Category: Dividend Stocks

Companies return profits to shareholders through two main channels, capital gains and income. A high dividend yield indicates that a company is returning a large amount of cash to shareholders relative to the value of the company. This allows investors to maximize their income received relative to their investment amount. The gross dividend is calculated from the net dividend amount paid to shareholders plus the value of any attached franking credits associated with those dividends. A fully franked dividend will have franking credits equal to 30% of the gross dividend value, which can, therefore, represent a significant source of additional value.

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Dividend Stocks

Constructive Regulatory Outcome in Missouri Would Be Big Boost for Evergy

Business Strategy and Outlook

Evergy must secure constructive regulatory outcomes in Missouri and Kansas to support growth plans that include $10.4 billion of capital investment during the next five years, primarily to replace aging coal plants with renewable energy. New legislation in Missouri should allow Evergy to securitize the remaining book value of coal plants as they retire in the coming years, improving cash flow and reducing equity needs.

Kansas, which represents about half of Evergy’s total asset base, has a more constructive regulatory environment than Missouri, and Kansas regulators have supported renewable energy investment for many years. Evergy also benefits from favorable federal regulation for its electric transmission assets, which could top 15% of its asset base in the coming years. Evergy is one of the few utilities that does not have any investments outside its rate-regulated businesses. Management said it remains committed to directing all of Evergy’s investment to its regulated utilities at least through 2025. Senior leadership has extensive experience at companies with unregulated power businesses, and we wouldn’t be surprised if Evergy directs some capital investment outside of the utilities, perhaps with a partner. 

Evergy raised the dividend 6% during the two years following the merger and raised it 7% for 2022 to $2.29 per share annualized. Morningstar analyst expect the dividend to grow in line with earnings for the foreseeable future

Constructive Regulatory Outcome in Missouri Would Be Big Boost for Evergy

Morningstar analyst are reaffirming to $60 fair value estimate for Evergy after reviewing the company’s two Missouri customer rate filings and incorporating them into their  forecast. 

Morningstar analyst expect regulators to approve rate increases less than Evergy’s $43.9 million request in its Missouri Metro jurisdiction and $27.7 million request in its Missouri West jurisdiction. However, Morningstar analyst think these are reasonable requests and expect constructive outcomes that support  6% average annual earnings growth rate through 2024. If regulators were to approve the full rate increase, it would raise Morningstar analyst growth rate to 7%, the middle of management’s 6%-8% target.

Financial Strength 

Evergy had an equity-heavy balance sheet following the all-stock combination of Westar and Great Plains. However, the company has repurchased over 45 million shares following the merger for about $2.6 billion. Morningstar analyst don’t expect any additional share repurchases due to an acceleration of the company’s investment plan. Morningstar analyst expect debt/total capital to remain in the mid-50s. Following the merger, the board raised the dividend 6.3% in late 2019, 5.9% in late 2020, and 7% in late 2021. Management has targeted a payout ratio of 60%-70% of operating earnings, in line with most other regulated utilities. Morningstar analyst forecast 6% dividend increases for at least the next four years, in line with earnings growth.

Bulls Say

  • Morningstar analyst expect annual dividend increases to average 6% over the next four years. 
  • A material net operating loss position is likely to shield Evergy from paying significant cash taxes until 2023. 
  • Recent legislation has improved the regulatory framework in Missouri, home to one third of Evergy’s rate base. This should reduce regulatory lag

Company Profile

Evergy is a regulated electric utility serving eastern Kansas and western Missouri. Major operating subsidiaries include Evergy Metro, Evergy Kansas Central, Evergy Missouri West, and Evergy Transmission Co. The utility has a combined rate base of approximately $15 billion, about half in Kansas and the rest split between Missouri and federal jurisdiction. Evergy is one of the largest wind energy suppliers in the U.S.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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COVID-19 Crisis and Other Issues Have Slowed VF, but Its Brands Provide a Competitive Advantage

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook:

Through dispositions and additions, VF has built a portfolio of strong brands in multiple apparel categories. The three brands that are viewed account for about 80% its sales (Vans, Timberland, and The North Face) as supporting VF’s narrow moat based on a brand intangible asset. Despite short-term disruption from the COVID-19 crisis and economic weakness in China, VF is believed to grow faster than most competitors in the long run and maintain its competitive edge.

The North Face will benefit from its new Future Light waterproof fabric, brand extensions, and expansions of its direct-to-consumer business. VF plans 8%-9% annual growth for The North Face, which may be possible after the coronavirus crisis has passed. It is less certain of VF’s long-term growth targets for Timberland and Dickies of 3%-4% and 5%-6%, respectively, given inconsistent results. At its 2019 investor event, VF targeted a gross margin above 55.5%, an operating margin above 15%, and an ROIC above 20% in fiscal 2024.

Financial Strength:

Although VF is struggling with some product shortages, higher costs, and inconsistent demand for Vans in China, its sales and profit margins have mostly recovered from the worst of the pandemic. Fiscal 2022 sales growth forecast has been lowered to 29% from 30% but adjusted EPS estimate have been held at $3.20. For fiscal 2023, adjusted EPS is adjusted of $3.68 on 7% sales growth. Fair value estimate implies fiscal 2023 price/adjusted earnings and EV/adjusted EBITDA of 18 and 15, respectively. The Kontoor spin-off and the sale of some of VF’s work brands has improved the firm’s margins as its remaining brands have more pricing power than those that have been eliminated. Further, the remaining VF has higher exposure to attractive active and outdoor categories. Gross margins of 56% or higher are forecasted after this fiscal year, well above historical gross margins of below 50%.

Bulls Say:

  • Vans, expected to generate over $4 billion in sales in fiscal 2022, is developing into a fashion brand. It still has growth potential, given its small share in the global sports-inspired apparel and footwear market, estimated at $152 billion in 2021 (Euromonitor). 
  • VF has disposed of its weaker jeans and work brands, helping to pull its gross margins up to the mid-50s from the high-40s. 
  • As an upscale brand with high price points, Supreme brings higher margins than any of VF’s individual brands except Vans. There is potential for VF to expand Supreme in international markets.

Company Profile:

VF designs, produces, and distributes branded apparel and accessories. Its largest apparel categories include action sports, outdoor, and workwear. Its portfolio of about 15 brands includes Vans, The North Face, Timberland, Supreme, and Dickies. VF markets its products in the Americas, Europe, and Asia-Pacific through wholesale sales to retailers, e-commerce, and branded stores owned by the company and partners. The company has grown through multiple acquisitions and traces its roots to 1899.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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L3Harris Technologies Growth Drivers: Tactical Radios Replacement Cycle, National Security Satellite Asset Decentralization, International Sales Expansion

Business Strategy and Outlook

Defense prime contractors are not born, they’re assembled. L3Harris Technologies, the sixth-largest defense prime by defense sales, was made from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies. 

Defense primes are implicitly a play on the defense budget, which is thought to be ultimately a function of a nation’s wealth and its perception of danger. The fiscal stimulus used to support the U.S. economy during the COVID-19 pandemic dramatically increased U.S. debt, and higher debt levels are usually a forward indicator of fiscal austerity. But it is alleged, a flattening, rather than declining, budgetary environment as is seen, that heightened geopolitical tensions between great powers are likely to buoy spending despite a higher debt burden. It is thought contractors will be able to continue growing despite a slowing macroenvironment due to sizable backlogs and the national defense strategy’s increased focus on modernization, and it is believed defense budget growth is likely to return to its long-term trend. 

Broadly, it is probable, with management’s thesis on the merger. Cost synergies to a large extent drove the 30-year wave of consolidation across the defense industry, which has largely generated shareholder value. Both L-3 and Harris had high revenue exposure to the defense sensors business and operated reasonably similar businesses, so it isn’t seen major execution risks in the merger. Arguably, L-3 was an ideal partner for a merger of equals because L-3 operated as a holding company and there are quite a few potential efficiencies from consolidating the firm into a more integrated firm. The three biggest firm-specific growth opportunities which are seen for L3Harris Technologies are the tactical radios replacement cycle, national security satellite asset decentralization, and international sales expansion.

Financial Strength

It is held, L3Harris is in solid financial shape. The firm increased debt by about $4.5 billion in 2015 to fund the acquisition of Exelis, a sensor-maker that was spun off from ITT and had been paying down debt since. The firm’s all-stock merger of equals with L-3 Technologies did not dramatically increase debt relative to size, and it is projected, a 2022 gross debt/EBITDA of roughly 2.0 times, which is quite manageable for a steady defense firm. The company is using the proceeds of portfolio divestitures for share repurchases, so it is anticipated EBTIDA expansion will be the driving force behind a decreasing debt/EBITDA over Analysts’ forecast period. While it is cherished the desire to compensate shareholders, it is likely that paying down debt may be more value accretive, as it would make more comfortable for analysts in decreasing their cost of equity assumption for the firm. While L3Harris has some exposure to commercial aviation (depending on definitions, roughly 5%-15% of sales), it is not anticipated the firm will be materially affected by the downturn in commercial aviation. As demand for defense products has remained resilient, it is not foreseen, for the firm needing to raise capital any time soon. That noted, L3Harris produces a substantial amount of free cash flow and is not especially indebted, so it is awaited that the company would be able to access the capital markets at minimal cost if necessary.

 Bulls Say’s

  • There is substantial potential for cost synergies from the merger with L-3 due to the decentralized organizational structure of the pre-merger entity. 
  • L3Harris is at the base of a global replacement cycle for tactical radios, which is likely to drive substantial growth. 
  • Defense prime contractors operate in an acyclical business, which could offer some protection as the U.S. is currently in a recession.

Company Profile 

L3Harris Technologies was created in 2019 from the merger of L3 Technologies and Harris, two defense contractors that provide products for the command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) market. The firm also has smaller operations serving the civil government, particularly the Federal Aviation Administration’s communication infrastructure, and produces various avionics for defense and commercial aviation.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Synchrony’s Partnership Base Remains Highly Concentrated, Top 5 Partnership Stretches more than 50% Revenue

Business Strategy and Outlook

Synchrony partners with retailers and medical providers to offer promotional financing as well as private label and co-branded general-purpose credit cards. The company’s promotional financing and instalment loans offered through its Home and Auto segment and its CareCredit program have performed well, and receivables have been relatively resilient in the current cycle. The company’s private-label and cobranded credit cards, co-marketed through partnerships with retailers, have faced more headwinds both before and during the pandemic, and credit card receivables outstanding are well below their 2018 peak. 

The company has also had to contend with the loss of Walmart in 2018 and then Gap in 2021. These were significant blows, as the Walmart credit card program was about 13% of Synchrony’s receivables at the time and the Gap credit card program was about 5%. The bank’s partnership base remains highly concentrated, with its top five partnerships accounting for nearly 50% of its revenue. The firm will likely continue to be forced to choose between revenue growth and margins as it is pressured at the negotiating table by its merchant partners.

Synchrony is also facing elevated repayment rates on the company’s cards as consumers have used fiscal stimulus money to pay down debt. This has caused the company’s loan receivables balance to stagnate and pushed down gross interest yields on the company’s credit cards. Repayment rates will likely normalize over time, as the impact of fiscal stimulus and loan forbearance fades, but in the short-term Synchrony’s net interest income will face headwinds. 

The future for Synchrony is not completely bleak. New credit card programs with Venmo and Walgreens give avenues for Synchrony to restart loan growth. The company also has several successful digital retailers as partners, such as PayPal and Amazon, which will offset the damage from Synchrony’s partners in the brick-and-mortar retail space. Additionally, high repayment rates on the company’s credit cards have pushed credit costs well below historical levels, and the company has been able to release the reserves it built up during the pandemic and accelerate share repurchases.

Financial Strength

Synchrony’s financial strength allowed it to navigate a difficult economic situation in 2020 without much stress being placed on the firm. The company’s sale of its Walmart portfolio to Capital One in late 2019 came at a fortuitous time, as it removed a credit-challenged account and created an influx of additional liquidity as the company entered 2020. Additionally, during the pandemic, decreased retail sales led to portfolio runoff and lower credit card receivables. While this is undoubtedly a negative for revenue generation, it did reduce the leverage of the bank and the company has been placed in a situation where it is seeking to manage the size of its deposit base to avoid becoming overfunded. 

The consequence of these events is clearly negative for the company’s income statement, as seen by Synchrony’s earnings results during 2020 and its low net interest growth since then. However, the balance sheet benefited and low receivable growth as well as low net charge-offs have allowed the firm to easily maintain that strength. The bank’s common equity Tier 1 ratio stands at 15.6%. With the bank’s allowance for bad loans at more than 10.76% of existing receivables, it is not foreseen Synchrony encountering any capital issues and there is likely room for continued shareholder returns. Even if credit conditions deteriorate or the firm sees additional retailer bankruptcies, the company is well positioned to manage it. The bank should have plenty of flexibility to respond to competitive threats and to invest in its business despite the uncertainties of the current economic cycle.

 Bulls Say’s

  • Synchrony enjoys long term contracts with several successful digital retailers such as Amazon and PayPal. These partnerships provide Synchrony with a source of receivable growth in a difficult environment for brick-and-mortar retailers. 
  • Synchrony continues to win new credit card programs, with credit cards for Venmo and Verizon being launched in 2020. 
  • The company’s credit cards present a compelling value for its retail partners. Struggling retailer will continue to be drawn to the incremental sales and revenue Synchrony’s credit cards provide.

Company Profile 

Synchrony Financial, originally a spin-off of GE Capital’s retail financing business, is the largest provider of private-label credit cards in the United States by both outstanding receivables and purchasing volume. Synchrony partners with other firms to market its credit products in their physical stores as well as on their websites and mobile applications. Synchrony operates through three segments: retail card (private-label and co-branded general-purpose credit cards), payment solutions (promotional financing for large ticket purchases), and CareCredit (financing for elective healthcare procedures). 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Boeing to Ramp 737 MAX Production Above Previous Peak Levels to Serve Global Aircraft Demand

Business Strategy and Outlook

Boeing is a major aerospace and defense firm that generates revenue primarily from manufacturing commercial aircraft. Boeing’s commercial aircraft segment can be split into two parts: narrow-bodied planes that are ideal for high-frequency short-haul routes, and wide-bodies that are used for transcontinental flights. Sales volumes for narrow-bodies have increased over the past 20 years the worldwide rise of low-cost carriers and an emerging-market middle class. 

Boeing’s narrow-body business is bruised after the extended grounding of the 737 MAX, but it is anticipated that the structural tailwinds driving narrow-body demand, particularly the development of emerging-market economies, will continue as the world emerges from the COVID-19 pandemic. As nations grow richer, their citizens tend to demand travel, and almost all aviation demand is served by two firms. It is projected that Boeing will ramp 737 MAX production above previous peak levels to serve global aircraft demand. Critical to our thesis is a normalization of U.S.-China trade relations, as management anticipates China will provide about a quarter of the growth in the aviation market over the next decade. 

It is expected that wide-body demand will recover more slowly from the COVID-19 downturn than narrow-body demand because wide-bodies are used for longer haul trips, which are unlikely to recover until a COVID-19 vaccine is distributed globally, which likely will begin happening in 2022. It is held that Boeing’s 787 Dreamliner is a fantastic aircraft for long-haul travel, but it is expected production issues will stop deliveries until 2022. It is alleged Boeing’s commercial deliveries will sustainably return to 2018 levels in 2026. 

Boeing has segments dedicated to the production of defense-specific products and aftermarket servicing. These businesses together generate about 38% of our midcycle operating income. It is broadly assumed GDP-like growth in the defense business and expect the services business will regain profitability faster than Boeing as a whole because aftermarket revenue increases directly with flights, but that global retirements will slow the recovery of this segment over the medium term.

Financial Strength

Boeing’s capitalization is looking more uncertain since the COVID-19 outbreak has substantially reduced air travel. EBITDA turned negative in 2020, which renders many traditional leverage metrics meaningless. The company ended 2021 with about $58.1 billion in debt and $16.2 billion in cash. Analysts’ expect EBITDA expansion and debt reduction over our forecast period to lead to gross debt/EBITDA levels at about 8.0 in 2022 and lower levels in subsequent years. Our estimated 2022 EBITDA covers interest expense 2.4 times, and the company has access to additional liquidity if necessary. In subsequent years, free cash flow is positive and EBITDA covers interest expense by about 5 or more times. The firm’s first capital allocation priority is to reduce debt, but will face considerable challenges as it needs to also reinvest in new technology to remain competitive. It is likely the correct balance between debt reduction and reinvestment is the critical question management needs to address.

 Bulls Say’s

  • Boeing has a large backlog that covers several years of production for the most popular aircraft, which gives us confidence in aggregate demand for aerospace products. 
  • Boeing is well-positioned to benefit from emerging market growth in revenue passenger kilometers and a robust developed market replacement cycle over the next two decades. 
  • It is probable that commercial airframe manufacturing will remain a duopoly for most of the world for the foreseeable future. It is anticipated customers will not have many options other than continuing to rely on incumbent aircraft suppliers.

Company Profile 

Boeing is a major aerospace and defense firm. With headquarters in Chicago, the firm operates in four segments, commercial airplanes, defense, space & security, global services, and Boeing capital. Boeing’s commercial airplanes segment generally produces about 60% of sales and two-thirds of operating profit, and it competes with Airbus in the production of aircraft ranging from 130 seats upwards. Boeing’s defense, space & security segment competes with Lockheed, Northrop, and several other firms to create military aircraft and weaponry. The defense segment produces about 25% of sales and 13% of operating profit, respectively. Boeing’s global services segment provides aftermarket servicing to commercial and military aircraft and produces about 15% of sales and 21% of operating profit. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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J.B. Hunt’s Intermodal Rate Backdrop Holding Strong, Comfortably Offsetting Volume Constraints

Business Strategy and Outlook

At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with Burlington Northern Santa Fe in the West in 1990. Years later, it struck an agreement with Norfolk Southern in the East. Hunt has established a clear leadership position in intermodal shipping, with a 20%-plus share of a $22 billion-plus industry. The next-largest competitor is Hub Group, followed by Schneider National’s intermodal division and XPO Logistics’ intermodal unit. Intermodal made up slightly less than half of Hunt’s total revenue in 2021.

Hunt isn’t immune to downturns, but over the past decade-plus it’s reduced its exposure to the more capital-intensive truckload-shipping sector, which represents about 28% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. Hunt is also shifting its for-hire truckload division to more of an asset-light model via its drop-trailer offering while investing meaningfully in asset-light truck brokerage and final-mile delivery. 

Rates in the competing truckload market corrected in 2019, driving down intermodal’s value proposition relative to trucking. Thus, 2019 was a hangover year and fallout from pandemic lockdowns pressured container volume into early 2020. However, truckload capacity has since tightened drastically, contract pricing is rising nicely across all modes, and underlying intermodal demand has rebounded sharply on the spike in retail goods consumption (intermodal cargo is mostly consumer goods) and heavy retailer restocking. Hunt is grappling with near-term rail network congestion that’s constraining volume growth, but the firm is working diligently with the rails and customers to minimize the issue. It is  expected that 2.5%-3.0% U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer term, with 2.0%-2.5% pricing gains on average, though Hunt’s intermodal unit should modestly outperform those trends given its favorable competitive positioning.

Financial Strength

J.B. Hunt enjoys a strong balance sheet and is not highly leveraged. It had total debt near $1.3 billion and debt/EBITDA of about 1 times at the end of 2021, roughly in line with the five-year average. EBITDA covered interest expense by a very comfortable 35 times in 2021, and we expect Hunt will have no problems making interest or principal payments during our forecast period. Hunt posted more than $350 million in cash at the end of 2021, up from $313 million at the end of 2020. Historically, Hunt has held modest levels of cash, in part because of share-repurchase activity and its preference for organic growth (including investment in new containers and chassis, for example) over acquisitions. For reference, it posted $7.6 million in cash and equivalents at the end of 2018 and $14.5 million in 2017. The company generates consistent cash flow, which has historically been more than sufficient to fund capital expenditures for equipment and dividends, as well as a portion of share-repurchase activity. It is expected that the trend will persist. Net capital expenditures will jump to $1.5 billion in 2022 as the firm completes its intermodal container expansion efforts, but after that it should also have ample room for debt reduction in the years ahead, depending on its preference for share buybacks. Overall,  Hunt will mostly deploy cash to grow organically, while taking advantage of opportunistic tuck-in acquisitions (a deal in dedicated or truck brokerage isn’t out of the question, but it is  suspected that the final mile delivery niche is most likely near term). 

Bulls Say’s

  • Intermodal shipping enjoys favorable long-term trends, including secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail). 
  • It is believed intermodal market share in the Eastern U. S. still has room for expansion, suggesting growth potential via share gains from shorter-haul trucking. 
  • J.B. Hunt’s asset-light truck brokerage unit is benefiting from strong execution, deep capacity access, and tight market capacity. It’s also moved quickly in terms of boosting back-office and carrier sourcing automation.

Company Profile 

J.B. Hunt Transport Services ranks among the top surface transportation companies in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement of its owned containers (45% of sales in 2021); dedicated trucking services that provide customer-specific fleet needs (21%); for-hire truckload (7%); heavy goods final-mile delivery (6%), and asset-light truck brokerage (21%).

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Citigroup Remains a Complex and Developing Story

Business Strategy and Outlook

Citigroup has large trading, investment banking, international corporate banking, and credit card operations. The bank’s best performing business is its Institutional Clients Group, or ICG, unit, where the bank’s commercial banking and capital markets operations have scale and a unique global footprint that few can replicate. Citigroup is currently in the middle of a major strategic shift and remains a complex story. The bank is selling off multiple consumer units throughout APAC, will eventually sell its consumer unit in Mexico, and is refocusing on its core ICG unit, North American Consumer, and global wealth. At the end of this process, Morningstar analysts think the bank will be easier to understand, structurally more focused, and will likely have a marginally better return profile, however Morningstar analysts think the bank will still structurally trail its peers from a profitability standpoint.

The bank also has operational issues to solve, which the Revlon payment fiasco and resultant regulatory scrutiny highlighted once again. New CEO Jane Fraser has promised to redouble efforts to clean up internal regulatory issues. In the meantime, the bank has less sensitivity to interest rates than peers and expenses are on the rise as the bank invests in its ICG unit and in regulatory initiatives. Morningstar analysts see Citigroup taking some time before returns are better optimized.

After updating  projections with the latest quarterly results, Morningstar analysts are maintaining a fair value estimate of $83 per share. Morningstar analysts had initially thought to raise its fair value estimate due to no longer incorporating a tax rate hike, however a reevaluation of revenue growth assumptions largely balanced out the benefit of the lower tax rate. Thus, fair value is equivalent to just over 1 times tangible book value per share as of December 2021.

Financial Strength 

As per Morningstar analyst, Citigroup is in sound financial health. Its common equity Tier 1 ratio stood at 12.2% as of December 2021. The bank’s supplementary leverage ratio was 5.7%, in excess of the minimum of 5%. Citigroup’s liabilities are prudently diversified, with just over half of its assets funded by deposits and the remainder of liabilities made up of long-term debt, repurchase agreements, commercial paper, and trading liabilities. Roughly $19 billion in preferred stock was outstanding as of December 2021.

The capital allocation plan for Citigroup is now fairly standard, with the bank generally targeting for roughly 25% of earnings to be devoted to dividends, with share buybacks being flexible in response to the investment needs of the business. As the bank sells off businesses and frees up capital, there could be more room for repurchases, however how much the bank requires for further investment into the business remains an open question.

Bulls Say

  • Citigroup is in the middle of a strategic repositioning, taking major moves such as selling off its consumer business in Mexico and reinvesting in its strong points, ICG and wealth. Citigroup may finally emerge as a structurally improved franchise. 
  • Citigroup remains uniquely exposed to card loan growth and global transaction and trade volumes. As card loans hopefully eventually rebound and as the global economy recovers, these should drive revenue growth for the bank. 
  • Citigroup’s stock is not expensive, trading at less than tangible book value, not a hard hurdle to clear.

Company Profile

Citigroup is a global financial services company doing business in more than 100 countries and jurisdictions. Citigroup’s operations are organized into two primary segments: the global consumer banking segment, which provides basic branch banking around the world, and the institutional clients group, which provides large customers around the globe with investment banking, cash management, and other products and services.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Heavier Than Expected Content Investment Dents AT&T’s 2022 Outlook; FVE Down to $35

Business Strategy and Outlook

AT&T is the third largest wireless carrier in the U.S. Morningstar analyst believe that AT&T management is now putting the firm on the right path, shedding assets and refocusing on the telecom business, investing aggressively to extend its fiber and 5G networks to more locations, which will build on the firm’s core strengths. The complexity of the Warner transaction and the intensity of this investment will likely create a bumpy ride over the next couple years, but it is  believed that patience will be rewarded.

AT&T also benefits from its ownership of deep network infrastructure across much of the U.S. and its ability to provide a range of telecom services, particularly among enterprise customers. The plan to extend fiber to at least 3 million homes and businesses annually through at least 2025 builds on this position and should allow it to serve those locations directly and enhance wireless coverage in the surrounding areas.

Also, Morningstar analysts believe that the T-Mobile merger greatly improved the industry’s structure, leaving three players with little incentive to price irrationally in search of short-term market share gains. We don’t believe Dish Network presents a credible threat to the traditional wireless business. AT&T is also positioned to benefit as Dish builds out a wireless network as the firm recently signed a 10-year wholesale agreement that generates revenue for AT&T and gives it access to Dish spectrum.

Heavier Than Expected Content Investment Dents AT&T’s 2022 Outlook; FVE Down to $35

AT&T posted mixed fourth-quarter results and 2022 expectations. The wireless business continues to perform well, attracting customers at a solid clip. Management still expects to deliver at least 3% wireless service revenue growth in 2022, in line with Verizon’s forecast. Overall, the firm expects to generate $23 billion of free cash flow this year, down from $27 billion in 2021, reflecting heavy investments in networks and content, which as per Morningstar analysts believe are necessary to protect and build on its narrow economic moat. Thus, lowering fair value estimate to $35 from $36 but still believe the shares are substantially undervalued.

Financial Strength 

AT&T ended 2020 with net debt of $148 billion, down from $177 billion immediately after the Time Warner acquisition closed in mid-2018. The firm’s purchase of C-band spectrum for $23 billion, partially offset by the proceeds from assets sales, pushed the net debt load back up to $156 billion as of the end of 2021, taking net leverage to 3.2 times EBITDA from 2.7 times. This load is far higher than the firm has operated under in the past.In addition, the firm has issued more than $5 billion of general preferred shares. The WarnerMedia spin-off will take $43 billion of debt with it. Coupled with an additional $9 billion spectrum purchase in early 2022, AT&T will carry about $120 billion in net debt after the deal closes, which management expects will shake out in the range of 2.6 times EBITDA. That debt load compares favorably versus Verizon and reasonably well against T-Mobile. The firm plans to continue repaying debt, pulling net leverage below 2.5 times by the end of 2023, a year sooner than it had previously expected. The firm will use the Warner spin-off to adjust its dividend policy, targeting a payout of around 40% of free cash flow, down from more than 70% in 2021 (by our calculation), leaving substantial excess cash to reduce leverage or take advantage of opportunities, including share repurchases. In total, management will target a payout of around $8 billion-$9 billion annually, down from $15 billion in 2021. Morningstar analysts consider this policy makes sense, as it contemplates a sizable increase in network investment, notably in fiber infrastructure, which we believe is important to AT&T’s long-term health.

Bulls Say

  • AT&T has pulled together assets no telecom company can match. The firm has direct contact with more than 170 million customers across various products, providing an opportunity to build deeper relationships. 
  • Within the wireless business, AT&T holds the scale needed to remain a strong competitor over the long term. With Sprint and T-Mobile merging, industry pricing should be more rational going forward.
  • WarnerMedia holds a broad array of content rights and has a strong reputation with content creators. Shareholders will own 71% of this firm after it merges with Discovery

Company Profile

Wireless is AT&T’s largest business, contributing about 40% of revenue. The firm is the third-largest U.S. wireless carrier, connecting 66 million postpaid and 17 million prepaid phone customers. WarnerMedia contributes a bit less than 20% of revenue with media assets that include HBO, the Turner cable networks, and the Warner Brothers studios. AT&T plans to spin Warner off and merge it with Discovery to create a new stand-alone media firm. The firm recently sold a 30% stake in its traditional television business, which serves 15 million customers and generates about 17% of sales. This business will be removed from AT&T’s financials going forward. Fixed-line telecom services provided to businesses and consumers account for about 20% of revenue, serving about 15 million broadband customers.

 (Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Corning’s Q4 Reaffirms Expectations for Long-Term Growth Despite Short-Term Margin Pressure

Business Strategy and Outlook

Corning is a materials science behemoth with differentiated glass products for televisions, notebooks, mobile devices, wearables, optical fiber, cars, and pharmaceutical packaging. In its 170 years of operation, the company has constantly innovated (including inventing glass optical fiber and ceramic substrates for catalytic converters) and oriented itself toward evolving demand trends that it can serve through its core competency of materials science. 

Corning is able to use its scale to invest heavily in research and development–$1 billion or more per year–and spread these expenses across its five segments. Centralizing R&D allows the firm to manufacture products for a materially lower cost than its competitors, all while using this hefty investment to maintain an innovation lead that results in leading share positions in its end markets. Corning’s cost advantage and intangible assets result in a narrow economic moat.

Financial Strength

Narrow-moat Corning capped off the year with strong fourth-quarter results, coming in at the top end of its guidance ranges for the top and bottom lines. Corning’s fourth quarter–and 2021 in general–show the firm reaping the benefits of its diverse end-market exposure and enjoying broad-based demand. The firm uses a combination of debt and strong operating cash generation to fund its capital and debt obligations, and this trend to continue. As of Dec. 31, 2021, Corning had $7 billion in total long-term debt and $2.1 billion in cash on hand. While the firm is highly leveraged, it has the longest debt maturity of any S&P 500 company, with debt maturities upward of 20, 30 and 40 years.

Through 2026, the company has barely $1 billion coming due. Corning is a reliable generator of free cash flow, despite capital-intensive businesses. Since 2016, Corning has averaged more than $700 million in free cash flow each year, even with the impact of COVID-19 in 2020. After $1.8 billion in free cash flow in 2021, it is expected that at least $1 billion in annual free cash flow over our explicit forecast.

Bulls Say’s 

  • Corning boasts a leading share in four distinct end markets: display glass, optical fiber, cover glass, and emissions substrates/filters. 
  • Corning’s portfolio is aligned toward global secular trends of increasing connectivity and efficiency. 
  • Corning’s debt has the longest average time to maturity of the entire S&P 500, giving it ample time and liquidity to fulfill its obligations.

Company Profile 

Corning is a leader in materials science, specializing in the production of glass, ceramics, and optical fiber. The firm supplies its products for a wide range of applications, from flat-panel displays in televisions to gasoline particulate filters in automobiles to optical fiber for broadband access, with a leading share in many of its end markets.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

TC Energy Continues to Pursue Promising Low-Carbon Efforts

Business Strategy and Outlook

TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. The most critical differences between Enbridge and TC Energy arise from their approaches to energy transition.

Canadian carbon emissions taxes are expected to increase to CAD 170 a ton by 2030 from CAD 40 today, meaning it is critical that TC Energy, with its natural gas exposure, follow Enbridge’s approach to rapidly reduce its carbon emission profile and continue to pursue projects like the Alberta Carbon Grid, which will be able to transport more than 20 million tons of carbon dioxide. These taxes potentially increase costs for Canadian pipes compared with U.S. pipes but also make hydrogen a viable alternative to gas-powered electricity generation by 2030 in Canada, presenting an emerging threat. TC Energy recently introduced targets to reduce its Scope 1 and 2 intensity by 30% by 2030 and reach net zero by 2050, which is a start.

In addition, Enbridge’s backlog is more diversified across its businesses already, and it already has a more material renewable business, including hydrogen, renewable natural gas, and wind efforts. Morningstar analysts think the renewable business lacks an economic moat today, and considers it is an important area of investment for TC Energy that it needs to pursue. The renewable investments can compete for capital across the rest of the portfolio, generating reasonable returns on capital, allowing the overall enterprise to adapt to the markets as they evolve. This shift is especially the case as a CAD 170 per ton carbon tax in Canada opens the door for potentially sizable investments to reduce carbon emissions.

Financial Strength 

TC Energy carries significantly higher leverage than the typical U.S. midstream firm, with current debt/EBITDA well over 5 times.The high degree of leverage is supported by the highly protected nature of its earnings stream. As capital spending declines over the next few years TC Energy to currently will reach the 4s in the latter half of the decade.TC Energy is also unusual in that it will continue to rely on the capital markets to meet about 20% of its expected capital expenditures over the next few years.TC Energy has outlined plans to spend about CAD 5 billion annually on a continued basis. About CAD 1.5 billion-2 billion is maintenance spending on its pipelines, and 85% of this is recoverable due to being invested in the rate base. Bruce Power and the U.S. and Canadian natural gas pipelines will consume about CAD 1 billion each annually. ESG-related opportunities such as using renewable power to power its own operations or seeking carbon capture efforts would be on top of this spending. TC’s dividend growth remains prized by its investors, and 3%-5% growth going forward is easily supportable under the firm’s 60/40 framework.

Bulls Say

  • TC Energy has strong growth opportunities in Mexican natural gas as well as liquefied natural gas. 
  • The company offers virtually identical growth prospects and a protected earnings profile to Enbridge but allows investors to bet more heavily on natural gas. 
  • The Canadian regulatory structure allows for greater recovery of costs due to project cancelations or producers failing compared with the U.S.

Company Profile

TC Energy operates natural gas, oil, and power generation assets in Canada and the United States. The firm operates more than 60,000 miles of oil and gas pipelines, more than 650 billion cubic feet of natural gas storage, and about 4,200 megawatts of electric power.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.