From the DividendInvestor news file this week:

Dominion Energy D, Duke Energy DUK, Enbridge ENB, and Omnicom OMC all declared quarterly dividends that were unchanged from their previous respective payouts. (Enbridge's dividend was unchanged in CAD, but it will be slightly different than the last payout due to currency fluctuations.)

Please see new analyst notes and updates below from Morningstar Research Services for CenterPoint Energy CNP, Compass Minerals CMP, Dominion Energy, Enbridge, Enterprise Products Partners EPD, Pfizer PFE, Plains GP Holdings PAGP, Ventas VTR, Verizon VZ, and Williams Companies WMB.

Altria MO and Philip Morris International PM were both mentioned in a note about the FDA seeking a ban on menthol cigarettes. It's also included below.

Best wishes,

David Harrell
Editor, Morningstar DividendInvestor

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News and Research for Dividend Select Portfolio Holdings

CenterPoint Reports Flat Earnings; Improved Outlook for Enable Investment Drives Increase in FVE
by Charles Fishman, CFA | Morningstar Research Services LLC | 05-07-21

We are increasing our fair value estimate to $25.50 per share from $25 after CenterPoint Energy reported flattish utility earnings in the first quarter, reaffirmed full-year earnings guidance, and reaffirmed its five-year annual EPS growth target of 6%-8%. Adjusted EPS were $0.59 in the recently ended quarter versus $0.60 in the same period last year. Utility EPS were $0.47 versus $0.50 last year.

In our opinion, underlying utility performance in the first quarter was solid, driven by customer growth, rate increases, and ongoing cost management. However, the higher share count due to the May 2020 equity issuance reduced EPS by $0.09, and 2020 earnings benefited from the CARES Act that added $0.03 last year.

The increase in our fair value estimate was due in part to the improved outlook for CenterPoint's investment in Enable Midstream Partners. On Feb. 17, Enable announced it would merge with Energy Transfer. Since the announcement, Energy Transfer common units have risen almost 40%, driven by an improved commodity outlook and the recently announced $2.4 billion pretax gain from the winter storm in Texas. We assume CenterPoint divests its investment (including Series G preferred shares) in Energy Transfer at 2021 year-end for aftertax proceeds of approximately $1.1 billion.

Our fair value estimate also benefited from our assumption that a large share of the proceeds from this sale and the divestiture of CenterPoint's two natural gas utilities in Arkansas and Oklahoma, announced April 29, would go toward increased planned capital expenditures at CenterPoint's utilities. We assume 2021-25 capital expenditures of $13.7 billion, $400 million higher than management's plan detailed at the December 2020 investor day. The higher level of investment increased our five-year average annual EPS growth rate by 40 basis points, to 7.4%, and our estimate is now in the upper half of management's 6%-8% target range.

Maintaining $78 FVE as Compass' First-Quarter Results Show Lower Salt Costs
by Seth Goldstein, CFA | Morningstar Research Services LLC | 05-05-21

Compass Minerals' first-quarter results showed tangible progress on the company's goal to fully restore its low-cost salt operation. In salt, adjusted EBITDA was up 37% versus the prior-year quarter as higher volumes and lower unit costs were partially offset by lower highway deicing salt contract prices. During the quarter, salt unit production costs fell nearly 13% from the prior-year quarter. The results were consistent with our view that Compass would be able to sharply reduce costs as it fully restores the low-cost Goderich mine. With our outlook largely unchanged, we maintain our $78 per share fair value estimate. Our wide moat rating, based on the firm's cost-advantaged salt production, is also unchanged.

At current prices, we view Compass Minerals as undervalued, with shares trading in 4-star territory. We think the market is giving Compass credit for the cost reductions that the firm has already achieved, but we don't think the market is pricing in further cost reductions that we forecast over the next couple of years. Additionally, we expect Compass will benefit from rising highway deicing salt prices in the upcoming winter as market conditions in much of Compass' Midwest footprint will remain tight following a competitor mine shutdown. We point to higher prices and lower costs as a near-term catalyst for shares.

Compass is also divesting assets as a way to reduce debt. The previously North American micronutrients divestiture was closed in early May for $60 million. We expect the previously announced South American fertilizer divestiture to close by the end of the year. While a deal has not yet been announced for the South American chemicals business, we think the company could divest it at a mid-single-digit multiple, consistent with no-moat chemicals firms. Given that the business is now being reported in discontinued operations, our valuation assumes Compass sells the business in 2022 at a 7 times multiple, which we view as value-neutral.

Dominion Energy Reports Strong Q1 Results; Growth Investments on Track
by Charles Fishman, CFA | Morningstar Research Services LLC | 05-05-21

We are reaffirming our $81 fair value estimate after Dominion Energy reported strong 2021 first-quarter earnings, reaffirmed 2021 operating earnings guidance, and reaffirmed long-term EPS and dividend growth guidance. Dominion also reaffirmed its $32 billion five-year capital investment plan, approximately 82% focused on decarbonization and 70%-plus eligible for rate rider regulatory mechanisms.

Dominion reported operating EPS of $1.09 in the first quarter versus $0.92 in the same period last year. Dominion has well-run operations, which certainly helps financial performance, but it also benefited from solid customer growth.

Dominion Energy Virginia, which we estimate will contribute 57% of operating earnings in 2021, had 1.3% average annual customer growth the past two years. The gas distribution segment, which contributes 17% of earnings, experienced 1.6% customer growth, and Dominion Energy South Carolina, which contributes 12% of earnings, had 1.6% growth. Customer growth for most U.S. utilities has averaged 1% or less the past few years.

U.S. commercial and industrial electricity demand has been negatively affected by COVID-19, but not in Virginia, where C&I usage is up almost 5% year to date. Management attributed most of the electricity demand growth at DE Virginia to 19 new data centers in 2020 and 20 more expected to be in operation this year. Dominion estimates that one third of DE Virginia's commercial electricity demand is now from these data centers.

Dominion's growth plans got further support on May 4 when the Nuclear Regulatory Commission authorized 20-year life extensions for the two reactors at the Surry station. Dominion filed for 20-year license extensions for the two reactors at the North Anna station last September. Nuclear life extension is approximately $1.5 billion of the $24 billion of five-year planned growth investment at DE Virginia. Dominion plans to file for rider recovery with Virginia regulators later this year.

Enbridge Reports Decent Q1; Continued Progress on Line 3, 5, Mainline Contracting, and ESG Efforts
by Stephen Ellis | Morningstar Research Services LLC | 05-07-21

Enbridge reported decent first-quarter results, as it continues to make progress on its high-profile projects (Line 3, 5, and its Mainline contracting) as well as its ESG-related efforts. We think all three projects are making material progress as Line 5 is unlikely to be shut down in the near term, and Enbridge's ESG-related efforts offer substantial opportunities to manage through the energy transition. 2021 guidance was unchanged at a midpoint of CAD 14.1 billion. Overall EBITDA was flat compared with last year's levels at CAD 3.7 billion as slightly lower volumes on the Seaway and Bakken systems were offset by higher seasonal storage contributions. We will maintain our fair value estimate and wide moat rating while we incorporate these results into our model. Enbridge increased its dividend 3% to CAD 0.835, which we consider reasonable and easily supportable in the near to medium term. 2021 is an important year for Enbridge in terms of capital projects and contracting. About CAD 10 billion of its CAD 17 billion in backlog is expected to go into service, allowing Enbridge to transition to a lower level of capital spending in the CAD 3 billion to CAD 4 billion range, with an incremental CAD 2 billion available for buybacks, debt reduction, or opportunistic high-return projects. We also expect the Mainline contracting structure to be resolved. These shifts are supportive of a 5%-7% earnings growth annually through 2023.

Enterprise's Natural Gas Operations See Benefit From Uri in Q1
by Stephen Ellis | Morningstar Research Services LLC | 05-03-21

Enterprise's first-quarter results broadly met our expectations, and we will hold our $25.50 fair value estimate and wide moat rating intact while we incorporate these results into our model. Winter storm Uri contributed an estimated $250 million in net gross operating margin, as similar to peers, Enterprise was able to benefit from selling natural gas out of storage, but some of these profits were offset by lost volumes from assets that were shutdown. Stripping out the Uri benefit, which we see as one-time in nature and not material enough to move our fair value estimate, results were close to flat, as Enterprise expects more of a recovery in 2022 and 2023 as U.S. volumes pick up with the economy's re-opening. At this stage, volumes still remain well below last year's levels across Enterprise's portfolio, though Uri certainly contributed. Overall gross operating margin was $2.3 billion compared with $2 billion last year, and the partnership generated over $350 million in free cash flow after capital spending and distributions. Enterprise also disclosed that it has been studying energy "evolution" opportunities across hydrogen, carbon capture, and plastics recycling for the past two years. The effort is organization wide -- more specifically, hydrogen transportation and storage, carbon capture, and storing and upgrading the byproducts of recycled plastics. We agree with this approach as we expect it to yield new investment opportunities, and as Enterprise also pointed out, leads to a natural extension of its overall value chain.

Waiving Vaccine IP Does Not Impact Our Assessment of Potential $70 Billion 2021 COVID-19 Market
by Karen Andersen, CFA | Morningstar Research Services LLC | 05-06-21

We're not making changes to our fair value estimates or moat ratings for COVID-19 vaccine firms following the May 5 announcement that the Biden administration supports a proposed waiver on intellectual property protection for COVID-19 vaccines. The proposal to waive patent rights during the pandemic was initially made to the World Trade Organization by India and South Africa in October. With the pandemic raging in India and Brazil, calls to support this proposal have strengthened, and U.S., Europe, and U.K. opposition has become a potential political liability. It could take months to finalize the proposal, and Europe and U.K. have yet to support the waiver.

Beyond IP, we see huge skill and supply-related barriers to designing and building efficient mRNA manufacturing at scale outside of global leaders Pfizer/BioNTech and Moderna, and their contract manufacturing networks. Moderna disclosed in October that it would not enforce its COVID-19 patents during the pandemic but has not seen any signs of copycat production globally, which we think supports the idea barriers to production beyond IP. Using raw materials in short supply (like lipids) for riskier efforts at new facilities rather than for established networks could result in reduced global supply in 2021 and 2022.

After incorporating updates from Moderna and Pfizer with first-quarter earnings, we have raised our forecast for COVID-19 vaccine sales to $70 billion in 2021 (from $67 billion as of April 22). Beyond 2021, both Moderna and Pfizer/BioNTech are negotiating new contracts, and they remain best positioned to develop the first vaccines against new variants. Moderna has released the first data for a third dose with its mRNA-1273.351 variant vaccine that imply stronger and more consistent protection across variants, and Pfizer expects data from its own variant vaccine in July. Pfizer also noted that future variant vaccine updates may only need a lead time until regulatory authorization of roughly 100 days.

Plains' First-Quarter Results Are Solid; 2021 Guidance Unchanged Amid Tepid Permian Volumes
by Stephen Ellis | Morningstar Research Services LLC | 05-05-21

Plains' first-quarter results were solid, as overall 2021 EBITDA guidance of $2.15 billion was unchanged after modest improvements due to winter storm Uri were offset by primarily lower supply & logistics margins. We will maintain our fair value estimates and narrow moat ratings for the Plains entities while we incorporate the results into our model. The biggest positive for Plains this year continues to be its $400 million in expected free cash flow after distributions (or over $1 billion when factoring in asset sales), which improved about $100 million from the prior quarter due to lower levels of capital spending. Plains plans to devote about 75% of the excess cash toward debt reduction, as 4 times leverage remains above its targeted 3.25 times. The remaining 25% of excess cash will be used for stock and unit buybacks, and as Plains reaches its leverage targets, it will devote more cash toward buybacks in 2022.

The biggest driver of Plains' results remains Permian volumes. Plains only sees a modest increase by the end of 2021, with Permian volumes around 4.4 million to 4.5 million barrels per day (bpd), up about 200,000 bpd from the start of the year. Plains' Permian tariff volumes (its fee-earning volumes) are about 4.1 million bpd down from 4.4 million bpd at the end of 2020. This still points to an oversupplied situation for the Permian, especially as Plains is relying on its own marketing operations for a material portion of those barrels. Plains' current earnings is largely protected with between 60% and 70% of nameplate capacity contracted across its asset base for at least five years, meaning spot-market shipments are likely to drive any earnings recovery. That said, we believe the industry used drag-reducing agents heavily over the past few years to likely exceed nameplate pipeline capacity by 10%-20%, further widening the gap required to close the Permian oversupply situation.

First-Quarter Decline in Line With Our Expectations for Ventas; Signs of a Senior Housing Recovery
by Kevin Brown, CFA | Morningstar Research Services LLC | 05-07-21

Ventas reported first-quarter results that were in line with our expectations, leading us to reaffirm our $59 per share fair value estimate for the no-moat firm.

Operating senior housing same-store occupancy fell another 250 basis points sequentially to 76.5% during the first quarter, although slightly better than our estimate of 75.6% for senior housing. Average rental rates fell 4.6% year over year, though, which was worse than our estimate of a 0.6% decline. Same-store revenue for senior housing fell 16.0% while same-store expenses only declined 4.1%, leading to a same-store net operating income decline of 42.5% that was relatively in line with our estimate of a 40.8% decline. The triple-net senior housing portfolio also saw negative growth, although the 12.7% decline was not as large as the decline for the operating portfolio. The office segment did manage positive growth, but it showed signs of slowing in the quarter, with same-store NOI for medical office only growing 0.3% while same-store NOI for the life science portfolio grew just 1.2%. As a result, total company same-store net operating income fell 20.2% year over year during the first quarter.

Ventas reported normalized funds from operations of $0.72 per share during the first quarter. While below the $0.97 level the firm reported for the first quarter of 2020, it was slightly above our estimate of $0.71 per share and management's guidance of $0.66 to $0.71 for the quarter.

Senior housing has shown signs that the recovery is already underway. After nearly a year of month-over-month declines in occupancy, the company saw occupancy increase 60 basis points in March and another 90 basis points in April to end the month at 77.9%. Additionally, April saw tenant leads and move-ins above 2019 levels while move-outs were below 2019 levels, suggesting the recovery will continue over the coming months. We are pleased to see the recovery in fundamentals we'd forecasted start to play out for Ventas.

Verizon Divests Media to Sharpen Its Focus; FVE Remains $57
by Michael Hodel, CFA | Morningstar Research Services LLC | 05-03-21

Verizon has inked an agreement to sell its media business, formerly known as Oath, to private equity firm Apollo Global Management for $4.25 billion in cash, $750 million preferred interest, and a 10% equity stake in the new stand-alone media firm, which will take the name Yahoo. The move marks the end of Verizon's direct involvement in the media industry, which it has been steadily unwinding in recent years. We aren't changing our $57 fair value estimate or narrow moat rating, and we view Verizon shares as fairly valued.

Verizon spent $3.8 billion to acquire AOL in 2015 and $4.5 billion to purchase Yahoo in 2017 to build a media business that generated $7.7 billion in revenue during 2018, dropping to $7.1 billion last year. The business returned to growth in the fourth quarter last year amid surging demand for digital advertising, and revenue increased 10% year over year during the first quarter. AOL and Yahoo generated about $1.4 billion in combined EBITDA in full years before they were acquired, though we would be surprised if the Verizon media business generated that level of profitability today, given revenue has generally been declining. Given what we know, it doesn't seem Verizon got a great price for the business. However, we like that the sale strengthens the firm's strategic focus on the core telecom business, where its competitive advantages reside.

The decision to divest the media business won't have a huge impact on Verizon's financial condition. The sale removes less than 6% of total revenue and likely only around 2% of total EBITDA. In exchange, the firm receives cash equal to about 3% of its net debt load. If Verizon can monetize the preferred interest and residual equity stake, it might shave 2%-3% off of net debt.

Williams Off to Quick Start in 2021 With Help From Winter Storm Uri
by Travis Miller | Morningstar Research Services LLC | 05-04-21

We are reaffirming our $27 fair value estimate and our narrow moat and stable moat trend ratings after Williams Companies reported a jump in first-quarter earnings with good performance from all its business lines. Adjusted EBITDA in the first quarter was up 12% from the first quarter of 2020 to $1.4 billion and earnings per share were up 35% to $0.35. We continue to expect 6% earnings growth for the full year.

Higher volumes and pricing from Winter Storm Uri in February added $77 million of EBITDA across its business. We consider this a one-time benefit with no material impact on our fair value estimate. Higher gathering and processing volumes in the Northeast added $32 million of adjusted EBITDA in the first quarter, highlighting Williams' ability to capture benefits from rising natural gas prices and demand.

The positives in the quarter led management to increase the midpoint of its 2021 earnings guidance range by $75 million to $1.425 billion ($1.17 per share), in line with our full-year estimate. We had been near the top end of management's initial guidance range from February. Management also raised the midpoint of its adjusted EBITDA guidance range by $100 million to $5.3 billion, in line with our estimate.

Williams's stock is up 24% year to date and now trades at just a 7% discount to our fair value as of May 4. We still think the 6.5% yield is attractive for a company with a utility-like risk profile and investment-grade balance sheet, although we expect the dividend to grow more slowly than earnings in 2022 and 2023.

We continue to project 5% long-term annual EBITDA growth driven by capital investments primarily in its gas pipeline systems. We expect higher revenue from the Southeastern Trail and Leidy South Transco expansions to boost 2021-22 earnings. The combination of growing cash flows, improving credit metrics, and fewer growth projects in 2022 and beyond opens the possibility for share buybacks starting next year.

Lowering Tobacco Valuations by Mid-Single-Digit Amounts After FDA Announces Plan to Ban Menthol
by Philip Gorham, CFA, FRM | Morningstar Research Services LLC | 05-03-21

Altria's in line first-quarter results were overshadowed by the Food and Drug Administration's announcement that it is to seek a ban on menthol cigarettes. Although the risk of a menthol ban has been a long-term overhang and one of the ESG risks we have identified, we did not include it in our base-case assumptions because we felt the legal burden of proof for implementing a ban--which required the FDA to prove that a ban would be a net public health benefit--was fairly high. Following the FDA's announcement, however, we believe the probability of a ban has now increased because the FDA clearly believes it has met that burden of proof. We still believe a ban will take years to implement, and we are lowering our stage II growth rate assumptions for the cigarette makers with exposure to the menthol category in the U.S. We are lowering our fair value estimates of Altria to $52 per share from $54, of British American Tobacco to GBX 4,000 from 4,300, and of Imperial Brands to GBX 2,900 from GBX 3,000. We believe the tobacco group remains undervalued, and our picks remain Philip Morris International, whose exposure to the U.S. is limited to a revenue share of its market-leading reduced risk portfolio, and Imperial Brands, which trades at under 10 times forward earnings and pays a dividend yield of 9%.

Altria's first-quarter revenue net of excise taxes fell by 3.3%, slightly worse than our forecast due to a steep 12% decline in cigarette volume. We do not think that the underlying volume trend of a roughly 4% decline rate has changed much, however, and with management reiterating full-year guidance, it is likely that trade inventory movements drove volumes lower and that the impact of inventory level changes will reverse throughout the remainder of the year. Nevertheless, we expect the gradual easing of social distancing measures to slow volumes in the coming quarters. We retain our full-year estimates at the high end of management's EPS guidance of $4.49 to $4.62.

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