Sure Dividend

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Sure Dividend

LONG-TERM INVESTING IN HIGH-QUALITY DIVIDEND STOCKS

May 2020 Edition

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

Published on May 3rd, 2020

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Table of Contents

Opening Thoughts - Do Recession-Resistant Stocks Stay Recession Resistant? - .................. 3 The Sure Dividend Top 10 ? May 2020....................................................................................... 4 Sell Recommendations.................................................................................................................. 5 Analysis of Top 10 Stocks............................................................................................................. 6

Unum Group (UNM) .................................................................................................................. 6 Ameriprise Financial Inc. (AMP) ............................................................................................. 10 Bank OZK (OZK) ..................................................................................................................... 14 AbbVie Inc. (ABBV) ................................................................................................................ 18 Archer-Daniels-Midland Co. (ADM) ....................................................................................... 22 Stanley Black & Decker Inc. (SWK)........................................................................................ 26 Walgreens Boots Alliance Inc. (WBA) .................................................................................... 30 Pentair plc (PNR)...................................................................................................................... 34 General Dynamics Corp. (GD) ................................................................................................. 38 Polaris Inc. (PII)........................................................................................................................ 42 Closing Thoughts - Deep Value Coming Out Of Recessions - ................................................ 46 Real Money Portfolio.................................................................................................................. 47 Buying & Ranking Criteria ....................................................................................................... 48 Portfolio Building Guide ............................................................................................................ 49 Examples................................................................................................................................... 49 Past Recommendations & Sells ................................................................................................. 50 Sell Rules .................................................................................................................................. 50 Unsold Past Recommendations ................................................................................................ 50 Pending Sells............................................................................................................................. 52 Sold Positions ........................................................................................................................... 52 List of Stocks by Dividend Risk Score ...................................................................................... 54 List of Stocks by Sector .............................................................................................................. 60

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Opening Thoughts - Do Recession-Resistant Stocks Stay Recession

Resistant? -

The COVID-19 marked decline happened surprisingly quickly. From February 21st through March 23rd, the S&P 500 declined more than 30%. Since that time, the market has made up some (but far from all) of its losses.

There's a difference between a recession-resistant stock price and a recession-resistant business. A company can continue on with positive earnings during a recession and see its stock price collapse.

Whirlpool (WHR) during the Great Recession is a good example. The company's earnings-pershare (EPS) from 2007 through 2010 were $8.10, $5.50, $4.34 and $9.10. The per share dividend of $1.72 remained unchanged through this period. Despite an EPS decline of less than 50%, dividends continued to roll in and the business remained completely viable as a going concern, but the company's stock declined by 78.2% including dividends from October 9th, 2007 through March 9th, 20091.

When price decouples from business value, there's a chance to buy stocks at a meaningful discount to intrinsic value. But buying when stocks are down is both psychologically and financially difficult. Putting psychology aside, it's hard to buy stocks at a discount if you were heavily invested in stocks before the market declined. But not all stocks perform the same during recessions...

Just as there are some businesses that see their stock price decline far more than operating results warrant, there are businesses whose stocks tend to do particularly well during recessions. Of course, you can't know exactly which securities are going to perform well in a recession beforehand. Who could've predicted mass restaurant and store closures six months ago? But interestingly, stocks that did well in the Great Recession (relatively speaking, versus the overall market) did better during the COVID-19 max drawdown period.

Of the 608 securities in the Sure Analysis Research Database2, 491 had return data available from October 9th, 2007 through March 23rd, 20203. The 10% of securities (49 in total) that had the highest total returns during the Great Recession generated average total returns of -29.6% during the COVID-19 decline, versus -40.3% for the rest of the database.

The bottom 10% of securities in the Sure Analysis Research Database by total return during the Great Recession generated total returns of -51.9% during the COVID-19 decline, versus -37.8% for the rest of the Sure Analysis securities. Overall there was a surprisingly high 0.41 correlation for security total returns during the maximum drawdown periods of these two market declines. While far from a perfect science, in general, stocks with price recession-resistance in the past seem to be more likely to also outperform in future recessions.

1 This is the S&P 500's max drawdown period during the Great Recession. 2 Using the Sure Analysis Research Database spreadsheet from 4/27/20. 3 These are the dates of the pre-Great Recession market high and the market trough for the COVID-19 decline.

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The Sure Dividend Top 10 ? May 2020

Name & Ticker

Unum Group (UNM) Ameriprise Financial (AMP) Bank OZK (OZK) AbbVie (ABBV) Archer-Daniels-Mid. (ADM) Stanley Black & Deck. (SWK) Walgreens (WBA) Pentair (PNR) General Dynamics (GD) Polaris (PII)

Div. Risk Score

A A A A A A A A A B

Price

$18 $119 $23 $82 $36 $112 $43 $35 $137 $75

Fair Value

$39 $206 $34 $101 $45 $137 $55 $46 $176 $110

Exp. Value Ret.

16.7% 11.8% 8.0% 4.2% 4.6% 4.2% 5.3% 5.8% 5.2% 8.2%

Div. Yield

6.3% 3.4% 4.7% 5.7% 4.0% 2.5% 4.3% 2.1% 3.2% 3.5%

Payout Exp. Ratio Growth

ETR4

23% 2.0% 25.0% 22% 8.0% 23.2% 28% 5.0% 17.7% 44% 5.5% 15.4% 48% 6.1% 14.7% 32% 8.0% 14.7% 30% 5.0% 14.6% 28% 6.5% 14.4% 34% 6.0% 14.4% 35% 7.0% 18.7%

Notes: Data for the table above is from a spreadsheet during the past week of our Sure Analysis Research Database and general data over the same week. `Div.' stands for `Dividend.' `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 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: OZK, ABBV, WBA, and PII. Nick McCullum is long ABBV. Bob Ciura is long ABBV. The Real Money Portfolio will buy shares of UNM on Tuesday 5/5/20.

H.B. Fuller (FUL), Whirlpool (WHR), Foot Locker (FL), People's United Financial (PBCT), UGI (UGI), and Comcast (CMCSA) were replaced by Unum Group (UNM), Ameriprise Financial (AMP), AbbVie (ABBV), Archer-Daniels-Midland (ADM), Stanley Black & Decker (SWK), and General Dynamics (GD) this month. Remember: stocks 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:

Top 10

S&P 500

Dividend Yield:

4.0%

2.4%

Growth Rate:

5.9%

5.5%

Valuation Expansion:

7.4%

-1.7%

Expected Annual Total Returns:

17.3%

6.2%

Note: Data for this newsletter was obtained between 4/29/20 and 5/1/20.

4 Expected Total Returns here is calculated using the simplified estimated method which is the sum of valuation, dividend, and growth returns. It does not take into account dividend growth or volatility decay.

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Sell Recommendations

As was the case last month, this is another unusual month for sell recommendations. 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. At the same time, economic stress has led to an increase in dividend reductions. We've seen dividend reductions or eliminations in four of our previous recommendations:

? Kohl's (KSS) ? Dividend suspended (temporarily eliminated)

? Invesco (IVZ) ? Reduction in the quarterly dividend from $0.31 to $0.16 ? Southwest Airlines (LUV) ? Dividend eliminated until at least September 30th, 2021

? Royal Dutch Shell (RDS.B) ? ADS share dividend reduction from $0.94 to $0.32 We are moving all four of these securities to our pending sell list due to their dividend reductions. They should be sold when they return to some semblance of fair value. These securities are all significantly undervalued right now. At the time of this writing5, all four have expected total returns of 20% or higher. These four securities have proven that they are unable to pay steady dividends. We are especially surprised at the dividend reduction from Royal Dutch Shell ? the first for the company since World War II. Since these securities have proven they cannot be relied upon for steady or rising dividends, all are pending sells. With that said, the time to sell on these is when they are not trading for such a wide discount to fair value. We will do full sell write ups on all four of these securities when we issue our final sell recommendations, once they return to some semblance of fair value. We also recommend selling Johnson & Johnson (JNJ). Johnson & Johnson is one of the highest quality dividend growth stocks around. There's an argument to be made that it is the safest Dividend King. But while Johnson & Johnson is exceptionally safe, it is also particularly overvalued. The company's stock has already fully rebounded from the COVID-19 market decline. We are expecting total returns of just 4.5% annually ahead for Johnson & Johnson, slightly below our marketwide expected total returns. As a result, we recommend selling Johnson & Johnson at current prices. Johnson & Johnson shares should only be sold if one is reinvesting back into other securities that are significantly undervalued. Now is not the time to sell Johnson & Johnson in a flight to cash. It is, however, an opportunity to `sell high' on this high-quality blue-chip security and reinvest the proceeds into securities that have much better total return profiles. Walgreens (WBA) and AbbVie (ABBV) are two Dividend Aristocrats focused on health care that are in this month's Top 10 and offer much better expected total returns than Johnson & Johnson.

5 Expected total return data for this page is from the 4/29/20 Sure Analysis Research Database Excel sheet.

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Analysis of Top 10 Stocks

Unum Group (UNM)

Overview & Current Events Unum Group is an insurance holding company providing a broad portfolio of financial protection benefits and services. The company operates through its Unum US, Unum UK, Unum Poland and Colonial Life businesses, providing disability, life, accident, critical illness, dental and vision benefits to millions of customers. Unum generated revenue of approximately $12 billion in 2019.

On February 4th, 2020 Unum reported fourth-quarter and full-year results for the period ending December 31st, 2020. For the fourth quarter Unum generated $3.03 billion in revenue, a 5.3% increase year-over-year, as premium income and net investment income rose by 3.9% and 1.3% respectively. Results were also helped by a net realized investment gain compared to a loss in the year ago period. On an adjusted basis, earnings-per-share (EPS) increased 8.5% year-over-year.

For the full year, Unum generated $12.0 billion in revenue, representing a 3.5% increase compared to 2018, as a small decline in net investment income was offset by a 4.2% increase in premium income. Adjusted earnings-per-share increased 4.6% to $5.44 for 2019. Book value per share equaled $49.10 at the end of 2019 compared with $40.19 at the end of 2018.

Competitive Advantages & Recession Performance Competitive advantages are difficult to achieve in the financial services industry, as customers are often motivated by price when it comes to insurance. That said, Unum has developed a top position in its industry with a long track record of providing reliable service and establishing deep relationships with customers.

These qualities have served the company well during recessions. Unum performed surprisingly well in the Great Recession of 2008-2009. Unum posted earnings-per-share of $2.19, $2.51, $2.57 and $2.71 from 2007 through 2010. Furthermore, the dividend kept increasing during this time as well. Therefore, we expect Unum's profits and dividend to hold up again, should another recession occur.

Growth Prospects, Valuation, & Catalyst Over the past decade, Unum grew its earnings-per-share by approximately 8% per year on average. Results were helped by rising premium income, as well as aggressive share repurchases which retired 5% of the share count each year. We believe Unum can continue to grow via reasonable improvement in premium and investment income, expense management, and continued share repurchases. We believe 2% annual EPS growth is a reasonable expectation through 2025.

We expect Unum to generate adjusted earnings-per-share of $4.90 for 2020. Based on this, the stock has a price-to-earnings ratio (P/E) of just 3.7. During the past decade shares of Unum have traded hands with an average valuation between 8 and 9. Our fair value estimate is a P/E ratio of 8.0, which implies the potential for a significant valuation tailwind. Expansion of the P/E multiple could boost annual returns by 16.7% per year over the next five years. In addition, shareholder returns will be driven by expected EPS growth of 2% per year, and the 6.3% dividend yield. Overall, we expect total annual returns of 25.0% per year over the next five years for Unum stock.

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

Key Statistics, Ratios, & Metrics

12

5-Year Growth Estimate:

6.3%

5-Year Valuation Return Estimate:

9.6%

5-Year CAGR Estimate:

$39

Dividend Risk Score:

$18

Retirement Suitability Score:

2.0% 16.7% 25.0% A A

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Income Statement Metrics

Year

2010 2011 2012 2013 2014 2015 2016 2017

Revenue

10278 10515 10369 10525 10731 11047 11287

SG&A Exp.

776 808 787 790 821 835 839 852

D&A Exp.

75

81

84

85

88 100 102 103

Net Profit

879 284 894 847 402 867 931 994

Net Margin

8.6% 2.8% 8.5% 8.2% 3.8% 8.1% 8.4% 8.8%

Free Cash Flow 1197 1096 1274 926 1109 1192 1037 1059

Income Tax

441

49 355 373 140 371 416 410

Balance Sheet Metrics

Year

2010 2011 2012 2013 2014 2015 2016 2017

Total Assets

57308 59555 62236 59404 62450 60564 61942 64013

Cash & Equivalents 54

117

77

94 103 113 100 77

Accounts Receivable 1666 6527 6475 6454 6541 6324 6470 6545

Goodwill & Int. Ass. 201 232 225 220 214 255 367 367

Total Liabilities 48363 51386 53624 50745 53928 51900 52974 54438

Long-Term Debt 2856 2883 3211 2612 2781 2801 2999 2938

Shareholder's Equity 8944 8170 8613 8659 8522 8664 8968 9575

D/E Ratio

0.32 0.35 0.37 0.30 0.33 0.32 0.33 0.31

Profitability & Per Share Metrics

Year

2010 2011 2012 2013 2014 2015 2016 2017

Return on Assets 1.6% 0.5% 1.5% 1.4% 0.7% 1.4% 1.5% 1.6%

Return on Equity 10.1% 3.3% 10.7% 9.8% 4.7% 10.1% 10.6% 10.7%

ROIC

7.7% 2.5% 7.8% 7.3% 3.6% 7.6% 7.9% 8.1%

Shares Out.

327.2 303.6 281.8 265.9 256.7 247.9 236.0 227.3

Revenue/Share 31.15 33.86 37.32 38.99 41.01 43.30 46.81 49.65

FCF/Share

3.66 3.61 4.52 3.48 4.32 4.81 4.39 4.66

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

2018 11599 886 101 523 4.5% 1392 104

2018 61876

94 6278 447 53254 2971 8622 0.34

2018 0.8% 5.8% 4.3% 220.1 52.71 6.33

7

2019 11999

898 110 1100 9.2% 1591 282

2019 67013

84 6384 440 57048 3327 9965 0.33

2019 1.7% 11.8% 8.8% 209.9 57.18 7.58

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$ -

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Price

$60 10.00%

$50 8.00%

$40 6.00%

$30 4.00%

$20 2.00%

$10

$70

Unum Group (UNM) Dividend Yield History

2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986

Yield

0.00%

12.00%

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