Sure Retirement

[Pages:64]2,546

Sure Retirement

HIGH-YIELD, HIGH-QUALITY SECURITIES

October 2021 Edition

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

Published on October 10th, 2021

Table of Contents

Opening Thoughts - On Dividend Taxes - .................................................................................. 3 Sell Recommendation ................................................................................................................... 4

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

Walgreens Boots Alliance Inc. (WBA) ...................................................................................... 6 Unum Group (UNM) .................................................................................................................. 9 AT&T Inc. (T) .......................................................................................................................... 12 Verizon Communications Inc. (VZ) ......................................................................................... 15 Gilead Sciences Inc. (GILD)..................................................................................................... 18 Spire Inc. (SR) .......................................................................................................................... 21 Altria Group Inc. (MO)............................................................................................................. 24 South Jersey Industries Inc. (SJI).............................................................................................. 27 Magellan Midstream Partners LP (MMP) ................................................................................ 30 Sunoco LP (SUN) ..................................................................................................................... 33 Closing Thoughts - Dividend Taxation & Corporate Policy - ................................................ 36 List of Securities by Retirement Suitability Score ................................................................... 37 List of Securities by Sector......................................................................................................... 44 Sell Rules, Past Recommendations, Pending Sells & Past Sells.............................................. 52 Sell Rules .................................................................................................................................. 52 Unsold Past Recommendations................................................................................................. 53 Sold Positions............................................................................................................................ 55 Pending Sells............................................................................................................................. 56 Buying & Ranking Criteria ....................................................................................................... 57 Portfolio Building Guide ............................................................................................................ 58 Examples................................................................................................................................... 58 Tax Guide .................................................................................................................................... 59 Corporations.............................................................................................................................. 60 Master Limited Partnerships (MLPs)........................................................................................ 61 Real Estate Investment Trusts (REITs)..................................................................................... 62 Business Development Companies (BDCs) ............................................................................. 63 Glossary of Common Terms & Acronyms ............................................................................... 64

3

Opening Thoughts - On Dividend Taxes -

Taxes are not a particularly exciting part of investing to think about. But the taxation of dividends has a significant impact on total returns for investors.

Note that both traditional and Roth retirement accounts in the U.S. do not pay dividend taxes on the money compounding within the account. This means that dividends paid within the account are not taxed when they are paid. However, traditional retirement accounts (not Roth accounts) will require paying a tax on withdrawals at your ordinary income tax rate. There are many rules regarding retirement accounts; the above is a general overview and not to be taken as tax advice as individual situations may vary.

For those investing outside of a retirement account, dividend taxes matter. First off, a distinction between different types of dividends must be made. There are distributions, which are paid by REITs and MLPs, that follow separate rules. Please see our tax guide in this newsletter for more on this. Common stocks pay dividends. Dividends can either be qualified or `ordinary.' Regular dividends are taxed at the ordinary income tax rate. In practice, the vast majority of long-term dividend stock investments are going to pay qualified dividends1.

Qualified dividends are currently taxed at the capital gains tax rate, which is 0% for 2021 for Married Filing Jointly investors with an annual income up to $80,800, 15% above that but below $501,601, and 20% for investors earning $501,601 or more.

Dividends were not always taxed at these rates. The History of U.S. Dividend Taxation is summarzied below:

? Prior to 1913: There was no income tax in the United States ? 1913 - 1935: Dividends were tax exempt ? 1936 - 1939: Dividends taxed at the ordinary income tax rate ? 1940 - 1953: Dividends were tax exempt ? 1954 - 1984: Dividends taxed at the ordinary income tax rate, but with partial exemptions ? 1985 - 2002: Dividends taxed at the ordinary income tax rate ? 2003 - Now: Qualified and ordinary dividend distinction, as defined above

It was better to be a dividend investor prior to 1936, and from 1940 through 1953. Keep in mind that dividends are paid from income that has already been taxed. Dividends are taxed twice; first at the corporate level as income to the company, and then at the individual level as dividends. Dividend taxation has implications beyond how much of your dividend payments you get to keep...

Dividend tax rates should affect how companies decide to return cash to shareholders. More on that in this month's Closing Thoughts.

Please keep reading to see our Top 10 securities with 4%+ yields analyzed in detail.

1 See this article for more on the difference between ordinary and qualified dividends.

4

Sell Recommendation

Invesco (IVZ)

We first recommended Invesco (IVZ) in the May 2018 edition of The Sure Retirement Newsletter, where it ranked third in our Top 10. Here's what we said about the company at the time: "Analysts expect Invesco to generate earnings-per-share of $2.85 in 2018. Based on this, Invesco stock trades for a price-to-earnings ratio of 9.9. We believe a fair valuation for Invesco is a priceto-earnings ratio of 14-15. As a result, our fair value price estimate for Invesco shares is approximately $41. The stock currently trades at $28.Over the next five years, a rising valuation could add approximately 7% to 8% to total returns. In addition, we believe Invesco can reasonably generate annual earnings growth of 6%. When accounting for [this] with the firm's 4.3% dividend yield, Invesco's total returns could reach over 17% per year." Our Invesco investment thesis did not go as planned. 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. Invesco's management team decided to reduce its quarterly dividend per share from $0.31 to $0.16 in its Q1 2020 earnings release. As a result, we moved Invesco to a pending sell in the May 2020 edition of The Sure Retirement Newsletter. With the benefit of hindsight, Invesco did not need to cut its dividend because adjusted earningsper-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 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 at the time for Invesco was because the security appeared significantly undervalued and we decided to wait for a better exit price. Invesco shares bottomed at under $7/share in May of 2020. Shares are now trading for ~$252, around the level they were in August 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). Total returns (including dividends) since our initial IVZ recommendation are 5.8%. We feel fortunate to come out with a small profit when so much went wrong with this investment. With that said, the opportunity cost of this investment shows its real cost. The S&P 500 ETF (SPY) generated total returns of 70.9% over the same period, for comparison.

2 Return and price data from afternoon of 10/7/21.

5

The Sure Retirement Top 10 ? October 2021

Name & Ticker

Div. Risk Score

Price

Fair Value

Exp. Value Ret.

Div. or Dist. Yield

Payout Exp. Ratio3 Growth

ETR

Walgreens (WBA) Unum Group (UNM)

A $48 $52 1.7% 4.0% 37% 5.0% 10.1% A $27 $34 4.5% 4.4% 25% 2.0% 10.0%

AT&T (T)

B $27 $36 5.9% 7.7% 64% 3.0% 14.2%

Verizon (VZ) Gilead Sciences (GILD)

B $54 $69 5.1% 4.7% 48% 4.0% 12.6% B $68 $78 2.7% 4.2% 40% 5.0% 11.4%

Spire (SR) Altria (MO)

B $64 $71 2.1% 4.1% 58% 5.5% 11.0% B $46 $51 1.8% 7.7% 78% 2.2% 10.4%

South Jersey Industries (SJI)

C

$23 $33 7.8% 5.3% 76% 3.0% 14.6%

Magellan Midstream (MMP)4 C

$46 $60 5.3% 8.9%

82%

3.0% 14.5%

Sunoco (SUN)

C $38 $44 2.9% 8.7% 49% 1.5% 10.9%

Notes: Data for the table above is from the 10/8/21 Sure Analysis Research Database spreadsheet and data over the last week. `Div.' stands for `Dividend.' `Dist.' stands for `Distribution.' `Exp. Value Ret.' means expected returns from valuation changes. `Exp. Growth' means expected annualized growth rate over the next five years. `ETR' stands for expected total returns. Data in the table above might be slightly different than individual company analysis pages due to writing the company reports throughout the past week. Disclosures: Ben Reynolds is long WBA & T. Eli Inkrot is long WBA, UNM, T & VZ.

AbbVie (ABBV), Enterprise Products Partners (EPD), and OGE Energy (OGE) were replaced by Walgreens Boots Alliance (WBA), Gilead Sciences (GILD), and Altria (MO) in this month's Top 10. As a reminder, securities that are no longer in the Top 10 are holds, not sells.

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

Dividend Yield: Growth Rate: Valuation Expansion: Expected Annual Total Returns5:

Top 10 6.0% 3.4% 4.0% 12.0%

S&P 500 1.3% 5.5% -7.4% -0.6%

Please keep reading to see detailed analyses of this month's Top 10. Note: Data for this newsletter is from 10/5/21 through 10/8/21.

3 The payout ratio for MLPs uses distributable cash flows (DCFs). 4MMP and SUN are MLPs. MLPs have different tax consequences versus common stocks. Please see the MLP portion of our Tax Guide in this newsletter, as well as the MLP Tax Consequences and the advantages & disadvantages of investing in MLPs portions of our primary MLP article on Sure Dividend. 5 Expected annual total returns for our Top 10 is calculated as the average of each individual stock's expected total returns from the Sure Analysis Research Database. Expected annual total returns for the S&P 500 uses the simplified method of calculating expected total returns and is the sum of dividend yield, expected growth, and expected returns from valuation changes.

6

Walgreens Boots Alliance Inc. (WBA)

Overview & Current Events Walgreens Boots Alliance is the largest retail pharmacy in both the United States and Europe. Through its flagship Walgreens business and other business ventures, the $41 billion market cap company has a presence in more than 25 countries, employs 450,000 people and has more than 21,000 stores.

On January 6th, 2021 Walgreens announced the sale of the majority of the company's Alliance Healthcare business and a portion of the Retail Pharmacy International segment's business in Europe to AmerisourceBergen for $6.5 billion.

On July 1st, 2021 Walgreens reported Q3 fiscal year 2021 results for the period ending May 31st, 2021. Adjusted earnings equaled $1.3 billion or $1.51 per share compared to $723 million or $0.83 per share in the year ago period.

Walgreens also updated its fiscal 2021 guidance, now anticipating 10% adjusted earnings-per-share growth, up from an expectation of "mid-to-high single-digit" growth previously. We are expecting $5.20 in earnings-per-share for 2021.

Competitive Advantage & Recession Performance Walgreens' competitive advantage lies in its vast scale and network in an important and growing industry. However, lately a variety of headwinds have surfaced including reimbursement pressure, lower generic deflation, consumer market challenges, and the COVID-19 pandemic.

Despite reduced earnings last year, earnings-per-share dropped 21%. It should be noted that Walgreens has put together a very strong record over time. In the 2008 through 2010 period the company generated earnings-per-share of $2.17, $2.02, and $2.16, while the dividend continued to increase.

Growth Prospects, Valuation & Catalyst From 2010 through 2019, Walgreens grew earnings-per-share by 12.0% per year. This was driven by a combination of factors including solid top-line growth ($67 billion to $137 billion), net profit margin expansion (3.2% to 4.0%), and a reduction in the number of shares outstanding. In 2020 results fell off due to the COVID-19 pandemic. The three factors of success in the past ? revenue growth, margin expansion, and a lower share count ? were simultaneously challenged in the short-term.

Over the intermediate term we are using a 5% anticipated growth rate, expecting some sort of recovery towards "normal," along with a return to share repurchases. This includes ~10% expected growth for fiscal 2021, which is in line with management's recent guidance. Over the long-term, an aging population and a focus on becoming a health destination should provide tailwinds.

Shares are presently trading hands at 9.2 times our estimate of 2021 earnings. Our fair value multiple is 10 times earnings, indicating the potential for a 1.7% annual tailwind from the valuation. When combined with the 4.0% starting dividend yield and 5% anticipated growth, this implies the potential for 10.1% yearly total returns.

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

Key Statistics, Ratios & Metrics

46

5-Year Growth Estimate:

4.0%

5-Year Valuation Return Estimate:

2.1%

5-Year CAGR Estimate:

$52

Dividend Risk Score:

$48

Retirement Suitability Score:

5.0% 1.7% 10.1% A A

Return to Top 10 List

7

Year Revenue ($B) Gross Profit Gross Margin

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

2011 72 20492 28.4% 16561 1086 3931 5.4% 2714 3.8% 2430 1580

Income Statement Metrics

2012 2013 2014 2015 2016

72

72

76

103 117

20342 21119 21569 26753 29874

28.4% 29.2% 28.2% 25.9% 25.5%

16878 17543 17992 22400 23910

1166 1283 1316 1742 1718

3464 3576 3577 4353 5964

4.8% 5.0% 4.7% 4.2% 5.1%

2127 2548 1932 4220 4173

3.0% 3.5% 2.5% 4.1% 3.6%

2881 3089 2787 4413 6522

1249 1499 1526 1056 997

2017 118 29162 24.7% 23813 1654 5349 4.5% 4078 3.4% 5904 760

2018 132 30792 23.4% 24694 1770 6098 4.6% 5024 3.8% 6896 998

2019 137 30076 22.0% 25242 2038 4834 3.5% 3982 2.9% 3892 588

2020 140 28017 20.1% 27045 1927 972 0.7% 456 0.3% 4110 360

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

D/E Ratio

2011 27454 1556 2497 8044 3229 12607 4810 2409 14847 0.16

Balance Sheet Metrics

2012 2013 2014 2015 2016 33462 35481 37250 68782 72688 1297 2106 2646 3000 9807 2167 2632 3218 6849 6260 7036 6852 6076 8678 8956 3447 3717 3539 28723 25829 15226 16027 16633 37482 42407 4384 4635 4315 10088 11000 5392 5047 4490 14383 19028 18236 19454 20513 30861 29880 0.30 0.26 0.22 0.47 0.64

2017 66009 3301 6528 8899 25788 37735 12494 12935 27466 0.47

2018 68124

785 6573 9565 28697 41435 13566 14397 26007 0.55

2019 67598 1023 7226 9333 27436 43446 14341 16836 23512 0.72

2020 87174

516 7132 9451 26021 66038 14458 15742 20637 0.76

Profitability & Per Share Metrics

Year

2011 2012 2013 2014 2015 2016 2017

Return on Assets 10.1% 7.0% 7.4% 5.3% 8.0% 5.9% 5.9%

Return on Equity 18.6% 12.9% 13.5% 9.7% 16.4% 13.7% 14.2%

ROIC

15.9% 10.4% 10.6% 7.8% 11.9% 8.8% 9.0%

Shares Out.

889 944 947 950 1,090 1,083 1,024

Revenue/Share 78.08 81.39 75.60 79.15 98.15 107.55 109.61

FCF/Share

2.63 3.27 3.23 2.89 4.19 5.98 5.47

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

2018 7.5% 18.8% 12.2% 952 132.20 6.93

2019 5.9% 16.1% 9.7% 895 148.20 4.21

2020 0.6% 2.1% 1.2% 880 158.51 4.67

Return to Top 10 List

8 Return to Top 10 List

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download