January 2019 Edition - Sure Dividend

[Pages:42]Sure Retirement Newsletter

HIGH-YIELD, HIGH-QUALITY INVESTMENTS

January 2019 Edition

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

Published on January 13th, 2019

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Table of Contents

Opening Thoughts - The New 4% Rule -.................................................................................... 3 Sell Recommendation: Holly Energy Partners (HEP) ............................................................. 4 Acquisition Review: Spectra Energy Partners (SEP)............................................................... 5 The Retirement Top 10 ? January 2019 ..................................................................................... 6 Analysis of Top 10 Securities ....................................................................................................... 7

Invesco Ltd (IVZ) ....................................................................................................................... 7 Newell Brands Inc. (NWL) ......................................................................................................... 9 AT&T Inc. (T) .......................................................................................................................... 11 Altria Group Inc. (MO)............................................................................................................. 13 Hanesbrands Inc. (HBI) ............................................................................................................ 15 AbbVie Inc. (ABBV) ................................................................................................................ 17 Cardinal Heath Inc. (CAH) ....................................................................................................... 19 International Business Machines Corp. (IBM) ......................................................................... 21 Energy Transfer LP (ET) .......................................................................................................... 23 Leggett & Platt Inc. (LEG) ....................................................................................................... 25 Closing Thoughts ? Market Decline Creates Opportunity ? .................................................. 27 List of Investments by Retirement Suitability Score ............................................................... 28 Past Recommendations & Ranking Criteria, & Sells.............................................................. 33 Ranking Criteria........................................................................................................................ 33 Sell Rules .................................................................................................................................. 33 Current Holds............................................................................................................................ 34 Sold Positions............................................................................................................................ 35 Pending Sells............................................................................................................................. 35 Portfolio Building Guide ............................................................................................................ 36 Examples................................................................................................................................... 36 Tax Guide .................................................................................................................................... 37 Corporations.............................................................................................................................. 38 Master Limited Partnerships (MLPs)........................................................................................ 39 Real Estate Investment Trusts (REITs)..................................................................................... 40 Business Development Companies (BDCs) ............................................................................. 41 Glossary of Common Terms & Acronyms ............................................................................... 42

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Opening Thoughts - The New 4% Rule -

The "4% Rule" is a retirement heuristic used to determine a safe portfolio withdrawal rate. Under the aptly named 4% Rule, spending 4% of your portfolio annually is deemed safe for retirement purposes.

Said another way, when following the 4% rule, you can retire when your portfolio value is 25x (the reciprocal of 4%) of your annual income needed from investments in retirement.

The 4% Rule has worked well historically ? when equity market returns were expected to be around 9%. When that's the case, 4% is a conservative amount to withdraw annually.

Unfortunately, expected future equity returns have declined sharply over the last 2 decades as valuation multiples have surged and interest rates have declined. Many experts are expecting returns of 5% or less for U.S. markets going forward. At Sure Dividend, we expect S&P 500 returns of around 5% going forward, including dividends.

And bond returns are expected to be even lower. There's a good chance that a balanced equity and bond portfolio will not even return 4% annually over the next decade based on reasonable forecasts. When one factors in volatility, the old 4% rule looks even more tenuous.

Volatility is the enemy of the 4% Rule. That's because the rule means to sell 4% of your starting portfolio value annually, not 4% of the current value. If a 2009 level market crash happened and the market was down 50% (and one were 100% in stocks), then that would mean selling 8% of your portfolio for the same amount of income instead of 4%. What's worse, this selling would be done at the worst possible time, when stocks are at bargain prices and one should be buying.

The Sure Retirement Newsletter looks at securities with 4%+ yields exclusively. Looking for 4%+ yields is the "New 4% Rule." When investing for income, volatility doesn't matter. If the market crashes 50% but your income securities pay the same dollar amount of income, you don't need to sell. In fact, if your portfolio income exceeds your needs then you can invest the excess income when securities are undervalued.

Under the New 4% Rule, volatility becomes your friend rather than your enemy. There's great peace of mind in your retirement safety not being tied to market prices. It is comforting to be okay if the market falls 5% or 10% in a month. Having this level of income doesn't mean that you want the market to fall, but rather that you'd be okay if it does.

To that end, this month's Top 10 is filled with high-quality income securities with 4% plus yields. Among our favorites are AT&T (T) and Altria (MO). Both are high-quality dividend stocks with very long histories of success and each of them more than passes the 4% yield screen. AT&T currently has a 6.7% yield; Altria currently has a 6.4% yield.

Altria and AT&T offer more than just a high yield. They are very likely to continue raising their dividends ahead. Both have also historically proven they can survive (and continue to grow dividends) during recessions. These characteristics make them excellent additions to portfolios looking for more income and recession resiliency. The other 8 securities in this month's Top 10 also offer investors a mix of high current income, expected income safety and growth, and high expected total returns.

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Sell Recommendation: Holly Energy Partners (HEP)

One of the sell rules in The Sure Retirement Newsletter is to review companies with an "F" Dividend Risk Score. Holly Energy Partners currently has an "F" Dividend Risk Score.

We are issuing a sell recommendation on Holly Energy Partners (HEP).

We first recommended Holly Energy Partners in the December 2016 edition of The Sure Retirement Newsletter. Since that time the partnership has generated total returns of 8% versus 22% for the S&P 500 (as measured by the ETF SPY).

There's no guarantee a distribution cut is coming, but there is an elevated chance of a cut at Holly Energy Partners.

Holly Energy Partners has generated distributable cash flows of $1.91/unit through the first 9 months of fiscal 2018. After a 3.1% distribution increase in October, Holly Energy Partners pays out $0.6650/unit quarterly. This comes to $1.995 in distributions over 3 quarters, versus $1.915 in distributable cash flows over the last 3 quarters. Said another way Holly Energy Partners must grow to cover its distribution using distributable cash flows going forward. There is absolutely no margin of safety in Holly Partners' distribution.

With that said, Holly Energy Partners' management says it is on track for a distribution coverage ratio in excess of 1.00 to close out fiscal 2018. Here's what CEO George Damiris said in the company's third-quarter 2018 report: "Looking forward, we anticipate higher earnings and distributable cash flow in the fourth quarter. HEP remains on track to report a distribution coverage ratio of 1.0x for the full year 2018."

In addition, Holly Energy Partners carries a large amount of debt. The partnership carries $1.42 billion in long-term debt versus $6 million in cash. The company has a weighted interest rate on its debt of around 5%.

Two scenarios could result in a dividend reduction at Holly Energy Partners. First, if the company's growth projects fail to meaningfully grow distributable cash flow, the company will have no choice but to reduce its distribution.

Second, if interest rates continue to rise, the company will be forced to slowly refinance its debt at less attractive rates. This will result in a higher interest expense. With no margin of safety for its distribution, higher interest expenses will force the company to reduce its distribution.

On the other hand, if the company's recent acquisitions and growth projects do significantly improve distributable cash flow on a per share basis, the company will likely keep its distribution growing.

Also, if for some reason equity markets were to upgrade Holly Energy Partners and the unit price were to rise significantly, the company would be able to issue new units at better rates and use the proceeds to reduce debt and fund growth. This seems unlikely in the current depressed MLP environment.

Due to the uncertainty and risk surrounding Holly Energy Partners, we recommend investors sell now and reinvest the proceeds into one of this month's Top 10.

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Acquisition Review: Spectra Energy Partners (SEP)

Enbridge Inc. (ENB) completed its acquisition of past Sure Retirement Newsletter recommendation Spectra Energy Partners LP on December 17th, 2018.

Spectra Energy Partners holders as of the close of business on November 5th, 2018 received 1.111 common shares of Enbridge. This comes to $38.35 per Spectra Energy Partners unit at current Enbridge share prices.

We first recommended Spectra Energy Partners in the November 2016 edition of The Sure Retirement Newsletter. Since that time the partnership has generated total returns of 8% versus 25% for the S&P 500 (as measured by the ETF SPY).

We believe the acquisition of Spectra by Enbridge was done at around fair value based on Enbridge's current share price.

So, what should investors do with their Enbridge (ENB) shares?

We recommend U.S. investors sell their Enbridge shares as Enbridge is a Canadian company. This means U.S. investors investing outside of a retirement account will be subject to dividend withholding taxes from the Canadian government. There is a tax treaty in place between the two countries for retirement accounts, but additional paperwork must be filed to receive the break.

With that said, Enbridge is a high-quality dividend growth stock with a long history of consecutive dividend increases and is a past recommendation of The Sure Dividend International Newsletter.

Enbridge shares currently offer investors a strong 6.4% dividend yield. We estimate a fair value of around $37.00 per share for Enbridge, versus a current stock price of ~$34. Unlike most high-yield stocks, we also expect solid growth of around 7% annually from Enbridge.

The company currently has a Dividend Risk Score of "C" (which is a reasonably safe score). We expect Enbridge to pay out just ~66% of its cash flows as dividends in fiscal 2018 leaving a significant margin of safety in its payout ratio.

The combination of a high yield and reasonable safety gives Enbridge stock a Retirement Suitability Score of "A."

We will not track Enbridge further in The Sure Retirement Newsletter because it is an international security. We recommend selling Enbridge shares now, but this is because Enbridge is an international security. However, it does have favorable investment characteristics at current prices. Investors who are comfortable investing in Canada and are looking for exposure to the energy sector could opt to hold their Enbridge shares instead of selling them.

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The Retirement Top 10 ? January 2019

Name

Invesco (IVZ) Newell Brands (NWL) AT&T (T) Altria Group (MO) Hanesbrands (HBI) AbbVie (ABBV) Cardinal Health (CAH) IBM (IBM) Energy Transfer (ET) Leggett & Platt (LEG)

Type

Price

Fair Value

P/E

Stock $17 $33 6.3

Stock $21 $38 7.4

Stock $31 $47 8.7

Stock $49 $64 12.5

Stock $14 $22 8.0

Stock $88 $103 11.2

Stock $47 $70 9.5

Stock $121 $170 8.8

MLP $15 $18 6.93

Stock $38 $44 15.5

Yield

6.8% 4.5% 6.7% 6.4% 4.3% 4.9% 4.0% 5.2% 8.1% 4.0%

Payout1 Growth2

43% 6.0% 34% 5.4% 57% 6.0% 73% 7.0% 35% 3.0% 46% 9.0% 39% 5.0% 48% 4.0% 60% 3.0% 61% 6.0%

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. True fair value is unknowable. The `Payout' column uses earnings, funds from operations, or distributable cash flow in the denominator. The numerator is the security's payment to its owners.

Four recommendations changed from last month's Top 10. Enterprise Products Partners (EPD), QUALCOMM (QCOM), Occidental Petroleum (OXY), and Verizon Communications (VZ) were replaced by Newell Brands (NWL), Hanesbrands (HBI), Cardinal Health (CAH), and Leggett & Platt (LEG). 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% 5.5% 5.4%

Note: Data for this newsletter is from market close 1/10/19 through midday 1/11/19.

1 Payout is based on different earnings/cash flow metrics based on the security. See the individual security analysis for more. 2 Growth estimates are from our analyst forecasts in The Sure Analysis Research Database. 3 Using price-to-distributable-cash-flow.

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Analysis of Top 10 Securities

Invesco Ltd (IVZ)

Overview & Current events Invesco is an investment management firm serving retail, institutional, and wealth management clients around the world. It has more than 7,000 employees, and it serves customers in more than 150 countries. Invesco trades with a market capitalization of $7.2 billion and has nearly $900 billion of assets under management (AUM). In mid-October, Invesco published (10/18/18) a multifaceted press release that covered three important topics. First, Invesco and MassMutual announced a definitive agreement whereby Invesco will acquire MassMutual's asset management subsidiary OppenheimerFunds. In turn, MassMutual and the OppenheimerFunds employee shareholders will received a combination of common and preferred equity that makes MassMutual a significant shareholder in Invesco, with an approximate ownership of 15.5%. Second, Invesco announced a new $1.2 billion share repurchase program (~16.7% of its current market capitalization) that will be completed in the next two years. Lastly, Invesco reported financial results for the third-quarter of fiscal 2018. The company generated revenues of $1.34 billion, unchanged from the prior year's period, while earnings-per-share of $0.66 declined by 7% over the same period a year ago. The year-on-year decline in earnings was primarily due to higher operating expenses. Still, Invesco's bottom line was in-line with consensus analyst expectations.

More recently, Invesco announced (1/10/19) AUM for December of $888.2 billion which decreased by 4.1% from November's comparable figure, driven by unfavorable market returns, net long-term outflows, and lower money market AUM.

Growth Prospects & Safety Invesco is investing heavily in growth, mainly through acquisitions and earlier this year it acquired the ETF business from Guggenheim Investments for $1.2 billion. Invesco also made a significant investment in financial technology with its acquisition of Intelliflo, a leading technology platform for financial advisors that supports around 30% of the financial advisors in the U.K. Overall, we expect 6% in annual earnings growth for Invesco over the next five years.

Invesco ranks well in terms of dividend safety with an expected payout ratio below 50%. It also has a strong balance sheet, with a credit rating of `A2' from Moody's and `A' from Standard & Poor's.

Valuation Invesco stock trades for a price-to-earnings ratio of 6.3 based on expected earnings-per-share of $2.80 for 2018. We believe a fair valuation for Invesco is a price-to-earnings ratio of 12. This gives us a fair value target of $33 for this asset management business. A rising valuation could add approximately 13.8% to the annual returns of the stock if mean reversion were to occur over the next 5 years. In addition, returns will benefit from 6% earnings growth as well as the 6.8% dividend yield. In total, we believe Invesco could potentially deliver total returns above 20% per year over the next 5 years.

Key Statistics, Ratios, & Metrics

Dividend Yield: 6.8%

10-Year Dividend Growth Rate: 12.0%

Most Recent Annual Div. Increase: 3.4%

Sector: Financial

Dividend History: Increasing since 2009

Business Type: Corporation

Ex-Dividend Date: 2/14/19 (est.)

Payment Date: 3/2/19 (est.)

Fair Value: $33

Payout Ratio: 42.9%

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8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%

Invesco Ltd. (IVZ) Dividend Yield History

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

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