Sure Dividend

[Pages:73]Sure Dividend

LONG-TERM INVESTING IN HIGH-QUALITY DIVIDEND STOCKS

May 2019 Edition

By Ben Reynolds, Nick McCullum, Bob Ciura, Josh Arnold & Samuel Smith Edited by Brad Beams

Published on May 5th, 2019

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Table of Contents

Opening Thoughts - The Quarterly Earnings Treadmill & Long-Term Investing -.............. 3 The Sure Dividend Top 10 ? May 2019....................................................................................... 4 Analysis of Top 10 Stocks............................................................................................................. 5

AbbVie Inc. (ABBV) .................................................................................................................. 5 Walgreens Boots Alliance Inc. (WBA) .................................................................................... 10 Cardinal Health Inc. (CAH)...................................................................................................... 15 AT&T Inc. (T) .......................................................................................................................... 20 United Parcel Service Inc. (UPS) ............................................................................................. 25 Ameriprise Financial Inc. (AMP) ............................................................................................. 30 Eaton Vance Corp. (EV) ........................................................................................................... 35 WestRock Co. (WRK) .............................................................................................................. 40 Bank OZK (OZK) ..................................................................................................................... 45 Western Digital Corp. (WDC) .................................................................................................. 50 Closing Thoughts - The 5-Method Capital Allocation Framework - ..................................... 55 Real Money Portfolio.................................................................................................................. 56 Buying & Ranking Criteria ....................................................................................................... 57 Portfolio Building Guide ............................................................................................................ 58 Examples................................................................................................................................... 58 Past Recommendations & Sells ................................................................................................. 59 Sell Rules .................................................................................................................................. 59 Current Holds............................................................................................................................ 59 Pending Sells............................................................................................................................. 61 Sold Positions ........................................................................................................................... 61 List of Stocks by Dividend Risk Score ...................................................................................... 63 List of Stocks by Sector .............................................................................................................. 68

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Opening Thoughts - The Quarterly Earnings Treadmill & Long-

Term Investing -

We are in the midst of a busy earnings season for the first quarter of 2019. So far, results have been solid. According to FactSet, by the time 46% of S&P 500 companies had reported earnings, 77% of them had reported an earnings surprise (with the average earnings figure coming in 5.3% higher than expected) and 59% of them reported a positive revenue surprise (with the average revenue number being 0.3% above estimates).

While results were strong relative to expectations, the first quarter has been somewhat weak on an absolute basis. FactSet also estimates that the first quarter's blended earnings growth rate was negative 2.3%. If this decline persists as more companies report earnings, it will be the first year-over-year decline in S&P 500 earnings since the second quarter of fiscal 2016.

With equity markets trading near all-time highs and many investors feeling cautious after the yield curve inverted in March, the above trend could be especially worrisome. We believe it is very helpful to understand the factors causing earnings to decline: mainly shrinking S&P 500 profit margins. Indeed, S&P 500 revenues had grown by 5.1%, and ten of the eleven sectors within the S&P 500 (with Utilities being the sole exception) reported declining year-on-year profit margins.

Should investors be concerned about all these trends? Absolutely not, although the temptation is there.

This time of the year it is particularly hard to be a disciplined, long-term investor. Indeed, there is no more difficult time to be a long-term investor than when quarterly earnings season hits: media coverage of stocks increases (especially for stocks with poor performance) and everybody seems to be talking about the stock market. These difficulties are especially tangible when either (1) fundamental performance is deteriorating ? such as S&P 500 profit margins in the current quarter ? or (2) stock prices are experiencing downside volatility, such as in the fourth quarter of fiscal 2018.

With that said, the current decline in profit margins is a non-factor in the long-term appeal of common stocks today. In 5, 10, or especially 20 years, there will be virtually no one talking about what occurred with S&P 500 profit margins or the yield curve in the first quarter of 2019. On the other hand, we would be willing to wager that there will be plenty of investors lamenting that they had not bought a diversified basket of high-quality stocks many years before.

Warren Buffett has an excellent quote related to this topic:

"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen

or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

With earnings season coming to a close, this month's Opening Thoughts is dedicated to reminding you of the benefits of long-term investing. Regardless of what is happening with S&P 500 profit margins, the fixed-income yield curve, the trade war with China, or other topics that are popular in the news, our strategy remains the same: buy high-quality dividend growth stocks trading at fair or better prices for the long run.

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The Sure Dividend Top 10 ? May 2019

Name & Ticker

AbbVie (ABBV) Walgreens (WBA) Cardinal Health (CAH) AT&T (T) United Parcel Service (UPS) Ameriprise Financial (AMP) Eaton Vance (EV) WestRock (WRK) Bank OZK (OZK) Western Digital (WDC)

Div. Risk Score

A A B B B B A B A B

Price

$79 $54 $50 $31 $106 $148 $42 $39 $34 $51

Fair Value

$114 $78 $71 $43 $137 $191 $54 $54 $42 $60

Exp. Value Ret.

7.8% 7.7% 7.8% 6.9% 5.4% 5.4% 5.6% 7.0% 4.8% 3.8%

Div. Yield

5.5% 3.3% 3.9% 6.6% 3.6% 2.6% 3.4% 4.7% 2.6% 4.0%

Payout Exp. Ratio Growth

ETR

49% 9.5% 22.7% 29% 6.0% 17.0% 38% 5.0% 16.7% 57% 3.1% 16.6% 51% 7.2% 16.2% 25% 8.0% 16.0% 42% 6.8% 15.8% 42% 4.0% 15.7% 26% 8.0% 15.3% 25% 6.5% 14.3%

Notes: Data for the table above is from The Sure Analysis Research Database, 5/3/19 spreadsheet, and general data over the week ending 5/3/19. `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: ABBV, WBA, CAH, T, & OZK. Nick McCullum is personally long WBA, CAH, T, UPS & OZK. The Real Money Portfolio will buy shares of CAH on Tuesday 5/7/19.

There were two changes in this month's Top 10. CVS Health (CVS) and People's United Financial (PBCT) were replaced by United Parcel Service (UPS) and Ameriprise Financial (AMP). 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:

4.0% 6.4% 6.2% 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 5/1/19 and market close 5/3/19.

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Analysis of Top 10 Stocks

AbbVie Inc. (ABBV)

Overview & Current Events AbbVie is a biotechnology company that is focused on the development and commercializing of treatments in immunology, virology, and oncology. The company was spun off from Abbott Labs in 2013. AbbVie generates $33 billion in annual revenue and has a $116 billion market capitalization.

AbbVie reported Q1 earnings on 4/25/19 and results were better than expected. Revenue declined 1.3% year-over-year, but that slightly beat expectations. Imbruvica continues to be a strong driver of growth for the company, grossing just over $1 billion during the quarter, a 34% increase over the prior year. Humira continues its decline as it loses patent protection, losing 5.6% in revenue year-over-year to $4.5 billion. Humira remains the world's highest-grossing drug despite recent declines, and AbbVie is working to replace the billions of dollars of annual revenue it will lose in the coming years as Humira's patent protection ceases to exist. AbbVie's earnings-per-share rose 14% year-over-year to $2.14, beating estimates. The company's expenses continue to be prudently managed and operating leverage remains strong. In addition, the company's enormous buyback program saw the share count fall 7% lower year-over-year, producing roughly half of the company's total earnings-per-share growth for Q1. Management guided for $8.73 to $8.83 in adjusted earnings-per-share for this year, a small increase from prior guidance despite the weak revenue number for Q1. We're now expecting AbbVie to produce $8.78 in earnings-per-share for this year, representing 11% growth from 2018.

Competitive Advantage & Recession Performance AbbVie did not exist as a standalone entity during the last recession, so there is no track record for this company. However, its former parent, Abbott Labs, did exist during the last recession and it performed extremely well, continuing to grow its earnings-per-share at impressive rates. We believe AbbVie will follow in Abbott's footsteps and perform admirably during the next economic downturn.

AbbVie's competitive advantage is its large cash flows that allow it to spend aggressively on research and development. The company's size advantage has allowed it to build a pharmaceutical portfolio that is robust, deep, and has potential blockbusters waiting in the wings like Imbruvica.

Growth Prospects, Valuation, & Catalyst AbbVie's earnings-per-share compounded at 20% annually from 2013 to 2018. While Humira revenue is likely going to decline sharply in the coming years, AbbVie's R&D is being used to create new drugs to fill the gap. In addition, AbbVie uses some of its internally generated cash to repurchase shares and shrink the float. We expect 9.5% annual earnings-per-share growth ahead.

AbbVie trades for just 8.9 times our earnings-per-share estimate of $8.78 for this year, which compares very favorably to our estimate of fair value at 13 times earnings. AbbVie, therefore, represents a unique combination of a very high yield, strong growth prospects, and a deeply undervalued stock that offers investors 22%+ prospective total annual returns.

Key Statistics, Ratios, & Metrics

Maximum Drawdown:

37.0%

10-Year EPS Growth Rate:

Dividend Yield:

5.5%

10-Year Dividend Growth Rate:

Most Recent Dividend Increase: 11.5%

10-Year Historical Avg. P/E Ratio:

Estimated Fair Value:

$114

10-Year Annualized Total Return:

Dividend History: 6 years of increases

Next Ex-Dividend Date:

20.3% 35.0% 13.8 18.0% 7/12/19 (est.)

Return to Top 10 List

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Income Statement Metrics

Year

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Revenue

N/A N/A N/A 18380 18790 19960 22859 25638 28216 32753

Gross Profit

N/A N/A N/A 13872 14209 15534 18359 19806 21174 25035

Gross Margin

N/A N/A N/A 75.5% 75.6% 77.8% 80.3% 77.3% 75.0% 76.4%

SG&A Exp.

N/A N/A N/A 4989 5352 7724 6387 5881 6295 7399

D&A Exp.

N/A N/A N/A 1150 897 786 836 1189 1501 1765

Operating Profit N/A N/A N/A 5817 5664 3411 7537 9340 9545 6383

Op. Margin

N/A N/A N/A 31.6% 30.1% 17.1% 33.0% 36.4% 33.8% 19.5%

Net Profit

N/A N/A N/A 5275 4128 1774 5144 5953 5309 5687

Net Margin

N/A N/A N/A 28.7% 22.0% 8.9% 22.5% 23.2% 18.8% 17.4%

Free Cash Flow N/A N/A N/A 6012 5776 2937 7003 6562 9431 12789

Income Tax

N/A N/A N/A 450 1204 595 1501 1931 2418 -490

Balance Sheet Metrics

Year

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Total Assets

N/A N/A N/A 27008 29198 27513 53050 66099 70786 59352

Cash & Equivalents N/A N/A N/A 5901 9595 8348 8399 5100 9303 7289

Acc. Receivable N/A N/A N/A 4298 3854 3735 4730 4758 5088 5384

Inventories

N/A N/A N/A 1091 1150 1124 1719 1444 1605 1605

Goodwill & Int. N/A N/A N/A 8453 8167 7375 32877 44313 43344 36896

Total Liabilities

N/A

N/A N/A 23645 24706 25771 49105 61463 65689 67798

Accounts Payable N/A N/A N/A 556 933 1401 1597 1407 1474 1546

Long-Term Debt N/A N/A N/A 15672 14723 14977 31671 36842 37368 40310

Total Equity

N/A N/A N/A 3363 4492 1742 3945 4636 5097 -8446

D/E Ratio

N/A N/A N/A 4.66 3.28 8.60 8.03 7.95 7.33 -4.77

Profitability & Per Share Metrics

Year

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Return on Assets N/A N/A N/A 22.7% 14.7% 6.3% 12.8% 10.0% 7.8% 8.7%

Return on Equity N/A N/A N/A 69.0% 105% 56.9% 181% 139% 109% -340%

ROIC

N/A N/A N/A 34.0% 21.6% 9.9% 19.7% 15.4% 12.6% 15.3%

Shares Out.

N/A N/A N/A N/A 1590 1590 1610 1590 1590 1550

Revenue/Share N/A N/A N/A 11.66 11.71 12.40 13.96 15.72 17.60 21.19

FCF/Share

N/A N/A N/A 3.81 3.60 1.82 4.28 4.02 5.88 8.27

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

Return to Top 10 List

7 AbbVie Inc. (ABBV) Dividend Yield History

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

Return to Top 10 List

2019 2018 2017 2016 2015 2014

$6.00 $5.00 $4.00 $3.00 $2.00 $1.00

$-

2019 2018 2017 2016 2015 2014 2013 2012 2011

AbbVie Inc. (ABBV) Fundamentals

Payout Ratio (TTM) - right axis

Dividends (TTM) - left axis

Earnings (TTM) - left axis

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100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

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