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[Pages:74]Sure Dividend

LONG-TERM INVESTING IN HIGH QUALITY DIVIDEND STOCKS

January 2018 Edition

By Ben Reynolds & Nicholas McCullum Edited by Brad Beams

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Table of Contents

Opening Thoughts - On The January Effect -............................................................................ 3 The Sure Dividend Top 10 ? January 2018 ................................................................................ 4 Analysis of Top 10 Stocks............................................................................................................. 5

Owens & Minor (OMI) ............................................................................................................... 5 Kimberly-Clark Corporation (KMB) ........................................................................................ 10 Johnson Controls International PLC (JCI)................................................................................ 15 Exxon Mobil (XOM) ................................................................................................................ 20 Cardinal Health (CAH) ............................................................................................................. 25 ONEOK Inc. (OKE)................................................................................................................. 30 International Business Machines Corporation (IBM) ............................................................... 35 Axis Capital Holdings Limited (AXS) ..................................................................................... 40 CVS Health Corporation (CVS) ............................................................................................... 45 Leggett & Platt (LEG) .............................................................................................................. 50 Special Recommendation: Walgreens Boots Alliance (WBA) ............................................... 55 Closing Thoughts ? What To Look For In 2018 ? ................................................................... 61 Portfolio Building Guide ............................................................................................................ 62 Examples................................................................................................................................... 62 Performance of the Sure Dividend Strategy............................................................................. 63 List of Stocks by Sector .............................................................................................................. 64 List of Stocks by Rank ................................................................................................................ 70

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Opening Thoughts - On The January Effect -

The stock market is full of interesting anomalies that have repeated themselves over time. Some market anomalies are only witnessed at particular times of the year, with "the January effect" being the greatest example. As we head into 2018, this month's Opening Thoughts will discuss the January effect and its longterm implications for investors. The January effect is a rally in overall stock prices that occurs during the month of January. The January effect was first observed as far back as 1942 and generally affects small-cap securities more than large-cap ones. This market anomaly also seems to have weakened over time. While it might not be obvious why stocks rise during the first month of the year, there are three main factors that are believed to cause this effect. The first is the reversal of broad selling during the month of December as investors implement tax-loss harvesting in their taxable investment accounts. To offset some of the capital gains incurred during the calendar year, investors often sell their poor-performing holdings at year-end to minimize the taxes they'll pay come tax time. This leads to poor equity performance in the month of December, and correspondingly strong performance in January as investors repurchase their old securities and equities rebound. This factor seems logical, and the weakening of the January effect over time has often been attributed to more investors buying stocks within tax-sheltered accounts (eliminating the need for year-end tax-loss harvesting). The second potential cause of the January effect is the investment of year-end cash bonuses into the equity markets. The third potential cause is investors buying stocks for the purpose of satisfying investment-related New Year's Resolutions. These two factors are not believed to be as strong as the reversal of tax-loss harvesting, but may still play a role nonetheless. How should investors react to the January effect in terms of their portfolio management? Buying and selling stocks exclusively because of the January effect is a dangerous mistake for two reasons. Firstly, it is an example of short-term thinking. The switch to a long-term orientation is one of the most powerful mindset changes that an investor can make, and selling due to the January effect defies this completely. Secondly, the returns associated with the January effect have not been sufficient to merit an investment strategy based around this trend. Below, we list the average returns for each month of the year during the 67-year period from 1950 to 2017:

Source: Moneychimp

The January effect is weak, and its returns will likely be eaten away by transaction costs alone. Moreover, if investors have already decided to focus on calendar anomalies, then the "March effect" or the "April effect" might be a better choice. As we head into 2018, our guidance remains the same: focus on making long-term investments in great companies, and ignore any market noise (like the January effect) that may arise in the meanwhile.

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The Sure Dividend Top 10 ? January 2018

Name

Owens & Minor (OMI) Kimberly-Clark (KMB) Johnson Controls (JCI) Exxon Mobil (XOM) Cardinal Health (CAH) ONEOK Inc. (OKE) IBM (IBM) Axis Capital (AXS) CVS Health (CVS) Leggett & Platt (LEG)

Price

$20 $118 $38 $87 $63 $56 $162 $49 $79 $48

Fair Value

$33 $125 $42 $89 $85 $66 $179 $52 $89 $50

Score

1.00 0.91 0.89 0.89 0.88 0.85 0.76 0.76 0.72 0.72

Months

1 1 4 7 21 1 6 1 3 1

2017 P/E

10.4 19.1 14.8 13.71 12.7 N/A2 11.8 0.864 13.4 19.2

Yield

5.2% 3.3% 2.7% 3.6% 2.9% 5.3% 3.7% 3.2% 2.6% 3.0%

Payout Growth Beta

82% 63% 66% 85% 45% 78%3 49% 32%5 34% 57%

11.0% 10.5% 12.0% 7.0% 13.0% 9.5% 4.3% 4.5% 8.0% 7.5%

-1.00 1.80 -2.23 0.13 1.68 -0.66 1.71 1.81 1.29 0.34

Notes: The `Score' column shows how close the composite rankings are between the top 10. The highest ranked stock will always have a score of 1. The `Months' column shows the number of consecutive months a stock has been in the Top 10. The `Price' column shows the price as of the date the newsletter was published. The `Fair Value' column gives a rough estimate of the fair value of each stock. Real fair value is unknowable. The `Growth' column shows the expected future growth rate of intrinsic value on a per-share basis used in rankings. 2017 P/E shows current price divided by expected fiscal 2017 adjusted earnings-per-share.

Five stocks changed from the previous month. Target Corporation (TGT), Occidental Petroleum (OXY), AT&T (T), Kellogg (K), and HNI Corporation (HNI) were replaced by Owens & Minor (OMI), Kimberly-Clark (KMB), ONEOK Inc. (OKE), Axis Capital Holdings Ltd. (AXS), and Leggett & Platt (LEG).

The stability of the top 10 list shows the ranking method is consistent, not based on rapid swings. Stocks that fall out of the top 10 are holds, not sells. Selling occurs rarely; only when a stock becomes extremely overvalued, or if it reduces its dividend. Extremely overvalued is qualified as a stock with a price-to-earnings ratio (P/E ratio) over 40.

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

Dividend Yield: Growth Rate: Expected Total Returns:

Top 10 3.6% 8.7% 12.3%

S&P500 1.8% 7.4% 9.2%

1 Using the PE10. See our qualitative analysis on Exxon Mobil for an explanation of this metric. 2 ONEOK's main asset is the ownership of an MLP, so dividend yield is a far more useful valuation metric for this stock. See our

qualitative analysis on the company for more information. 3 Using distributable cash flow. 4 Using the price-to-book ratio instead of the P/E ratio as it is far more applicable for the analysis of insurance companies. 5 Using 2018's forecasted financial results to account for the one-time negative earnings experienced by Axis Capital in 2017. See our

qualitative analysis for more information.

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Analysis of Top 10 Stocks

Owens & Minor (OMI)

Overview & Current Events Owens & Minor is a healthcare logistics company that provides packaged healthcare products for hospitals and other medical centers. The company has a market capitalization of $1.2 billion and distributes ~220,000 different medical and surgical supplies to ~4,400 hospital systems worldwide.

Owens & Minor's stock price lost more than 30% of its value after the company reported poor third quarter earnings (11/1/17). In the quarter, revenues declined by 3.7% from the prior year's period while adjusted earnings-per-share of $0.40 missed expectations by $0.10 (or 20%). Poor performance was caused by the loss of a large customer in 2016, and the impact of competitive pricing on margins. Owens & Minor also revised its fiscal 2017 adjusted EPS guidance to $1.75-$1.85, from $1.90-$2.00.

The company is taking action to restore growth. Owens & Minor recently signed an agreement to acquire Halyard Health's surgical & infection prevention (S&IP) business for $710 million ? the largest in Owens & Minor's history. This acquisition gives Owens & Minor greater economies of scale and significantly more international exposure.

Competitive Advantage & Recession Performance Owens & Minor's competitive advantage comes from its entrenched position within the healthcare distribution industry and its strong relationships with customers. The company has a customer base of approximately 4,400 hospital systems and boasts an on-time delivery rate of 99%.

Owens & Minor is very recession-resistant. The company increased its adjusted earnings-per-share each year during the 2007-2009 financial crisis. Despite its high yield, Owens & Minor's dividend is also quite safe. The company is expected to report adjusted earnings-per-share of about $1.80 in fiscal 2017 and pay $1.03 in dividends for a dividend payout ratio of 57%.

Growth Prospects, Valuation, & Catalyst Owens & Minor has a long growth runway ahead due to the expansion of the broader healthcare industry. Moreover, the company has shown a willingness to grow via acquisitions. Owens & Minor recently closed (8/1/17) on the acquisition of Byram Healthcare, a $380 million purchase that will generate $450 million in sales for the company and be earnings accretive in 2018. Owens & Minor's track record suggests more inorganic growth is likely for this healthcare company.

Owens & Minor's financial guidance call for earnings-per-share of ~$1.80 in fiscal 2017. Using this guidance, the company is trading for a price-to-earnings ratio of just 10.4. For context, the company traded at an average price-to-earnings ratio of 18.2 over the last decade, which implies a fair value of $33. Owens & Minor currently trades for just under $20.

Key Statistics, Ratios, & Metrics

Maximum Drawdown6:

81.7%

10 Year EPS Growth Rate:

5.5%

Dividend Yield:

5.2%

10 Year Dividend Growth Rate: 11.5%

Most Recent Dividend Increase: 1.0%

10 Year Historical Avg. P/E Ratio: 18.2

Estimated Fair Value:

$33

10 Year Annualized Total Return: -1.3%

Dividend History: 20 years of increases

Next Ex-Dividend Date:

3/14/18 (estimated)

6 Maximum drawdown occurred in December of 1974.

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