February 2019 Edition - Sure Dividend

[Pages:47]Sure Retirement Newsletter

HIGH-YIELD, HIGH-QUALITY INVESTMENTS

February 2019 Edition

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

Published on February 10th, 2019

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Table of Contents

Opening Thoughts - Combining Income & Total Return Investing -...................................... 3 Sell Recommendation: Welltower (WELL)............................................................................... 4 The Retirement Top 10 ? February 2019 ................................................................................... 5 Analysis of Top 10 Securities ....................................................................................................... 6

Newell Brands Inc. (NWL)......................................................................................................... 6 AbbVie Inc. (ABBV) .................................................................................................................. 8 Invesco Ltd (IVZ) ..................................................................................................................... 10 WestRock Co. (WRK) .............................................................................................................. 12 AT&T Inc. (T) .......................................................................................................................... 14 Altria Grp. Inc. (MO)................................................................................................................ 16 Western Digital Corp. (WDC) .................................................................................................. 18 Energy Transfer LP (ET) .......................................................................................................... 20 International Business Machines Corp. (IBM) ......................................................................... 22 People's United Financial Inc. (PBCT) .................................................................................... 24 Closing Thoughts ? Company-Specific Recession Performance ? ......................................... 26 List of Stocks by Retirement Suitability Score......................................................................... 27 List of Stocks by Sector .............................................................................................................. 32 Past Recommendations & Ranking Criteria, & Sells.............................................................. 38 Ranking Criteria........................................................................................................................ 38 Sell Rules .................................................................................................................................. 38 Current Holds............................................................................................................................ 39 Sold Positions............................................................................................................................ 40 Pending Sells............................................................................................................................. 40 Portfolio Building Guide ............................................................................................................ 41 Examples................................................................................................................................... 41 Tax Guide .................................................................................................................................... 42 Corporations.............................................................................................................................. 43 Master Limited Partnerships (MLPs)........................................................................................ 44 Real Estate Investment Trusts (REITs)..................................................................................... 45 Business Development Companies (BDCs) ............................................................................. 46 Glossary of Common Terms & Acronyms ............................................................................... 47

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Opening Thoughts - Combining Income & Total Return Investing -

There are real advantages to investing primarily for income and income growth. When you focus on the income your securities produce rather than their share price, you are more likely to hold (or even average down) during recessions instead of panic selling.

A second benefit of income investing is that it puts a greater emphasis on where the underlying value of all financial assets comes from ? their lifetime expected cash flows discounted back to present value using an appropriate interest rate.

Finally, investing for income has the practical benefit of producing what most investors need - namely, income for retirement. It also emphasizes buy and hold investing for the long run. An old investing poem by John Burr Williams that captures the practicality of dividends is as follows:

"A chicken for its eggs, bees for their honey, cow for her milk and a stock for its dividend."

The downside to income investing is that it can be myopic. Yes, dividends/distributions matter a great deal when investing. But so does expected growth and valuation when you are looking at how an investment is likely to perform overall.

And that's where total return investing shines. Expected total returns provide a complete view of an investment's return prospects by adding up returns from all 3 sources: dividends/distributions, changes in valuation, and growth on a per share (or per unit) basis.

I believe that by combining the focus on income with expected total returns, investors can get `the best of both worlds.' By purchasing securities with the goals of (1) generating solid income now, (2) realizing rising income over time, and (3) holding for the long run, investors can capture the benefits of income investing. Similarly, selling when an asset cuts or reduces its dividend/distribution (which is hopefully never) makes sense from an income investing perspective as well.

And that's where expected total returns come into play. Expected total returns decline when valuations rise, or when growth prospects seriously decline while valuations do not. By purchasing income stocks that also have high expected total returns, you `buy right.' Hopefully, the investment continues paying you via dividends/distributions indefinitely. But if it gets significantly overvalued and its total returns fall significantly, you can sell and reinvest the proceeds into an income security with better prospects.

Combining income and total return investing creates an investing methodology that:

1. Buys and holds for the long run 2. Takes advantage of overvaluation

It fosters a mindset of holding through security declines, and only selling when expected total returns dictate ? and funds can be redeployed into significantly better opportunities. In many scenarios, selling overvalued securities and reinvesting into underpriced income securities will boost portfolio yield as the new security often has a higher yield than the sold security.

The Sure Retirement Newsletter combines income investing and expected total returns. We still have a long-term buy and hold forever mindset ? if security prices remain reasonable. But we also remain flexible to take advantage of irrational exuberance in security prices when it occurs.

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Sell Recommendation: Welltower (WELL)

As discussed in this month's Opening Thoughts, it makes sense to sell securities with poor expected total returns and invest the proceeds into securities with better investment prospects ahead. Welltower is offering investors expected total returns of under 2% annually over the next 5 years, well below average expected market returns.

As a result, we are issuing a sell recommendation on Welltower (WELL).

We first recommended Welltower in the January 2018 edition of The Sure Retirement Newsletter. Since that time the REIT has generated total returns of 29.9%1 versus 1.5% for the S&P 500 (as measured by the ETF SPY).

Our Welltower investment has worked out favorably from a total return perspective, trouncing the market by over 27 percentage points. But that does not tell the whole story.

Welltower's funds from operations per unit (FFO/Unit hereafter) peaked at $4.55 in 2016. We recommended the trust about 1 month before its fiscal 2017 results came out (3 out of 4 quarters were already in the books). The company generated FFO/Unit of $4.21 in 2017. With 3 out of 4 quarters of fiscal 2018 out of the way, we are expecting FFO/Unit of just $4.05 in fiscal 2018. Said another way, the per-unit results of Welltower have declined since we first recommended the security.

So how did this investment work out? First, distribution income played a part. Welltower had a 5.6% yield when we analyzed it in the January 2018 Sure Retirement Newsletter. The real return driver, however, was valuation multiple expansion. Despite declining FFO/Unit, Welltower's unit price increased from $62.59 to $76.65. Commensurately, Welltower's yield has fallen from 5.6% to 4.5%.

Here's what we wrote about Welltower's valuation in the January 2018 edition of The Sure Retirement Newsletter:

"Welltower's average distribution yield over the past 10 years has been 5.4% and its average distribution yield over the past 5 years has been 4.8%. The REIT's current distribution yield of 5.6% indicates that it is a touch undervalued at current prices."

One of the major advantages of tracking expected total returns of our past recommendations is that we can spot overvalued securities that should be sold to lock in gains. Note that if the trust's price did not rise, its expected total returns ahead would be significantly higher, and we would recommend holding and collecting dividends instead of selling to lock in gains.

We probably got `lucky' that Welltower's unit price expanded significantly while the market languished. But we are not going to push that `luck.' The market has presented an excellent opportunity to lock in gains at Welltower.

Due to low expected total returns ahead at Welltower, we recommend investors sell now and reinvest the proceeds into one of this month's Top 10.

1 Return data for Welltower analysis is from before market open 2/7/19.

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The Retirement Top 10 ? February 2019

Name

Newell Brands (NWL) AbbVie (ABBV) Invesco (IVZ) WestRock (WRK) AT&T (T) Altria Group (MO) Western Digital (WDC) Energy Transfer (ET) IBM (IBM) People's United (PBCT)

Type Price

Fair Value

P/E

Stock $21 $38 7.7

Stock $80 $113 9.1

Stock $18 $26 7.9

Stock $38 $54 8.4

Stock $29 $43 8.2

Stock $48 $64 11.7

Stock $45 $60 5.5

MLP $14 $18 6.52

Stock $133 $178 9.6

Stock $17 $19 11.6

Yield

4.4% 5.4% 6.5% 4.7% 6.9% 6.5% 4.5% 8.5% 4.8% 4.2%

Payout Growth

34% 5.4% 45% 9.5% 53% 5.0% 40% 4.0% 57% 2.1% 80% 4.0% 25% 6.5% 60% 3.0% 49% 3.0% 53% 5.0%

Notes: The `Price' column shows a recent price of the security. The `Fair Value' column shows our estimate of the company's per-share fair value. The `P/E' column typically uses forward earnings-per-share, FFO-per-share, or DCF-per-share, depending on the security type. The `Payout' column uses earnings, funds from operations (FFO), or distributable cash flow (DCF) in the denominator. The numerator is the security's payment to its owners. The `Growth' column shows our estimate of growth on a per share (or per unit) basis; these estimates typically come from Sure Analysis Research Database reports.

Three recommendations changed from last month's Top 10. Cardinal Health (CAH), Leggett & Platt (LEG), and Hanesbrands (HBI) were replaced by WestRock (WRK), Western Digital (WDC), and People's United (PBCT). Remember: Securities that fall out of the Top 10 are holds, not sells.

The ranking criteria for the Top 10 list and requirements for inclusion in The Sure Retirement Newsletter are derived from and The Sure Analysis Research Database.

An equal-weighted portfolio of the Top 10 has the following characteristics:

Payout Ratio: Dividend or Distribution Yield: Growth Rate:

50% 5.6% 4.8%

Disclosures and Notes: From this month's Top 10, Ben Reynolds is personally long NWL, ABBV, T, and ET; Nick McCullum is personally long T; Bob Ciura is personally long MO. Data for this newsletter is from market open 2/6/19 through midday 2/8/19.

2 Since ET is an MLP, we used price divided by distributable cash flows here instead of the traditional P/E ratio.

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Analysis of Top 10 Securities

Newell Brands Inc. (NWL)

Overview & Current Events Newell Brands core brands include Rubbermaid, Oster, Sunbeam, Mr. Coffee, Ball, Sharpie, Paper Mate, Elmer's, Yankee Candle, and Coleman. Newell is in the middle of a major restructuring. The company is selling off under-performing brands that are no longer a part of its future growth strategy. For example, Newell has already sold the Waddington and Rawlings brands, as well as the Goody Products line. More recently, Newell struck a deal to sell its Pure Fishing and Jostens brands for $2.5 billion of after-tax proceeds. In addition, Newell is currently soliciting bids for the United States Playing Card Co., maker of Bicycle playing cards, which could bring in as much as $200 million.

In early November, Newell reported (11/2/18) third-quarter earnings that showed progress in its key strategic goals, namely deleveraging and share repurchases. Sales fell 7.7% from the same quarter a year ago, influenced primarily by its various divestments. Adjusted earnings-per-share declined 5.8% year-over-year. That said, Newell reduced its debt by $2.5 billion and its share count by 4%.

Growth Prospects & Safety Along with its third-quarter earnings report, Newell also raised its revenue and earnings estimates for the full year. This is an indication that the turnaround is proceeding better than expected. Once the product portfolio transformation is complete, the company's new assortment of brands should provide long-term revenue growth and higher profit margins. We see annual earnings-per-share growth averaging 5.4% for the next five years, comprised mainly of margin improvements and share repurchases offsetting lost revenue from divestitures.

Newell Brands has a number of qualities that boost its safety. Its core competitive advantage is its strong brand portfolio. Its brands hold leadership positions across their respective categories, which provides the company with growth potential and pricing power. It is reasonable to assume many consumers make repeat purchases of Newell products each year. Newell's dividend payout appears to be secure. The company currently pays an annual dividend of $0.92 per share. Newell's anticipated payout ratio for 2018 is just 34%, which indicates a sustainable dividend.

Valuation Based on expected earnings-per-share of $2.70 for 2018, Newell shares trade for a low price-toearnings ratio of 7.7. This is well below our fair value estimate, which is a price-to-earnings ratio of 14 for a fair value price of $38 per share. A price-to-earnings ratio of 14 is a more reasonable valuation for a profitable company with leading brands. Reversion to the fair value estimate over the next 5 years would yield annual returns of 12.7% annually. In addition, the stock has a 4.4% dividend yield, and is expected to produce 5.4% annual earnings growth. As a result, total returns are expected to exceed 22% annually over the next five years. Newell stock's combination of yield and deep value makes the company an appealing opportunity for both value and income investors alike.

Key Statistics, Ratios, & Metrics

Dividend Yield: 4.4%

10-Year Dividend Growth Rate: 0.9%

Most Recent Annual Dividend Increase: 21%

Sector: Consumer Goods

Dividend History: Increasing since 2009

Business Type: Corporation

Ex- Dividend Date: 2/27/19

Payment Date: 3/15/19

Fair Value: $38

Payout Ratio: 34.1%

Return to Top 10 List

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Return to Top 10 List

Newell Brands Inc. (NWL) Dividend Yield History

2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987

18.00% 16.00% 14.00% 12.00% 10.00%

8.00% 6.00% 4.00% 2.00% 0.00%

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AbbVie Inc. (ABBV)

Overview & Current Events AbbVie is a pharmaceutical company focused on Immunology, Oncology, and Virology. AbbVie was spun off by Abbott Laboratories in 2013 and has a market capitalization of ~$119 billion.

Recently, AbbVie authorized (12/13/18) a $5 billion increase to the company's existing share repurchase program, which represents nearly 4% of its market capitalization. This will help boost future earnings-per-share growth. Separately, AbbVie announced (1/4/19) a roughly $4 billion impairment charge related to the 2016 acquisition of Stemcentrx. The impairment is the result of the prior decision to stop enrollment for the TAHOE trial, which was a Phase 3 study evaluating Rova-T as a second-line therapy for advanced small-cell lung cancer.

Growth Prospects & Safety AbbVie's share price has declined by nearly 30% in the past 12 months. Investors appear to be concerned over AbbVie's future growth, in light of the competitive threats facing Humira. Humira represents approximately 61% of AbbVie's annual sales. Humira is facing biosimilar competition in Europe, and AbbVie has had to significantly cut prices to retain business. On the company's recent quarterly earnings call, CEO Rick Gonzalez acknowledged that discounting in Europe has been "on the higher end" of what the company expected, with Humira prices being slashed from 10%-80% depending on the country. Humira will face biosimilar competition in the U.S. starting in 2023.

Fortunately, AbbVie continues to perform well, and the company has a plan to continue on a growth trajectory. AbbVie reported fourth-quarter revenue of $8.3 billion, up 7.4% from the fourth quarter of fiscal 2017. AbbVie is seeing growth outside Humira, including 42% growth for Imbruvica. Earningsper-share increased 28% in the fourth quarter, and 41% in 2018. For the upcoming year, AbbVie expects earnings-per-share in a range of $8.65 to $8.75.

AbbVie has strong safety metrics. It has a manageable level of debt, with an interest coverage ratio above 9.0x for 2018. The company also has a dividend payout ratio of 45%, which indicates a secure dividend with room for continued increases even if earnings stall temporarily.

Valuation Based on expected earnings-per-share of $8.70, AbbVie stock trades for a price-to-earnings ratio of 9.1. Our fair value estimate for AbbVie is a price-to-earnings ratio of 13.0, indicating the stock is significantly undervalued today. An expanding valuation multiple could boost shareholder returns by approximately 7.4% per year if the stock valuation expands to our fair value estimate over the next five years. In addition, we expect annual earnings growth of 9%-10% through 2024. Lastly, the stock has a current dividend yield of 5.4%, a very high yield resulting from both a declining share price, and the company's high rate of dividend growth. In total, we expect annual returns of 22.3% per year over the next five years, making AbbVie one of our highest-ranking stocks in terms of expected return.

Key Statistics, Ratios, & Metrics

Dividend Yield: 5.4%

10-Year Dividend Growth Rate: 17.8%3

Most Recent Annual Dividend Increase: 50.7% Sector: Health Care

Dividend History: Increasing since 2013

Business Type: Corporation

Ex- Dividend Date: 4/12/19 (est.)

Payment Date: 5/15/19 (est.)

Fair Value: $113

Payout Ratio: 44.5%

3 Since 2013 spin-off.

Return to Top 10 List

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