Despite an upcoming management change, we are maintaining our Bronze rating on this value-oriented dividend fund.
BlackRock Equity Dividend's efforts to build out its team and refine its process have prepared it for an impending manager change, so it keeps its Morningstar Analyst Rating of Bronze.
The manager who has run this team since 2001, Bob Shearer, announced on Feb. 14, 2017, that he will step down in August and retire in September. That's a lot of institutional memory walking out the door, but the fund is prepared for the transition, which will be gradual. Current comanager Tony DeSpirito, who joined Shearer in August 2014 from Pzena Investment Management, will succeed him this August. At that time two other team members that DeSpirito spirited away from Pzena last year, David Zhao and Franco Tapia, will become named comanagers. David Cassese, a named manager since 2011, also remains.
It quickly became clear after DeSpirito joined that he would eventually lead the team. He has overseen its expansion and added quantitative screens and more face-to-face meetings to the team's process to help make it more competitive with active and passive rivals. While adding people and tools, the fund hasn't altered its philosophy and standards. It still looks for shares offering attractive valuation, consistent dividend growth, competitive yield, and financial and business model strength. The fund also still leans toward higher-quality value stocks. At the end of December 2016, it had more money in stocks with wide or narrow Morningstar Research Services Economic Moat Ratings (nearly 82%) than the Russell 1000 Value Index (about 80%).
The competition among dividend-growth funds, however, has stiffened. This fund's willingness to own more-cyclical stocks with narrower or debatable competitive advantages in the financial, energy, and basic-materials sectors has sometimes held it back relative to the Nasdaq US Dividend Achievers Select Index, a dividend-growth benchmark that owns more wide-moat stocks and fewer no-moat stocks than this fund does. That said, owning cheap dividend-payers has helped this fund beat the average large-value fund and its stated benchmark over time, and recent tweaks could make it more competitive.
Process Pillar: Positive | Dan Culloton 02/22/2017
This fund looks for stocks with a balance of earnings and dividend growth, yield, quality, and low valuations. All else equal, it will usually opt for a lower-yielding stock with a steadier growth rate rather than a higher-yielding but more erratic one, though it has been known to dip into lower-quality fare at times.
The managers start by looking for dividend-paying companies among the 500 largest U.S. stocks with debt/capital ratios below 50%. They rely on quant screens more than in the past in this initial step but still resort to bottom-up analysis of individual companies and industries to find affordable shares of large companies generating enough profits and cash flow to satisfy dividend payments without stinting on research and development, capital spending, and debt service. This usually keeps the fund focused on a pool of businesses with competitive advantages that enable them to earn consistent returns on invested capital in all kinds of economic environments--in other words, blue chips.
This fund buys dividend-growers when their valuations are below their five-year averages. It trims or sells when valuations rise or when company fundamentals or industry dynamics change, but it will hold some stocks past their median historical valuations if fundamentals warrant it. Price consciousness makes the fund more value-oriented than a lot of dividend-growth funds.
In the past year, the fund has increased its stake in energy stocks, while also maintaining its interest in financials, technology, and healthcare.