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By Josh Peters, CFA and Jeremy Glaser | 12-09-2015 03:00 PM

Time to Warm Up to Cold-Weather Dividend-Payers

A warm start to winter is causing stocks such as AmeriGas Partners and Compass Minerals to trade down, which could create buying opportunities for investors, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We've had a warm start to this winter. I'm here with Josh Peters--he is the director of equity-income strategy and also the editor of Morningstar DividendInvestor newsletter--to see what impact that could have on some of his portfolio holdings.

Josh, thanks for joining me.

Josh Peters: Good to be here.

Glaser: You've said in the past that you have kind of a cold-weather bias in your portfolio in some ways. How do you think about short-term trends like this for businesses that might be dependent on weather for demand?

Peters: I think you want to see it as a variable for certain kinds of companies in your portfolio. If you think about a warm winter for a large swath of the country, especially the areas that consume a lot of heating fuels like the Northeast and the Midwest, that might be kind of tough short term for some utilities. One name that comes to mind that's got some exposure there that I still like is AmeriGas Partners (APU). They are a little bit different from a utility in that they are not price regulated. They are delivering propane that gets used for heating and other appliances in the home, but they have the benefit of not being regulated. It doesn't cap their profitability, but it also means that they don't have regulatory support. They can't book a regulatory asset to level out and weather-normalize the business. They either sold the propane or--if it was too warm--they didn't. So, there is some variability in the business there.

Another business I own and like a lot is Compass Minerals (CMP). I actually bought this stock back after having had a great experience with it earlier in our 11-year run because I thought the stock had gotten cheap. But their biggest product is highway de-icing salt. And here, if it's kind of warm but really wet, maybe you still get a lot of wet snow and some ice storms and stuff. That's not, on balance, so bad for them, but warm and dry--or even cold and dry--is kind of bad for them. So, from year to year, weather is going to have a big impact on the business. For that reason, you may think that maybe you don't want to max out your exposure all the time in names like this. If there is a warm winter, maybe I want to have the ability to take my exposure up opportunistically if investors are overreacting to one bad winter season for these companies. But the bigger question for the long run is are they adequately protected? Is there enough excess coverage for the dividends--or in AmeriGas' case, partnership distribution--that they can survive a warm winter or two without that threatening my income as an investor?

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