News and Research for Dividend Select Portfolio Holdings
Dominion Energy: Stock Remains Value Trap With Few Near-Term Catalysts
by Andrew Bischof, CFA, CPA | Morningstar Research Services LLC | 5-31-23
Dominion Energy trades at one of the biggest discounts to our fair value estimate among all U.S. utilities we cover, but we see few near-term catalysts that will close that discount. Dominion trades at a 15% discount to our fair value estimate and a 26% discount to the utilities sector average 17.1 price/earnings as of May 31. We currently view the utilities sector as 5% undervalued. We are maintaining our $59 fair value estimate and narrow moat rating.
We believe Dominion's 5.4% dividend yield -- a 170-basis-point premium to peers -- suggests the market is concerned about the dividend payout. Management has promised to maintain its dividend as part of its strategic review, but the company must achieve attractive valuations for potential asset divestitures in an increasingly challenging macroenvironment to maintain its current payout. We don't assume a dividend cut in our forecast. Dividend policy has no effect on our fair value estimate.
Most recently, Eversource's sale of its undeveloped offshore wind acreage and write-off of about 10% of its investment suggests weak market pricing for offshore wind projects. This makes the sale of an equity investment in Dominion's offshore wind project look less attractive. Some utilities also are experiencing a weaker market for natural gas distribution utilities, another potential source of equity for Dominion.
Dominion has significantly underperformed its peers since management initiated the strategic review in November. Our Medium Morningstar Uncertainty Rating highlights the wide range of potential outcomes from the strategic review.
With the sector trading lower on higher interest rates and persistent inflation concerns, we think there are better alternatives that trade at similar or greater discounts to our fair value estimates. Our top picks in the sector remain Entergy, NiSource, American Electric Power, and Duke Energy.
A Fair Value Nudge for Genuine Parts
by Zain Akbari | Morningstar Research Services LLC | 5-30-23
We are lifting our valuation of Genuine Parts to $158 per share from $154, largely reflecting a time value of money-related adjustment after the company posted solid first-quarter earnings (including 9% sales growth). Our valuation implies forward fiscal 2023 enterprise value/adjusted EBITDA of 11 times and adjusted forward P/E of 17.
The automotive segment should remain resilient despite economic turmoil, posting mid-single-digit growth in 2023 atop 9% expansion in 2022. Longer-term conditions are sound, with rising vehicle age and benefits to come from larger, post-financial-crisis sales cohorts aging into retailers' sweet spot. We expect mid-single-digit percentage average organic segment sales growth long term, outpacing low-single-digit industry expansion as scaled sellers assert their advantages. Focus on more profitable DIY customers as well as rising cost leverage should lead segment margins to 10% long term from 8.7% in 2022.
Cooler Heads Should Prevail as Amazon Seeks to Enter Wireless
by Michael Hodel, CFA | Morningstar Research Services LLC | 6-02-23
Amazon's potential entrance into the wireless resale business, as Bloomberg News has reported, reflects a risk to our view of the wireless industry. However, we expect the carriers will remain rational, and our fair value estimates on Verizon, AT&T, T-Mobile, and Dish Network are unchanged.
We believe the industry is positioned for competitive rationality thanks to the parity that has emerged among the three national carriers, which limits the incentives to chase market share. The wholesale market, however, presents a challenge, as it provides an opportunity for one of the major carriers to do something ill-advised, with the thinking, in this case, along the lines of, "if Amazon is going to disrupt the market, I may as well get some benefit.”
The wholesale market isn't new. The cable companies are the clearest example, capturing about 4% retail wireless market share over the past several years by bundling wireless and broadband. Verizon, which provides wireless capacity to Comcast and Charter, has repeatedly assured us that it knows how to structure wholesale agreements that don't undermine its core retail customer base. Based on current pricing across the industry, we believe that is true.
We expect any wholesale agreement with Amazon would be structured to ensure that the winning carrier is economically indifferent between adding a retail customer or an Amazon customer, with Amazon taking on customer acquisition and service costs. Anything less favorable only promises a race to the bottom as carriers then compete for an agreement with Walmart, etc.
Dish Network, as always, is a wildcard. We expect chairman Charlie Ergen will remain focused on maximizing the long-term value of Dish's spectrum hoard, which requires a healthy wireless industry overall. That focus has made Ergen notoriously difficult to work with, but Dish could strike a poor deal with Amazon out of desperation, both for capital and a strong partner to help it truly challenge the big three carriers.
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