JotCast | Conrad's Utility Investor Online Chat | 5/21/2019

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Conrad's Utility Investor Online Chat

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Lani

3:22

Hello Roger,

You're upbeat about Kinder Morgan,but do you realize that 70% of their so-called dividend in 2018 was return of capital?  They filed IRS form 8937 Feb. 6 of this year. To quote "they did not have sufficient earnings and profits needed to characterize all their dividend distributions as taxable distributions".  The KMI webpage as of yesterday stated that KMI expects a portion of the dividends paid this year will also be return of capital.  I think current and potential investors should know this.

Re: ABB in the CUI+ portfolio, is the dividend subject to foreign tax withholding, and if so what percentage?  I believe it would be hefty.  Any ADR fee, however, would be small.  Please clarify such matters when recommending specific foreign stocks.

Thank you!  Your recommendations have added to my income for a good many years.

Roger Conrad

3:25

Thanks Lani. The high level of "return of capital" in dividends at Kinder is the result of the nature of its assets--which are very long-term and heavily depreciable. That basically enables them to shelter a huge portion of their earnings from taxes, just as they did as a master limited partnership. They're also sheltering earnings by utilizing the "tax pools" created when they merged together all of their MLPs back in 2014.

3:27

Bottom line is return of capital in no way means Kinder is selling off parts of its business to pay dividends. In fact, if you hold this stock in a taxable account, you get a pretty nice tax shelter from the ROC without having to file a K-1 at tax time. You're right that this is something investors should know, but I think it clearly strengthens KMI's value proposition, rather than weakens it.

3:30

As for ABB, on June 13 they'll pay a net dividend of 76.9709 cents per share for US ADRs versus a gross amount of 79.7209. You can recover the difference by filing a Form 1116 with your US taxes. Note that we use the net amount in our CUI Plus total return calculations. Thanks for reading. I'm happy the recommendations have been useful for you.

Rob

3:30

Additionally, I have a position in NFG and note your slightly positive comments in the Report Card. It currently trades above your rec price. At what point would you take a little money off the table on this stock; what situation would you consider a challenge to watch for going forward? Thanks again for your attention.

Roger Conrad

3:36

National Fuel Gas (NYSE: NFG) is the last of a group of regulated natural gas utilities with growing gas production operations. I was initially attracted to this model because the energy production provided a natural hedge to the utility business as well as the dividend paying stock. I still think that's a valid case, though NFG as you point out is trading a bit above our buy price of 55. As for taking money off the table, my view is this company has proven its utility/midstream/producer business model is profitable even with natural gas at such a depressed price in Appalachia where its reserves are. It currently trades at less than 16X expected 2019 earnings, a sharp discount to most utilities. I think that will go to a premium over the next few years, as gas usage continues to grow.

3:38

There are a couple challenges--such as getting pipelines built out of the region. But I don't think this stock would be a profit taking candidate unless it moved at least to the high 60s--at least if your time horizon is in the 3 to 5 years range. Shorter term, energy is among the cheapest market sectors and NFG is an exceptionally conservative way to play increased adoption of natural gas in the US.

kb

3:38

what do you think about mlp etfs such as InfraCap MLP ETF (AMZA)?

Roger Conrad

3:48

I haven't favored them generally over the years because they tend to hold the good, bad and ugly of the MLP sector--and as anyone investing in MLPs the last few years knows, there's been a whole lot of ugly. I also think we can do much better in any sector we know well by picking our own individual stocks. And again, in a sector that's been shaken out as much as MLPs, that goes double. At this point, I do see a potential trading opportunity in ETFs like AMZA, mainly because the top holdings like ET, MPLX, EPD etc are cheap and the cycle is moving in their favor. But I do think if you spend the time you'll be able to pick individual MLPs that will beat the averages.

Arthur

3:48

Thoughts on Global Net Lease(GNL) and it's 11% dividend. A monthly dividend stock.

Roger Conrad

3:53

That's not a real estate investment trust I'm familiar with. The yield is more in line with a mortgage REIT than an equity REIT, which is a little concerning. So is the decline in funds from operations in Q1, which pushed the payout ratio for Q1 to 111 percent. The triple net lease business is very broad and management points to some strengths in its results, such as 8.1 years average weighted lease term and 99.5% occupancy, as well as an equity raise to finance more purchases of assets. But I'd want to see a better coverage ratio before jumping on board.

dtrend

3:53

Hi Roger, Have you considered using Zoom for your webcast?

Roger Conrad

3:55

We do Zoom for intracompany conferencing as well as for webinars with audio. For text only chats, we've found this sort of format a better fit but we're always willing to listen to suggestions. Thanks.

Lee

3:55

Anything new on legal/regulatory issues re Dominion; and, CWEN as it relates to PGE?

Roger Conrad

4:00

The big issue for Dominion's Virginia utility operations is as I noted above coal ash cleanup, where its attempts at cost recovery for containment have been challenged by the AG. The company's strong relationship over the past 40 years with the state has also attracted some critics. But at this point, it continues to enjoy one of the best regulatory environments in the country. A biggest issue with more uncertainty is the attempt to build the Atlantic Coast Pipeline to bring natural gas from Appalachia to the Carolinas. That's still waiting on a US Supreme Court appeal of a previous court ruling that forbade crossing the Appalachian Trail without an act of Congress. We view odds of a successful appeal better than 50-50. But more important, the financial hit of abandoning ACP is manageable and there are many other areas to invest.

4:04

As for Clearway, PG&E is still apparently current on payments to power plants owned by the company. The bankrupt utility is apparently still trying to win the right in court to change the terms of its power purchase contracts with CWEN and others. But the big issue now in the case is the determination by investigators that the company is "at fault" in last year's Camp Fire--a disaster that killed 85 people, burned more than 150,000 acres in northern California, displaced thousands of residents and blanketed the Bay Area with smoke for several days.

4:08

All of those things represent a potentially huge additional liability, and any bankruptcy resolution is going to require a deal that takes that expense into account. There's also another fire season approaching, with its own potential to cause damages. The bottom line is California has to reach some kind of deal on all of these issues for PG&E to come out of bankruptcy, which in turn will free up the cash flow now being held at Clearway's plants. Until then, the dividend will not be increased. The good news is CWEN appears to have the resources to continue growing while we have to wait.

Sreve

4:08

With PGE charged for starting forest fires, what's the risk to NEP?

Roger Conrad

4:13

They're not exposed to potential liability from fire damages. As with Clearway (see above answer), they are still getting paid for their power sales to PG&E's system, though cash is being withheld at the project level and the bankrupt utility is jockeying in court to renegotiate power purchase contracts to lower prices. NextEra Energy the parent, however, took aggressive steps more than a month ago to support NextEra Energy Partners' cash flow and growth plans. As a result, the yieldco will continue to increase its dividend on a quarterly basis at an annualized rate of 12-15% per guidance. The latest boost was announced April 22 and raised the payout by 3.8% from the previous quarter (14.9% from a year ago). Bottom line is no change in the value proposition for NEP, though it's a bit above our buy target of 45.

kb

4:13

Hello, what do you think of mlp etfs such as InfraCap MLP ETF (AMZA)?

Roger Conrad

4:14

Please see my answer to your question a bit earlier in the chat. I generally prefer individual MLPs.

Hans

4:14

Now that we have the merger of Occidental and Anadarko what will happen to WES.

Roger Conrad

4:20

We've been given no reason to expect the new Occidental will want to acquire Western's midstream assets in a simplification merger. In fact, we've yet to see a company that's primarily a producer roll up a midstream MLP--they generally want to use whatever cash they have to deleverage, buy back stock, boost production and drive down costs, activities that would create far more shareholder value. What may happen is they decide to sell their 56% stake. That basically means finding an individual buyer as selling to the public will be problematic, as Centerpoint Energy's (NYSE: CNP) failure to sell Enable Midstream (NYSE: ENBL) makes clear. Western has completed the latest $4 bil drop down from Anadarko and is capable of surviving on its own.

4:22

Q1 results were generally solid, including distribution coverage of 1.2 times that topped estimates. And the merger with the general partner should lead to more cost cutting. That said, until Occidental completes the merger and makes its intentions better known, there will be uncertainty hanging over WES.

We cover this MLP in Energy and Income Advisor.

Lou

4:23

Thanks as always for hosting the chat. You have been warning us about high valuations and the potential for disappointment should expectations not be met. What other warning signs should we be watching for (as we move farther along in this aging bull market) as potential exit signals?

Roger Conrad

4:26

I think the most important thing with utilities and dividend paying stocks is always to watch internal business developments. We've just had a pretty successful Q1 for most companies in terms of matching up to guidance and keeping growth plans on track. And companies are also taking advantage of the recent drop in interest rates to further strengthen balance sheets by refinancing maturing debt and pushing out maturities. That's all very positive, but there are pockets of weakness I've pointed out and where I've advised sales. And to the extent companies weaken going forward, I'll do the same.

4:29

I also think dividend paying stocks and utilities have moved higher the past few weeks in expectation the Federal Reserve will cut interest rates later this year. That's indicated by the price of Fed Funds futures and the Dow Jones Utility Average in response hit a new all-time high today. I suspect the buyers pushing these stocks higher are not long-term investors and that they will sell if convinced the economy isn't slowing and the Fed isn't cutting. I don't think we need to do more to protect ourselves other than to just observe those profit taking targets I publish in every issue's Strategy Update and be prepared to take some money off the table when extremes are reached--as well as not to chase.

Marc

4:30

Hi Roger. I would like to add a couple of Utility stocks into a basket of equities that I am creating for my grandchildren that they could hold for the next 50 years. Could you please recommend a couple that you find worthy. Maybe D and NEP?

Roger Conrad

4:33

I definitely like both of those. I also recommend taking a look at the Focus stocks I've featured the past couple issues, including Algonquin Power & Utilities (NYSE: AQN), which raised its dividend by another 10% this month after announcing very solid Q1 results. The company not only pays nearly 5% in yield but has several high percentage drivers of long-term growth including coal-to-wind conversion at regulated utilities, contract renewables, a soon to be 48.5% investment in yieldco Atlantica Yield (NSDQ: AY) and the possibility of another major US utility acquisition, with El Paso Electric (NYSE: EE) rumored as a potential candidate. My buy target is up to 12.

MartyR

4:33

Is there a general rule of thumb of when you take gains?

Roger Conrad

4:37

Yes. I publish a table in the Strategy Update of each CUI issue which expresses the difference between current price and a good entry point for stocks in terms of the number of quarterly dividends needed to bridge the gap. The bigger that number, the more compelling it is to take at least a partial profit. I've generally used 20 as a benchmark for making that recommendation, though I'll sometimes go below that. I set entry points based on the Quality Grade system and valuation, as expressed by yield plus sustainable dividend growth rate. To be worth buying, I want A (best) rated companies to offer yield plus growth of 10% or more. Riskier companies require higher returns.

4:38

I realize this may sound complicated and perhaps esoteric. That's why I always give you whole numbers for entry points, for "Dream Buys" that would be ideal entry points if extreme conditions are reached, and for taking profits.

And I will of course always sell if I believe the underlying business of a company is weakening.

Don

4:38

Roger--over the years, I have followed your lead and had great good fortune with US, Canadian, Singaporean and Hong Kong telecom companies. Are there any telecoms in Europe or Australia that you could recommend? Thanks for all of your help over the years.

Roger Conrad

4:43

I think Deutsche Telekom (Germany: DTE, OTC: DTEGY) is a good buy up to 17 (it's just under now). This company is really reaping a windfall for its decision not to sell its 63.04% stake in T-Mobile USA (NSDQ: TMUS) when the US government rejected its attempt to sell to AT&T (NYSE: T). It now looks like both the Federal Communications Commission and the US Department of Justice will approve that company's takeover of Sprint (NYSE: S), which will further improve its scale in the US and almost certainly profitability--as the number of major competitors goes from 4 to 3. That's historically boosted margins in Deutsche's other territories. They do pay dividends only annually though. If you look at our Aggressive Holdings, you'll see we also hold Telefonica SA (Spain: TEF, NYSE: TEF).

4:46

This company has been a chronic underperformer for use and is trading very close to our Dream Buy price of 8 because of its exposure to emerging markets, and worries about what a US/China trade war would do to global economic growth. But the company has made great strides cutting costs, reducing debt and focusing on being in top network in focus markets--all good reasons for holding on at this stage in the cycle.

Jimmy

4:46

Does D have much of a chance to get its Appalachian Trail crossing issue reviewed by the Supreme Court?

Roger Conrad

4:51

My information is they have a very good chance given the current makeup of the Court and the fact that their position is supported by the Trump Administration. I certainly wouldn't put that at 100% or even 90%, however, and we're not going to know in any case until June how this comes out. But as I noted above, the important facts for investors are (1) success is not priced in to the stock and (2) the company's potential writeoff from abandoning the Atlantic Coast PIpeline is manageable, while it has numerous places to invest its money that will be far easier to get by regulators, including a huge offshore wind project in Virginia.

BobD

4:52

I subscribe to CUI and EIA and cannot remember which service discussed BSM at one point. They have an interesting business model, and I bought a small amount at one point. It has been paying me well and regularly. Do you have any additional thoughts on BSM?

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