Sure Dividend

[Pages:74]Sure Dividend

LONG-TERM INVESTING IN HIGH-QUALITY DIVIDEND STOCKS

April 2019 Edition

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

Published on April 7th, 2019

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Table of Contents

Opening Thoughts - The Inverted Yield Curve -....................................................................... 3 Sell Recommendation: Church & Dwight (CHD) .................................................................... 4 The Sure Dividend Top 10 ? April 2019 ..................................................................................... 5 Analysis of Top 10 Stocks............................................................................................................. 6

Bank OZK (OZK) ....................................................................................................................... 6 AbbVie Inc. (ABBV) ................................................................................................................ 11 Walgreens Boots Alliance Inc. (WBA) .................................................................................... 16 Eaton Vance Corp. (EV) ........................................................................................................... 21 Cardinal Health Inc. (CAH) ...................................................................................................... 26 WestRock Co. (WRK) .............................................................................................................. 31 CVS Health Corp. (CVS).......................................................................................................... 36 AT&T Inc. (T) .......................................................................................................................... 41 Western Digital Corp. (WDC) .................................................................................................. 46 People's United Financial Inc. (PBCT) .................................................................................... 51 Closing Thoughts - The Differences Between Cash Flows and Earnings -............................ 56 Real Money Portfolio .................................................................................................................. 57 Buying & Ranking Criteria ....................................................................................................... 58 Portfolio Building Guide ............................................................................................................ 59 Examples................................................................................................................................... 59 Past Recommendations & Sells ................................................................................................. 60 Sell Rules .................................................................................................................................. 60 Current Holds............................................................................................................................ 60 Pending Sells............................................................................................................................. 62 Sold Positions ........................................................................................................................... 62 List of Stocks by Dividend Risk Score ...................................................................................... 64 List of Stocks by Sector .............................................................................................................. 69

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Opening Thoughts - The Inverted Yield Curve -

On July 21st, 2005, Alan Greenspan famously said the following about the inverted yield curve, which is known as Wall Street's original `fear gauge':

"The evidence very clearly indicates that its efficacy as a forecasting tool has diminished very dramatically because of economic events."

He could not have been more wrong. One year after Greenspan's statement, the yield curve inverted and 18 months after that, the economy of the United States entered into its worst recession since the Great Depression of the 1930s. Recent events in the bond market have ominously paralleled this development. On March 22nd, the 3month T-bill yield exceeded the 10-year U.S. Treasury yield for the first time in more than a decade. While the inversion lasted a mere five trading days, it was enough to cause a flurry of commentary from the financial community. Was Greenspan wrong? Let's consider the data. As the following image shows, the ability of an inverted yield curve to predict recessions has been remarkably powerful over time:

Source: The Financial Times

Even beyond the time period shown in the graphic, an inverted yield curve has a perfect track record of predicting recessions. Each time the yield curve has inverted in the past, a recession has followed... But there will always be another recession. We do not recommend making any changes to your portfolio based on yield curve alone. While a recession is certain to happen at some point in the future, we cannot say with any accuracy when. Moreover, making defensive changes (such as moving to cash) in anticipation will surely hurt your long-term returns if you are wrong. To close this month's Opening Thoughts, we refer to one of our favorite quotes from investing great, Peter Lynch:

"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves."

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Sell Recommendation: Church & Dwight (CHD)

As a reminder, we are selling up to two securities a month from our past recommendations that have low expected total returns.

Having low expected total returns does not mean the underlying business is weak in any way. In fact, it could be an incredibly high-quality business that has weak expected total returns due to being significantly overvalued.

That's certainly the case with Church & Dwight. Church & Dwight is one of the safest businesses around for both recessions and periods of economic growth. It has trusted disposable consumer products that are unlikely to be replaced by advances in technology. In short, Church & Dwight is the type of business you want to buy and hold for the long run at the right price.

The problem with Church & Dwight today has nothing to do with the underlying business. Indeed, recent results have been stellar. The company grew its adjusted earnings-per-share 17.0% in fiscal 2018, and the company's management expects ~8% adjusted earnings-per-share growth in fiscal 2019.

The problem with Church & Dwight is the company's elevated valuation. The stock is currently trading for 29.5 times expected fiscal 2019 adjusted earnings. For comparison, the company's longterm average price-to-earnings ratio is around 21. We expect valuation multiple mean reversion to cause a 6% to 7% headwind to returns at Church & Dwight over the next five years. This eats up much of the expected growth of the company over this time period. And the high valuation means Church & Dwight has a below-average dividend yield of just 1.3%.

We first recommended Church & Dwight in the April 2018 of The Sure Dividend Newsletter, where it was ranked 10th out of 10. Since that time (approximately 1 year), Church & Dwight shares have gone on to deliver total returns1 of 50.2% versus 13.7% for the S&P 500.

Our Church & Dwight recommendation has worked out better than expected, trouncing the market by over 30 percentage points.

Where Returns Came From With a low dividend yield, the bulk of returns from our Church & Dwight recommendation came from a mix of growth and valuation multiple expansion. The company's adjusted earnings-per-share grew 17% in fiscal 2018. Our recommendation doesn't line up perfectly with this time frame but is close. The real driver of returns here was an expanding valuation multiple. This is something completely out of an investor's control.

Performance, Recommendation, & Review Our Church & Dwight recommendation delivered strong total returns due to the dual tailwinds of solid earnings-per-share growth and (especially) a rising valuation multiple. When the stock market gifts us with a sharply increasing valuation multiple, we believe locking in gains and reinvesting into undervalued securities is appropriate.

It is time to sell Church & Dwight and reinvest the proceeds into a security with better expected total returns ahead ? like any of those in this month's Top 10. We recommend selling Church & Dwight shares now.

1 Return data is from mid-morning trading 4/4/19.

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The Sure Dividend Top 10 ? April 2019

Name & Ticker

Div. Risk Price Score

Fair Value

Exp. Value Ret.

Div. Payout Exp. Yield Ratio Growth

ETR

Bank OZK (OZK)

A $31 $46 8.8% 2.8% 24% 11.3% 22.9%

AbbVie Inc. (ABBV)

A $84 $113 6.5% 5.2% 50% 9.5% 21.2%

Walgreens (WBA)

A $55 $78 7.6% 3.3% 30% 6.0% 16.9%

Eaton Vance Corp. (EV)

A $42 $54 5.1% 3.3% 42% 6.8% 15.2%

Cardinal Health (CAH)

B $47 $71 8.8% 4.1% 28% 5.0% 16.8%

WestRock Co. (WRK)

B $40 $54 8.0% 4.7% 40% 4.0% 16.7%

CVS Health Corp. (CVS)

B $53 $75 7.1% 3.8% 30% 5.0% 15.9%

AT&T (T)

B $32 $43 6.9% 6.4% 55% 2.1% 15.4%

Western Digital (WDC)

B $52 $61 3.6% 3.9% 29% 6.5% 14.0%

People's United (PBCT)

B $17 $19 2.3% 4.2% 49% 5.0% 11.5%

B

Notes: Data for the table above is from The Sure Analysis Research Database, 2/27/19 spreadsheet, and

general data over the week ending 3/1/19. `Div.' stands for `Dividend.' `Exp. Value Ret.' means expected

returns from valuation. `Exp. Growth' means expected annualized growth rate over the next five years. `ETR'

stands for expected total returns and is the sum of the Exp. Value Ret., Div. Yield, and Exp. Growth columns.

Data in the table above might be slightly different than individual company analysis pages due to writing the

company reports throughout the week.

Disclosures: Ben Reynolds is personally long the following from this month's Top 10: WBA, T, CAH, & ABBV. Nick McCullum is personally long WBA, T, and CAH. The Real Money Portfolio is long EV, ABBV, WBA and will buy shares of OZK on Tuesday 4/9/19.

There were two changes in this month's Top 10. Caterpillar (CAT) and Ameriprise Financial (AMP) were replaced by CVS Health (CVS) and People's United Financial (PBCT). The stability of the top 10 list shows the ranking method is consistent, not based on rapid swings. Securities that fall out of the top 10 are holds, not sells. Selling occurs rarely; only when a security has expected total returns below the S&P 500's, or if it reduces its dividend.

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

Dividend Yield: Growth Rate: Valuation Expansion: Expected Annual Total Returns:

4.2% 6.1% 6.5% 16.7%

The return estimates above are just that, estimates. Of the three expected total return factors, dividend yield is the most reliable. Future growth estimates are notoriously unreliable. Undervalued stocks tend to outperform in aggregate. However, the timing and nature of valuation is not a science but an art with a high degree of error. Overall, we expect our recommendations to outperform the S&P 500 by 1 to 3 percentage points over full economic cycles.

Note: Data for the newsletter was obtained between market open 4/3/19 and market close 4/5/19.

Return to Top 10 List

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Analysis of Top 10 Stocks

Bank OZK (OZK)

Overview & Current Events Bank OZK is a regional bank that offers general consumer financial services in the U.S. The bank's service territory includes Florida, North Carolina, South Carolina, Alabama, New York, California, Texas, and Arkansas. It was founded in 1903 and has a current market capitalization of $3.9 billion.

Bank OZK reported its fourth quarter and full year earnings on January 17th, 2019. Revenue rose 4.4% year-over-year to $256 million. The bank saw growth from a larger loan portfolio in Q4. Indeed, total loans rose 6.7% in Q4, which helped drive net interest income higher by 6.3%. Net interest income was crimped somewhat by a lower net interest margin performance, as that value fell 17bps year-overyear to 4.55%. Provisions for loan losses were also lower year-over-year, improving from $9.3 million in Q4 of 2017 to just $7.3 million in the most recent quarter.

Earnings-per-share came in at $0.89 in Q4, which was the best quarter of 2018 for Bank OZK, and capped a year of $3.24 in earnings-per-share. Finally, Bank OZK raised its dividend by 4.8% in early January, and then again in April by another 4.5%; the new quarterly payout is $0.23 per share.

Competitive Advantage & Recession Performance Bank OZK is performing well in its key markets due to new branches and acquired growth. It is also expanding into areas of higher growth, such as Texas, Florida, and California. We see Bank OZK's mix of core market strength and access to growth markets as a competitive advantage.

Bank OZK not only remained profitable during the Great Recession but managed to grow its earnings as well. This performance speaks to how well-managed Bank OZK is. We believe it will withstand the next economic downturn quite well.

Growth Prospects, Valuation, & Catalyst Bank OZK has a very strong history of growth, compounding earnings at an annual rate of nearly 22% from 2009 to 2018. The bank has been able to grow profits at very impressive rates over time through a combination of organic and acquired growth, and we see this continuing for the foreseeable future. The bank's focus on core lending and deposit-taking activities enables it to maintain a strong balance sheet, which enables it to continue to grow over time. We see a forward growth rate of 11.3% annually in the years to come, which is low by Bank OZK's own standards, but still quite robust.

We expect the bank to earn $3.56 per share in 2019. Based on this, it is valued at 8.5 times earnings. That compares favorably to our fair value estimate, which is 13 ? slightly below the bank's 10-year average valuation multiple of 14.1. Should the stock revert to this multiple, shareholders should see an 8.8% tailwind to total annual returns. Combining this with our estimate of earnings growth and the 2.8% yield, we see Bank OZK producing better than 20% total returns annually in the next five years.

Key Statistics, Ratios, & Metrics

Maximum Drawdown2:

59.8%

10-Year EPS Growth Rate:

Dividend Yield:

2.8%

10-Year Dividend Growth Rate:

Most Recent Dividend Increase: 4.5%

10-Year Historical Avg. P/E Ratio:

Estimated Fair Value:

$46

10-Year Annualized Total Return:

Dividend History: 22 years of increases

Next Ex-Dividend Date:

21.8% 22.9% 14.1 20.7% 4/12/19

2 Using the company's maximum drawdown in the 2007-2009 financial crisis.

Return to Top 10 List

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Income Statement Metrics

Year

2008 2009 2010 2011 2012 2013 2014

Revenue

118 169 154 211 228 258 346

SG&A Exp.

30

59

55

75

78

84 100

D&A Exp.

4

4

5

7

9

10

13

Net Profit

34

43

64

101

77

91 119

Net Margin

29.0% 25.4% 41.5% 48.0% 33.8% 35.3% 34.3%

Free Cash Flow

18

39

24

-1

-62

49

79

Income Tax

10

13

27

50

34

40

54

Balance Sheet Metrics

Year

2008 2009 2010 2011 2012 2013 2014

Total Assets

3233 2771 3274 3842 4040 4791 6766

Cash & Equivalents 41

78

49

59 208 196 150

Accounts Receivable 19

15

14

13

13

14

20

Goodwill & Int. Ass. 6

6

8

12

12

19

106

Total Liabilities 2906 2498 2950 3414 3529 4159 5855

Accounts Payable N/A N/A N/A 46

28

17

37

Long-Term Debt 490 408 347 367 346 346 256

Shareholder's Equity 252 269 320 425 508 629 908

D/E Ratio

1.51 1.51 1.08 0.86 0.68 0.55 0.28

Profitability & Per Share Metrics

Year

2008 2009 2010 2011 2012 2013 2014

Return on Assets 1.2% 1.4% 2.1% 2.8% 2.0% 2.1% 2.1%

Return on Equity 15.5% 16.5% 21.7% 27.2% 16.5% 16.1% 15.4%

ROIC

4.8% 5.8% 9.5% 13.8% 9.3% 9.9% 11.1%

Shares Out.

67.50 67.60 68.18 68.96 69.78 72.40 78.06

Revenue/Share 1.75 2.51 2.26 3.06 3.26 3.57 4.43

FCF/Share

0.27 0.57 0.35 -0.01 -0.89 0.68 1.01

Note: All figures in millions of U.S. Dollars unless per share or indicated otherwise.

2015 479 111 17 182 38.0% 184 94

2015 9879 91 25 152 8412 52 322 1465 0.22

2015 2.2% 15.4% 12.3% 87.35 5.49 2.11

2016 694 163 25 270 38.9% 197 154

2016 18890

866 52 721 16095 73 383 2792 0.14

2016 1.9% 12.7% 10.9% 104.70 6.63 1.88

2017 929 212 34 422 45.4% 346 159

2017 21276

440 65 709 17812 186 364 3461 0.11

2017 2.1% 13.5% 12.0% 125.81 7.39 2.75

Return to Top 10 List

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4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00%

Bank OZK (OZK) Dividend Yield History

2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998

Return to Top 10 List

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