Sure Dividend

[Pages:62]Sure Dividend

LONG-TERM INVESTING IN HIGH-QUALITY DIVIDEND SECURITIES

October 2021 Edition

By Ben Reynolds, Bob Ciura, Eli Inkrot, & Josh Arnold Edited by Brad Beams

Published on October 3rd, 2021

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Table of Contents

Opening Thoughts - On Spiking Interest Rates -....................................................................... 3 Sell Recommendation ................................................................................................................... 4

Invesco Ltd. (IVZ) ...................................................................................................................... 4 The Sure Dividend Top 10 ? October 2021 ................................................................................ 5

Bristol-Myers Squibb Co. (BMY) .............................................................................................. 6 FedEx Corp. (FDX) .................................................................................................................... 9 Silgan Holdings Inc. (SLGN) ................................................................................................... 12 ABM Industries Inc. (ABM)..................................................................................................... 15 Unum Group (UNM) ................................................................................................................ 18 Lockheed Martin Corp. (LMT)................................................................................................. 21 AT&T Inc. (T) .......................................................................................................................... 24 Amgen Inc. (AMGN)................................................................................................................ 27 Verizon Communications Inc. (VZ) ......................................................................................... 30 Spire Inc. (SR) .......................................................................................................................... 33 Closing Thoughts - A Historical View Of Interest Rates - ...................................................... 36 Real Money Portfolio.................................................................................................................. 37 Buying & Ranking Criteria ....................................................................................................... 39 Portfolio Building Guide ............................................................................................................ 40 Examples................................................................................................................................... 40 Past Recommendations & Sells ................................................................................................. 41 Sell Rules .................................................................................................................................. 41 Unsold Past Recommendations ................................................................................................ 41 Pending Sells............................................................................................................................. 44 Sold Positions ........................................................................................................................... 45 List of Securities by Dividend Risk Score................................................................................. 47 List of Securities by Sector......................................................................................................... 54

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Opening Thoughts - On Spiking Interest Rates -

Interest rates have spiked upwards recently.

Source: Ycharts, through 9/28/21.

Rising interest rates are, in general, negative for most asset classes. This includes stocks, real estate, bonds, and cryptocurrencies. That's because rising interest rates make holding short-term interestbearing securities look better relative to investing in other assets. If you could get 5% interest in your savings account, taking on so much additional risk for a few extra percentage points of return by investing in the stock market looks less appealing. We are, of course, a very far way from 5% interest at banks. But the point is that rising interest rates make debt securities more attractive and everything else less attractive. Note: Rising interest reduces the value of current debt securities ? with more damage being done to longer term securities ? because the old lower yields on these securities look less appealing and the price must decline to compensate. But they make newly issued debt securities with higher starting yields comparatively more attractive. While rising interest rates are not beneficial for stocks in general, there are exceptions. We expect rising interest rates to reduce market valuations, all other things being equal. This means there is a chance to invest new money (or reinvest dividends) into securities with higher starting dividend yields. While interest rates have spiked recently, they are still very low from a long-term historical perspective. This month's Closing Thoughts will look at interest rates from a long-term lens instead of the shorter-term analysis from this month's Opening Thoughts.

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Sell Recommendation

Invesco Ltd. (IVZ)

We first recommended Invesco (IVZ) in the March 2018 edition of The Sure Dividend Newsletter. Here's what we said about the company at the time:

"(T)he stock appears to be undervalued by approximately 40%. If it takes five years to reach fair value, the rising valuation multiple would add 8% to annual returns. Therefore, even with modest earnings growth assumptions, the stock can return roughly 15% per year, including the 3.7% dividend yield. The dividend is highly secure. Invesco has a dividend payout ratio of 43%, which leaves room for continued dividend growth."

Unfortunately, our Invesco investment thesis did not play out as intended. The company's business deteriorated over the next several years. Invesco generated adjusted earnings-per-share of $2.75 in fiscal 2017. In fiscal 2020, adjusted earnings-per-share came in at $1.94.

Despite this, Invesco's management team decided to reduce its quarterly dividend per share from $0.31 to $0.16. As a result, we moved Invesco to a pending sell in the May 2020 edition of The Sure Dividend Newsletter. With the benefit of hindsight, Invesco ultimately did not need to cut its dividend because adjusted earnings-per-share in 2020 would've easily covered its $1.24 per share annual dividend. Management cut the dividend to `manage uncertainty', as shown in the quote below from the company's Q1 2020 earnings release:

"In addition to tightly managing expenses and taking steps to further strengthen our balance sheet, we are reducing our quarterly common dividend from $0.31 to $0.155 per share, beginning with the dividend that will be paid in the second quarter. We believe these steps will provide us with enhanced liquidity to manage through the uncertainty in the markets, ensure ongoing dividend stability, help strengthen our balance sheet over time and preserve optionality for investing in future growth."

How a dividend reduction `ensures ongoing dividend stability' is beyond me... Our reasoning for not issuing a final sell recommendation then for Invesco from the May 2020 edition is below:

"Market declines make selling securities now a generally bad idea. Stocks are trading for a discount virtually across the board. Now is simply not the time to sell."

Invesco shares bottomed at under $7/share in May of 2020. Selling at that time would've been disastrous as the company looked extremely undervalued. Shares are now trading for ~$24, around the level they were back in September of 2018, after briefly rising above $29/share this Summer.

With Invesco's partial share recovery, we are issuing our final sell recommendation on Invesco. Shares should be sold when the market is next open (Monday).

Ultimately, our Invesco investment did not work out particularly well. Total returns (including dividends) since our initial recommendation are down 11.2%. We feel fortunate to see relatively minor losses when so much went wrong with this investment. While returns could've been worse on an absolute basis, the opportunity cost of this investment shows its real cost. The S&P 500 ETF (SPY) generated total returns of 68.7% over the same period, for comparison.

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The Sure Dividend Top 10 ? October 2021

Name & Ticker

Bristol-Myers Squibb (BMY) FedEx (FDX) Silgan Holdings (SLGN) ABM Industries (ABM) Unum Group (UNM) Lockheed Martin (LMT) AT&T (T) Amgen (AMGN) Verizon (VZ) Spire (SR)

Div. Risk Score

A A A A A B B B B B

Price

$59 $219 $38 $45 $25 $345 $27 $213 $54 $61

Fair Value

$101 $296 $43 $61 $34 $430 $36 $221 $69 $71

Exp. Value Ret. 11.3% 6.2% 2.3% 6.3% 6.3% 4.5% 5.9% 0.8% 5.0% 3.0%

Div. Yield

3.3% 1.4% 1.5% 1.7% 4.8% 3.2% 7.7% 3.3% 4.7% 4.2%

Payout Exp. Ratio Growth

ETR

26% 3.0% 16.8% 15% 6.0% 13.6% 18% 9.0% 12.8% 22% 5.0% 12.7% 25% 2.0% 11.9% 42% 8.0% 15.3% 64% 3.0% 14.3% 43% 9.0% 12.7% 48% 4.0% 12.6% 58% 5.5% 12.0%

Notes: Data for the table above is from the 10/1/21 Sure Analysis Research Database spreadsheet. Numbers for the Top 10 table and the individual reports may not perfectly match as reports and Sure Analysis uploads and reports are completed throughout the week. `Div.' stands for `Dividend.' `Exp. Value Ret.' means expected annualized returns from valuation changes over the next five years. `Exp. Growth' means expected annualized growth rate over the next five years. `ETR' stands for Expected Annual Total Returns.

Disclosures: Ben Reynolds is long T. Bob Ciura is long BMY & LMT. Eli Inkrot is long UNM, T, & VZ. The Real Money Portfolio will buy additional shares of AT&T (T) on Tuesday 10/5/21 and is long BMY, UNM, LMT, T, & VZ.

There were five changes in this month's Top 10 versus last month's Top 10. BancFirst (BANF), Polaris (PII), Archer-Daniels-Midland (ADM), Enterprise Bancorp (EBTC), and Lowe's (LOW) were replaced by FedEx (FDX), Silgan Holdings (SLGN), ABM Industries (ABM), Unum Group (UNM), and Spire (SR). Remember, securities that fall out of the Top 10 are holds, not sells.

An equally weighted portfolio of the Top 10 has the following future expected total return estimate characteristics:

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

Top 10 3.6% 5.5% 5.2% 13.5%

S&P 500 1.4% 5.5% -7.1% -0.3%

Please keep reading to see detailed analyses of this month's Top 10. Note: Data for this newsletter is from 9/28/21 through 10/1/21.

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Bristol-Myers Squibb Co. (BMY)

Overview & Current Events Bristol-Myers Squibb can trace its corporate beginnings back to 1887. Today this $132 billion market cap company is a leading drug maker of cardiovascular and anti-cancer therapeutics with annual revenue of about $43 billion. Bristol-Myers' late-2019 acquisition of Celgene is helping near-term results, but about two-thirds of Celgene's revenue is at risk of patent expiration in 2022.

Bristol-Myers reported a solid second-quarter report on July 28th. Revenue of $11.7 billion beat estimates by $470 million and increased 15.5% year-over-year (13% growth excluding foreign exchange comprised of 14% U.S. and 10% international growth). Adjusted earnings-per-share (EPS) of $1.93 grew 18% from the same quarter last year. Revlimid remains the company's top-selling product and grew sales by 11% to over $3.2 billion last quarter.

The company also reiterated its 2021 non-GAAP EPS guidance range of $7.35-$7.55. Worldwide revenue is expected to increase in the high single-digits for 2021. The company expects to maintain a non-GAAP gross margin of 80.5% for the full year.

Competitive Advantages & Recession Performance Bristol-Myers' competitive advantage is its ability to either create (through research & development) or acquire patents for pharmaceuticals with high potential revenue. Two of Bristol-Myers' top selling pharmaceuticals, Opdivo and Eliquis, are expected to see high peak annual sales. Opdivo sales increased 16% last quarter year-over-year and generated overall sales above $1.9 billion. Meanwhile, Eliquis revenue increased 29% in the second quarter, to $2.8 billion. Eliquis has become the top oral anticoagulant in several international countries since 2019 and had over $9 billion in sales last year.

During the Great Recession, BMY reported earnings-per-share of $1.59, $1.63, and $1.79 during the 2008 through 2010 stretch. The dividend was held steady and ultimately increased during that time. Even in a recession, people seek treatment for health problems, especially with respect to cancer.

Growth Prospects, Valuation, & Catalyst Bristol-Myers has seen its earnings-per-share grow at a rate of 12.9% per year over the last ten years, but much of this growth occurred in the last three years. We are forecasting 3% annual earnings-pershare growth over the next five years, as the expectation for significantly higher earnings in 2021 is weighed against fluctuating results over the years. Celgene is also facing a patent cliff in the coming quarters.

We expect Bristol-Myers to generate $7.45 in adjusted earnings-per-share this year. Based on the current share price of $59, shares are presently trading at 7.9 times expected earnings. We believe the valuation multiple is far too low for Bristol-Myers, given the company's strong product portfolio and growth potential. Our fair value estimate is 13.5, implying the potential for a 11.3% annualized return from a higher valuation over the next half-decade. When combined with a 3% growth rate and the 3.3% dividend yield, total expected returns come to 16.8% per year over the next five years.

Years of Dividend Increases: Dividend Yield: Most Recent Dividend Increase: Estimated Fair Value: Stock Price:

Key Statistics, Ratios, & Metrics

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5-Year Growth Estimate:

3.3%

5-Year Valuation Return Estimate:

8.9%

5-Year CAGR Estimate:

$101

Dividend Risk Score:

$59

Retirement Suitability Score:

3.0% 11.3% 16.8% A A

Return to Top 10 List

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Year Revenue Gross Profit Gross Margin SG&A Exp. D&A Exp. Operating Profit Op. Margin Net Profit Net Margin Free Cash Flow Income Tax

2011 21244 15646 73.6% 5170 628 6637 31.2% 3709 17.5% 4473 1721

2012 17621 13011 73.8% 5175

681 3932 22.3% 1960 11.1% 6393 -161

Income Statement Metrics

2013 2014 2015 2016

16385 15879 16560 19427

11766 11947 12651 14458

71.8% 75.2% 76.4% 74.4%

5104 5699 5001 4979

763

467

376

382

2931 1714 1730 4467

17.9% 10.8% 10.4% 23.0%

2563 2004 1565 4457

15.6% 12.6% 9.5% 22.9%

3008 2622 1285 1843

311

352

446 1408

2017 20776 14762 71.1% 4751

789 3446 16.6% 1007 4.8% 4220 4156

2018 22561 16094 71.3% 4551

637 5114 22.7% 4920 21.8% 6115 1021

2019 26145 18067 69.1% 4871 1746 5913 22.6% 3439 13.2% 7374 1515

2020 42518 30745 72.3% 7661 10380 2177 5.1% -9015 -21.2% 13299 2124

Year Total Assets Cash & Equivalents Acc. Receivable Inventories Goodwill & Int. Total Liabilities Accounts Payable Long-Term Debt Total Equity

D/E Ratio

2011 32970 5776 2250 1384 8710 17103 2603 5491 15956 0.34

2012 35897 1656 1708 1657 16413 22259 2202 7394 13623 0.54

Balance Sheet Metrics

2013 2014 2015 2016 38592 33749 31748 33707 3586 5571 2385 4237 1690 2100 2948 3774 1498 1560 1221 1241 9414 8780 8300 8260 23356 18766 17324 17360 2559 2487 1565 1664 8340 7832 6689 6708 15154 14852 14266 16177 0.55 0.53 0.47 0.41

2017 33551 5421 4347 1166 8073 21704 2248 7962 11741 0.68

2018 34986 6911 4636 1195 7629 20859 1892 7349 14031 0.52

2019 129944 12346

6476 4293 86457 78246 2445 46733 51598 0.91

2020 118481 14546

7219 2074 73790 80599 2713 50676 37822 1.34

Profitability & Per Share Metrics

Year

2011 2012 2013 2014 2015 2016 2017

Return on Assets 11.6% 5.7% 6.9% 5.5% 4.8% 13.6% 3.0%

Return on Equity 23.4% 13.3% 17.8% 13.4% 10.7% 29.3% 7.2%

ROIC

17.5% 9.2% 11.5% 8.6% 7.1% 20.2% 4.7%

Shares Out.

1717 1688 1662 1670 1679 1680 1652

Revenue/Share 12.37 10.44 9.86 9.51 9.86 11.56 12.58

FCF/Share

2.61 3.79 1.81 1.57 0.77 1.10 2.55

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

2018 14.4% 38.2% 23.8% 1637 13.78 3.74

2019 4.2% 10.5% 5.7% 1712 15.27 4.31

2020 -7.3% -20.2% -9.6% 2258 18.83 5.89

Return to Top 10 List

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