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:
BlackRock BLK and Omnicom OMC both declared quarterly dividends this week that were unchanged from their previous payouts.
Last week, Morningstar analysts increased their fair value estimate for Welltower WELL. An update from Morningstar Research Services LLC is below, as well as an updated investment thesis for Genuine Parts GPC and a notice that the fair value estimate for BT Group BT is under review.
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David Harrell
Editor, Morningstar DividendInvestor
News and Research for Dividend Select Portfolio Holdings
A Fair Value Increase for Welltower
by Kevin Brown | Morningstar Research Services LLC | 05-14-19
We are increasing our fair value estimate to $79 from $77 as we incorporate first-quarter 2019 results and recently announced acquisitions and dispositions into our model. Our fair value estimate implies a mid-5% cap rate on our forward four-quarter net operating income forecast, 17 times multiple on our forward four-quarter funds from operations estimate, and 4.4% dividend yield, based on a $3.48 annualized payout.
The rent, occupancy, and margin assumptions for each sector drive total company annual same-store NOI growth averaging 2.6% across our 10-year forecast. We expect continued acquisition and disposition activity as Welltower repositions its portfolio and improves the overall quality of its assets; we project $400 million-$500 million in acquisitions annually at an average cap rate of about 6.1% and $120 million of dispositions at 6.7% cap rates as the company looks to recycle lower-quality assets to partially fund the acquisition of higher-quality assets. We plan to incorporate potential significant acquisitions, such as the $1.25 billion acquisition of a 55-property, Class A medical office portfolio from CNL Healthcare Properties set to close in 2019, as they are announced. Additionally, we expect Welltower to invest roughly $360 million annually in new development and redevelopment projects at a 7.5% average yield. We estimate Welltower's net asset value to be approximately $65 per share. We use NAV as an assessment of the firm's potential private-market value, essentially viewing the firm as a portfolio of assets. To calculate the NAV, we utilize recent asset transactions to assign a cap rate to each segment of the portfolio, apply the cap rates to arrive at gross asset value for the company's real estate, put a multiple on the company's non-real estate assets, add the non-income producing tangible assets, then net out the company's liabilities (excluding corporate overhead considerations). We find NAV to be a useful data point in gauging the underlying value of the firm, especially as the likelihood for realizing this value through potential asset sales, recapitalization, or mergers and acquisitions activity.
Genuine Parts Should Benefit From Strong Market Conditions in the Automotive Part Retail Sector
By Zain Akbari | Morningstar Research Services LLC | 05-24-19
As a top distributor of automotive and industrial/electrical parts (56% and 34% of 2018 net sales, respectively), Genuine Parts benefits from industry dynamics favoring its scale-enabled service levels. We believe the firm will use its cost advantage to boost sales through its ability to offer a wide variety of parts on short order, building inventory and cost leverage as sales rise while fortifying brand value in a way subscale peers cannot economically replicate. Aftermarket auto-parts retailers serve DIY and professional clients. The faster-growing latter category (about 75%-80% of segment sales) depends on high levels of part availability and rapid delivery to turn repair bays quickly. Both categories have benefited from rising miles driven and average vehicle age, along with low unemployment. Genuine Parts (mostly via its NAPA brand) should benefit due to its infrastructure, which enables it to economically offer a vast catalog with quick delivery. We believe its acquisition of Alliance Automotive should elevate its standing with global vendors. Similar dynamics prevail in its industrial parts group (Motion Industries and EIS). Clients need to receive replacement parts quickly, particularly when failures result in costly downtime. Customers (facilities engineers) depend on the unit's part availability and its trained staff for assistance in locating the needed component, guidance on an oft-unfamiliar installation procedure, and rapid delivery. Spreading infrastructure and inventory investments over a large sales base leads to a cost advantage over small peers, while service levels reinforce the firm’s brand intangible asset in a way smaller rivals cannot duplicate. Genuine Parts maximizes automotive and industrial inventory turnover by centralizing slow-selling items, as several locations can call upon warehoused parts as demand warrants. We believe resulting virtually on-demand availability cannot be matched by subscale peers, enabling Genuine Parts to act as a consolidator.
We are trimming our valuation for Genuine Parts to $101 per share from $103, reflecting somewhat sluggish first-quarter earnings. Our estimate implies forward fiscal 2019 enterprise value/adjusted EBITDA of 12 times and adjusted forward P/E of 17, incorporating 4% organic revenue growth and a 7% operating margin, on average, over the next decade.
We expect favorable aftermarket auto-parts trends to persist as vehicles from larger, post-financial crisis sales cohorts age into retailers' sweet spot. Genuine Parts should see 4% average segment sales growth long term after adjusting for Alliance and other smaller acquisitions, outpacing low-single-digit industry expansion as scaled sellers assert their advantages. Focus on more profitable DIY customers as well as rising infrastructure and inventory leverage should lift segment margins to 10% long term from 8.1% in 2018.
BT Group Under Review
by Michael Hodel, CFA | Morningstar Research Services LLC | 05-17-19
We are placing our fair value estimate for BT Group under review. We will publish an updated report and valuation by May 27.
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