TIME OF TRUMP ROGER S CONRAD CAPITALIST TIMES WASHINGTON DC AAII - - PowerPoint PPT Presentation

HIGH YIELD INVESTING IN THE TIME OF TRUMP

ROGER S CONRAD CAPITALIST TIMES WASHINGTON DC AAII MARCH 2017

IN STOCKS WE TRUST

PICK YOUR OWN STOCKS

WHAT’S IN AN INDEX?

COMPANY % OF DJUA NextEra Energy Inc 15.0 Duke Energy Corp 9.3 Edison International 9.0 Consolidated Edison 8.8 Dominion Resources 8.7 American Water Works 8.7 American Electric Power 7.5 PG&E Corp 7.5 Southern Company 5.7 Public Service Enterprise Group 5.1

DIFFERENTIATION MATTERS

WHAT’S IN AN INDEX?

MLP % OF ALERIAN INDEX Enterprise Products Partners 18.8 Energy Transfer Partners 9.2 Magellan Midstream Partners 8.9 Plains All-American Pipeline 6.2 Williams Partners LP 5.0 MPLX LP 4.9 Buckeye Partners LP 4.7 ONEOK Partners LP 4.1 Sunoco Logistics Partners LP 3.1 Western Gas Partners LP 2.4

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SIX BRIEFING OBJECTIVES

• WHO WE ARE
• WHY INCOME INVESTING?
• BEYOND THE BLUSTER: WHAT TRUMP POLICIES

REALLY MEAN FOR INVESTORS

• SECTOR BY SECTOR LOOK AT WHERE HIGH YIELD

INVESTMENTS STAND

• ADAPTING YOUR PORTFOLIO TO TRUMP-A-

NOMICS: SOME RECOMMENDATIONS

• FOR MORE: REPORTS AND SLIDES

INCOME STILL WORKS

• THE BIRD IN THE HAND
• GROWING DIVIDENDS BEST INFLATION
• LATER IN THIS PRESENTATION: A DIVIDEND

STOCK YIELDING OVER 9% THAT WILL GROW ITS PAYOUT 10% THIS YEAR

• THE FED: NOT THE HAZARD YOU THINK
• TAX RATES MAY FALL AGAIN
• DIFFERENTIATION IS CRITICAL

UTILITIES SINCE THE FED ACTED

RISING RATES CAN BE BULLISH

THEY’RE STOCKS, NOT BONDS

DIVIDENDS DAY OF DOOM?

WHAT’S HE SIGNING?

MORE QUESTIONS THAN ANSWERS

• TAXES AND HEALTH CARE: CAN THEY PASS? WILL

CHANGES HELP OR HURT GROWTH?

• INFRASTRUCTURE BILL: SO MUCH FOR THE FIRST 100

DAYS, IS 2018 A PIPE DREAM TOO?

• REGULATION ROLLBACK: STATES AND COURTS HAVE A

SAY

• KEY POSITIONS STILL UNFILLED: FERC
• SHRINKING GOVERNMENT: CONTRACTIONARY
• THE LAW OF LOFTY EXPECTATIONS AS THE BULL

MARKET ENTERS YEAR 9

• FOCUS ON COMPANIES, NOT THE GRANDIOSE

ONE EXAMPLE: UTILITIES

TRUMP AND PIPELINES: BULLISH?

• OBAMA FERC STREAMLINED PIPELINE

APPROVAL PROCESS = RECORD APPROVALS

• NATURAL GAS THE KEY TO CUTTING CO2

WITHOUT SKYROCKETING ELECTRIC RATES

• FERC NOW LACKS A QUORUM: PROJECT

APPROVALS STALLED UNTIL TRUMP APPOINTS NEW COMMISSIONERS

• WILL TRUMP THUMP GAS TO FAVOR COAL?
• STATES AND COURTS HAVE THE LAST WORD

WHERE’S THE SLACK?

HIGH YIELDS BY SECTOR

• BONDS: LOW QUALITY HAS THE EDGE
• UTILITY STOCKS: UNDERVALUED GROWTH
• YIELDCOS: BAD RAP MEANS BIG VALUE
• ENERGY MLPS: WHO MAKES IT AT $50< OIL?
• SUPER OILS: STILL BEDROCK?
• REITS: THE REAL VALUE IS SPECIALIZING
• BEYOND THE DOLLAR: BIG YIELDS OUTSIDE US

TREASURYS SWIM UPSTREAM

UTILITY JUNK PROSPERS

BONDS: IS THE CORE BUSINESS GETTING STRONGER?

• WHY NOT INVESTMENT GRADE?
• IS REVENUE SUSTAINABILITY IMPROVING?
• REFINANCING RISKS MANAGEABLE?
• HOW PROTECTED ARE WE FROM VOLATILITY IN

COMMODITY PRICES? ECONOMY? LEGISLATION AND LEGAL TURBULENCE?

• ANYTHING LEFT IN A BANKRUPTCY?
• KEEP IT SHORT: 5 YEARS OR LESS TO MATURITY

A HIGH PRICED SECTOR…

…WITH MANY GROWTH CATALYSTS

• DIVIDEND GROWTH ACCELERATES FROM LOW

SINGLE DIGITS TO MID/HIGH SINGLE DIGITS

• GROWTH FUELED BY CAPITAL SPENDING ON

SMALLER PROJECTS WITH HIGH PROBABILITY OF EARNING A FAIR RETURN

• UTILITIES’ TECH CONNECTION
• REGULATION IN THE STATES FAVORABLE
• REFINANCING RISKS ARE LOW

TECH PREFERENCES

DOD: A MAJOR ENERGY CONSUMER

DOD PRIORITIES

• CUT FUEL COSTS
• ENSURE RELIABILITY AT THE BASE AND ON

THE BATTLEFIELD

• SIMPLIFYING LOGISTICS SO PERSONNEL CAN

DO THEIR JOBS MORE EFFECTIVELY AND SAFELY

• CLIMATE CHANGE CONSIDERED A MAJOR 21ST

CENTURY THREAT

• BIG PRESENCE AT ARPA-E ENERGY SUMMIT

DOD GOING GREEN

RENEWABLES ARE FOR REAL

AES CORP (NYSE: AES)— BUY<15

CHEAPEST STOCK IN DJUA: 1. YIELD 4.36%, 9.1% GROWTH LAST 12 MONTHS 2. P/E 10.3X TRAILING 12 MONTHS EARNINGS, DJUA IS 18.6X PRIMARY REASONS: 1. INVESTMENTS IN SEVERAL EMERGING MARKETS 2. SUB-INVESTMENT GRADE RATING OF BB (STABLE) FROM S&P 3. LONG MEMORIES OF 2001-02 MELTDOWN KEY CATALYSTS IN 2017: 1. VISIBLE GUIDANCE OF 8-10% ANNUAL EARNINGS AND DIVIDEND GROWTH THRU 2021 2. GLOBAL FRANCHISE IN OPERATING ENERGY STORAGE 3. S-POWER ACQUISITION

HOW GRID STORAGE WORKS

THE DUCK CHART

AES GAINS MARKET SHARE

ALT ENERGY BASICS

• PLANT ECONOMICS INCREASINGLY IMPORTANT

WITH TAX CREDITS EXPIRING

• COMPONENT COSTS CONTINUE TO PLUNGE
• GRID INVESTMENT MUCH EASIER TO RECOVER

THAN NEW FACILITIES

• REPOWERING FACILITIES ATTRACTIVE
• REGULATORY SUPPORT AT STATE LEVEL CRITICAL

SOLAR RADIATION

The U.S. wind resource

• Wind could power more than

13 times U.S. electricity needs

• New technology is reaching higher

winds, making wind energy possible in new regions of the country

FALLING COST OF SOLAR PANELS

COMPONENTS MAKERS SLAMMED

PATTERN ENERGY GROUP (NSDQ: PEGI)—BUY<22

YIELD: 8.5% 12-MONTH DISTRO GROWTH: 8.6% Q4 PAYOUT RATIO: 27.2% DEBT DUE THROUGH 2019: $35 MIL Q4 CAFD GROWTH: 44% KEY GROWTH CATALYSTS: 1. GLOBAL WIND AND SOLAR DEVELOPMENT PIPELINE AND ROFO—PATTERN 2020 2. CLOSING DISCOUNT TO NEP AS ACCOUNTING ISSUES RESOLVED 3. ABILITY TO MEET 15% CAFD GROWTH GUIDANCE 4. POTENTIAL TAKEOVER BY PRIVATE CAPITAL OWNERS IF SHARES REMAIN AT DEPRESSED LEVELS: RIVERSTONE (19.41%), CARLYLE (19.41%, CI INVESTMENTS (12%) 5. ANALYST COUNT: 13B, 3H, 0S

PATTERN’S PORTFOLIO

PATTERN FOR GROWTH

2017 OUTLOOK: CYCLE BASICS

NATURAL GAS: 20-YEARS

NATURAL GAS: A GROWTH STORY

MEXICO GAS PRODUCTION….

ENERGY TRANSFER’S BILLIONS

PICKING PIPELINE MLPS

• WISE SELECTION IS CRITICAL: SECTOR

RECOVERY MASKS RISKS

• KEY FACTORS: LEVERAGE, ABILITY TO MOVE

FORWARD ON KEY PROJECTS, EXPOSURE TO WEAKER BASINS

• DISTRIBUTION COVERAGE RATIO IMPORTANT

BUT MAY NOT INDICATE SUSTAINABILITY

• MERGERS USUALLY POSITIVE BUT NOT

ALWAYS—ROLLUPS ARE A TREND

ENABLE MIDSTREAM PARTNERS (NYSE: ENBL)— BUY<19

YIELD: 7.8% NO DISTRIBUTION INCREASES SINCE NOVEMBER 2015 Q4 PAYOUT RATIO: 54.1% Q4 DCF INCREASE: 32% DEBT DUE BY END 2019: $950 MIL KEY CATALYSTS: 1. CONTINUED STRONG GROWTH OF VOLUMES IN SCOOP/STACK 2. RETURN TO DISTRIBUTION GROWTH BY 2018 3. SETTLING THE OWNERSHIP QUESTION: CENTERPOINT TO SELL OR HOLD ITS 41.93% LIMITED PARTNER STAKE AND 50% OF GENERAL PARTNER?

CAPACITY SHORTAGE

ENABLE DEBT

BIG OIL PROS AND CONS

PROS

• GUARANTEED SURVIVORS
• RELIABLE DIVIDEND

GROWTH

• ACCESS TO LOW COST

CAPITAL FUELING GROWTH

• ACCESS TO DIVERSE

MARKETS AND ABILITY TO DO BIG PROJECTS

• FRIENDLY WHITE HOUSE

CONS

• HARD TO REALIZE

MEANINGFUL PRODUCTION GROWTH

• MOST TOOK LARGE LOSSES

FROM BETS MADE AT $100 OIL

• MANY EXPOSED TO

POLITICAL RISKS

• LONG-RUN

ENVIRONMENTAL CONCERNS

CHEVRON: THE LONG VIEW

TOTAL SA (PARIS: FP, NYSE; TOT)—BUY<55

YIELD: 5.24% 12-MO DIVIDEND GROWTH: 1.6% 2016 PAYOUT RATIO: 64.6% MOODY’S CREDIT RATING: Aa3 (Stable Outlook) OWNS LEASES ON LAND UNDER VITAL INFRASTRUCTURE 12-MO PRODUCTION GROWTH: 9% KEY GROWTH CATALYSTS: 1. EXPECTED 4% OUTPUT GROWTH IN 2017 2. DIVIDEND GROWTH AS COMPANY NEARS FREE CASH FLOW POSITIVE AFTER CAPEX DECLINES, OPERATING COST REDUCTION AND CASH FLOW GROWTH 3. DOWNSTREAM OPERATIONS IN SOLAR ENERGY EXPANDING RAPIDLY GLOBALLY 4. FRENCH ELECTION THIS SPRING IS A WILDCARD: USD GAINS ADD TO EARNINGS IN EUROS

REITS ROCKET HIGHER

PICKING REITS

• STANDARD PROPERTY OWNERS ARE NOT

CHEAP: BBREIT INDEX YIELDS 4.5%

• NICHE REITS (DATA STORAGE) HAVE SCORED

HUGE GAINS

• OVERBUILDING, SECULAR DECLINE OF BRICKS

AND MORTAR, HIGHER INTEREST RATES ALL ARE CONCERNS

• STILL SOME VALUES

LANDMARK INFRASTRUCTURE PARTNERS (NSDQ: LMRK)—BUY<17

YIELD: 9.1% 12-MO DIVIDEND GROWTH: 7.7% 2017 DIV GR GUIDANCE: 10% Q4 COVERAGE RATIO: 0.81X 2017 COV GUIDANCE: 1.05X Q4 DCF GROWTH: 38% OCCUPANCY 97%, CONTRACTS MEASURED IN DECADES KEY GROWTH CATALYSTS: 1. DISTRIBUTION GROWTH AND IMPROVING COVERAGE RATIO AS EARNS FULL QTR CASH FLOW ON ASSETS DROPPED DOWN IN DEC 2. YIELD AND DISTRO GROWTH 3. GROWTH OF MARKET CAP ($343 MIL), ANALYSTS 6B, 0H, 0S 4. INSIDERS BOOST HOLDINGS BY 51.5% LAST SIX MONTHS

CANADA’S SHALE PLAYS

ALTAGAS LTD (TSX: ALA, OTC: ATGFF)—BUY<32

YIELD: 6.8% 12-MO DIVIDEND GROWTH: 6.1% Q4 PAYOUT RATIO: 50.6% Q4 NFFO GROWTH: 18% 2-YEAR DEBT DUE: CAD551 MIL KEY CATALYSTS: 1. DIVIDEND GROWTH—NEXT INCREASE IN JULY 2. WGL MERGER TO ACCELERATE GROWTH IF APPROVED 3. RECOVERY OF CANADIAN ENERGY PATCH AS NON-US EXPORT CAPACITY GROWS 4. OPPORTUNITY TO INVEST IN POWER INFRASTRUCTURE IN ALBERTA AS PROVINCE PHASES OUT COAL-FIRED ELECTRICITY

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