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Portfolio Update

Q4 First Reporters: Favorable Portents

By Roger S. Conrad, on Jan. 28, 2018

It’s another earnings reporting season for Lifelong Income Portfolio companies. Fourth-quarter and end-year filings take longer to process, so this will stretch well into March. Here’s what we’ve seen for our holdings and what we’re looking for from those to come.

Note that all current Capitalist Times Premium Lifelong Income Portfolio Holdings are now tracked in sister advisory Deep Dive Investing, either on the Focus List or in the Idea Vault.

Per usual, Kinder Morgan (NYSE: KMI) was first to release its 2017 results and guidance for 2018. The two biggest numbers were (1) full-year distributable cash flow of $2 per share, which beat guidance of $1.99 per share and (2) debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) of 5.1 times, which topped projections of 5.2 times.

More impressive were the results inside those headline numbers. The company returned to quarterly discounted cash flow growth at 4 percent, as the combined impact of cost cutting and new assets coming on stream more than offset the loss of cash flow from the sale of 50 percent of the Southern Natural Gas Pipeline and the spinoff of a 30 percent ownership stake in Kinder’s Canadian assets as Kinder Morgan Canada (TSX: KML).

The company’s largest and most important division, Natural Gas Pipelines, lifted transportation volumes by 8 percent as it completed new projects and enjoyed robust demand from regulated utilities and Mexico. Kinder pipes currently ship 70 percent of US-to-Mexico gas volumes, as well as 40 percent of all natural gas used in the US. Liquids terminals and products pipelines boosted earnings by adding assets. And even the CO2 unit showed signs of a return to growth, thanks to stabilized prices and volumes.

Kinder’s results affirmed management’s plans to boost the quarterly dividend by 60 percent starting with the May payment and subsequent boosts of 25 percent for both 2019 and 2020. The stock’s high teens trading price, however, is a pretty clear indication investors are conditioning future gains on progress at the Trans Mountain pipeline expansion, which the company doesn’t plan to complete until 2020.

That’s myopic in our view, given the $12 billion company-wide backlog and the fact Trans Mountain has been ring-fenced financially from the parent. But there’s good news on this front as well, with Canada’s National Energy Board announcing a procedure to resolve local and provincial permitting disputes.

This is a stock for patient investors. Kinder is still a buy up to $22 for those who don’t already own it.

Verizon Delivers

Like Kinder, Verizon Communications (NYSE: VZ) also delivered on its numbers. Widely watched fourth-quarter wireless revenue returned to growth for the first time in two years (1.7 percent) as the company added 1.2 million net new postpaid (contracted) customers for the year.

Churn declined by another 11 basis points to 0.77 percent, by far the lowest in the US wireless communications industry and the clearest possible affirmation the company still has the best-in-class network. And the company didn’t sacrifice profitability to achieve that, with EBITDA margin increased to 39.8 percent from 36.9 percent a year ago.

The other big news from this earnings and guidance report is that Verizon will receive a one-time earnings benefit from the changes in the tax law of $16.8 billion, to be followed by additional annual cash flows of $3.5 to $4 billion.

That’s one of the most positive outcomes for a company from Congress’ tax plan and it greatly boosts the company’s financial flexibility to reduce debt and fund projects.

The focus of Verizon’s capital expenditures this year will be the commercial launch of advanced 5G communications services to up to five US cities, starting with Sacramento, CA.

The company has been putting needed wireless spectrum and fiber optic broadband infrastructure in place for the better part of this decade, with Federal Communications Commission approval of the acquisition of Straight Path Communications (NYSE: STRP) the most recent step in the process. And global 5G protocols agreed to in December established Verizon as the clear US leader in developing needed standards for seamless broadband in reliability, throughput and latency.

During the company’s earnings and guidance call, CEO Lowell McAdam forecast low single-digit revenue and earnings growth for 2018, picking up steam starting in 2019 as 5G gains traction. That positive message coupled with recent results appears to have reawakened the company’s share price, pushing it above our target of $52.

We’re bullish too. But it’s important to remember that Verizon’s is basically an evolutionary growth story. And while a price of less than 12 times consensus 2018 earnings per share is a steep discount to the S&P 500’s 18.8 times, the company does operate in an industry that’s paradoxically both fiercely competitive and highly regulated.

We expect the stock to break out to a much higher level over the next couple years as Verizon executes on its 5G strategy. But there’s plenty of potential headline risk that could cause pullbacks in the meantime.

Those who didn’t get in last fall when the stock was 20 percent cheaper should be patient and wait for a dip. Verizon is a buy below $52.

What to Expect from the Rest

As leading companies in their respective industries, Verizon and Kinder results are also important for what they portend for other Lifelong Income Portfolio companies in their sectors.

Kinder’s strong volumes from its properties in the Haynesville shale, for example, likely bode well for the results Enable Midstream Partners LP (NYSE: ENBL) will announce Feb. 20.

We expect Enable to show a solid build of distribution coverage that potentially tops management’s recent guidance.

The main issue for partnership shares remains what co-general partner CenterPoint Energy (NYSE: CNP) does with its ownership stake. That company announces Feb. 22. Given the waffling we’ve seen so far, we’re not expecting much in the way of a firm decision. But Enable remains a solid buy for high income alone up to $17.

Kinder’s solid performance is also promising for Enterprise Products Partners LP’s (NYSE EPD) release on Jan. 31. That could extend share price gains we’ve seen since early December, though much will probably depend on the partnership’s guidance. Enterprise is still a buy up to $33 for those who don’t already own it.

Verizon’s strong results in wireless will likely be repeated by AT&T (NYSE: T) when that company announces on Jan. 31. But investors will also look for signs of improvement in customer losses at the DirecTV business, which were hugely disappointing in the third quarter.

We expect good news and possibly an update on the Time Warner Inc (NYSE: TWX) deal. No one should chase the stock over our target of $38 until there’s more clarity on both issues.

As for the rest of the holdings, higher oil and gas prices and growing production from the completion of major multi-year projects should lift results at both Chevron Corp (NYSE: CVX) and Total (NYSE: TOT) when they’re released on Feb. 2 and 8, respectively.

The return to dividend growth announced this month at Canada’s RioCan REIT (TSX: REI, OTC: RIOCF) should be reflected in solid numbers on Feb. 13.

While it hasn’t yet raised its payout, fellow Canadian REIT Artis (TSX: AX-U, OTC: ARESF) figures to do the same on March 1 in light of a promising project update in late December.

As for US/Europe REIT WP Carey Co. (NYSE: WPC), we expect fourth-quarter results announced at the end of February to basically match guidance, supporting another low single-digit dividend boost in mid-March.

AES Corp’s (NYSE: AES) fourth-quarter results will reflect a charge of $1.10 to $1.25 per share for “repatriation” taxes under newly enacted tax law changes, as well as a non-cash charge of 5 to 8 cents per share for early payoff of $1 billion of debt related to the sale of its Philippines business. The numbers and guidance to be announced Feb. 27, however, will also show strong progress on projects and reaching investment-grade credit metrics next year.

The stock got a lift in January as an activist investor joined the board, with a mandate to accelerate the company’s growth in solar and energy storage.

AES is still a buy for long-term growth and income up to $15. And from a valuation of just 9.6 times expected 2018 earnings, it’s also a top pick to outperform this year.

The same is true for Entergy Corp (NYSE: ETR) from its price of 11.6 times trailing 12 months earnings, in part because the company’s remaining unregulated nuclear plants should get a winter season bump from cold-weather demand.

Landmark Infrastructure Partners LP (NSDQ: LMRK) delivered last month on management’s promise to accelerate its dividend growth rate, boosting the Feb. 14 payout by a penny a share from the previous quarter. That’s a sequential growth rate of 2.8 percent versus the 0.7 percent rate of the previous period, and it puts the company on track for promised 10 percent annualized growth in 2018. We’re raising our buy target to $18 in anticipation of solid results and guidance on Feb. 15.

We also expect good news from Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI) sometime in late February, along with clarification of its dividend policy. The business development company’s growth prospects appear to be intact, despite the possible impact on its customers from the Trump administration’s new 30 percent tariff on imported solar panels.

We expect a mid-single digit dividend growth rate for 2018, which will support Hannon’s current valuation. The stock is a buy up to $24, but only for those who don’t already own it.

Roger S. Conrad is the founder and editor of Conrad’s Utility InvestorHe also co-edits Energy & Income Advisor and Deep Dive Investing with Elliott Gue.

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