News and Research for Dividend Select Portfolio Holdings
Dominion Proposes Large Expansion of Solar and Battery Storage in Annual Clean Energy Filing
by Andrew Bischof, CFA, CPA | Morningstar Research Services LLC | 09-16-21
We are maintaining our $81 fair value estimate for Dominion Energy after the company's largest subsidiary, Dominion Energy Virginia, proposed substantial new solar investments as part of its annual clean energy filing.
The annual filing is the company's second, part of Dominion's effort to achieve the goals in the Virginia Clean Economy Act. The VCEA's renewable energy portfolio standard calls for 100% clean energy by 2045. Nationwide, state renewable energy portfolio standards have led to about 123 gigawatts of new renewable energy, or 40% of renewable energy capacity today. Virginia's standard is among the nation's most aggressive, just behind California's and New York's clean energy goals.
Dominion proposed 15 utility-scale, small-scale distributed solar, and energy storage projects totaling more than 1,000 megawatts. The projects are part of our expectations for Dominion to spend over $45 billion during the next five years. Dominion expects growth investments supporting net-zero carbon emissions will be more than $70 billion over the next 15 years, including $17 billion for what is expected to be one of the largest offshore wind farms in the United States. Capital investment is a key driver of our 6.5% annual earnings per share growth rate.
Nationwide, we forecast clean energy, which includes solar, wind, geothermal, nuclear, and hydro, will be 65% of electricity generation by 2030, up from 40% today. This is higher than other forecasts but short of President Joe Biden's 100% goal by 2035. We expect utility-scale wind and solar to more than triple to 33% of total generation by the end of the decade. Solar will be the big winner during the next decade, eventually matching wind generation. Our forecast is supported by four primary building blocks driving renewable energy adoption: electricity demand, state renewable portfolio standards, coal plant closures, and improving economics.
Edison's Updated Growth Outlook in Line With Our Estimate; Remains Top Utilities Pick
by Travis Miller | Morningstar Research Services LLC | 09-17-21
We are reaffirming our $70 fair value estimate for Edison International after management initiated a 5%-7% annual earnings growth outlook for 2021-25, in line with our estimate. Management also initiated 2021 earnings per share guidance of $4.42-$4.62, which is slightly higher than our estimate but not enough to affect our fair value estimate. We are maintaining our narrow moat and stable moat trend ratings.
Edison is one of the cheapest U.S. utilities as of Sept. 16, trading at a 17% discount to our fair value estimate with a 4.6% dividend yield. It trades at 13 times the midpoint of management's 2021 earnings guidance, well below the sector's 19 median P/E. More certainty around regulatory issues and near-term growth should ease market worries.
Management's 2021 guidance and long-term growth outlook come after regulators finalized Edison's 2021-23 general rate case in late August. The decision was in line with our expectations and slightly better than regulators' proposed decision in July. Edison will need several more constructive rate decisions in 2022 and 2023 to achieve the 5%-7% EPS growth target, but we think recent regulatory decisions set a foundation for future constructive outcomes.
We continue to assume Edison invests $16 billion in 2021-23, nearly all of which has regulatory approval. We also continue to assume Edison invests $5 billion annually beyond 2023, although that could go higher. Management's updated plan calls for $6.1 billion in 2024 and $7 billion in 2025. This increase in investment could add 3%-5% to our fair value estimate, but we consider it too early in the regulatory approval process to change our assumptions.
We continue to include a $1 per share reduction in our fair value estimate to reflect a possible cut in Edison's allowed return on equity as part of its recent cost of capital filing. Management did not update its progress on settling the remaining estimated $1.4 billion of 2017-18 disaster liabilities.
FDA Authorization of Third Pfizer Covid Vaccine Dose Looks
Likely; Maintaining Our Vaccine Forecast
by Karen Andersen, CFA | Morningstar Research Services LLC | 09-17-21
With the spread of the delta variant of the coronavirus, countries around the world are weighing or already implementing the use of third doses to previous recipients of Pfizer/BioNTech's mRNA vaccine, and an advisory committee to the Food and Drug Administration held a meeting on Sept. 17 to discuss Pfizer's application for supplemental approval for such a booster shot in the U.S.
The committee voted 3-15 that the safety and efficacy data from a single trial, C4591001, in 330 patients, does not support approval of a booster at least six months after a second dose of Comirnaty in ages 16 and up. But subsequent votes for use of a booster as part of an emergency use authorization in seniors and high-risk populations (due to health or occupation) were unanimously positive. Comirnaty was granted full FDA approval in August for the initial two doses, and Pfizer filed for supplemental approval of a booster dose two days later.
If the FDA approves Pfizer's third dose, the Centers for Disease Control and Prevention’s Advisory Committee on Immunization Practices will meet on Sept. 22 and Sept. 23 to discuss its recommendations for the rollout.
We're not making any changes to our fair value estimates for Moderna ($159), BioNTech ($172), or Pfizer ($42) as a result of this vote, and we continue to see no-moat Moderna and BioNTech as significantly overvalued at recent prices. Wide-moat Pfizer looks more fairly valued relative to our fair value estimate. We still model broad use of third-dose boosters, with $4 billion Pfizer and $2 billion Moderna sales from boosters later this year, and $26 billion Pfizer and $14 billion Moderna sales from boosters in 2022. While Pfizer and Moderna third-dose boosters are now authorized in the U.S. only for immunocompromised individuals, we expect additional data later this year to allow for broader recommendations, and other countries (Israel and several European countries) are already in the midst of a third-dose rollout.
Steady Does It; Starbucks' Long-Term China Strategy Intact, Investors Should Look Through the Noise
by Sean Dunlop | Morningstar Research Services LLC | 09-15-21
Investors have quickly taken note of a bleak intra-quarter report from wide-moat Yum China Sept. 14, sending wide-moat Starbucks' shares down 4% as they contemplate the coffee chain's exposure to the region. Yum China's management indicated that the sustained spread of the delta variant has resulted in piecemeal closures across 16 (of 23) Chinese provinces, with the firm anticipating a 50%-60% decline in quarterly operating profit, attributable to deleverage and rising input costs. We urge investors not to read too deeply into these headlines, with a number of differences between the firms, hedged commodity prices through at least mid-2022 for Starbucks, and geographic diversification blunting the impact of near-term pressures. We maintain our fair value estimate of $109 per share, with the stock trading in a range we consider fairly valued.
With China representing between 45%-55% of the chain's international sales (10%-13% of aggregate sales), a 50%-60% drop in quarterly profitability would certainly drag on international margins, but the consolidated blow to operating income for the year would be small (2.2%, by our calculations), given that international EBIT represented less than 20% of prepandemic consolidated operating income.
Lockdown concerns are reasonable but likely overblown, with COVID-19-cases (39 per day, per Reuters) in the country representing only about 1% of the 2020 peak. In our view, sustained restrictions are unlikely at these caseloads, and businesses figure to be better equipped to navigate them, with enhanced off-premises options, delivery integration, and low-touch mobile order and payment providing suitable workarounds. A dine-in friendly culture could certainly pinch near-term results, but geographic diversification and strength in its largest market (the U.S.) should afford Starbucks the leeway to maintain its growth trajectory and financial flexibility, leaving our long-term assumptions intact.
Health and Human Services and Congressional Plans to Cut Drug Prices Look Manageable by the Industry
by Karen Andersen, CFA | Morningstar Research Services LLC | 09-12-21
Upcoming congressional proposals on lowering drug pricing as well as a recent plan from the Department of Health and Human Services have put U.S. drug pricing policy back in the spotlight. We continue to see Medicare Part D redesign capping out of pocket costs of seniors and Medicare inflation caps as the most likely reforms to pass Congress. We forecast a 50% probability of Part D redesign (potential 1% hit to U.S. drug sales) in our base-case scenario and an overall 4% hit from inflation caps in our bear-case scenario. While price negotiation can take many forms, we haven't seen a proposal that we believe is moderate enough to pass the razor-thin Democrat majority in the Senate and also be ambitious enough to gain the support of more progressive Democrats in the House. Therefore, we don't expect any changes to fair value estimates or moat ratings for our biopharma coverage. We continue to expect innovative drugs will carry strong pricing power, a core pillar in the valuations and moat ratings for the industry.
Congress is reconvening and will work to pass a $3.5 trillion budget reconciliation package, and Politico reported that House Democrats plan to include Medicare drug price negotiation (along with other elements of the HR3 bill, which was originally introduced and passed in the House in 2019) in their budget reconciliation package. In the Senate, the Finance Committee is likely to release its own plan this month, and Stat has reported that the Senate may propose an international reference pricing system similar to that included in HR3, or could propose pegging Medicare prices to prices in other U.S. government programs, like the health program for the Department of Veteran Affairs or Medicaid.
We expect Congress will struggle to pass any system that includes significant Medicare price negotiation, such as pegging prices to international prices or deeply discounted (Medicaid, VA) U.S. prices, given pressure from more moderate Democrats in the Senate. In addition, if the Senate bill focuses on Medicare negotiation (rather than introducing reference prices for both Medicare and private insurance plans, like in HR3), drug firms may be able to offset much of the impact with price increase in the private market.
The Department of Health and Human Services also released a plan last week to lower drug costs, calling out drug price negotiation as a key part of controlling costs and mirroring other parts of the HR3 bill, like capping out of pocket costs in Medicare Part D and capping price inflation. However, it is not clear what sort of parameters the administration favors for price negotiation; this could be somewhere on a spectrum from prices only slightly lower than what PBMs are already able to negotiate on behalf of Medicare, to domestic reference prices, to international reference prices.
Using estimates from the Congressional Budget Office for the impact of HR3, we previously estimated that U.S.-branded drug sales could fall 21% below our current forecasts if international price benchmarking were applied to Medicare and private plans, with up to a 40% impact if such a system were applied to all drugs (the plan would likely only apply to a basket of drugs) and if drug firms were not able to offset these prices with international price increases. Based on our prior analysis of rebates in Medicaid and the VA, the impact of domestic reference pricing could also be sizeable, as high as 20%, if applied to all of Medicare (assuming no offsets).
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