DividendInvestor℠ 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:

Please see new analyst notes below from Morningstar Research Services for BlackRock BLK, Genuine Parts GPC, Johnson & Johnson JNJ, and Omnicom OMC.

Also, if you missed the alert from earlier today, the May issue of DividendInvestor is now available for download.

Best wishes,

David Harrell
Editor, Morningstar DividendInvestor

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News and Research for Dividend Select Portfolio Holdings

BlackRock Benefited From 1Q Positive Flows and Market Gains; We're Increasing FVE Slightly to $495
by Greggory Warren, CFA | Morningstar Research Services LLC | 04-17-19

While there was little in wide-moat-rated BlackRock's first-quarter earnings that would alter our long-term view of the firm, we expect to raise our fair value estimate to $495 per share to reflect a stronger first quarter than we were projecting. BlackRock closed out the March quarter with a record $6.515 trillion in managed assets, up 9.0% sequentially and 3.1% year over year, with positive flows, foreign exchange gains, and market gains all contributing to assets under management.

Net long-term inflows of $59.0 billion during the first quarter were fueled by $14.0 billion of active inflows (primarily from BlackRock's fixed-income operations), $14.4 billion of inflows from its institutional index business (with fixed-income inflows also offsetting equity outflows during the period), and iShares (where the company's exchange-traded fund platform generated $30.6 billion in inflows despite seeing its first quarterly outflows from its equity ETF offerings since the first quarter of 2016). Although BlackRock's annual organic growth rate of 2.2% over the past four calendar quarters trails management's annual target rate of 5%, its annualized rate of 4.3% (based purely on first-quarter results) was more in line with our long-term forecast for 3%-5% organic AUM growth annually.

BlackRock reported a 6.6% decline in first-quarter revenue compared with the prior-year period, as a 1.0% decline in average long-term AUM combined with a 3.9% decline in the firm's fee realization rate and meaningfully lower performance and distribution fees to affect the top line. While BlackRock reported a 160-basis-point decline in first-quarter operating margins to 36.8% when compared with the same period in 2018, we still believe that the firm will close out the year in a 38%-40% range (as the first quarter tends to have higher compensation costs than the remaining three quarters of the year).

Despite a Slow Start to 2019 in Europe, Our Long-Term Targets for Genuine Parts Remain Intact
by Zain Akbari, CFA | Morningstar Research Services LLC | 04-18-19

While a slow first quarter for its European automotive unit and currency headwinds should lead us to temper our 2019 expectations, we anticipate an offsetting time value of money-related adjustment will keep our valuation for narrow-moat Genuine Parts near its current $103 per share mark. As the soft results in Europe appear to be attributable mostly to transitory (weather-related) factors, our long-term targets for the firm, calling for 4% organic annual revenue growth and 7% adjusted operating margins, on average over the next decade, should also see little change.

Genuine Parts posted $4.7 billion in first-quarter sales and a 6.8% operating margin. Management reaffirmed its 2019 guidance, calling for 3%-4% sales growth against adjusted diluted EPS of $5.75 to $5.90 (or 4%-5% and $5.81 to $5.96 excluding currency pressure), behind our 4.9% and $6.04 pre-announcement targets.

The automotive unit (56% of 2018 sales) saw 2% sales growth against just under 40 basis points of operating margin deleverage (to 6.8%), versus our 4% and flat respective full-year targets. Although a softer European economy and upheaval from Brexit contributed, management cited weather in the region as the main culprit, with a mild winter curbing demand. While the company’s experience with the European market is relatively recent (coming after it acquired Alliance Auto Parts in 2018), warm winters were the primary factor behind the automotive parts industry’s 2017 slowdown in the United States. We anticipate a similar trajectory, with the unit likely to remain sluggish throughout 2019 (the strain of cold weather accelerates part failures) before recovery should the following winter prove more typical. Still, Genuine Parts should benefit from low-single-digit inflation, which we are encouraged (though not surprised) that it has been able to pass on to customers. In all, we do not plan to materially alter our long-term segment forecast (4% sales growth, 9% average operating margin).

J&J Posts Solid 1Q, but Increasing Generic Competition Weighs on Full-Year Outlook
by Damien Conover, CFA | Morningstar Research Services LLC | 04-16-19

Buoyed by strong drug sales and solid expense management, Johnson & Johnson reported first-quarter results slightly ahead of our and consensus expectations, but we don't expect any major changes to our fair value estimate based on the minor outperformance. Recent drug launches in oncology and immunology supported total operational drug sales growth of 8% year over year, outpacing device (up 4%) and consumer (up 1%) sales. The strong drug sales reinforce the intangible assets moat source backing our wide moat rating.

While first-quarter drug sales were solid, we expect the division's growth to slow later in the year due to increasing generic pressure. We expect intensifying generic competition to cancer drugs Zytiga and Velcade along with continued pressure from biosimilar Remicade in immunology to weigh on total drug sales. We believe these factors played a part in management's decision to sell Advanced Sterilization Products and record the gain in adjusted earnings to maintain overall earning growth for the year. Following 2019, we expect generic pressure to ease and recently launched drugs to return the drug group to steady growth.

The medical device segment continues to accelerate growth, offsetting weakness in the consumer group. Strong growth from devices in interventional solutions, including in electrophysiology for atrial fibrillation, helped offset relatively flat operational growth from orthopedics. In consumer, slow overall industry growth weighed on sales, but we also believe J&J's strong brand power is not holding up as well in the increasingly important online sales channel.

J&J is holding expenses in check slightly better than we expected, but the one-time legal charge of $423 million is concerning and probably relates to talcum litigation. We continue to expect only a minor impact to our J&J fair value estimate based on this litigation and have modeled close to $2 billion in related charges.

Omnicom Kicks Off 2019 With Strong Organic Growth in 1Q; Maintaining $85 FVE
by Ali Mogharabi | Morningstar Research Services LLC | 04-16-19

Omnicom reported impressive organic revenue growth along with year-over-year operating margin expansion, which led to better-than-expected bottom-line results. Strengths in the U.S. and Europe during the quarter were encouraging. Management maintained its 2019 top- and bottom-line guidance. We made slight adjustments to our projections and are maintaining our fair value estimate of $85 per share. The stock of this narrow-moat name is up nearly 5% and is approaching our fair value estimate and 3-star territory. We continue to recommend investments in ad holding names, which also include Publicis, WPP, and IPG, as upside to our fair value estimates and the firms' average 5% dividend yield remain attractive.

Total first-quarter revenue of $3.46 billion was down 4.4% year over year as headwinds, including foreign exchange and impact of divestitures, more than offset the firm's strong 2.5% organic growth, which slightly accelerated from the 2018 rate. North America revenue had an organic growth of 2.2% due to strong media buying in the U.S., plus the 6.1% growth contributed from Canada. European and Asia-Pacific regions posted organic growth rates of 3% and 2.1%. U.K.'s 1.3% organic growth along with solid growths in the Netherlands, Spain, and Germany, all of which more than offset weakness in France, led to the overall organic growth in Europe. The firm performed well in Australia, India, and New Zealand, which led to the 2.1% organic growth in Asia-Pacific compared with last year. Omnicom noted some weakness in China as a few projects were delayed, but are still likely to be completed this year. Weakness in Brazil, which is likely to persist, pushed revenue generated in Latin America down 3% from last year.

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