Sure Dividend

[Pages:34]Sure Dividend

HIGH QUALITY DIVIDEND STOCKS, LONG-TERM PLAN

April 2016 Edition

By Ben Reynolds

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Table of Contents

Opening Thoughts -On Value-..................................................................................................... 3 The Top 10 List ? April 2016 ....................................................................................................... 4 Analysis of Top 10 Stocks............................................................................................................. 5

Archer-Daniels-Midland (ADM) ................................................................................................ 5 Johnson Controls (JCI) ............................................................................................................... 7 Flowers Foods (FLO).................................................................................................................. 9 General Dynamics (GD) ........................................................................................................... 11 Deere & Company (DE) ........................................................................................................... 13 Wal-Mart (WMT) ..................................................................................................................... 15 Cummins (CMI)........................................................................................................................ 17 Abbott Laboratories (ABT)....................................................................................................... 19 Verizon (VZ)............................................................................................................................. 21 Becton, Dickinson & Company (BDX) .................................................................................... 23 Analysis of International Stocks ................................................................................................ 25 List of Past International Recommendations ........................................................................... 25 List of Stocks by Sector .............................................................................................................. 26 List of Stocks by Rank ................................................................................................................ 29 Portfolio Building Guide ............................................................................................................ 32 Examples................................................................................................................................... 32 List of Past Recommendations................................................................................................... 33 Closing Thoughts ........................................................................................................................ 34

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Opening Thoughts -On Value-

This is the first Sure Dividend newsletter with fair value estimates for each of the Top 10 stocks.

It is my hope that readers of the Sure Dividend newsletter will use these estimates as further proof they are buying into great businesses at fair or better prices. The fair value estimates in this newsletter are not intended for short-term trading.

I believe in long-term investing. This is different from value investing. Value investors typically have shorter time frames. The goal is to buy an undervalued security and hold it until it reaches its fair value. Benjamin Graham advised to sell a stock after 2 years if it had not reached fair value.

Value investing takes advantage of overreactions. When people undervalue a security due to undue pessimism, a value investor will buy shares at a discount. When these shares revert to fair value, the value investor will sell shares. The sooner the stock price rebounds, the better.

Long-term investing takes a different approach. Rather than profit from mispricings in securities, one profits from the underlying business growth. Take McDonald's as an example. You could have purchased shares of McDonald's between $34 and $44 in 2006 at forward P/E ratios between 15 and 19. Today those shares are worth $127 each (not including dividends). McDonald's was not a deep value play or a bargain at those prices. If you would have bought in at a P/E ratio of 15 and sold as soon as McDonald's a forward P/E ratio rose to 20 (assuming that's what you thought fair value was), you would have sold McDonald's stock in 2007 and missed out on much of the businesses' growth over the next several years.

The investing focus of Sure Dividend remains primarily on identifying high quality businesses. That's why we exclusively invest in businesses with 25+ years of dividend payments without a reduction. A business with that long of a history of rewarding shareholders has to have (or at least very recently had) a strong and durable competitive advantage.

The price you pay does matter when investing in great businesses. Buying McDonald's at a P/E ratio of 50 (if it had reached that high) would have been a poor idea. Lower prices mean higher dividend yields for a given security ? which means more income today. That's why the estimated fair value calculations are included. They are estimates only ? no one knows with any certainty the true fair value of a business. Regardless, your focus should be on buying high quality businesses first, and then on buying them at fair or better prices second.

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The Top 10 List ? April 2016

Ticker

Name

Price $

ADM Arch.-Dan.-Mid. 36.47

JCI Johnson Controls 39.15

FLO Flowers Foods 18.22

GD General Dynami. 132.34

DE Deere & Co.

76.50

WMT Wal-Mart

69.06

CMI Cummins

110.12

ABT Abbott Labs

42.19

VZ Verizon Wireless 54.01

BDX Becton Dickins. 153.49

Score Months 1.00 4 0.99 4 0.97 2 0.97 2 0.97 1 0.97 25 0.96 6 0.96 8 0.94 5 0.93 3

Yield 3.3% 3.0% 3.2% 2.3% 3.1% 2.9% 3.5% 2.5% 4.2% 1.7%

Payout 40% 33% 62% 33% 44% 43% 44% 48% 57% 35%

Growth Beta Volatility 10.0% 1.02 33.8% 10.7% 1.27 36.7% 13.3% 0.57 26.5% 9.0% 0.83 24.7% 13.3% 1.21 35.1% 6.5% 0.53 19.5% 14.0% 1.58 44.5% 10.0% 0.56 20.1% 6.0% 0.71 21.9% 10.0% 0.56 20.0%

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 closer the score is to 1, the better. Stocks are ranked using the criteria in The 8 Rules of Dividend Investing. 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.

Deere & Company replaces W.W. Grainger in the Top 10 this month. The stability of the top 10 list shows the ranking method is consistent, not based on rapid swings.

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

Dividend Yield: Payout Ratio: Growth Rate: PE Ratio:

Top 10 3.0% 44.0% 10.3% 15.2

S&P500 2.1% 47.8% 7.4% 22.9

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Analysis of Top 10 Stocks

Archer-Daniels-Midland (ADM)

Overview & Current Events ADM is one of the largest agricultural businesses in the world based on its $22 billion market cap. The company is a global agricultural sourcing, production and transportation business.

ADM realized adjusted earnings-per-share of $0.61 in its most recent quarter (2/2/16) versus $1.00 in the same quarter a year ago. ADM's business is cyclical and is currently in a downturn. The company's dividend is very safe despite the downturn. Management announced a ~7% dividend increase, bringing the company's quarterly dividend to $0.30/share for a payout ratio of ~50%.

Next Dividend Record Date: Mid May, 2016

Next Earnings Release: Mid April 2016

Competitive Advantage & Recession Performance ADM's competitive advantage comes from its excellent global distribution network which consists of: 280 processing plants, 420 procurement facilities, ~250 warehouses, and many rail cars, trucks, and ocean vessels for transportation. It would take an enormous upfront capital investment for a competitor to come close to matching the scale and distribution network of ADM.

ADM is not subject to normal economic cycles. Grains still need to be processed and transported, even during recessions. The company's results are correlated with grain and oil prices; not with overall economic activity. As a result, ADM tends to do well during recessions. The company saw earningsper-share rise each year through the Great Recession as demand for ethanol increased.

Growth Prospects, Valuation, & Catalyst ADM has compounded EPS at 13.6% a year from 1999 through 2015. Investors should expect total returns of 10.3% to 13.3% a year from the stock's 3.3% dividend yield and expected EPS growth of 7% to 10% a year. The long-term growth driver for ADM is increased food consumption from growing global populations. ADM's management is shedding low margin businesses and acquiring higher margin businesses. Recent acquisitions include: WILD Flavors (flavorings and additives) and Harvest Innovations (Non-GMO, organic, and gluten-free ingredients).

ADM's cyclical downturn has made the stock a bargain. ADM is currently trading for an adjusted P/E ratio of 12.2; its historical median P/E ratio over the last decade is ~13.5. Earnings are depressed at $2.98/share. Earnings under normal conditions would be around $3.50/share. $3.50 Normalized EPS x 13.5 Historical P/E ratio = a fair value of $47/share.

Maximum Drawdown (starting in year 2000): -68% in October of 2008

Estimated Fair Value Price: Dividend Yield: 10 Year EPS Growth Rate: 10 Year Dividend Growth Rate: Most Recent Dividend Increase: Dividend History:

$47/share (currently at ~$36.50/share) 3.3% 4.5% per year (low due to current downturn) 11.2% per year 7.1% 41 consecutive years of dividend increases

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Johnson Controls (JCI)

Overview & Current Events Johnson Controls manufactures car interiors and components, building control systems and power solutions, and battery systems. Johnson Controls has the following automotive market shares by region: China ? 44%, North & South America ? 36%, Europe ? 38%, SE Asia, Japan, Korea ? 13%.

Johnson Controls continues to post excellent results (1/28/16). The company saw adjusted EPS increase 11% in its most recent quarter due to revenue growth, rising margins, and share repurchases.

The company also (1/25/16) plans to merge with Tyco (TYC) in a deal that will reshape the company.

Next Dividend Record Date: Early June 2016

Next Earnings Release: Late April, 2016

Competitive Advantage & Recession Performance Johnson Controls' history and size give it a competitive advantage in the automotive manufacturing market. The company's global reach and large market share in China make it difficult for new entrants to compete with Johnson Controls.

Johnson Controls is not recession resistant. The company saw EPS plummet from $2.33 per share to $0.47 per share during the Great Recession. Johnson Controls serves the automobile and construction industries, both of which are highly sensitive to downturns in the global economy. The company's low payout ratio and commitment to steady or rising dividends helped the company to continue paying dividends through the Great Recession, when other automotive companies eliminated dividends.

Growth Prospects, Valuation, & Catalyst Johnson Controls is in flux. The company plans to spin off its automotive business in October of 2016. The spun-off business will be named Adient.

In addition, Johnson Controls is merging with Tyco in a tax inversion. The deal will be completed at the end of 2016 and will relocate Johnson Controls to Ireland to take advantage of lower tax rates. Johnson Controls shareholders will own 56% of the new company.

These two moves will refocus Johnson Controls as a diversified manufacturer of building solutions. The company's greater focus and synergy opportunities should invigorate growth.

Johnson Controls is expecting 8% to 14% EPS growth in 2016. Over the long-run I expect EPS growth of between 7% and 9%, in line with historical averages. This growth combined with the company's 3% dividend yield gives investors expected returns of 10% to 12% a year.

The company's historical average P/E ratio is ~13.5. Johnson Controls is currently trading for a P/E ratio of 10.9. Shares of the company are trading for ~$39; fair value is likely around $46 per share.

Maximum Drawdown (starting in year 2000): -80% in March of 2009

Estimated Fair Value Price: Dividend Yield: 10 Year EPS Growth Rate: 10 Year Dividend Growth Rate: Most Recent Dividend Increase: Dividend History:

$46/share (currently trading at $39.15/share) 3.0% 7.7% per year 11.4% per year 11.5% 38 years without a reduction

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