JotCast | 8/23/21 Conrad's Utility Investor Live Chat

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8/23/21 Conrad's Utility Investor Live Chat

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Roger Conrad

4:51

Hi Terry. I think this news was pretty much baked in for Exelon Corp (NYSE: EXC) shares last year, when the company came under fire for its lobbying practices and become more or less toxic to Illinois legislators. It's noteworthy that management still hasn't shut the facilities. I think that's due to two reasons: One, it is still negotiating with the state for a financial arrangement to keep them open and still believes that's a realistic possibility, and two the US infrastructure bill appears to include spending to incentivize nuclear plants to stay open even if they're uneconomic to run currently in unregulated wholesale power markets. I think the odds still favor them getting a deal that allows the plants to stay open, which would potentially greatly ease the way toward the spinoff of the generation unit from the regulated utility in the first half of 2022. And I think that's basically what's behind the stock's run this month to a price that's now actually above my highest recommended entry point of 48.

Roger Conrad

4:54

I'm not intending to raise beyond that level until we get a bit closer to the spinoff. But I think the risk to that deal is diminishing and that the value of the nuclear generation part could be considerably higher than is priced into the stock now. In any case, despite the furor in Illinois, this is a good stock to hold onto at this time.

Paul

5:00

KMI still a buy on recent pullback?

Roger Conrad

5:00

I think so. In fact, I think Kinder is still a great buy for long-term, income focused investors up to 22. As I noted in the August issue Utility Report Card comments, Q2 results and guidance clearly support the current dividend and target 3-5% annual growth the next few years, as the company's diversification and reach ensure stronger operations more than offset weakness at others in the current environment. The Kinetrex Energy acquisition that closed earlier this month adds an element of long-term growth in renewable natural gas and domestic LNG production, and very likely additional earnings growth by early next year. And the company is faring well on the legal front as well, as the Texas Supreme Court sided with it in a lawsuit filed by Texas localities over taxes.

In my view, the recent selloff in the stock is basically part of the sector selloff in midstream and another chance to pick up shares cheaply--though I never recommend overloading on a single name.

Pat M

5:10

Hello Roger,
Would you give some background information on reasons for the wide performance difference between Duke and Dominion. I appreciate your steady advice through the years.
Thank You

Roger Conrad

5:10

Hi Pat. Duke Energy has returned about 35% over the last 12 months while Dominion is up only about 4% so that's a very fair question. I think it's basically for two reasons. First, Dominion cut its dividend from a quarterly rate of 94 cents per share to 63 cents when it sold its natural gas midstream operations to Berkshire Hathaway. And second, Duke has been targeted by activist investor Elliott Management, which has raised investor anticipation management will be forced to make moves that will elevate the stock in the near term.

My view is Dominion's underperformance is unlikely to be repeated, since its transformation into a renewable energy rate base growth opportunity is basically completed and the next move for the dividend is likely to be an increase in November, or February at the latest. Duke for its part may have already received its Elliott Management bounce, as the company has to date balked at the investor's suggestions whose current ownership stake is just 0.13%.

Bottom line: I like both.

Jim T

5:10

Roger,

Roger Conrad

5:10

Hi JIm.

Shelll

5:16

Does the nearly 10% dividend signal a significant risk for MPLX? Also, what is your opinion of Core and Main, Inc.

Roger Conrad

5:16

Hi Shelli. I would be a lot more worried about MPLX LP were it not for the very strong Q2 results and guidance announced earlier this month. That included 1.73 times distribution coverage in 2021 with distributable cash flow and free cash flow in excess of all CAPEX and dividends. They also accelerated deleveraging, bringing down debt to EBITDA to 3.7 times. To some extent the results were due to the economy's recovery from the pandemic of a year ago. But they also show pretty clearly that this midstream company has adapted to the current environment of slower spending by producers of oil and gas. Moreover, general partner Marathon Petroleum (NYSE: MPC) remains supportive and the strategic review continues to increase efficiency.

I think it's always wise to question a yield as high as MLPX's. But in this case, I think it's a matter of investors pricing in risk that's not showing up in the company's numbers and guidance--and is less and less likely to going forward.

Again, I don't track MPLX in CUI. But we

Roger Conrad

5:17

will be having an Energy and Income Advisor live chat on August 31 for members--with all things oil and gas on the table. I hope you'll join us.

Paul

5:23

I had a significant holding in AGLXY before you put it on hold when I dropped I moved it from IRA to Roth. I have bought more below $5.50 since your last note changing hold to buy. I will still be slightly under water if it reaches your $7 buy up to price. I am tempted to buy more if it gets any closer to $.5.00. I am willing to wait for a profit a few years. Would you buy more at this time. Do you have any other low priced high dividend gems that may take a while to blossom, but aren't expect to dive? Also I am quite overweight in CVX and am comfortable with it. Should I be?

Roger Conrad

5:23

Hi Paul. I don't think it's ever a great idea to double down on any one of these recommendations. For one thing, at any given time there are going to be multiple opportunities to buy fallen stocks backed by high quality businesses, where I believe investors are pricing in much too much risk and not enough upside. Putting all your bets on one runs puts too much at risk to some unexpected event--and while I think AGL is pricing in pretty much everything but an extremely unlikely bankruptcy, I've been in this business long enough to know I'm not omniscient--the best I'm going to do over time is help you handicap your bets effectively to get the most out of your investments, maximizing winners and not letting losers kill us. And really loading up on one name puts us at too much risk in case I am wrong.

That said, I think you have the right approach with AGL--just be patient and let it ride and I think the odds are heavily in your favor that you'll be able to sell well north of $7.

Roger Conrad

5:24

As for other high dividend gems, I intend to devote the September issue of CUI to yield--potentially with some fixed income and convertibles as well. In the meantime, midstreams Kinder Morgan and Pembina are pretty good examples of high quality businesses that pay out a great deal.

Jim T

5:30

You recently said now is the time to get a jump on investors, what stocks do you recommend NOW. I currently have AES, AGR, AQN, CMCSA, CNP.B, D,NEE, PBA, TDS TRP, VST. Add to any or buy some new ones? Thanx. Jim

Roger Conrad

5:30

Hi Jim. Yeah I absolutely agree this is a good time to seek out high quality stocks selling at discounted valuations/high yields, while a lot of investors are still on vacation. You have a pretty good list there. The Centerpoint preferreds are about a week or so away from converting to common stock and at this point it looks like we'll get the maximum number of shares. My advice is going to be to hold through the conversion and receive the common shares. As for adding to the rest of your positions, watch those highest recommended entry points for Avangrid, Comcast and NextEra. The rest of those are still below max entry points and so are buys.

By way of other stocks worthy of buying now, I've mentioned several utilities in this chat that fit the bill--including Dominion Energy. If you're interested in stocks outside the utility universe, I would suggest checking out my REIT Sheet and CUI Plus services, the latter of which is a diversified portfolio of companies across a wide range of industries.

Roger Conrad

5:31

We're actually offering all three as a "bundle" per members' request. If you're interested, give Sherry a call Monday-Friday between 9 and 5 pm eastern time at 1-877-302-0749.

Howard F

5:32

Thanks for staying calm when our country is in such termoil.

Roger Conrad

5:32

Thanks Howard. I won't say it's easy at this point in time. But I've certainly found it pays to keep your head when others may be losing theirs.

Howard F

5:38

Hi Roger, would you take profits in BHP and thoughts on SHEN

Roger Conrad

5:38

I would stick with BHP for a several reasons. First, the recent decline is basically due to downside volatility in iron ore prices, triggered by uncertainty in the world's largest market and the company's most important customer China. This is a legitimate threat to earnings this year. But the company has also taken steps to reduce risk, including holding in a greater than expected portion of expectation-beating FY2021 (end June 30) earnings for debt reduction. And the history of iron ore prices and China has been marked by similar volatility that's brought out the doomsayers, only for demand to rebound. And with the US on the verge of massive infrastructure spending for basic roads, bridges, rails and ports, the Middle Kingdom isn't the only game in town for demand.

BHP also announced the spinoff of its oil and gas production operations (4.8% of earnings) and their merger with Woodside Petroleum (ASX: WPL, OTC: WOPEY). The all-stock deal appears to have disappointed some who hoped the company would receive

Roger Conrad

5:40

cash to buy back stock or pay off more debt. And S&P appears to take that view, putting the company's rating on watch negative today in response. But i think this deal actually has a lot more upside for BHP shareholders because they'll be receiving stock in Australia's largest and most efficient producer of oil, gas and LNG precisely as the energy cycle is turning up. The impact on BHP earnings and dividends from the sale will be negligible. And the stock is likely find more favor in an ESG-driven world as it ramps up investment in battery materials.

5:41

Bottom line is I didn't like BHP over 75 but I do like it in the low 60s a lot. It's also a recommendation in my CUI Plus service, which as I mentioned earlier we're offering as a bundle to CUI members who call Sherry at 1-877-302-0749.

5:45

As for Shenandoah Telecom, the current price of around $30 and change now reflects the special dividend of $18.75 per share. What we don't yet know is how much annual dividend the company will declare in October, as now a pure provider of cable television, wireline phone and broadband data service. This part of the business has been thriving as indicated in Q2 results released at the end of July. And that in my view makes this stock worth continuing to hold as a potential takeover target if not for growth on its own--with a market cap of $1.55 bil. Once we know the dividend, I'll set a recommended entry point, probably pretty close to the current price level.

5:47

Can you refresh my memory on what the expected return is when you recommend a stock and how that is reflected in your recommended buy price.

Roger Conrad

5:47

Hi Ed. The rule of thumb is I want sustainable dividend growth plus yield of at least 10% for companies drawing an "A" Quality Grade, and higher returns progressively for stocks of lower grades. The idea is that share prices over time will follow dividends paid higher.

Jon

5:52

Hi, can you comment on Brookfield Renewable and its prospects for growth in the context of all of the other renewable companies chasing similar opportunities? What sets BEP/BEPC apart? Any unique advantages? And what parameters do you base your buy-under price on? Thanks!

Roger Conrad

5:52

Hi Jon. I think two things have set Brookfield Renewable apart from other developers over the 20 plus years I've tracked its fortunes. First is basic conservatism of growth strategy that's resulted in a company that now has scale, diversification by generation source as geography and balance sheet strength to post steady results almost no matter what the economic environment or wind/water conditions. That's a huge change from when I first started covering the company, when a season of low water flows would trigger a huge shortfall in cash flow. The second thing is the backing of Brookfield Asset Management, which has always historically ensured the company always had access to low cost capital to make strategic moves.

Both of these strengths are evident in Q2 results and guidance. My only problem with BEP (and especially BEPC) has been price. And I would still only buy at 40 or lower. But this is a first rate company getting stronger every year and a great long term holding.

Guest

5:57

Can you discuss your opinion on the 3 major cell phone providers (VZ T TMUS) in view of what appears to be pretty aggressive pricing by the MVNOs (the 3rd party provides like Mint, etc). It seems like profit margins could be stressed for the majors. I just signed up for a pretty good level of service with an MVNO for $5 per month.

Roger Conrad

5:57

The thing to remember in communications is companies that don't actually have their own network have to rely on using others. And in the US, that means paying prices set by owners of those networks, not regulators. Companies can price as low as they want but ultimately that's going to cut into their margins. The network owners, meanwhile, will always get paid. And if the MVNO can't find a sustainable business model, it will eventually have to leave the field. The biggest third party carriers using major phone company networks now are the cable companies especially Comcast Corp and Charter, who have a deal to use Verizon's network. That's a business Verizon happily supports as its reliable revenue without marketing costs. AT&T's arrangement with DISH Networks should provide similar benefits.

In any case, you'd be hard pressed to see any margin compression on that basis in Q2 results for AT&T, Verizon or T-Mobile US.

Frank

6:01

Roger, as always, thanks for all you do on behalf of utility investors. Read your latest piece on AGL Energy (AGLXY). Given the work in front of the company, any feelings about how big a cut they might need to make in the dividend to help speed up the recovery or do you feel they can skate by? Thanks.

Roger Conrad

6:01

Thanks Frank. Based on their guidance--including a target of paying out 70% of net profit after tax for fiscal year 2022 (end June 30)--I think they'll be paying out anywhere from 20-30% less. As I mentioned answering an earlier question in the chat, investors can take some solace in the fact that management has been very much on target with previous guidance. And I do think the company has reached a business bottom. But the real play here is that AGL successfully completes its planned spilt into a fossil generation company and a retail/distributed energy/renewable energy company, with decent value for both. I think investors are pricing in too little potential of that happening and too much risk. Again for the record, I don't recommend anyone double down on this stock or any other stock. But for those who don't own AGL and have patience to wait a few months for its plans to take shape, it is a buy up to USD7.

Alex M.

6:05

Hey Roger. Now that DTM has released its first earnings report, any thoughts on this new spin-off? Thank you.

Roger Conrad

6:05

I have picked it up in Energy and Income Advisor under our "MLPs and Midstream" coverage universe. As I noted when they announced the spinoff, I think DT Midstream will do well on its own as an owner of what are high quality, highly contracted assets serving key markets, and with minimal commodity price risk for a midstream. The quarterly dividend of 60 cents a share is right in line with management guidance and takes the total DTE/DTM payout to $1.125 per share--a higher level as promised than the pre-split payout. I also consider it a potential takeover target with a market cap of less than $4.2 bil. I have not set a buy target in EIA to date but will likely do so at 45 in the upcoming issue. And again, I invite everyone to our chat on August 31 for more discussion of all things energy.

Alex M.

6:10

Hey Roger. I've got a REIT question for you. What are your thoughts on Medical Properties Trust (MPW)? It seems that the market is discounting it due to tenant concentration and balance sheet leverage. Would love to get your opinion on the matter. Thanks.

Roger Conrad

6:10

Hi Alex. I would agree on both counts for Medical Properties Trust, which by the way I do cover in the REIT Sheet and is a recommendation there as well as in CUI Plus. I thought Q2 results were quite solid and demonstrated success absorbing and financing several billion dollars of high quality acquisitions this year alone. The company's biggest tenant is right now about 28% of rents. That's higher than management would like but the tenant is also pretty much running at pre-pandemic levels of occupancy. And we're talking about a healthcare provider, which is not a particularly cyclical area of the property market to put it mildly. In any case, Medical Properties does compensate investors for the risk with a yield north of 5.6% that management has consistently grown. And as it gains scale by completing more acquisitions, investor concerns about the business model should diminish--as they have for 9 research houses rating the REIT buy versus no sells and 4 holds.

pete

6:12

Any thoughts on Centerpoint Preferred B. i see it is a hold. thank you

Roger Conrad

6:12

Hi Pete. I think we hold it through the conversion into Centerpoint Energy common stock, which is set for September 1 along with the final quarterly dividend of 87.5 cents per share. I intend to continue holding the common stock in the Aggressive Holdings at that time as I see considerable upside at Centerpoint as a potential takeover target, for the value of its shares of Energy Transfer LP (NYSE: ET) as the energy cycle turns up and for its robust utility CAPEX and customer growth.

Dudley

6:15

Hi Roger. Your thoughts on Dominion Energy Reliability Investment ? I would use it as a money market tool. Pays 1.25 rate. Thanks

Roger Conrad

6:15

I'm not familiar with that financial instrument. If you'd like to tell me more about it, I'd be interested. Drop me a line at rsconrad2013@gmail.com or just write to service@capitalisttimes.com.

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