Sure Dividend

Sure Dividend

LONG-TERM INVESTING IN HIGH-QUALITY DIVIDEND STOCKS

October 2018 Edition

By Ben Reynolds, Nick McCullum, & Bob Ciura Edited by Brad Beams

Published on October 7th, 2018

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Table of Contents

Opening Thoughts - Our 3rd Sell Recommendation - ................................................................ 3 The Sure Dividend Top 10 ? October 2018 ................................................................................ 4 Analysis of Top 10 Stocks............................................................................................................. 5

Altria Group Inc. (MO)............................................................................................................... 5 Owens & Minor Inc. (OMI)...................................................................................................... 10 Kimberly-Clark Corp. (KMB) .................................................................................................. 15 Cardinal Health Inc. (CAH) ...................................................................................................... 20 Franklin Resources Inc. (BEN)................................................................................................. 25 Aflac Inc. (AFL) ....................................................................................................................... 30 Ameriprise Financial Inc. (AMP) ............................................................................................. 35 Southwest Airlines Co. (LUV) ................................................................................................. 40 Procter & Gamble Co. (PG)...................................................................................................... 45 Vector Group Ltd (VGR).......................................................................................................... 50 Closing Thoughts ? Anchoring On Your Purchase Price ?.................................................... 55 Portfolio Building Guide ............................................................................................................ 56 Examples................................................................................................................................... 56 Performance of The Sure Dividend Strategy ........................................................................... 57 List of Stocks by Sector .............................................................................................................. 58 List of Stocks by Rank ................................................................................................................ 64

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Opening Thoughts - Our 3rd Sell Recommendation -

One of the advantages of investing in high-quality dividend growth stocks is being able to hold for long periods of time. As long as a stock continues to pay rising dividends, it's doing what you purchased it for and should be held for the long run. This greatly reduces frictional costs like capital gains taxes, brokerage fees, and slippage simply because there are so few sells. Your money is left to compound in your account, where it belongs.

The inaugural Sure Dividend Newsletter was published in April 2014. Since that time, we have made just two finalized sell recommendations. Both were due to acquisitions.

The first was when the `old' Chubb Corporation was acquired by fellow insurer ACE Limited. The new company was renamed Chubb and trades under the ticker CB. At the time, we recommended selling rather than holding the combined business because the old Chubb was a Dividend Aristocrat and the new company did not have a long of a history of rising dividends. The sell recommendation was made in the July 2015 Sure Dividend Newsletter.

Our second sell recommendation came in the February 2016 Sure Dividend Newsletter for a similar reason; past recommendation Baxalta (BXLT) was being acquired by Shire PLC (SHPG). We recommended selling for a ~20% premium over our initial recommendation price.

We also made one more pending sell in the February 2016 Sure Dividend Newsletter - on ConocoPhillips (COP). ConocoPhillips had cut its dividend due to low oil prices, and as a result became a pending sell in our 8 Rules system. But the company was not going out of business ? though it wasn't in good shape. It was very clearly undervalued. In fact, February of 2016 saw ConocoPhillips trading at lows not previously seen since the depths of the Great Recession in 2009. It turned out that the bottom for ConocoPhillips actually occurred during February of 2016. We recommended selling when oil prices recovered. Oil prices are now trading around their 10-year historical average, making now a reasonable time to sell ConocoPhillips stock for those who purchased prior to the dividend cut in 2016. Incidentally, ConocoPhillips is now trading near its pre-low oil price highs.

We first recommended ConocoPhillips in December of 2014. The timing of this recommendation was very poor due to the steep, but previously unknown, decline in future oil prices. Still, ConocoPhillips has generated total returns of ~34% since. This is admittedly poor since the S&P 500 has returned ~51% over the same period. But this is an example of a dividend growth stock cutting its dividend and not working out very well, the opposite of what we hope for in our recommendations.

There are two lessons to be learned by analyzing our ConocoPhillips recommendation. The first is that commodity cycles can make stocks look cheap when in reality they are not. The second is that taking a long-term approach and holding when you have a high conviction that a stock is undervalued is generally the more prudent move.

Recommendation for longtime readers: Sell ConocoPhillips (COP).

Keep reading this newsletter to see our current Top 10.

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The Sure Dividend Top 10 ? October 2018

Name

Price

Fair Value

Score Months

P/E

Yield Payout1 Growth Beta

Vector Group (VGR)

$13 $17 1.00 3

26.8 12.3% 323%2 4.0% -0.3

Altria Group (MO)

$62 $64 0.88 6 15.4 5.2% 81% 7.0% 0.9

Owens & Minor (OMI) $16 $26 0.86 10 11.3 6.3% 71% 8.0% 1.7

Kimberly-Clark (KMB) $112 $122 0.83 10 17.0 3.5% 61% 4.0% 0.5

Cardinal Health (CAH) $54 $78 0.81 30 10.8 3.5% 37% 9.0% 1.4

Franklin Res. (BEN)

$31 $49 0.78 5

9.0 3.0% 27% 6.0% 0.7

Aflac (AFL)

$47 $48 0.78 8 11.7 2.2% 26% 8.0% 0.4

Ameriprise (AMP)

$152 $150 0.78 7 11.9 2.4% 30% 8.0% 1.0

Southwest Air. (LUV) $62 $68 0.76 9 13.7 1.0% 14% 8.0% 0.8

Procter & Gamble (PG) $82 $84 0.72 2 18.5 3.5% 64% 5.0% 0.5

Notes: The `Score' column shows how close the composite rankings are between the top 10. The highest ranked stock will always have a score of 1. The `Months' column shows the number of consecutive months a stock has been in the Top 10. The `Price' column shows the price near the date the newsletter was published. The `Fair Value' column gives a rough estimate of the fair value of each stock. Real fair value is unknowable. The `Growth' column shows the expected future growth rate of intrinsic value on a per-share basis used in the rankings. `P/E' shows current price divided by expected current fiscal year adjusted earnings-per-share.

Remarkably, no recommendations have changed in our newsletter this month. The stability of the top 10 list shows the ranking method is consistent, not based on rapid swings. Stocks that fall out of the top 10 are holds, not sells. Selling occurs rarely; only when a stock becomes extremely overvalued, or if it reduces its dividend. Extremely overvalued is qualified as a stock with a priceto-earnings ratio (P/E) over 40.

An equally weighted portfolio of the top 10 has the following characteristics:

Dividend Yield:

Growth Rate: Expected Total Returns3:

Top 10 4.3% 6.5% 10.8%

S&P500 1.8% 7.4% 9.2%

Note: Data for the newsletter was obtained between market open 10/3/18 and market close 10/5/18.

1 Payout ratios in this table reflect the company's anticipated payout ratio in the upcoming fiscal year. 2 VGR's payout ratio and P/E ratio are overstated due to high depreciation charges. The company pays out 91% of adjusted EBITDA

as dividends. 3 Before valuation multiple changes. The Sure Dividend Top 10 is (by our estimates) significantly undervalued relative to the rest of

the market.

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Analysis of Top 10 Stocks

Altria Group Inc. (MO)

Overview & Current Events Altria Group was founded by Philip Morris in 1847. Today, Altria is a diversified company. It still has the core tobacco business, led by the flagship Marlboro cigarette brand. But it also has a variety of other product segments, including chewing tobacco, cigars, wine, and an investment in beer. Altria has non-smokable brands such as Skoal and Copenhagen chewing tobacco, Ste. Michelle wine, and it owns a 10% investment stake in global beer giant Anheuser-Busch InBev.

In late July, Altria reported (7/26/18) second-quarter earnings. Revenue net of excise taxes declined 5.4% and missed analyst expectations by $140 million, due to the declining smoking rate. However, adjusted earnings-per-share of $1.01 increased by 19% from the same quarter a year ago. Altria continues to grow earnings, despite weak cigarette shipments, due to cost cuts and share repurchases. Altria is also a major beneficiary of tax reform.

More recently, on 8/23/18 Altria declared a quarterly dividend of $0.80 per share. This represents a 14.3% increase from the previous quarterly dividend rate and is Altria's second dividend increase in 2018. Including both dividend increases, Altria raised its dividend by over 20% in the past year. Altria has increased its dividend 53 times in the past 49 years.

Competitive Advantages & Recession Performance Altria has tremendous competitive advantages. It operates in a highly regulated industry, which virtually eliminates the threat of new competitors. It has the most valuable cigarette brand in the U.S., which gives it pricing power over the consumer. The average pack of Marlboros cost $6.79 last quarter, up 2.3% year-over-year. Altria's business model is also highly resistant to recessions.

Growth Prospects, Valuation, & Catalyst Altria's biggest risk is the declining U.S. smoking rate. After adjusting for trade inventory movements, Altria's cigarette shipment volume declined by 5% last quarter, worse than the industry decline of 3.5%. In response, Altria has invested heavily in non-combustible products that it believes carry fewer health risks. Altria's Nu Mark e-vapor subsidiary grew shipment volume by 16% last quarter, as the MarkTen Elite has been expanded to over 23,000 retail stores. Altria is also awaiting regulatory approval from the Food & Drug Administration for its new reduced-risk product line called IQOS.

Altria stock trades for a price-to-earnings ratio of 15.4, compared with an average of 16.2 in the past 10 years. We estimate a fair value price of $64 for Altria stock. If Altria stock returns to a price-toearnings ratio of 16.2, the expanding valuation would add 1.0% to Altria's annual returns. In addition, we expect 7% annual earnings growth for Altria over the next five years. Including the current dividend yield of 5.2%, Altria's annual returns to shareholders could reach 13.2%.

Key Statistics, Ratios, & Metrics

Maximum Drawdown4:

58%

10 Year EPS Growth Rate:

9.1%

Dividend Yield:

5.2%

10 Year Dividend Growth Rate: 5.6%

Most Recent Dividend Increase: 21%

10 Year Historical Avg. P/E Ratio: 16.2

Estimated Fair Value:

$64

10 Year Annualized Total Return: 17.7%

Dividend History: 53 increases in 49 years

Next Ex-Dividend Date:

12/20/18 (est.)

4 Maximum drawdown occurred in February of 2000.

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