You are viewing the chat in desktop mode. Click here to switch to mobile view.
X
Return toRoger Conrad's Utility Investor
2/11/20 Conrad's Utility Investor Live Chat
powered byJotCast
AvatarRoger Conrad
1:58
Welcome to the Conrad's Utility Investor live chat for February. Thanks for joining us! Per usual, there is no audio. Just type in your questions and I'll get to them as soon as I can concisely and comprehensively. I will be keeping this open so long as there are questions left in the queue. And you will be sent a link to the completed Q&A transcript shortly after I sign off.
As I usually do, I'm going to start by sharing my answers to questions we received via email prior to the chat:
1:59
Q. Roger. Some friends who are also utility fans are touting Xcel Energy (NYSE: XEL) as the future NextEra Energy (NYSE: NEE). I know that you call it a buy under 65, but do you see it as having big potential in the alternative energy space? Thanks for your long-standing sound advice—Don C.
 
A. Thanks Don. Xcel is a utility stock I’ve personally owned for many years, dating back to when it was Northern States Power. The primary difference between the company and NextEra as a bet on renewable energy growth is it’s 100% regulated utilities.
 
Basically, all of Xcel’s investment in wind and solar is flowing into regulated rate base, where it earns a designated rate of return set by states, most importantly Colorado and Minnesota. NextEra in contrast is investing in rate base at its regulated Florida utilities. But the lion’s share of growth is at the unregulated NextEra Resources unit, which develops facilities and sells the output under long-term contracts to regulated utilities, government entities and corporations.
 
I would argue that renewable energy investment under the regulated utility model provides greater security. Once a facility enters service and regulators have approved the cost, the benefit to earnings is more or less locked in. The key advantage of NextEra’s way is the only limit to growth is management’s ability to find opportunities, sign contracts, finance cheaply and then build and operate efficiently.
In the current environment of rapid growth, investors are valuing NextEra’s way (33.5X expected 12 months earnings) much more highly than Xcel’s (20.8X). That’s despite the fact that both companies project similar upper single digit annual earnings growth rates over the next few years. And that’s why I consider Xcel a much better buy than NextEra at current prices.
 
As I wrote in the February issue, this is not a knock on NextEra’s business model. In fact I would argue long-term contracts with creditworthy counterparties offer close to the degree of safety of regulated utility revenue. But right now, I would agree Xcel is the better buy. In fact, if it comes down a bit more, I will be considering adding the stock to the Conservative Holdings.
 
Q. I am continuing to invest in the ONEOK Inc (NYSE: OKE) dividend reinvestment plan. Should I reduce it or get out?—Richard D.
 
A. I’m advising neither action at this time. Like all North American midstream companies, ONEOK had a difficult year in 2020, with lower oil and gas prices greatly depressing drilling activity in shale basins its infrastructure serves and therefore its system throughput. That was particularly true in Q2, when dividends exceeded distributable cash flow.
 
Conditions improved greatly in Q3, and we’ll likely see the same positive trends for Q4 numbers to be released February 22. But the results last year nonetheless showed once again that company cash flows are still highly cyclical, despite the dramatic moves taken by management the past five years to reduce direct exposure to commodity prices and lock in revenue with contracts.
2:00
There are definite signs of strength for ONEOK. That starts with management’s ability to maintain the quarterly dividend of 93.5 cents per share in a year when only a handful of energy companies were able to avoid cuts. The company has completed its extensive CAPEX program of the past several years and now has systems in place that can absorb meaningfully higher volumes with minimal expenditure.
 
That means operating cash flows should cover both CAPEX and dividends with cash to spare in 2021, which in turn can be deployed to reduce the current $14.4 billion debt load. And the fact that Moody’s, Fitch and S&P rate the outlook stable means there’s no immediate pressure on investment grade credit ratings, as does ONEOK’s low cost of long-term debt capital with bonds of January 2051 yielding 4.67% to maturity.
I’ve kept the company on the Endangered Dividends List precisely because this is early days of the energy price recovery, revenues follow system volumes and management has said deleveraging is its top priority. But equally, that risk is reflected in the 8.5% yield. And if investors get more comfortable that $50 plus per barrel oil is here to stay, I think ONEOK shares could well rebound to the 70s, which is where they traded the last time oil sold consistently for more than $50.
 
The fact that ONEOK’s revenue has proven this cyclical does give me cause for pause about whether I want to ride it through another downturn in a dividend reinvestment portfolio. And it’s possible I may decide to switch horses to another high yielding midstream with less cyclical exposure—say Williams Companies (NYSE: WMB)—at some point in the future. But at this point, I believe the risk/reward for ONEOK favors holding on, especially given my expectation that oil will hold $50 this year.
 
Q. Hi Roger. First, thank you for all your good advice over the years. I am a
subscriber to both CUI and CUI+ and appreciate your sound insights. They have helped me grow my portfolio since I started investing 12 years ago, and I sleep better knowing you "have my back". My question for this chat is about AGL Energy (ASX: AGL, OTC: AGLXF). Do you think they will ever dig their way out of the depths? Is their dividend still safe? I recently bought more on a significant dip, then it dipped even more and hasn't recovered. Kind of wishing I'd put the extra money into Enterprise Products Partners (NYSE: EPD).--Thanks, Cindy S.
 
A. Hi Cindy. Yes, AGL is a stock that as I’ve said before we would have been better off selling after the Liberal/National Party’s unexpected victory in Australia’s 2019 elections. I do think management has done an admirable job navigating through what’s become a regulatory war between pro-renewable energy states and the fossil fuel-defending national government.
 
But whereas a Labor government would have helped AGL’s long-term strategy to expand renewable energy, Liberal/National has done everything it could to hinder them. The government is no longer bashing utilities on rates, as the pandemic’s impact on the economy has resulted in a collapse of wholesale electricity prices. But that’s also taken a big bite out of company profits, resulting in an AUD2.69 billion non-cash writedown announced by management this month.
 
That said, AGL is still Australia’s leading electricity company. Management continues to push ahead on deploying new wind, solar and increasingly energy storage assets. The acquisition of a fiber broadband company has enhanced its ability to provide advanced services as well. The planned closure and replacement of the Liddell coal-fired power plant with renewable, storage and gas resources is still on track, despite previous Liberal/National government threats. And the company continues to streamline operations while maintaining its strong balance
2:01
sheet in tough times.
 
My mistake with AGL was underestimating just how important results of an election would be for its medium-term fortunes. Before the end of 2022, Australians will go to the polls again to choose between Labour and the ruling Liberal/National coalition.
 
At this point, Labor and its allied parties (Greens etc) appear to be running slightly ahead in most opinion polls. And while AGL management has clearly calmed relations with the government over the past year, it’s kept a direction that would clearly benefit from Labor/Green policies.
Of course, Labor was also running ahead before the 2019 election. But what’s different this time is AGL shares are at a far lower price—in fact 7 times trailing 12 months earnings—which mean much lower investor expectations. That means a favorable outcome this time around would provide a big lift. So would a waning of the pandemic’s impact on Australia’s economy in coming months.
 
The -26.6% drop in fiscal year first half 2021 underlying profits (end December 31) reflects the current environment and was not unexpected. In fact, management actually stuck with is full-year guidance (end June 30) for EBITDA of AUD1.585 to AUD1.845 billion.
2:02
The company also stuck to underlying net profit guidance of AUD500 to ADU580 million. Like most Australian companies, AGL pays its dividend in line with expected profits. That makes it likely the twice-annual fiscal 2021 payout will be less than the record disbursement in 2019 or what the company paid in FY2020. But what was declared (31 Australian cents plus 10 cents “special cash”) as a first half FY payout (payment March 26) is only -12.8% less than what was paid out in total a year ago. So management is also sticking to guidance there.
A variable dividend is of course very much a positive in stronger profit years, which I think we can expect going forward given that this is likely to be the bottom of the cycle. And the payoff to US investors will be favorably impacted by the roughly 15% lift in the Australian dollar vs the US dollar over the past 12 months.
 
The most important thing is the numbers again show AGL’s business is solid on the inside, even at what should be it’s weakest point. That’s why I’m staying with it, despite the pain we’ve felt over the past year particularly.
Q. Do you have an ETF or mutual fund that you would recommend for utilities? I’m looking at the Vanguard Utilities Index Fund ETF (VPU)—Chris and Lorraine G.
 
A. If you’ve been reading me long enough, you know that I believe investors will over time do far better picking out and managing their own utility stocks, rather than buying them through ETFs. The top four holdings in the Vanguard ETF, for example, are NextEra Energy at almost 15%, Duke Energy (NYSE: DUK) at 6.7%, Southern Company (NYSE: SO) at 6.4% and Dominion Energy (NYSE: D) at about 6.3%.
2:03
Why do I need to pay ETF fees, however low they’re advertised, to own these long-term keepers? And if I really like them, why do I want to weight them down with the rest of the 66 total holdings, some of which actually don’t pay dividends? The ETF pays around 3.5% depending on how you calculate it, which is in line with the Dow Jones Utility Average. But again, the difference between the top and bottom performing utility stock in our coverage universe last year was 843 percentage points—that’s the best advertisement I know of for stock picking in this sector.
 
Anyway, if you are interested in owning a basket of utilities rather than making your own choices, there is a much better option: Selected closed-end funds where managers make the call. I do cover several in the Utility Report Card. My favorite for utilities is BlackRock Utilities Infrastructure & Power Opportunities Trust (NYSE: BUI). It yields 5.6% and has returned about 20% over the past 12 months, versus the Vanguard ETF’s -5.6% loss.
It’s a bit above my recommended buy target of 24. But would be a solid portfolio addition on a dip to that level.
Q. Roger. Do you have any opinion on midstream companies Delek Logistics Partners (NYSE: DKL), Enable Midstream Partners (NYSE: ENBL) and Golar LNG (NSDQ: GLNG). Some are doing gangbusters, some not so much. Thanks--Denny Hajek.
 
A. Thanks Denny. All of these are tracked in our MLPs and Midstream coverage universe in Energy and Income Advisor. The only companies in this space that we track in the Utility Report Card are a small handful that I’ve determined have utility-like characteristics, basically the likes of Enterprise Products Partners, Williams Companies etc.
2:04
Enable’s fortunes are extremely important to one of the Aggressive Holdings. That’s Centerpoint Energy’s 7% preferred stock, which mandatorily converts to common stock on September 1, 2021. It’s conversion value at that time is likely to depend heavily on whether or not Centerpoint is able to get an acceptable price for its 50% general partner and 53.7% limited partner interest in Enable.
 
Both Centerpoint (Feb 25) and Enable (Feb 24) will release Q4 results and update guidance later this month. And it’s possible we’ll get some news then on potentially interested suitors. We’ll also see how well Enable is holding up to cyclical pressures in the energy business, particularly drilling cutbacks in its key central Oklahoma service territory.
 
I expect to see numbers that back up what’s actually a very conservative dividend, despite high yield of 11% plus. That could give the shares a lift. But the end game here is what offer Centerpoint gets for its stake in Enable, which is likely to be extended to OG&E Energy’s (NYSE: OGE) 50% GP and 25.49% limited partner stakes, as well as the remaining 20% plus held by the public. Bottom line I think this one is worth holding onto for the takeover potential as well as the still high dividend.
 
The short view on Delek and Golar LNG is we’re sellers. The LNG transportation market is severely glutted, with supply of ships at least temporarily in excess of rising demand the next several years, and that should limit dividend-paying opportunities for Golar—which currently doesn’t pay one. Delek depends on inland refineries that are at risk. And every dividend increase has decreased coverage.
We have a lot more discussion on midstream companies and MLPs in Energy and Income Advisor. In fact, we see a great deal of upside in the stronger names this year.
Q. Roger. Following your CUI advice for “greening up” my midstream portfolio. Started with Brookfield Renewable Partners (NYSE: BEP), but now way too expensive. Have positions now in Algonquin Power & Utilities (NYSE: AQN) Dominion Energy (NYSE: D) Duke Energy (NYSE: DUK) and Edison International (NYSE: EIX). As you say, as the green technology becomes increasing available, they will profit. Have room for one more selection. Thinking about American Electric Power (NYSE: AEP). You don’t seem to say much about it. Do I have your blessing to get it, or do you have a “greener” option that is affordable, or just increase positions I already have? Thanks--David O.
A. Thanks David. I do track American Electric Power in the Utility Report Card. And while it’s not a Portfolio holding at this time, I have mentioned it as a possible one for the future. Current highest recommended entry point is 85 and the valuation is reasonable at 17.5 times expected next 12 months earnings, with a mid-single digit yield and mid-single digit percentage annual dividend growth. It’s a large and secure regulated franchise and draws my highest Quality Grade of A.
 
That said, if your primary interest is renewable energy, my view is Avangrid Inc (NYSE: AGR) is a better play. As my February feature article highlights, it’s the largest investor in US offshore wind other than its partner Orsted SA (Denmark: ORSTED, OTC: DNNGY), which is now basically a pure developer. Orsted has come down below my highest recommended entry point this week. But as a regulated utility, Avangrid fits more the mold of the renewable stocks you already hold.
 
2:05
I have a fairly detailed discussion of Avangrid and other US offshore wind stocks in the February. The market still seems to be taking a “show me” approach to this area of renewables development, as we see if the Biden Administration Bureau of Ocean Energy Management is any more accommodating of these projects than Trump appointees were. As I note in the article, however, faster approval certainly does seem to be in the cards here, starting with the target 42 gigawatts of capacity by 2030—up from 6 megawatts right now (Dominion/Orsted’s pilot project off the Virginia coast).
 
Q. Please provide your opinion on Iberdrola SA (Spain: IBE, OTC: IBDRY). This stock is not in either of your portfolios and yet, it appears to be a very well run company with decades of success in bring green energy into the real world while making a profit. Thanks.--Doug W.
 
A. I agree Iberdrola is a very solid company and I continue to rate the stock’s US American Depositary Receipts a buy with a highest recommended entry point of 55. As I note in Utility Report Card, it will report Q4 results and update guidance on February 24. That’s one day after its US affiliate Avangrid will (see answer to previous chat questions), of which it owns 81.5% of publicly traded shares.
I consider Avangrid the most valuable piece of Iberdrola. And it will be even moreso following the merger with PNM Resources (NYSE: PNM), which looks set to close in early Q4. The toughest hurdle is still likely to be getting New Mexico regulators’ approval. But Iberdrola/Avangrid’s plans to ramp up renewable energy in the state—and their finances and track record in development—make for a pretty compelling sales pitch.
 
The inevitable question is what’s the better play: US unit Avangrid or the whole company. The answer really depends on whether investors want a piece of Iberdrola’s assets in South America and Europe as well. The latter are mainly focused in the company’s home market of Spain and in the UK, where its primary asset is the former Scottish Power.
 
2:06
I see merit in both stocks. But with US offshore wind development one of very few renewable energy sectors investors haven’t bid to the stratosphere, I think the near-term opportunity at least is greater with Avangrid—which is why it’s in the Conservative Holdings rather than Iberdrola at the moment.
 
Also note that Iberdrola’s home stock market is Spain, which means that the US dollar value of the share price and dividends will fluctuate with the Euro exchange rate. Avangrid in contrast is priced in and pays dividends in US dollars.
 
 
Q. Are you recommending a different money market fund besides Vanguard Intermediate-Term Tax Exempt Fund (VWITX)? Thank you—Joe M.
 
A. Joe, I consider the Vanguard Muni fund as an excellent parking place for capital. Despite rising well above my highest recommended entry point of $14.60, the fund still pays a competitive yield for fixed income—2.1%, with considerable tax advantages particularly for high tax bracket investors. It’s hard to beat the safety provided by holding nearly 10,000 individual bonds with an average credit rating above A and the 10 largest less than 2.5% of net asset value. And there’s protection from a rise in interest rates as well from the limited maturities of the holdings and the fact that municipal bonds as an asset class still trade at a discount to benchmark US Treasury rates.
 
That said, it’s not a money market fund, which by definition can never lose money so long as the sponsor remains solvent and has properly ring-fenced accounts. In what’s currently effectively a zero interest rate environment, most actual money funds don’t currently pay more than a few basis points of yield. Really the only thing you want to make sure of is that you have access to your funds, either to withdraw or to invest in top quality stocks when targeted entry points are reached.
 
The only money fund I’m actually recommending in any of our services now is Vanguard Federal Money Market (VMFXX), mainly because it’s in the same family as the Vanguard Muni Fund. But there are any number of others that will perform the same function of offering a source of readily accessible funds. Again, that’s the main criterion for a money fund—can you get at your money when you want it?
 
2:07
 
 
Q. Hi Roger. I may not be able to make the chat Thursday, so a few questions: Can you comment on prospects for AT&T Inc (NYSE: T)? There seems to be a divergence of opinion on many fronts concerning the future. Second, I am generally concerned about the stock market. I am retired and primarily concerned with 1) preservation of capital, 2) income and 3) extremely low interest rates. I imagine many subscribers are in similar circumstances. Given that, can you provide your perspective on how to best position a portfolio? Third, can you provide guidance re: bonds that fit a retirees’ portfolio? Thanks—John C.
 
A. AT&T currently sells for less than 9.1 times expected next 12 months earnings. Of the 22 major research houses tracked by Bloomberg Intelligence that cover the company, 10 rate it buy, 16 hold and 6 sell. And the yield of over 7% is clearly a sign that at least some investors consider it to be at risk.
When you own a stock trading at a discount this wide to other stocks---the S&P 500 forward earnings multiple is 22.4X—it’s important to know why. My view has been and remains that AT&T has ample means to pay its dividend in 2021, even if the pandemic continues to depress revenue at Time Warner. That starts with expected free cash flow of roughly $26 billion—after sector leading CAPEX of almost $20 billion—which would cover the dividend by 1.7 times.
 
That would leave more than $11 billion to pay down debt, in addition to the company’s ongoing asset sales program. It’s been pointed out that management may have paid as much as $20 to $25 billion in the US government’s recent spectrum auction. That will likely weighing on shares as investors wait to see how much it did spend and how it will finance, though management has apparently already secured $14.7 billion from Bank of America.
On the plus side, AT&T’s massive refinancing efforts last year pushed back maturities and slashed interest costs to the point where management can take its time permanently financing spectrum costs. In addition, the $15.5 billion writedown of DirecTV should ease the way toward selling that unit, which would provide another opportunity to pay off a sizeable chunk of debt. Finally, if the pandemic recedes, there’s likelihood of a strong revenue recovery at Warner Media, which combined with more cost cutting would make the $26 billion free cash flow target for 2021 conservative.
 
What I really likely about the Q4 results is how solid the core wireless operation appears to be on the eve of 5G uptake. The US government currently bars Americans from owning shares of China Mobile (Hong Kong: 941, NYSE: Delisted). But that company’s big uptake of 5G users—and the accompanying lift in its average revenue per user—are pretty solid proof of concept.
And as one of three US wireless companies large enough to matter, AT&T is going to get its share of growth.
 
Bottom line is investor expectations are rock bottom now. And there’s some reason for that, including high debt and a record of underperforming investments by management outside its core business. But that also means a lot of room to beat expectations this year. And while the streamlining plans pushed by activist Elliott Management more than a year ago haven’t yet resulted in a higher stock price, there is evidence they’re transforming the business into a more effective competitor where it counts.
2:08
That’s enough reason for me to stay with slumping AT&T shares at this time. Note that I will sell if the underlying business really does show signs of weakening, even if that means taking a loss.
As for the second half of your question, at the risk of being accused of self-promotion, I would suggest taking a look at our CUI Plus service. Basically, it’s a diversified and balanced managed portfolio where I recommend specific stocks and other income generating investments as well as how many shares to buy.
 
Each semi-monthly update highlights my research on the individual holdings, as well as overall strategy for putting them together. There are also occasional Alerts if action is needed in between time. But our focus is long-term: That’s a portfolio that will pay a safe and rising income stream, gain value over time and hold value during tough times. And that’s what we’ve achieved in the roughly two and a half years since the launch: A total return of roughly 32 percent versus 9 percent for our primary benchmark—the 101 dividend paying stock member Dow Jones Select Dividend Index.
CUI Plus’ holdings are best in class companies across a range of sectors—filtered by my Quality Grade system—that pay safe dividends backed by healthy and growing businesses. Most also trade at discounted valuations to the broad stock market, but have what it takes to close the gap over time. And as they do so, I expect them to generate steady capital gains, even in less than ideal macro economic conditions.
 
If that sounds like something you’d like to check out, I strongly encourage you call our Customer Relations Director Sherry Roberts at 1-877-302-0749, anytime from 9-5 ET, Monday through Friday. And like all of our services, CUI Plus includes are risk-free trial guarantee as well as our forever guarantee. You never pay a higher subscription price for a renewal than what you came in on.
As for your third question, the current percentage of bonds in the CUI Plus portfolio is a bit less than 20 percent—all in the Vanguard municipal bond fund I highlighted in my answer to a previous chat question.
 
My general advice on bonds in retirees’ portfolios is to basically ignore the standard line parroted by many advisors. That includes the big investment houses like Vanguard that try to shunt investors into “Target” funds using a formula of allocating stock and bond ETFs depending on age, so-called risk preference etc.
2:09
The main reason is relative risk of stocks and bonds as asset classes isn’t fixed, but rather changes constantly with market conditions. The combination of a very accommodative US Federal Reserve and virtual absence of inflation pressure in the global economy has severely compressed bond yields in recent years. But it’s also greatly increased the reliability of bonds’ returns on an annual basis.
 
As anyone with a market memory longer than a decade or so can tell you, that hasn’t always been the case. I don’t see much inflation pressure or any indication the Fed will start to tighten credit yet. But at some point, the economic cycle will shift. And from this level of bond prices, there’s a lot more downside when it does than upside from things staying the same.
Bottom line: Bonds are still important for conservatively run portfolios. But at this point, stocks offer both higher yields and actually greater safety against when the cycle turns again. Invest judiciously.
Q. Hello Roger: Please help me decide what to do with AT&T (NYSE: T). I've been in and out of T for years. Right now I'm in. The latest opinions out there suggest that the company will have to increase their debt significantly
in the current spectrum auction to keep up with the other big telecoms, and that they wasted billions on spectrum a few years ago that is not useable with 5G. Keep thinking that I should have my money in something "going somewhere". The dividend is nice, but with inflation expected much higher in the future, wind, solar, etc. appear to be a better direction for my investments? Thanks for all your advise over the many years I've followed you.—Bill G.
Load More Messages
Connecting…