Tailwinds or Headwinds?
Greg Powell
Portfolio Manager

Gregory Powell, PhD, focuses on the firm's Income-Equity portfolios. Greg comes to Miller/Howard with a distinguished 19-year career as a senior portfolio manager and director of research at AllianceBernstein.

At AB he managed a team of 12 analysts and a suite of products with $11 billion in AUM, including equity income, long-only value, diversified value, and long/short hedge funds. He also served as head of fundamental value research there, redesigning the analyst role with an emphasis on investment success and training analysts in all aspects of the position. Prior to AB, Greg worked for 12 years at General Motors in Detroit and São Paulo, Brazil. He began his career as a senior economist and became general director of market research and forecasting. Greg holds a BA in Economics/Mathematics from the University of California Santa Barbara, and a PhD and MA in Economics from Northwestern University.

About the Video

Investing in dividend-producing equities requires looking at a raft of factors, including valuation, balance sheet strength, industry dynamics and management strategies. We believe a good starting point for long-term investors is to focus on industries with strong demand tailwinds.

Tailwinds or Headwinds?

Commentary

Tailwinds or headwinds? Which are you going to choose for your long-term investments?

Check out this dreary chart. This shows demand for products of three large income sectors indexed back to 1990. You've probably already guessed that the bottom line on the graph shows cigarette volumes. Looking back at history tobacco stocks have had some great years due primarily to price hikes and cost control. But the industry continues to shrink relentlessly, creating a headwind that becomes more severe with every year.

The orange line represents US soft drink consumption. This was once a great category—growing demand, good pricing and management teams that were willing to share profits with investors. But tastes have changed and demand for soft drinks has come down consistently over the past decade. The companies have scrambled to develop new products for health-oriented consumers, but these products aren't as profitable, and meanwhile, the once-upon-a-time tailwind from rising thirst for Coke and Pepsi has long since turned into a headwind.

The top line on the graph may surprise you‐it shows total US electricity demand indexed back to 1990. Despite the mounting number of gadgets and a still rising population, electricity consumption has plateaued. Think about LED lights, more efficient household appliances and the construction of green commercial buildings. This wave of efficiency has disconnected electricity demand from economic growth.

Now one might argue that stock prices in these sectors reflect these headwinds. That's a tough sell because valuations in the consumer staples and utility sectors are actually high relative to history. This chart shows the price to earnings multiple for the consumer staples and utility sectors over time. These sectors have both headwinds and rather full valuations.

In our Income-Equity Strategies our bias in the current market is towards technology and financials, two sectors that we believe have clear tailwinds. The technology sector has morphed from cyclical, nice-to-have products to mainstays in our personal and business lives. The industry is booming in a way that electricity demand did in decades past.

We feel that the growth case for financials is just as strong as for technology. Financial products—loans, insurance and investments are much more pervasive in our economy than they were years ago. As just one example, this graph shows total US bank loans adjusted for inflation compared to electricity consumption. As you can see, the growth in bank loans has easily outpaced the growth in electricity consumption. The increasing demand for bank loans combined with rising interest rates give banks a tailwind going forward.

One indication that we're on the right track is that recent research shows that over 50% of the S&Ps dividend growth is projected to come from just two sectors—technology and financials.

Investing in dividend-producing equities requires looking at a raft of factors, including valuation, balance sheet strength, industry dynamics and management strategies. But a good starting point for long-term investors is to focus on industries with strong demand tailwinds.

© 2018 Miller/Howard Investments.

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Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time.

The information contained herein is obtained from multiple sources and believed to be reliable; however, we have not independently verified this information. Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer's board of directors and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment. The information provided should not be considered a recommendation nor should it be considered investment advice. It does not take into account an investor's individual circumstances.

Past performance is not an indication of future returns.

Past performance does not guarantee future results.

DISCLOSURE

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative of future performance. Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon.

Past performance does not guarantee future results.

© 2018 Miller/Howard Investments.