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
GE Disappoints and Emerson Ups Its Bid for Rockwell -- The Week in Dividends 2017-11-17
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:

General Electric's GE investor day (and its dividend cut announcement) was obviously the biggest portfolio news this week. Please see Dividend Select portfolio manager Michael Hodel's GE update from Tuesday as well as the trade alert from the following day. Morningstar Research Services* also posted a new GE analyst note, which is included below.

On Thursday, Emerson Electric EMR increased its bid for Rockwell Automation ROK from $215 a share to $225 a share. Please see today's analyst note below.

After a recount of proxy votes, activist investor Nelson Peltz is now claiming that he won a seat on Procter & Gamble's PG board. But as pointed out in the Morningstar analyst note below, it may take several weeks before the outcome is certain.

Finally, PPL PPL announced a quarterly dividend of $0.395, unchanged from its previous payout.

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor

News and Research for Dividend Select Portfolio Holdings

In Case This Wasn't Clear, Emerson Really, Really Wants to Buy Rockwell Automation

by Barbara Noverini, CFA | Morningstar Research Services LLC | 11-17-17

On Nov. 16, Emerson upped the ante by making a third unsolicited offer to buy Rockwell Automation for $225 per share (60% cash/40% stock). This equates to over $28 billion of enterprise value, or an eye-popping almost 19 times the consensus estimate for Rockwell's 2018 EBITDA. Emerson's latest proposal asserts that nearly $6 billion of capitalized synergies could be generated from the deal, with a third derived from revenue synergies and the remainder from cost savings. Much like the rationale for acquiring Pentair's valves and controls, Emerson believes that the combined entity would be better equipped to bid for the larger-scale automation projects that Emerson favors. Furthermore, Emerson's leadership in process automation, combined with Rockwell's leadership in discrete automation, would combine the two wide-moat companies into a truly hybrid, global player.

The strategic rationale is sound, and we believe that industrial automation is an attractive secular growth story. That said, we remain skeptical that Emerson's shareholders will benefit from a rich offer, and think that much of the value created from a tie-up will accrue to Rockwell's shareholders. We expect that Rockwell's board has some serious consideration to do at these levels, given the juicy 30% premium to Rockwell's undisturbed share price and over 60% premium to our fair value estimate. Rockwell has always valued its independence, and would likely bristle at the proposed "Emerson Rockwell" name. We're not entirely convinced that granting board representation and the creation of an automation center of excellence in Rockwell's home town of Milwaukee will assuage Rockwell's concerns of a culture clash, should the tie-up proceed. However, every company has its price, and Emerson's latest aggressive offer could be coming close.

The Never-Ending P&G Versus Peltz Saga Is Back for Another Act
by Erin Lash, CFA | Morningstar Research Services LLC | 11-16-17

Even though wide-moat Procter & Gamble claimed victory following a three-month proxy battle just last month, activist investor Nelson Peltz (who owns about $3.5 billion, or around 1% of shares outstanding) now attests that a recount by an independent election firm shows he edged out current board member Ernesto Zedillo (the former president of Mexico) to win a seat at the table. In response, P&G acknowledged that the preliminary recheck puts Peltz modestly ahead (but only to the tune of 42,000 votes, or 0.0016% of shares outstanding; this runs in contrast to P&G's contention last month that its slate of directors had won by more than 6 million votes), but failed to go so far as to accept defeat.

At issue, Peltz has suggested P&G's organizational structure, corporate governance, and recent financial performance has lagged peers and that more must be done to accelerate the pace of change at the leading household and personal-care firm. However, from our vantage point, P&G has been pursuing a course over the past several years to right its ship (culling unprofitable brands and extracting excess costs). While these efforts have yet to materialize into sustainable improvement, we view the firm's efforts as sound and don't surmise that merely adding Peltz to the board would bring forward a meaningful uptick in performance.

The challenge in assessing the ultimate result stems from the fact that shareholders can vote as many times as they wish during the proxy contest, but only their last vote is official; as such, it is likely the outcome could remain unknown for another few weeks. However, this does little to alter our $96 fair value estimate (based on 4% annual sales growth in the longer term and 300 basis points of operating margin expansion to nearly 25% at the end of our 10-year explicit forecast). We view shares as modestly undervalued, trading 5%-10% below our valuation.

GE Cuts Dividend and Resets 2018 Earnings; We Think Point of Maximum Pessimism Finally Reached
by Barbara Noverini, CFA | Morningstar Research Services LLC | 11-13-17

We expect to cut our fair value estimate to about $26 from $29, chiefly by reducing our expectations for midcycle margins after GE's long-anticipated investor update, in which new CEO John Flannery reset expectations to reflect the harsh realities of what we believe will likely be a multiyear turnaround. With the dividend cut by half to $0.48 per share, significant restructuring planned for the power segment, and no imminent breakup of the industrial conglomerate on the table, we believe maximum pessimism has been reached. Following today's sharp sell-off, GE shares are trading at a level that implies that the portfolio is incapable of returning to meaningful earnings growth; however, we do not believe this reflects the company's longer-term potential, considering that 70% of GE's revenue and 85% of its earnings come from businesses that dominate their markets. While we acknowledge that 2018 will be messy, and that 2018 earnings will exhibit a lot of accounting and restructuring noise, we assert that GE's collection of assets can return to healthy free cash flow generation over the long run under today's better management.

In these early days of Flannery's tenure, we like that his messaging repeatedly addresses questions we consider most important to investors: How will GE improve its free cash flow, and how will the company allocate that cash going forward? Cutting the dividend is painful, but it frees capital to allocate toward restructuring sorely needed to rightsize the power segment. Flannery also highlighted $20 billion of assets earmarked for divestiture over the next two years, including transportation, lighting, and up to 10 other smaller businesses, a sign of purposeful redirection of capital and management attention toward businesses with strong potential for secular growth. Finally, management incentives will be pegged to free cash flow performance, a change we welcome to better align the company's interests with shareholders'.
*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.

©2017 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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