About the Editor

Michael Hodel is the editor of Morningstar DividendInvestor, a monthly newsletter that focuses on dividend income investment strategy. For illustration purposes, issues highlight activities pertaining to a Morningstar, Inc. portfolio invested in accordance with a current income and income growth from stocks strategy.

Michael is portfolio manager for Morningstar Investment Management LLC, a federally registered investment adviser and a wholly-owned subsidiary of Morningstar,Inc. At Morningstar, Mike was a technology strategist for Morningstar, responsible for telecommunications research. He also served as chair of Morningstar's Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar. He joined Morningstar in 1998.

Hodel holds a bachelor's degree in finance, with highest honors, from the University of Illinois at Urbana-Champaign and a master's degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation.

Investment Strategy

Dividends are for everyone regardless of age. The outcome of owning dividend-yielding stocks is the key variable-higher-yielding stocks with safe payouts being less risky while affording investors who don't need current income the ability to reinvest/reallocate the capital.

The goal of the Dividend Select Portfolios is to earn annual returns of 8% - 10% over any three-to-five year rolling time horizon. We further seek to minimize risk, as defined by the probability of a permanent loss of capital. For our portfolio as a whole, this goal is composed of:

3% - 5% current yield
4% - 6% annual income growth

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Michael Hodel, CFA
Editor, Morningstar DividendInvestor
Portfolio Manager, Dividend Select Portfolios
Michael Hodel is the editor of Morningstar DividendInvestor, a monthly newsletter that focuses on dividend income investment strategy. For illustration purposes, issues highlight activities pertaining to a Morningstar, Inc. portfolio invested in accordance with a current income and income growth from stocks strategy.
Featured Posts
Comcast Issues Statement of Intent for Fox Bid -- The Week in Dividends 2018-05-25
DividendInvestorâ„  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:

Omnicom OMC declared a quarterly dividend that was, as anticipated, unchanged from its previous quarterly payout.

Please see new analyst notes below from Morningstar Research Services for Comcast CMCSA (two notes), Enbridge ENB, and Southern SO. Several holdings were tagged in a general note about regulatory changes for banks, which is also included below.

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor

News and Research for Dividend Select Portfolio Holdings

Comcast Formalizes Intent to Bid for Fox; Impetus Is Potential Shareholder Vote at Fox
by Neil Macker, CFA | Morningstar Research Services LLC | 05-24-18

Comcast issued a press release on May 23 stating that it is "considering, and is in advanced stages of preparing, an offer" for the assets that Twenty-First Century Fox is selling to Disney. If it makes an offer, Comcast will present an all-cash offer for the assets that is higher than Disney's current all-stock bid. Management assured Fox shareholders that its offer "would be at least as favorable to Fox shareholders as the Disney offer" with respect to the spinout of "New Fox" and the regulatory risk. We are maintaining our wide moat ratings for all three companies and fair value estimates of $130 for Disney, $42 for Comcast, and $43 for Fox.

This statement of intent follows months of speculation about a possible Comcast counteroffer, with the most recent rumor about Comcast searching for funding for its all-cash offer leaking in the beginning of May. Comcast admitted in the release that recent news that Fox was seeking a date for its shareholder vote in the next few months spurred it into formalizing its intent. We believe that the bid from Comcast remains contingent on the approval of the AT&T-Time Warner merger by the courts. Comcast originally made an offer similar in size to the rumored amount of $60 billion for the Fox assets, but the Murdoch family preferred the Disney deal due to regulatory and tax issues. If Comcast did bid on the Fox assets, it would probably trigger a bidding war between Comcast and Disney as both companies look to bulk up to compete in the increasingly aggressive battle for content. While Rupert Murdoch may prefer Disney shares and the promise of remaining relevant in the media space, we expect outside Fox shareholders to simply look for the highest price for the assets on a posttax basis.

U.K. Government States It Is Unlikely to Require Comcast's Bid for Sky to Undergo Extended Review
by Allan C. Nichols, CFA | Morningstar Research Services LLC | 05-21-18

On May 21, Matt Hancock, the United Kingdom Secretary of State for Digital, Culture, Media and Sport, wrote a ministerial statement regarding Comcast's offer to buy Sky: "I am minded not to issue (a European Intervention Notice) on the basis that the proposed merger does not raise concerns in relation to public interest considerations," he said. This means that Comcast's offer will likely not need to go through the lengthy government review that 21st Century Fox's offer has been going through. This removes one of the advantages that we had attributed to Fox's offer, which is near the end of its review and has been ongoing for about 18 months. We had expected Comcast's offer to also undergo a significant review process. Hancock will accept comments until May 24 before making a final ruling. Assuming he doesn't change his mind, we believe this decision increases the odds of a bidding war between Fox and Comcast for Sky. That said, for now we are maintaining our GBX 1,240 per local share fair value estimate for Sky, which already includes a premium to Fox's offer, and our narrow moat rating.

Investors' Concerns Over Enbridge's Dividend Are Overblown
by Joe Gemino, CPA | Morningstar Research Services LLC | 05-23-18

Enbridge's stock hasn't fared well over the past six months, down 15% year to date. Investors are skeptical of Enbridge's aggressive plan for 10% annual dividend growth throughout 2019 and 2020 and fear the company might be biting off more than it can chew, reminiscent of Kinder Morgan's 2015 dividend cut. Accordingly, the stock has sold off throughout the year on any news that may negatively affect the company, most recently a Minnesota judge recommending that Line 3 follow its existing route.

We think that the market is overreacting to the news flow and unjustly conjuring up the ghosts of Kinder Morgan. Enbridge sports a near-term CAD 22 billion in commercially secured capital projects in its growth portfolio that is highlighted by the Line 3 replacement project. We think that the project will receive approval to use its preferred route, as it offers $3.5 billion in economic benefits and limits its impact on Minnesota's environment and the tribal communities. Once placed into service, we expect the Line 3 replacement project coupled with various natural gas growth projects to generate CAD 4 billion in incremental EBITDA, which will support the dividend growth.

Accordingly, we expect Enbridge to maintain a healthy 1.45 times forward distributable cash flow coverage ratio, even after the impact of the proposed Enbridge consolidation, which would only decline to 1.35 times if the project doesn't obtain final approval in Minnesota. If the recommended route by the Minnesota administrative law judge is approved, the ratio remains at 1.45 times once the project is placed into service.

While Enbridge offers an attractive 6.6% yield, it's more than a just a dividend stock. As a Best Idea and with a 5-star rating, wide-moat Enbridge remains our top pick in the energy sector. We still see 55% upside in the stock and think that the time is right for long-term investors to capitalize on the stock's considerable upside while collecting a steady stream of growing income.

Southern Further Addresses Equity Needs With Sale of Florida Assets
by Charles Fishman, CFA | Morningstar Research Services LLC | 05-21-18

We are reaffirming our $51 per share fair value estimate and narrow moat rating after Southern Company announced it would sell its Florida-based Gulf Power subsidiary along with a small natural gas distribution utility and two merchant power plants to NextEra Energy. Total pretax proceeds are expected to be approximately $6.5 billion, and we estimate a 75% probability of the transaction being completed in mid-2019.

The transaction is about 21 times our 2018 earnings estimate (assumes 50% equity) for the two regulated utilities. Southern indicated that the value placed on the two merchant plants was roughly $195 million. Cheap at $160 per net MW, but probably reasonable since these plants had power sales agreements expiring in the next few years in what we believe will be a difficult wholesale power market in Florida. Overall, we think the transaction is in line with recent transactions considering the weakness in utility shares year to date.

The transaction further addresses the five-year $7 billion of equity needed by Southern to strengthen its balance sheet following tax reform, the Kemper settlement and cash needs to complete the two new nuclear units at Vogtle. Earlier this month, Southern announced it would sell Home Solutions to American Water Works for $365 million and net an additional $1 billion from the sale of a tax equity position in its Southern Power wind portfolio. The sale of the Florida assets announced today would reduce the equity needs by an additional $3 billion.

The remaining equity needs of less than $3 billion can probably now be handled by ongoing internal equity programs without the need for additional equity issuances. We estimate this will be accretive to earnings by about $0.03 to $0.05 per share in 2020 and modestly increase our 5-year 4.6% average annual EPS growth estimate to closer to the midpoint of management’s 4%-6% growth target. However, the increase will not have a material impact on our fair value estimate.

Regulatory Relief Is Coming for the Banks, Watch Out for Increasing Competition, More M&A
by Eric Compton| Morningstar Research Services LLC | 05-24-18

As expected, regulatory relief for banks is set to be signed into law by President Trump, after passing through the House and the Senate. Because the bill needed the support of both republicans and democrats, a middle ground was needed and as such the bill only made moderate changes to existing regulations, most notably leaving the Consumer Financial Protection Bureau alone. Overall, the benefits from regulatory relief fit well within our previous projections, and we are not making any material changes to our fair value estimates after the passing of this bill. One of the primary benefits we see of a less stringent regulatory environment will be the ability to shed excess capital and increase leverage. For the traditional banks we have under coverage, we currently project an increase in leverage of roughly 5% on average (as measured by equity/assets), and for returns on equity to increase by over 20%, with roughly a quarter of this increase coming from the increasing leverage, over the next five years. Further, we do not plan to make any changes to our moat ratings based on the passing of this bill, as we believe that over the longer term, the economic benefits of this bill will be shared and competed away to some degree, and the gains we currently project are already accounted for in our current ratings.

Bill S. 2155 was aimed at primarily benefiting smaller banks, however, we see two key benefits for the larger banks, as well.

First, the trust banks, and potentially even the larger banks with trust operations (JP Morgan and Citi) will benefit from easing of supplementary leverage ratio (SLR) regulations. The SLR calculates Tier 1 capital divided by total leverage exposure (including off-balance sheet exposures) to arrive at a non-risk adjusted leverage ratio for a bank. This is used in conjunction with risk adjusted leverage ratios, most notably the common equity Tier 1 ratio, to ensure that banks are not becoming over-leveraged. The current changes will eliminate funds stored at central banks from the total leverage exposure calculation. This means that these funds, which are essentially considered “riskless,” will now have a risk-weighting of zero, whereas before every asset had an equal risk weighting of 100%. This will improve each bank's SLR ratio and allow these banks to leverage up to a greater degree, most likely through purchasing higher yielding securities. If the extra room for leverage allowed by these changes is simply invested into a like securities basket, revenue should go up for the trust banks by 4% to over 6% for each trust bank, all else equal. 

Second, the bill raises the “SIFI” threshold from $50 billion to $250 billion in assets. For banks with $50 billion to $100 billion in assets, this relief would be immediate (under our coverage: Comerica, Zions, and SVB Financial), while the Federal Reserve would be able to craft custom responses for banks between $100 billion and $250 billion in assets (under our coverage: BB&T, Sun Trust, Fifth Third, KeyCorp, Regions, M&T Bank, and Huntington). This would free these banks from the current enhanced prudential standards to which they are subject, including enhanced reporting requirements, liquidity requirements, resolution planning requirements, and stress testing requirements. In our view, the most significant changes for these banks will be increased flexibility in capital return planning due to the lack of yearly stress tests, some cost savings on the margin (although as we noted in the past, the initial build up costs for these compliance systems have already taken place), and the potential for some additional income from slightly relaxed leverage/liquidity requirements (although this effect should be minimal). We would expect increased room for more aggressive dividend and share buyback policies, as well as more room for M&A, particularly given the less stringent appointees the current administration is favoring.

We would not be surprised to see more deals like the recently announced acquisition of MB Financial by Fifth Third, where a mid-sized regional acquires a smaller player to gain scale in key markets and move up the super-regional size ladder. Given the recent increases in overall bank valuations, we do not expect these deals to come at bargain prices in the current environment. The largest banks are already so large, they are either explicitly forbidden from further banking acquisitions, or any one which would move the needle significantly would likely not be approved. Instead, we see these banks (mainly the big four, and USB, PNC, and Capital One) focusing on organic growth, thereby increasing competition within their markets. Further, with so much momentum and record profits within the banking industry, we would expect competition to pick up in general regardless, both for loans and for deposits, as the current cycle continues to mature. This, along with the eventual turning of the credit cycle, should provide some counter balancing effects to returns over the next 3-5 years.

Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. Analyst ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst ratings are based on Morningstar’s analysts’ current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst ratings are not guarantees nor should they be viewed as an assessment of a stock's creditworthiness. Ratings, analysis, and other analyst thoughts are provided for informational purposes only; references to securities should not be considered an offer or solicitation to buy or sell the securities.

©2018 Morningstar, Inc. All rights reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. The information contained in this document is the proprietary material of Morningstar, Inc. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, Inc., is prohibited. All data presented is based on the most recent information available to Morningstar, Inc. as of the release date and may or may not be an accurate reflection of current data.  There is no assurance that the data will remain the same.

The commentary, analysis, references to, and performance information contained within Morningstar® DividendInvestorâ„ , except where explicitly noted, reflects that of portfolios owned by Morningstar, Inc. that are invested in accordance with the Dividend Select strategy managed by Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc. References to "Morningstar" refer to Morningstar, Inc.

Opinions expressed are as of the current date and are subject to change without notice. Morningstar, Inc. and Morningstar Investment Management LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use.  This commentary is for informational purposes only and has not been tailored to suit any individual. 

The information, data, analyses, and opinions presented herein do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Please note that references to specific securities or other investment options within this piece should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment.

This commentary contains certain forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

Investments in securities are subject to investment risk, including possible loss of principal.  Prices of securities may fluctuate from time to time and may even become valueless.  Securities in this report are not FDIC-insured, may lose value, and are not guaranteed by a bank or other financial institution. Before making any investment decision, investors should read and consider all the relevant investment product information.  Investors should seriously consider if the investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision. There can be no assurance that any financial strategy will be successful.

Common stocks are typically subject to greater fluctuations in market value than other asset classes as a result of factors such as a company's business performance, investor perceptions, stock market trends and general economic conditions.

All Morningstar Stock Analyst Notes were published by Morningstar, Inc. The Week in Dividends contains all Analyst Notes that relate to holdings in Morningstar, Inc.'s Dividend Select Portfolio. Morningstar’s analysts are employed by  Morningstar, Inc. or its subsidiaries.  In the United States, that subsidiary is Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Commission.

David Harrell may own stocks from the Dividend Select and Dividend Select Deferred portfolios in his personal accounts.
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