come from deicing salt to governments and consumers, who purchase salt based on snowfall instead of economic activity. For example, during the Great Recession, Compass Minerals saw higher salt volumes in 2008, as that year had a higher number of snow days than average. As a result, during both 2008 and 2009, Compass Minerals was able to raise deicing salt prices. While we expect deicing salt sales to remain steady, we have trimmed our 2020 salt volume forecast to account for lower industrial-related volumes. However, we expect the lower industrial volumes to be short-lived and have not changed our long-term assumptions.

In Compass' North American fertilizer businesses, we continue to forecast a recovery in volumes as farmers plant more crops across the U.S. following the lowest acres planted in over a decade in 2019. Further, the South American harvest has been underway with few disruptions and the fertilizer business should continue to see solid demand as a result.

Compass' financial leverage remains elevated, with net debt/adjusted EBITDA at 4.1 times at the end of 2019. However, of Compass' $1.4 billion in total debt, only $52.1 million matures this year. The relatively low near-term maturities should give Compass time to divest its South American fertilizer business without being a forced seller. This should allow the company to receive a fair price and use the proceeds to reduce debt, restoring the balance sheet to more healthy levels.

COVID-19 Likely to Pressure FirstEnergy's C&I Sales and Capital Investment

by Charles Fishman, CFA | Morningstar Research Services LLC | 03-30-20

We are reducing our fair value estimate to $44 per share from $45 for FirstEnergy due to the impact of COVID-19 on earnings and capital investment. We believe supply chain disruptions and staffing issues will make it difficult for FirstEnergy to fully execute our five-year, $15.6 billion capital expenditure estimate. Thus, we have reduced our 2020-24 capital expenditures by $900 million, to $14.7 billion.

Lower revenue, higher expenses, and lower investment reduced our average annual EPS growth rate between 2020 to 2024 by about 30 basis points, to 6.2%. Our 2023 estimate of $2.88 per share, a $0.12 reduction from our prior estimate, is now slightly under the guidance range that was initiated in early February and before the full impact of COVID-19 on the economy was realized.

We reduced our 2020 EPS estimate to $2.30 from $2.52, below the guidance range of $2.40-$2.60. In the near term, FirstEnergy will likely experience a significant reduction in usage from commercial and industrial customers following stay-at-home orders for Ohio, New Jersey, and West Virginia. On March 28, Pennsylvania Gov. Tom Wolf expanded stay-at-home orders to 22 of the state's 88 counties, roughly 75% of the state's population. In 2019, C&I costumers represented about 64% of FirstEnergy's retail electric sales.

Pfizer Is Likely to Face Some Disruptions from Coronavirus Concerns

by Damien Conover, CFA | Morningstar Research Services LLC | 04-03-20

We are slightly reducing our fair value estimate for Pfizer to $44 from $46 based on likely coronavirus disruptions to Pfizer's drug portfolio. Specifically, we expect new drug launches for oncology drugs Xtandi, Mektovi, and Braftovi along with cardiovascular drug Vyndaqel to stagnate a bit while patients and doctors are less inclined to try new treatments, resulting in $500 million (1% of total sales) less sales for these drugs collectively in 2021. Also, we expect entrenched drugs Eliquis (for atrial fibrillation) and Ibrance (for breast cancer) to bring on fewer new patients as people avoid checking on ailments, cutting off close to $600 million (1% of total sales) in 2021. Additionally, we expect vaccine sales for Prevnar 13 to fall (especially for adult patients) as older patients try to avoid doctor offices and hospitals due to concerns around contracting the coronavirus.

Permian Oil Differentials Have Blown Out Again; The Situation Does Not Rhyme with 2018
by Stephen Ellis | Morningstar Research Services LLC | 04-01-20

Permian oil differentials have blown out again as the Midland and Houston corridors are trading about $7 and $5 per barrel below WTI (West Texas intermediate), and spreads have been as wide as $10 a barrel recently. This means that some producers are getting as low as $10 a barrel for oil, a far cry from the current $20 trading levels. However, the situation is not like 2018, where Permian differentials blew out temporarily due to a short-term mismatch between a lack of pipeline capacity and ramping supply at much higher oil price levels, which was resolved with new pipeline capacity. The current environment is a combination of a demand and supply shock, to the extent that midstream firms such as Plains have been requesting that Permian producers scale back production as well as prove they have a ready buyer for their barrels as local Permian storage is being overwhelmed. We do not see any fair value or moat impacts to our coverage universe, but this does demonstrate the industry shake-out is occurring and investors should be aligned with quality operators on both the midstream and E&P side.

We think there are several takeaways. Owners of oil storage such as Plains, Enterprise Products Partners, and Magellan are likely to reap substantially higher profits as storage rates and volumes increase. Also, like in 2018, we broadly expect our E&P coverage to be largely insulated from wider spreads, given the focus on long-term fixed fee transportation agreements. Diamondback, for example, has less than 10% of its production exposed to wider differentials and is nearly fully hedged.

We also see negatives. The challenge will be for the non-investment-grade producers, private equity-backed E&Ps, and other private E&Ps that largely took the brunt of wider spreads in 2018 and are exposed again now due to the lack of long-term pipeline agreements to survive with even weaker pricing and unknown, but likely questionable liquidity. Finally, with the shake-out in process, we think this speaks to the substantial uncertainty around volumes and fees for gathering and processing entities such as Targa and DCP. We reiterate our extremely uncertainty ratings for both stocks.

Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. Analyst ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst ratings are based on Morningstar’s analysts’ current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst ratings are not guarantees nor should they be viewed as an assessment of a stock's creditworthiness. Ratings, analysis, and other analyst thoughts are provided for informational purposes only; references to securities should not be considered an offer or solicitation to buy or sell the securities.

©2020 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.
 
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