JotCast | 8/13/20 Conrad's Utility Investor Live Chat

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8/13/20 Conrad's Utility Investor Live Chat

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John Cannizaro

6:41

Wouldn't owning BUI provide me with a good investment without having to invest directly in D, NEW and other utilities and renewables?

Roger Conrad

6:41

I think the Blackrock closed end fund is a terrific investment, and as I said I do use it in the CUI Plus portfolio. But for the reasons I named earlier in the chat answering questions on this fund--we'll never know what's inside enough to have 100% confidence in the dividend, and we lose the ability to profit from dividend growth at individual stocks--I prefer building a portfolio of individual stocks to using BUI as a substitute for building a portfolio.

John Cannizaro

6:46

What are your thoughts on Avangrid? I am concerned with the lack of recent dividend growth.

Roger Conrad

6:46

I haven't raised my highest recommended entry point from 42 for precisely that reason--and won't until there is dividend growth. I do think the current payout is safe and allows the company to invest enough operating cash flow in its contract renewable energy portfolio and utility system to avoid taking on too much leverage. I like the operating and financial strategy of 81.62% owner Iberdrola SA--which essentially calls the shots. And I think if it can get its offshore wind facilities permitted, built and running the next few years, it's going to have a massive engine for earnings and dividend growth later in the decade. But until there is more progress in that direction and/or a dividend increase, I consider this stock basically a hold at the current price.

John A.

6:49

Opinion on ARESF?

Roger Conrad

6:49

It's tough times for real estate investment trusts. And even though Artis has cut its exposure to the embattled Calgary office market greatly the last few years, there are still pressures in the markets where it operates. That said, I do rate it a buy in our "REIT Sheet" and I did like many of its Q2 performance metrics--including the Q2 payout ratio of just 51.9%, the 1.2% boost in same property net operating income excluding bad debt, 92.9% occupancy including commitments (was 90.7% at the end of March. Bottom line is this REIT appears on the right track and it's very cheap relative to NAV of CAD15.40 per unit.

Al

7:01

BEPC is now trading 6.5 % higher than BEP. Since these are equivalent holdings, why is that?

Roger Conrad

7:01

I think there's money coming into Brookfield now through BEPC from sources that weren't able to invest when the only way to buy in was with partnership units. I'd be surprised if this gap lasted too long, since the only difference between BEP and BEPC is how dividends are taxed--and eventually it will become attractive to arbitrage. If the gap does become too wide at some point, I will recommend selling BEPC and buying BEP with the proceeds as it's basically free money. But for now continue to hold both if you have both.

Al

7:05

How can I switch from BEP to BEPC without taking a loss? I want to be rid of the K1.

Roger Conrad

7:05

I answered this question earlier in the chat. Basically, if you sell BEP to buy BEPC now, you're going to eat the difference--and you might also get hit with a big tax bill. That makes absolutely no sense since these are basically just two ways to own the same company. My advice is to be patient, find out what your tax could be from selling BEP now, and at a minimum wait for the price gap to shrink as it inevitably will. It's also possible Brookfield itself will figure out a remedy that doesn't punish investors for converting.

bob

7:11

bui you say they don't use leverage, how then do they pay such a high dividend?

Roger Conrad

7:11

The 10 largest holdings of BUI pay an average dividend of 3.31% and are about 42% of the portfolio. That compares to 6.5% for the fund based on its current market price. Since that's basically the same as NAV, it's fair to ask how management comes up with the higher payout?

The answer is the payout is a combination of investment income (27% fiscal year to date as of July 31), and what's considered return of capital (73%). The fund doesn't specify what this is. But we can infer from the holdings that a good chunk of it is distributions that are considered return of capital for tax purposes with the balance fund reserves.

That's pretty standard practice for CEFs and its uses doesn't alarm me in the case of this Blackrock fund. But on the other hand, it is another way that this fund like other CEFs is a black box to us investors. We don't know the secret sauce and we're not going to. And that my friends is why I'm so insistent we focus on building a portfolio of high quality stocks!

DM

7:16

Any update on Valero? I bought when you recommended so down currently about 9%. Any reason to average down at this point?

Roger Conrad

7:16

We still have Valero Energy in the Energy and Income Advisor model portfolio. It's large, diversified by geography and customer, financially strong and is successfully navigating its way through a very tough environment that saw a huge drop earlier this year in refining throughputs and margins. Its an environment that has already claimed several rivals and thereby increased Valero's long-term dominance of the increasingly mature North American energy industry. Again, I'm not a big fan of averaging down anything but Valero is still very much a buy for patient investors.

Howard F

7:16

Thanks once again for this very informative chat.

Roger Conrad

7:16

Thank you for tuning in.

Howard F

7:22

What are your thoughts on all the oil stocks that you have recommended in the past will they ever recover in 2020

Roger Conrad

7:22

I think the companies we've pointed people to over the past couple years have been best in class companies that by and large have proven their resilience in this the worst environment for North American energy in at least decades. I think by doing that, they have ensured their ultimate recovery, despite the fact that this is now much more of a mature business than it was early in the past decade--and the fact that the regulatory environment as well as economics are likely to keep getting tougher going forward, no matter who wins the November election.

Does that mean they recover fully in 2020? I think that depends largely on whether the rally in stocks continues and whether or not there's a real switch from growth to value stocks. I don't think this rally will continue if there's not a change in leadership. But the important thing now is for these companies to continue to be resilient on the business fundamentals--so long as they are, they will ultimately recover.

Pat

7:27

What are your current thoughts on PCG and any guess when they will restart the dividend?

Roger Conrad

7:27

The current guidance is that won't happen for at least the next 2-3 years. As I said answering an earlier question, if PG&E can get through this upcoming fire season relatively unscathed, then investors are going to have progressively more confidence it is making the right investments in hardening its grid--and that the state's wildfire insurance will be sufficient to withstand future disasters. I think if it can do that, PG&E shares will be trading in mid-teens next year.

Expectations really are that low right now for success, which given the company's track record is very understandable. But that also means a lot of upside for doing things right.

bob

7:33

CEFs pay relatively high dividends, what are the downsides? are their general guidelines to select them, for example price relative to N

Roger Conrad

7:33

As we saw in March, the biggest risk to CEFs net asset value and distributions comes from use of debt leverage--which is also the reason why so many of them are able to pay out so much. What basically happened this spring is portfolio values fell sharply and leveraged funds were forced to sell holdings at low prices to pay down debt--in order to come back into compliance with borrowing covenants. And the results was a value wipeout that forced many CEFs to eliminate or cut distributions--including many that had been very conservative about what they held.

You can limit this risk by buying only CEFs that employ limited leverage, say 10% or less of their holdings. The potential upside and yields won't be as exciting. But you'll avoid the risk of a wipeout in a down market.

I think you select CEFs by what they invest in primarily. You may also be comfortable with a particular fund manager. What I would not do is search on the basis of yield or discount to net asset value alone.

Roger Conrad

7:36

Funds often trade at big discounts because they employ a lot of leverage, which means more risks to unitholders. And yields can be high because of concern management is about to cut them. I do track a handful of CEFs in the Utility Report that I think have good track records and can be buys at the right price. Those include the BUI fund I've discussed at length today. But my preference remain to buy individual stocks.

Jon B

7:41

Interesting comments as always. A couple questions: 1) Given low interest rates, why aren't utilities as a group behaving better? Natural gas distributors (OGS, NJR, SJI) in particular seem to have lost their luster. 2) What are your thoughts about PNW? Seems to be cheap compared to the group. Will the move away from coal be a catalyst or a drag on earnings?

Roger Conrad

7:41

First, there is no hard correlation between interest rates and returns for utility stocks or any other income producing sector. They're stocks and they perform best when earnings are healthiest, which is generally when the economy is doing well. Low rates are pushing down borrowing costs. But utilities have performed well and poorly in all sorts of rate environments. As I've said, I think there is a bias in the stock market toward "growth." For this market to continue to rise the leadership must change to value groups like utilities. But until it does, the only utilities that will outperform will be those considered growth stocks--such as NextEra Energy and other renewable energy focused companies, which have actually been pretty outstanding outperformers this year.

Second, I think Pinnacle West had good Q2 earnings as I note in the Utility Report Card comments. I rate it a buy up to 85. I do think the move away from coal will be a benefit--as rate base investment in renewables and grid upgrades grows.

jerry felsenthal

7:42

SJI and T and EPD have been struggling, in terms of their

7:47

SJI, T and EPD have been struggling to reach the valuations that you set for them, despite "A" ratings. Can you explain this?? Are there other things going on for them that may have come up since you gave them their ratings that might have affected the stock price?? Thanks for your response.

Roger Conrad

7:47

Hi Jerry. Basically, the important thing for all three is they did post solid enough Q2 results to assure they're defending balance sheet strength and dividends while keeping growth plans on track. AT&T has been lagging other telecoms as I pointed out earlier in the chat because of exposure to media and entertainment, which as expected has been hurt by the pandemic. Enterprise as a midstream energy company operates in a sector that's living through its worst environment in memory. I think both stocks are going to be facing headwinds from those factors until the pandemic's impact on the economy subsides a great deal more. I am confident that will happen. But in the meantime, the important thing is they continue to navigate this environment.

I won't repeat what I've said about South Jersey Industries already in this chat other than to say that it's also a value and dividend stock--and investors right now are piling into growth stocks and largely shunning these groups. I think there will be a change

Roger Conrad

7:48

in leadership eventually. But until there is, these stocks are likely to lag. The Quality Grades keep in mind are measures of business quality. A rated companies can stay cheap for a long time in my experience before investors discover them. But when they do laggards can become leaders really fast.

Howard F

7:51

What improvements will CVX have on Israel concerning their natural gas operations.

Roger Conrad

7:51

Not sure what you mean by that. But as the new main owner of Noble Energy's projects off the coast of Israel, Chevron will be able to bring a lot more financial firepower, technical expertise and operating ability to bear on these properties if they're anywhere close to as promising as they appear to be. I think this could be another real earnings drivers for this company, though my view is the Permian Basin and other US reserves were the primary attraction for buying. And they're getting it very cheap--locking in a price 60% less than where Noble shares began the year.

Howard F

7:55

What are your concerns about the debt AT&T has run up. This is not a healthy situation

Roger Conrad

7:55

I would be concerned if the company stopped generating so much free cash flow in excess of dividends and the biggest CAPEX budget in its industry--which it needs to continue paying down its debt on schedule. That didn't happen in Q2, despite an enormous amount of operating pressures on Warner Media and certain Latin American assets due to Covid-19 fallout. I actually consider that pretty encouraging for AT&T. Yes there is a high level of debt--but again it's manageable so long as there's free cash to pay if off, which the company has been systematically doing the past year. And by eliminating or refinancing $23 bil in debt that otherwise would have come due by the end of 2023, they've dramatically reduced refinancing risk, even while using record low borrowing rates to cut its debt interest expense. And lastly, the company's July 2097 bonds yield just 4.25% to maturity--that's pretty low cost money and a pretty good sign this is a healthier situation than it may look at first glance.

Andy

7:58

Thanks Roger for all your work.Two questions CWEN has moved nicely as you predicted with a 5% yield. Going forward is this a growth story that’s beginning or now a stable dividend play?

Roger Conrad

7:58

Thank you for being a subscriber! I think Clearway is now basically a pretty solid growth and income story, with a mid-single digit yield and a mid-single digit annual dividend growth rate--underwritten by a very steady stream of drop downs of long-term contracted mostly renewable energy power generation assets. It's also one of a vanishing breed of yieldcos that have gone from dogs to darlings the past couple years. I've raised the buy target to 30.

Howard F

8:00

do you follow TDOC?

Roger Conrad

8:00

I don't but I will take a look--no dividends but I think a growth business. CVS Health Corp actually has a growing business in this area that it's integrated with the former Aetna--I think a real engine for growth and shares are just 10 times expected 2020 earnings after reporting solid Q2 numbers.

donna

8:04

AWK is 8% of my portfolio and the swings are big. Not sure if I should perhaps lessen my holdings.
It seems quite strong ....I am up 600% but when it dips I really feel it.

Roger Conrad

8:04

For me, 8% of a portfolio would be a lot, but American Water Works is a superior company in a very low risk industry with very few obstacles to being able to grow 8-10% annually (earnings and dividends) over the next few years. The problem for new buyers and the reason for volatility is valuation at 37x expected 2020 earnings. Again, this is a low risk stock and I don't know of any real risks right now that could really bring it down. But AWK was under $100 for a while in March. If a drop to 120 is intolerable, it might make sense to think about lightening up as my standing advice is always to try to balance to avoid one stock having an inordinate impact on overall portfolio value.

Andy

8:05

How about a Democrat win in November. Will energy and energy transports MLPs head for the hills or continue slow progress. Pba, tc, epd, etc,

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