in this issue 6 di holdings increase dividends in april o · · 2016-05-066 di holdings increase...

6 DI Holdings Increase Dividends in AprilOver the last month, 17 DI holdings have reported quarterly earnings (through

May 3). Of these, only four have missed expectations (see page 5). Six DI holdings increased their dividend payments during April: Apple Inc.

(AAPL) raised its quarterly dividend by 9.6%, IBM Corp. (IBM) by 7.7%, Invesco Ltd. (IVZ) by 3.7%, Procter & Gamble Co. (PG) by 1.0%, Qualcomm Inc. (QCOM) by 10.4% and Wells Fargo & Co. (WFC) by 1.3%.

For the year to date, 10 holdings have increased their quarterly payments and we expect increases from an additional 11 holdings by year-end. The aver-age dividend increase has been 7.2%. The current question marks are Deere & Co. (DE), Occidental Petroleum (OXY) and Union Pacific (UNP). Deere has not increased its payment since May of 2014 and has not provided any guidance as to potential increases this year. It has, however, reiterated that returning cash to shareholders is a priority. Occidental reported quarterly earnings on May 5 that missed expectations, but the company increased its production guid-ance. The company ended the quarter with a strong cash balance ($3.2 billion), but Occidental declared a quarterly dividend in line with the previous quarter. Given the volatile oil environment, we weren’t surprised that Occidental held its payment steady. Union Pacific hasn’t increased its payment since February of last year, but historically the company has not followed a routine schedule of increases.

Handling Excess Portfolio CashThis month, excess cash in the DI tracking portfolio is being added to Stage

Stores Inc. (SSI); see the DI Portfolio Alerts section on page 2 for more details. Keep in mind that even though this is the approach used to handle excess cash in the DI tracking portfolio, it doesn’t mean you have to follow suit, as we explain in the DI User’s Guide. A review of the options and the rationale behind the DI portfolio’s use of cash can help you choose your best course.

There are three ways DI subscribers can use their cash dividend payments: 1. Set aside the cash payments for future stock purchases when a DI addition

alert is published,2. Withdraw the cash for portfolio income, or3. Reinvest the dividends, using them to acquire more shares of the same stocks.

It’s important to note that withdrawing the cash or immediately reinvesting the cash means that your portfolio’s performance will differ from the returns reported by the DI portfolio.

The DI strategy is to allocate dividend payments to cash and then use it to add new stocks or reinvest in underweighted positions within the portfolio. This al-lows more control over which stocks are reinvested in.

What is an underweighted position?To determine an underweighted position, you will first need to calculate the

average position (dollar value) of your holdings. You can do this by taking the total portfolio value and dividing by the number of holdings in the portfolio (see Table 1 on page 3).

Comparing your holdings’ total dollar values to the average position size will

AAII Dividend Investing is produced by AAII. “The American Association of Individual Investors is an independent nonprofit corporation formed in 1978 for the purpose of assisting individuals in becoming effective managers of their own assets through programs of education, information and research.”

In This Issue

DI TablesPortfolio Alerts This Month 2Portfolio Holdings 3Performance of DI Portfolio 4Recent Earnings Announcements 5Dividend Payments 6Dividend Analysis 7

In-Depth Stock ReportsApple Inc. (AAPL) 8

Global tech leader selling at attractive valuation levels.

Deere & Company (DE) 10Equipment manufacturer farming strong return on equity.

McDonald’s Corp. (MCD) 12Latest quarterly results paint favorable picture of fast-food giant’s turnaround efforts.

WEC Energy Group (WEC) 14Utility raised its dividend for the 13th year and intends to continue doing so.

DI Article Checking Company Health With the Altman Z-Score 16

The first in a series discussing Altman’s Z-Score to assess a company’s potential likelihood of going bankrupt.

Next Publication Date: June 3, 2016

May 2016Volume V Issue 5

www.AAIIDividendInvesting.com

TM

http://www.aaiidividendinvesting.com/resources/guide.cfm

2 May 2016

give you an idea of which stocks are overweighted or underweighted. If a holding’s value is below the average, it is underweighted in the portfolio.

When you initially invested in the DI portfolio (assuming you followed the guidelines issued in the DI User’s Guide), you invested equal dollar amounts in each of the 24 holdings (or in a subset of the holdings). Therefore, each company started with the same relative position size, but weightings will change over time due to price performance. If a company is still a sound investment, as outlined by the DI approach, it makes sense to reinvest in a stock that is undervalued (buy low, sell high).

When determining the dollar amount to reinvest in a particular holding, subtract the holding’s total dollar value from the average position dollar value. This is the amount you need to reinvest in that stock to put its position size on par with the average in the portfolio.

Table 1 on page 3 shows how to de-termine the dollar amount to reinvest.

Subscribers have asked why they don’t see DI tracking portfolio position sizes and dollar amounts included in the list of holdings. This is because the total portfolio value and position sizes of

the DI tracking portfolio will differ from those of most subscribers’ portfolios. A slight difference in purchase price, ac-companied by a different initial invest-ment, will cause significant differences in position sizes, individual holdings’ market values and, of course, total port-folio value. In addition, some members do not purchase all 24 holdings.

For example, Investor A and Investor B decide to start following the DI ap-proach. Investor A has a $100,000 initial investment and purchases all 24 hold-ings midday on April 29, 2016. By the end of the day, his holdings declined 2% (on average). His initial average position was $4,166 ($100,000 ÷ 24), but by the end of the day, his average position de-clined to roughly $4,083 ($98,000 ÷ 24).

Investor B has a $75,000 initial invest-ment and purchases all 24 holdings midday on May 4, 2016. By the end of the day, her holdings gained 4% (on average). Her initial average position was $3,125 ($75,000 ÷ 24), but by the end of the day, her average position increased to roughly $3,250 ($78,000 ÷ 24).

Anytime a stock’s price changes, the position size will adjust, along with the total portfolio value and gain or loss since purchase for each holding.

Consequently, it is not useful to report indi-vidual company weight-ings or specific dollar amounts of the DI track-ing portfolio in the list of holdings. However, the Transactions page in the DI Portfolio section of the DI website reports the dollar amounts of trans-actions for the DI tracking portfolio.

A similar discussion of average posi-tion size and target position value ap-peared in the April 2016 AAII Journal in Charles Rotblut’s article “Strategies for Selling Stocks, Including Guidelines from Experts.” His application illustrated sell-ing overweighted positions as opposed to adding to underweighted positions.

DI Portfolio AlertsNo additions or deletions are being

made to the portfolio for May. However, as mentioned, excess cash is being added into Stage Stores Inc. (SSI).

Stage Stores has seen a significant price decline over the last year, as its stores in the oil patch region of the U.S. and along the border with Mexico have been struggling with the sharp drop in oil prices and the strength of the U.S. dollar relative to the Mexican peso. While we have no way of knowing how long these macroeconomic headwinds will last, we are encouraged by ini-tiatives that management has been undertaking to counteract these events, including the decision to close under-performing stores, focusing capital ex-penditures on remodeling stores instead of opening new stores, and investment in e-commerce technology. The com-pany also resumed its share buybacks

Published monthly by the American Association of Individual Investors 625 N. Michigan Ave., Chicago, IL 60611 312-280-0170, www.aaii.com. Annual DI subscription, $199.

AAII Dividend Investing™ (DI) is not a registered investment adviser or a broker/dealer. This report is issued solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities.

The opinions and analyses included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our information providers shall be liable for any errors or inaccuracies, regardless of cause,

or the lack of timeliness of, or any delay or interruptions in, the transmission thereof to the users. All information contained in this report should be independently verified with the companies mentioned.

© American Association of Individual Investors, 2016. AAII Dividend Investing is a trademark and service mark of the American Association of Individual Investors—All rights reserved. This publication may not be reproduced in whole or in part by any means without prior written consent.

“The American Association of Individual Investors is an independent nonprofit corporation formed in 1978 for the purpose of assisting individuals in becoming effective managers of their own assets through programs of education, information and research.”

Printed in the U.S.A.

Portfolio Alerts This MonthMay Portfolio Deletions

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price Alert Date Purchase PurchaseNo portfolio deletions for May

May Portfolio Additions

Company (Ticker)Latest Price

(5/3/2016)Dividend

Yield* Sector: IndustryNo portfolio additions for May

Purchase of Additional Shares with Excess Cash:Stage Stores Inc. (SSI) $7.20 8.3% Services: Retail (Apparel)*Data as of 5/3/2016.

Company (Ticker)Portfolio Deletion Alert

http://www.aaiidividendinvesting.com/resources/guide.cfm

http://www.aaiidividendinvesting.com/portfolio/transactions.cfm

http://www.aaii.com/journal/article/strategies-for-selling-stocks-including-guidelines-from-experts

May 2016 3

AAII DIvIDeND INvesTINg

last year, a signal of management confi-dence in its financial situation.

Currently, SSI shares yield 8.3%, well above the five-year high yield of 4.3%. Often, a stock will trade at a very high relative yield shortly before the com-pany cuts its dividend. However, Stage Stores has expressed confidence that it

will be free-cash-flow positive in 2016 and has not given any indication that the dividend is in danger. Earnings are projected to grow by nearly 300% in fis-cal 2016 and by 20.7% in 2017.

April DI PerformanceThe DI portfolio declined 0.2% in April,

composed of a 0.3% capital loss (price decline) and 0.1% income return (divi-dend payments). The Dow Jones U.S. Index ETF (IYY) gained 0.5% during April, solely composed of capital gain.

Year-to-date, the DI portfolio has outpaced its benchmark, gaining 5.5% (composed of 4.5% capital gain and 1.0% income return), compared to the Dow Jones U.S. Index’s return of 0.7% (0.2% capital gain, 0.5% income return). The weighted yield of the Dividend Investing portfolio is 3.2%, well above the Dow Jones U.S. Index’s yield of 2.0%.

Eleven holdings declined during the month, but only two of those had a negative earnings surprise during the quarter: Apple Inc. (AAPL) and Microsoft Corp. (MSFT). This demonstrates that investors weren’t necessarily changing their perspective on a particular stock solely based on whether the company beat or missed quarterly earnings estimates.

Portfolio NewsStrongest Stocks in April

The rising price of oil during April helped to boost Occidental Petroleum’s

DI Pur- Latest Aprchase Price Gain/ Div

Ticker Company Date Price Price (5/3/16) (Loss) Stock Index Yield IndustryAAPL Apple Inc. 4/4/14 $75.97 $75.26 $95.18 (14.0%) 31.3% 14.4% 2.4% Communications EquipmentT AT&T Inc. 12/31/11 $30.24 $30.48 $38.91 (0.9%) 62.1% 74.2% 4.9% Communications ServicesCAT Caterpillar Inc. 11/7/14 $101.76 $102.36 $76.36 1.5% (20.8%) 3.2% 4.0% Construction & Agricultural MachineryCMI Cummins Inc. 10/3/14 $135.10 $136.18 $118.60 6.4% (9.0%) 7.3% 3.3% Misc. Capital GoodsDE Deere & Company 2/7/14 $86.56 $87.59 $83.40 9.2% 1.4% 15.8% 2.9% Construction & Agricul MachineryEMN Eastman Chemical Co. 2/6/15 $73.20 $74.67 $76.19 5.7% 5.1% 2.1% 2.4% Chemical ManufacturingETN Eaton Corporation 12/31/11 $43.53 $45.52 $63.29 1.1% 58.3% 74.2% 3.6% Electronic Instruments & ControlsEMR Emerson Electric Co. 8/7/15 $49.19 $50.05 $54.67 0.5% 12.5% (1.5%) 3.5% Scientific & Technical InstrumentsIBM IBM Corp. 10/2/15 $144.58 $149.54 $144.13 (3.6%) (1.7%) 3.6% 3.9% Computer ServicesIP International Paper Co. 4/4/14 $45.81 $45.69 $42.18 5.4% (1.1%) 14.4% 4.2% Paper & Paper ProductsIVZ Invesco Ltd. 6/6/14 $38.18 $37.82 $30.13 0.8% (16.0%) 8.2% 3.7% Investment ServicesMCD McDonald's Corp. 12/31/11 $100.33 $99.19 $128.40 0.6% 53.6% 74.2% 2.8% RestaurantsMSFT Microsoft Corp. 12/31/11 $25.96 $26.94 $49.78 (9.7%) 108.0% 74.2% 2.9% Software & ProgrammingOXY Occidental Petroleum 1/9/15 $77.54 $75.96 $75.57 12.0% 4.7% 3.3% 4.0% Oil & Gas - IntegratedPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $103.56 0.5% 75.6% 74.2% 2.9% Beverages (Non-Alcoholic)PG Procter & Gamble Co. 12/7/12 $70.29 $70.89 $81.10 (2.7%) 27.8% 52.5% 3.3% Personal & Household ProductsQCOM Qualcomm, Inc. 3/6/15 $71.51 $72.60 $50.73 (1.2%) (27.7%) 0.6% 4.2% Communications EquipmentSSI Stage Stores Inc. 8/7/15 $16.67 $16.58 $7.20 (8.7%) (54.3%) (0.7%) 8.3% Retail (Apparel)TGT Target Corporation 12/31/11 $51.22 $51.28 $79.99 (3.4%) 74.9% 74.2% 2.8% Retail (Department & Discount)TXN Texas Instruments 4/5/13 $34.20 $34.80 $57.20 (0.7%) 79.6% 38.0% 2.7% SemiconductorsUNP Union Pacific Corp. 7/2/15 $96.66 $97.23 $86.77 9.7% (9.0%) (0.0%) 2.5% RailroadsWEC WEC Energy Group 12/31/11 $34.96 $34.68 $58.95 (3.1%) 117.4% 74.2% 3.4% Electric UtilitiesWFC Wells Fargo & Co. 12/7/12 $33.23 $33.40 $50.00 3.3% 63.9% 52.5% 3.0% Regional BanksWYN Wyndham Worldwide Corp. 3/4/16 $76.04 $75.36 $70.95 (7.2%) (5.2%) 4.6% 2.8% Hotels & MotelsData as of 5/3/2016. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

Table 1. Calculating Reinvestment Amount

1) Calculate the average position dollar value for the portfolio:Total dollar value of portfolio ÷ Number of holdings

2) Calculate amount needed to bring stock position size up to average:Average position dollar value – Stock total dollar value in portfolio

Hypothetical Example Using Stage Stores Inc. (SSI)

Total dollar value of portfolio = $156,000SSI current total dollar value in portfolio = $4,000

1) Average position dollar value for the portfolio:$156,000 ÷ 24 = $6,500

2) Amount to reinvest into SSI to bring its position up to the average amount: $6,500 – $4,000 = $1,500

$1,500 should be reinvested into Stage Stores.

4 May 2016

$80,0001/3/2012 7/3/2012 1/3/2013 7/3/2013 1/3/2014 7/3/2014 1/3/2015 7/3/2015 1/3/2016

$90,000

$100,000

$110,000

$120,000

$130,000

$140,000

$150,000

$160,000

$170,000

$180,000Growth of $100,000

AAII Dividend Investing Portfolio

Performance

Dividend Yield 3.2% 2.0%

Total Return

Income Return

Capital Gain/(Loss)

Total Return

Income Return

Capital Gain/(Loss)

April (0.2%) 0.1% (0.3%) 0.5% 0.0% 0.5%2016 YTD 5.5% 1.0% 4.5% 0.7% 0.5% 0.2%2015 (7.7%) 2.9% (10.6%) 0.4% 1.9% (1.5%)2014 12.2% 3.0% 9.2% 12.9% 2.0% 10.9%2013 36.5% 3.6% 32.9% 32.6% 2.3% 30.3%2012* 10.2% 3.5% 6.7% 14.3% 2.2% 12.1%From Inception 64.3% 19.7% 44.6% 73.1% 13.2% 59.9%Performance as of 5/4/2016

Dividend Investing Portfolio Dow Jones U.S. Index (IYY)

Dividend Investing Portfolio* Dow Jones U.S. Index (IYY)

*The AAII Dividend Investing portfolio started on January 3, 2012. The portfolio is run as if managed by a subscriber and includes delays in reaction time to portfolio alerts, actual commissions and bid-ask spreads.

AAII Dividend Investing Portfolio

Performance of DI Portfolio

(OXY) stock price 12.0% during the month. Light sweet crude oil finished the month priced at around $46 a bar-rel, up 16% during April and up 44% from its recent low point in late January. Occidental’s board of directors declared a regular quarterly dividend of $0.75 per share payable on July 15, 2016, to stockholders of record as of June 10, 2016. The stock will trade ex-dividend on Wednesday, June 8, 2016. The divi-dend was unchanged from the previous quarter, and we await Occidental’s quar-terly earnings results to gain a better

feel for their dividend policy going forward. Occidental’s dividend yield is an attractive 4.0%, but its earnings and cash flow have been hurt by the rapid decline in oil prices.

During the January conference call, president and CEO Vicki A. Hollub said, “based on the cash that we have on hand and what we project our situation will be over the next few years, we do expect to be able to make it through this cycle and get back to reasonable oil prices and secure our dividend through-out this entire process…we don’t see

a threat to our dividend going through this cycle.” Occidental has paid quarterly dividends continuously since 1975 and has increased its dividend each year since 2002. The current annual rate is $3.00 per share.

Union Pacific Corp. (UNP) shares climbed 9.7% in April, making it the sec-ond-best performer in the DI portfolio for the month. The company announced first-quarter earnings that beat the consensus estimate by 5.7%, although profits fell 15% and revenues were down 14% from a year ago. First-quarter business volumes, as measured by total revenue carloads, declined 8% from a year ago. Volume declines in coal, indus-trial products, agricultural products, and intermodal more than offset growth in automotive. Chemicals volume was flat compared to 2015 as declines in crude oil and fertilizer carloads offset growth in other chemicals shipments.

Freight revenues for the quarter were down 1% for automotive, down 2% for chemicals, and down 6% for agricultural products. Intermodal was down 9%, industrial products were down 18% and coal declined 43%.

Railroads have been suffering from weak freight demand, especially for coal; coal shipments fell 34% for Union Pacific. However, the company contin-ues to make strides in its cost-cutting efforts and the prices it charges its cus-tomers are rising. In addition, CEO Lance Fritz pointed to several bright spots in the U.S. economy such as healthy growth in industrial chemicals and im-proving signs for construction, including more rock and lumber shipments.

Deere & Co. (DE) gained 9.2% during April, making it a top performer for the month. There was no stock-specific news that boosted the machinery man-ufacturer; however, there has seemingly been a change in sentiment surrounding many cyclical firms with global opera-tions: Investors are speculating that the worst may be over.

Deere’s diluted earnings per share declined 33% from 2014 to 2015. Based on the full-year 2016 consensus esti-mate provided by Thomson Reuters, earnings are expected to decline 29%

May 2016 5


from 2015 to 2016; however, only a 1% decline is estimated from 2016 to 2017.

Deere’s dividend yield of 2.9% is above its five-year average of 2.4%. Its payout ratio of 44% is above its five-year average of 27% but in line with the construction and agricultural machinery industry median.

For more on Deere & Co., see pages 10 and 11.

Cummins Inc. (CMI) gained 6.4% during April. Similar to Deere, Cummins lacked company-specific news to explain the gain during the month.

Just before press time, Cummins reported quarterly earnings of $1.87 per share, above the I/B/E/S consen-sus estimate of $1.78 per share. “Our results for the first quarter reflect solid execution of our cost reduction plans in the face of very challenging market conditions,” said COO Rich Freeland. “Benefits from restructuring actions, material cost reduction projects and lower warranty costs all helped to mitigate the impact of lower sales.” Cummins reaffirmed its full-year 2016 revenue guidance, estimating revenue between $17.4 billion and $18.2 billion.

Weakest Stocks in AprilApple Inc. (AAPL) reported its second-

quarter earnings for 2016, posting its first quarterly year-over-year revenue drop in 13 years. While the market was expecting the year-over-year decline, the results were weaker than expected and the forward guidance was also below consensus. The lack of year-over-year iPhone growth spooked investors, pushing down the stock price 14.0% during April.

Apple earned $50.6 billion in revenue and $1.90 in earnings per share, missing expectations by $1.37 billion and $0.10 per share, respectively. Apple’s 12.8% year-over-year drop in revenue was due mainly to slowing sales of the iPhone, which saw its first slide in an eight-year unbroken run of growth since its initial release. Apple sold 51.2 million iPhones in the second quarter, down from 61.2 million for the year-ago quarter. The average selling price of the iPhone declined to $642 from $691 one year

ago. It is worth noting that the average selling price will likely continue to drop as Apple just introduced the smaller, lower-priced iPhone SE this quarter. The iPhone SE will also lower margins during the quarter.

Service revenue continues to grow at Apple, up 20% year over year to $6 bil-lion. Service revenue consists of iTunes, App Store, Apple Music, AppleCare and Apple Pay. The healthy growth high-lights the longer tail of revenue from the Apple infrastructure. The service revenue points to the strength of Apple’s customer base and the ability to collect ongoing service revenue.

Apple generated strong operating cash flow of $11.6 billion and returned $10 billion to shareholders during the quarter. The company also announced that its board of directors has autho-rized an increase of $50 billion to the company’s program to return capital to shareholders.

The board approved a 9.6% increase to the quarterly dividend, declaring a dividend of $0.57 per share that is pay-able on May 12, 2016, to shareholders of record as of the close of business on May 9, 2016. The stock trades ex-dividend on Thursday, May 5, 2016. The increase boosts the dividend yield to 2.4% from 1.7% one year ago. The mar-ket’s disappointment in Apple’s quar-terly results has pushed the forward

and trailing price-earnings ratios to around 10.0 times earnings, well below the norm for the market, industry and company average.

For more on Apple, see pages 8 and 9.Microsoft Corp.’s (MSFT) stock price

declined 9.7% during April after it reported adjusted earnings per share of $0.62, which missed the consensus estimate of $0.64 per share, and offered revenue guidance below consensus. Microsoft reported GAAP revenues of $20.5 billion ($22.1 billion non-GAAP), in line with the consensus estimate (GAAP stands for generally accepted ac-counting principles). Operating income was $5.3 billion GAAP ($6.8 billion non-GAAP). Net income was $3.8 bil-lion GAAP ($5.0 billion non-GAAP). The announcement came as a surprise to in-vestors, who were expecting Microsoft’s recent cloud-computing focus to con-tinue to push the company forward.

Microsoft expects fiscal fourth-quarter revenues of $21.7 billion to $22.4 bil-lion, below the consensus estimate of $23.1 billion.

Microsoft’s dividend yield is now 2.9%, above its five-year average of 2.6%, but below its 3.6% level one year ago. During the last quarter, Microsoft returned $6.4 billion in cash to share-holders, composed of $3.6 billion in share repurchases and $2.8 billion in dividends.

Recent earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %AAPL Apple Inc. Apr 26 $1.900 $1.998 (4.9%)T AT&T Inc. Apr 26 $0.720 $0.691 4.2%CAT Caterpillar Inc. Apr 22 $0.670 $0.677 (1.0%)EMN Eastman Chemical Co. Apr 28 $1.710 $1.531 11.7%ETN Eaton Corporation Apr 29 $0.880 $0.850 3.5%IBM IBM Corp. Apr 18 $2.350 $2.094 12.2%IP International Paper Co. Apr 27 $0.800 $0.692 15.6%IVZ Invesco Ltd. Apr 28 $0.490 $0.539 (9.1%)MCD McDonald's Corp. Apr 22 $1.230 $1.164 5.7%MSFT Microsoft Corp. Apr 21 $0.620 $0.637 (2.7%)PEP PepsiCo, Inc. Apr 18 $0.890 $0.813 9.5%PG Procter & Gamble Co. Apr 26 $0.860 $0.816 5.4%QCOM Qualcomm, Inc. Apr 20 $1.040 $0.964 7.9%TXN Texas Instruments Apr 27 $0.650 $0.622 4.5%UNP Union Pacific Corp. Apr 21 $1.160 $1.097 5.7%WFC Wells Fargo & Co. Apr 14 $0.990 $0.973 1.7%WYN Wyndham Worldwide Corp. Apr 26 $1.120 $1.105 1.4%Data as of 5/3/2016. Sources: I/B/E/S and company releases.

6 May 2016

Months Ann'lDividend Ex-Dividend Date Ind Div Direct DRIP

Ticker Company Paid Date Payable Div Yield Invest PlanAAPL Apple Inc. 2, 5, 8, 11 Thu May 5, 2016 Thu May 12, 2016 $0.5700 � $2.28 2.4% -- --T AT&T Inc. 2, 5, 8, 11 Wed Apr 6, 2016 Mon May 2, 2016 $0.4800 $1.92 4.9% Yes YesCAT Caterpillar Inc. 2, 5, 8, 11 Thu Apr 21, 2016 Fri May 20, 2016 $0.7700 $3.08 4.0% Yes YesCMI Cummins Inc. 3, 6, 9, 12 Wed Feb 17, 2016 Tue Mar 1, 2016 $0.9750 $3.90 3.3% Yes YesDE Deere & Company 2, 5, 8, 11 Tue Mar 29, 2016 Mon May 2, 2016 $0.6000 $2.40 2.9% Yes YesEMN Eastman Chemical Co. 1, 4, 7, 10 Fri Mar 11, 2016 Fri Apr 1, 2016 $0.4600 $1.84 2.4% Yes YesETN Eaton Corporation 3, 5, 8, 11 Wed May 4, 2016 Fri May 20, 2016 $0.5700 $2.28 3.6% Yes YesEMR Emerson Electric Co. 3, 6, 9, 12 Wed May 11, 2016 Fri Jun 10, 2016 $0.4750 $1.90 3.5% Yes YesIBM IBM Corp. 3, 6, 9, 12 Fri May 6, 2016 Fri Jun 10, 2016 $1.4000 � $5.60 3.9% Yes YesIP International Paper Co. 3, 6, 9, 12 Fri Feb 12, 2016 Tue Mar 15, 2016 $0.4400 $1.76 4.2% Yes YesIVZ Invesco Ltd. 3, 6, 9, 12 Wed May 11, 2016 Fri Jun 3, 2016 $0.2800 � $1.12 3.7% Yes YesMCD McDonald's Corp. 3, 6, 9, 12 Fri Feb 26, 2016 Tue Mar 15, 2016 $0.8900 $3.56 2.8% Yes YesMSFT Microsoft Corp. 3, 6, 9, 12 Tue May 17, 2016 Thu Jun 9, 2016 $0.3600 $1.44 2.9% Yes YesOXY Occidental Petroleum 1, 4, 7, 10 Wed Jun 8, 2016 Fri Jul 15, 2016 $0.7500 $3.00 4.0% -- YesPEP PepsiCo, Inc. 1, 3, 6, 9 Wed Jun 1, 2016 Thu Jun 30, 2016 $0.7525 � $3.01 2.9% Yes YesPG Procter & Gamble Co. 2, 5, 8, 11 Thu Apr 14, 2016 Mon May 16, 2016 $0.6695 � $2.68 3.3% Yes YesQCOM Qualcomm, Inc. 3, 6, 9, 12 Fri May 27, 2016 Wed Jun 22, 2016 $0.5300 � $2.12 4.2% Yes YesSSI Stage Stores Inc. 3, 6, 9, 12 Fri Feb 26, 2016 Wed Mar 16, 2016 $0.1500 $0.60 8.3% -- --TGT Target Corporation 3, 6, 9, 12 Mon May 16, 2016 Fri Jun 10, 2016 $0.5600 $2.24 2.8% Yes YesTXN Texas Instruments 2, 5, 8, 11 Thu Apr 28, 2016 Mon May 16, 2016 $0.3800 $1.52 2.7% Yes YesUNP Union Pacific Corp. 3, 6, 9, 12 Thu Feb 25, 2016 Thu Mar 31, 2016 $0.5500 $2.20 2.5% Yes YesWEC WEC Energy Group 3, 6, 9, 12 Wed May 11, 2016 Wed Jun 1, 2016 $0.4950 $1.98 3.4% Yes YesWFC Wells Fargo & Co. 3, 6, 9, 12 Wed May 4, 2016 Wed Jun 1, 2016 $0.3800 � $1.52 3.0% Yes YesWYN Wyndham Worldwide Corp. 3, 6, 9, 12 Wed Mar 9, 2016 Thu Mar 24, 2016 $0.5000 � $2.00 2.8% -- --

� Quarterly dividend increased from prior quarter. Bold dates indicate dividend actions during this month.� Quarterly dividend decreased from prior quarter. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Data as of 5/3/2016.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

Falling 8.7% in April, Stage Stores Inc. (SSI) was the third-poorest performer in the DI portfolio for the month. There was no company-specific news in April for Stage Stores. Beyond the macroeco-nomic headwinds the company is fac-ing—weak oil prices and a strong dollar against the Mexican peso—its industry was fairly weak in April as well. The Dow Jones U.S. Apparel Retailers Index lost 6.5% for the month.

In the near term, the company’s chal-lenging operating environment does not appear to be headed for significant

improvement. For 2016, management projected a comparable sales decline of between 1% and 3%, and an over-all sales decline of 2.5% to 4.6% as it plans to close 30 stores. One encourag-ing development for the company is the recovery in oil prices. West Texas Intermediate crude was up nearly 25% in the four months ended April 29.

Shares of Wyndham Worldwide Corp. (WYN) fell by 7.2% last month. A nega-tive reaction by traders following the company’s first-quarter earnings report was the primary reason for the decline.

First-quarter earnings did beat expec-tations. Wyndham reported adjusted earnings of $1.12 per share, topping the I/B/E/S consensus estimate by $0.01 per share. The company also upped its full-year earnings guidance, from $5.46 to $5.60 per share to $5.61 to $5.75 per share, though it left its full-year revenue guidance unchanged at between $5.8 billion and $6.0 billion. The change in the earnings guidance reflects stock repurchases that occurred during the first quarter, which reduced the number of outstanding shares. ▪

May 2016 7


Est Consec- PayoutEPS Div First utive Ratio:

P/E Growth Growth Year Years FCFPS Liab MarketRatio 1 Yr 5 Yr Rate Rate Div Div 12 5 Yr (12 to Cap

Ticker (TTM) Current Ago Avg (3-5 Yr) (5 Yr) Paid Raised Month Avg Month) Assets (Mil)AAPL 10.6 2.4% 1.7% na 9.2% na 2012 4 23% 17% 21% 57% $519,424T 17.3 4.9% 5.5% 5.4% 8.8% 2.3% 1984 32 66% 136% 58% 69% $237,683CAT 36.5 4.0% 3.5% 2.6% 0.7% 11.6% 1933 22 142% 43% 65% 80% $45,398CMI 15.2 3.3% 2.5% 2.0% (1.4%) 32.0% 1948 6 45% 28% 49% 51% $19,864DE 15.3 2.9% 2.7% 2.4% 1.6% 15.7% 1971 11 44% 27% 181% 88% $26,465EMN 13.5 2.4% 2.2% 2.0% 6.3% 13.2% 1994 6 29% 26% 26% 75% $11,570ETN 14.9 3.6% 3.2% 3.1% 8.0% 15.3% 1923 7 54% 45% 55% 51% $28,943EMR 14.6 3.5% 3.2% 3.0% 4.9% 7.0% 1947 59 50% 53% 67% 65% $35,384IBM 10.9 3.9% 3.0% 2.2% 2.7% 14.9% 1915 21 39% 28% 34% 87% $141,182IP 18.9 4.2% 3.1% 3.2% 7.3% 32.6% 1946 4 73% 63% 74% 87% $17,914IVZ 13.4 3.7% 2.0% 2.7% 10.0% 19.6% 1994 12 40% 41% na 63% $13,085MCD 24.7 2.8% 3.6% 3.2% 10.6% 8.8% 1976 38 67% 59% na na $112,272MSFT 37.9 2.9% 3.6% 2.6% 8.6% 19.0% 2003 4 92% 45% 44% 59% $392,237OXY na 4.0% 3.7% 3.0% 183.7% 15.1% 1974 13 na na (112%) 44% $58,220PEP 29.6 2.9% 3.0% 3.0% 6.5% 7.9% 1952 44 80% 58% 54% 84% $148,732PG 27.1 3.3% 3.3% 3.1% 6.1% 7.5% 1890 60 81% 65% 59% 54% $212,309QCOM 16.0 4.2% 2.8% 2.0% 11.3% 20.1% 2003 14 60% 35% 44% 41% $76,575SSI 39.6 8.3% 3.0% 2.5% na 18.3% 2005 6 318% 140% (33%) 49% $203TGT 15.2 2.8% 2.8% 2.6% 11.4% 19.0% 1967 44 41% na 30% 68% $48,470TXN 20.2 2.7% 2.6% 2.5% 10.0% 23.4% 1962 12 49% 46% 38% 39% $58,999UNP 16.2 2.5% 2.1% 2.1% 7.1% 27.4% 1899 5 41% 33% 58% 63% $74,440WEC 25.0 3.4% 3.5% 3.3% 6.8% 16.8% 1939 13 73% 57% 2005% 70% $18,333WFC 12.3 3.0% 2.7% 2.6% 9.4% 49.1% 1939 6 36% 28% 52% 89% $254,936WYN 14.2 2.8% 2.6% 1.9% na 28.5% 2007 7 36% 31% 25% 92% $8,018Data as of 5/3/2016. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Payout Ratio:Dividend Yield EPS

Dividend Analysis

Ann’l Ind Div: The total dollar amount of cash dividends forecast to be paid over the next 12 months.Consecutive Years Div Raised: The number of current years the company has continuously increased the annual dollar amount of the dividend.Date Payable: The date a company will distribute (or has distributed) the most recent quarterly dividend.DI Purchase Price: The average cost basis per share of the stocks purchased for the real DI tracking portfolio. The average cost basis includes any commissions incurred for the purchase and is adjusted for stock splits and spin-offs, if appropriate.Direct Invest: Denotes companies that offer a direct investment program, which allows investors to buy their initial shares directly from a company, without having to go through a broker. Div Growth Rate (5 Yr): The compound annual percentage change in dividends per share over the past five years. Positive numbers show an increase in the dollar amount of dividends paid.Div Yield (or Current Dividend Yield): Projected dividend payments for the next 12 months divided by the current stock price. This number shows, in percentage form, how much income can be expected relative to the current stock price. Dividend Yield—1 Year Ago: The stock’s dividend yield (dividends divided by price) from

one year ago. 5 Year Average: The stock’s average dividend yield over the past five years.DRIP Plan: Denotes companies that offer a dividend reinvestment plan, which allows shareholders to use cash dividends to acquire additional shares of stocks, including partial amounts. Est EPS Growth Rate (3-5 Yr): The forecast annual growth rate in earnings per share for the next three to five years.Ex-Dividend Date: The date used by the exchanges to determine who owns shares of a company. This is two trading days before the record date. Investors must purchase shares prior to the ex-dividend date to receive the dividend.First Year Dividend Paid: The first year a company paid its dividend. If a dividend was suspended, the date is the first year the dividend was reinstated.Liab to Assets: Total liabilities divided by total assets. A measure of balance sheet strength, lower percentages signal a lower proportionate amount of debt.Market Cap (Mil): A measure of company size, this is the current share price multiplied by the number of shares outstanding, expressed in millions of dollars.Months Dividends Paid: The calendar months the company has typically paid dividends to shareholders (1 = January, 2 = February, 3 = March, etc.).

Definitions of Terms Used in Tables

Payment Amount: The dollar amount of the current quarterly dividend payment. An up arrow () indicates that the dividend is higher than that paid last quarter. If no arrow is displayed, the dividend has not changed from the prior quarter.Payout Ratio: EPS—12 Month: The percentage of earnings paid out as dividends over the latest 12-month period. 5 Year Average: The average payout ratio for the previous five years. A payout ratio of 100% means the dollar amount of dividends paid equals the dollar amount of profits earned.Payout Ratio: FCFPS (12 Month): The percentage of free cash flow per share paid out as dividends over the latest 12-month period. Free cash flow is cash flow from operating activities less capital expenditures. A measure of a company’s ability to both pay dividends and increase its cash balance.P/E Ratio (TTM): The price-earnings ratio (price divided by earnings) based on reported earnings per share for the previous 12 months (trailing 12 months). Total Return Since Purchase—Stock: The change in a stock’s price plus the value of all dividends received during the holding period divided by the commission-adjusted purchase price. Index: The total return of the benchmark index since the stock was added to the DI tracking portfolio, expressed as a percentage.

8 May 2016

Apple Inc. designs, manufactures and markets mobile com-munication and media devices, personal computers and por-table digital music players. The company also sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. Products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and Macintosh operating systems, iCloud cloud storage ser-vice, and a variety of accessory, service and support offerings.

Why Own AAPL?Apple’s products are synonymous with quality and ease

of use. Apple famously revolutionized the wireless phone industry by releasing the iPhone and successfully launched a new product line in the iPad that brought tablets to main-stream consumers. The Apple Watch and Apple Pay have the potential to again revolutionize how people interact with technology.

The company’s product ecosystem is, almost undisputedly, more attractive than its competitors. The iCloud allows users to quickly store and sync music, video and other data through a range of Apple devices. Though most smartphones and tab-lets are similar as far as hardware and offer their own unique advantages, Apple still enjoys comparatively high switching costs due to its robust ecosystem.

The launches of Apple Pay, Apple Music and the Apple Watch give consumers more reasons to stay within the eco-system. Larger retailers such as Starbucks are set up to accept Apple Pay. Analysts estimate that 12 million Apple Watches were sold during its first year, accounting for 61% of global smart watch sales.

Apple’s current price-earnings ratio of 10.6 is below the 24.3 median of the technology sector and 25.2 median of the communications equipment industry. Apple’s forward price-earnings ratio is 11.4 times 2016 earnings and 10.4 times 2017 earnings—valuation numbers that are very low

relative to its historical growth rate. Looking forward, analyst are concerned about slowing growth of core Apple products including iPhones, iPads and Macs.

Sales have increased at a 14.3% average annual rate over the last three years and at a 29.1% average annual rate over the last five years. Net income has expanded at an 8.6% aver-age annual rate over the last three years and at 30.7% a year, on average, over the last five years. Going forward, analysts expect the firm to earn $8.33 per share for fiscal-year 2016 ending in September and $9.15 per share for fiscal-year 2017. The consensus long-term (three to five years) annual growth rate in earnings per share is 9.2%, with a range of 2.0% to 20.0%. Projected earnings and the long-term term growth rate have been reduced over the last quarter.

Dividend AnalysisThe stock trades with a 2.4% dividend yield. Apple’s strong

free cash flow and large cash balance give it the ability to raise its dividend. Apple has in excess of $232.9 billion in short-term cash plus marketable securities. However, $208.9 billion of this total (90%) is outside the United States and subject to taxation. Apple has been using its domestic cash and cash flow coupled with borrowing to fund its dividend payments and share repurchases.

Apple increased its quarterly dividend this past April by 9.6%, from $0.52 per share to $0.57 per share. Its current free cash flow payout ratio is 20.8% and its earnings payout ratio is 23.0%. Apple has been aggressively buying back its shares and has reduced its share count by 17%.

RisksApple suffered its first year-over-year revenue decrease in

13 years during its most recent quarter and is expected to have a year-over-year decline in sales and earnings per share for its complete 2016 fiscal year. Apple operates in a highly competitive environment with short product upgrade cycles. IPhone sales account for 65% of revenue, making it difficult for any new product to have a major impact on the overall company growth. Services revenue is growing from Apple’s strong customer infrastructure; however, services account for only 12% of revenue.

The company’s two major product lines, phones and tab-lets, are approaching saturation in developed economies.

Apple does have opportunities in less-developed parts of the world, but the company does not compete on price or of-fer less-expensive phones that would be attractive to consum-ers in less-developed markets. In order for the company to continue to succeed and increase its already massive pres-ence in developed markets, it must continue to innovate and develop new, pioneering products in different product lines. It is unclear whether new products such as Apple Pay, the Apple Watch or Apple Music will gain enough traction in the marketplace to impact overall company performance. ▪

Apple Inc. (AAPL)

Bullish Factors• Trades at a discounted price-earnings ratio relative to

sector and industry peers• Aggressively returning its massive cash position to

shareholders• Loyal customer base willing to pay premium prices

Bearish Factors• Operates in a highly competitive and fast-moving

environment• Greater saturation of global smartphone market is

leading to slowing growth• The launch of new products such as Apple Pay and the

Apple Watch may not succeed, hurting diversification of product offerings and growth opportunities

May 2016 9


AAPL $95.18 ($132.97 - $92.00)

Addition Alert Date: 4/4/2014Price at Alert: $75.97 Risk Index: 2.04Market Cap (Million): $519,424.2Avg Daily Dollar Volume (Million): $3,795.2Primary Sector: TechnologyPrimary Industry: Communications Equipment

Indicated Annual Dividend: $2.28 Multiples Current 9/2015 9/2014 9/2013 9/2012 9/2011Latest Dividend Increase: Date Dividend Yield (%): Avg 2.4% 1.7 1.9 2.4 0.5 --Latest Dividend Increase: % 9.6% Dividend Yield (%): High 2.2 2.6 3.0 0.6 --Dividend Yield: Current 2.4% Dividend Yield (%): Low 1.5 1.5 2.0 0.4 --Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 10.6 12.3 14.7 12.1 12.6 13.3Dividend Paid Since: 2012 Price/Earnings (Industry) 25.2 22.6 25.6 18.6 14.4 17.3Number of Years of Div Increases: 4 Price/Book Value 4.0 5.5 5.2 3.6 4.4 4.5Direct Invest Option: No Price/Sales 2.3 2.8 3.2 2.6 3.3 3.2DRIP Plan: No Ratios Current 9/2015 9/2014 9/2013 9/2012 9/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 23.0 21.3 28.0 28.5 5.9 0.0

$0.5700 Payout Ratio: FCFPS (%) 20.8 16.3 22.2 23.7 6.0 0.0$0.5200 Gross Margin (%) 39.8 40.1 38.6 37.6 43.9 40.5$0.5200 Operating Margin (%) 29.4 30.5 28.7 28.7 35.3 31.2$0.5200 Operating Margin (%) (Ind) 2.1 1.6 0.8 (0.2) (0.6) 2.9$0.5200 Net Margin (%) 22.3 22.8 21.6 21.7 26.7 23.9$0.4700 ROE (%) 40.2 46.2 33.6 30.6 42.8 41.7

Rel Strgth ROE (%) (Industry) 3.6 4.2 2.2 1.8 3.4 4.9Rank ROA (%) 17.4 20.4 18.0 19.3 28.5 27.1

4 Week 8% Current Ratio 1.3 1.1 1.1 1.7 1.5 1.613 Week 27% Liabilities to Assets (%) 57.3 58.9 51.9 40.3 32.9 34.226 Week 25% Liab to Assets (%) (Ind) 46.9 43.0 47.7 40.4 39.3 39.652 Week 36% Asset Turnover 0.8 0.9 0.8 0.9 1.1 1.1

Financial Statements TTM 9/2015 9/2014 9/2013 9/2012 9/2011Growth 5 Year Sales ($M) 227,535 233,715 182,795 170,910 156,508 108,249Dividend -- Gross Income ($M) 90,573 93,626 70,537 64,304 68,662 43,818Sales 29.1% Depreciation ($M) 0 0 0 0 0 0Net Income 30.7% Unusual/Extra ($M) 0 0 0 0 0 0EPS Basic 33.3% Operating Income ($M) 66,864 71,230 52,503 48,999 55,241 33,790EPS Dil Cont 33.6% Interest Expense ($M) 1,036 733 384 136 0 0

Pretax Income ($M) 68,250 72,515 53,483 50,155 55,763 34,205SUE Score Net Income ($M) 50,678 53,394 39,510 37,037 41,733 25,922

(1.80) Operating Cash Flow ($M) 67,527 81,266 59,713 53,666 50,856 37,5290.60 Investing Cash Flow ($M) (46,888) (56,274) (22,579) (33,774) (48,227) (40,419)

Annual Financing Cash Flow ($M) (13,614) (17,716) (37,549) (16,379) (1,698) 1,4449/2017 Capital Expenditures ($M) 12,352 11,488 9,813 9,076 9,402 7,452

44 Net Cash Flow ($M) 7,025 7,276 (415) 3,513 931 (1,446)$9.15 EPS Basic ($) 9.04 9.28 6.49 5.72 6.38 4.01

$10.00 EPS Diluted Cont ($) 8.99 9.22 6.45 5.68 6.31 3.95 # Rev Up 0 EPS DC Year/Year Chg (%) 11.1 42.8 13.6 (9.9) 59.5 82.6 # Rev Down 38 Dividends/Share ($) 2.08 1.98 1.82 1.63 0.38 0.00Three Mos. Ago $10.01 Dividend Year/Year Chg (%) 10.6 8.8 11.8 330.2 -- --Year/Year Chg 9.9% Free Cash Flow/Share ($) 10.01 12.13 8.20 6.88 6.33 4.65

3/2016 12/2015 9/2015 6/2015 Total Cash ($M) 55,283 41,601 25,077 40,546 29,129 25,952$1.90 $3.28 $1.96 $1.85 $8.99 Goodwill/Intangibles ($M) 9,092 9,009 8,758 5,756 5,359 4,432$2.33 $3.06 $1.42 $1.28 $8.09 Total Assets ($M) 305,277 290,479 231,839 207,000 176,064 116,371

Long-Term Debt ($M) 69,374 53,463 28,987 16,960 0 03/2016 12/2015 9/2015 6/2015 Total Total Liabilities ($M) 174,820 171,124 120,292 83,451 57,854 39,756$9.17 $13.65 $9.12 $8.66 $40.59 Book Value/Share ($) 23.66 20.75 18.33 19.07 18.06 11.84

$10.01 $12.77 $7.10 $6.23 $36.10 Avg Shares Outst'g (M) 5,514 5,753 6,086 6,477 6,544 6,470Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 5/3/2016.

41$9.08

$1.78 $9.06$1.40

Est Surprise

EPS Estimates

11.1%11.1%

Apr 26, 2016Jan 26, 2016

May 14, 2015Feb 12, 2015

Annual9/2016

3 Year

(4.9%)1.6%

% Surp

Year Ago

TTM

TTMSales/Sh (Qtr)

CurrentMonth Ago

# of Estimates

EPS (Qtr)

Year Ago

035

$1.77

37

(75.9%)

Apple designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. The company's products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and a variety of accessory, service and support offerings.

Jul 21, 2015

Apr 26, 2016Jan 26, 2016Oct 27, 2015

Apr 26, 2016

Aug 6, 2015 Aug 13, 2015

NA

Nov 12, 2015

May 12, 2016Feb 11, 2016Feb 4, 2016

Nov 5, 2015

Apr 27, 2015Jan 27, 2015

May 7, 2015

May 5, 2016

Feb 5, 2015

(9.6%)

(3%)(22%)(27%)

73.6%7.2%6.0%

$8.33

EPS$1.90$3.28

44

Quarterly6/2016

14.3%

0

Stock

13.5%

0.790.74

0.84(15%)

13.3%

TTM

IndexGainRel Strgth

0.91

8.6%

10.6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$20

$40

$60

$80

$100

$120

$140

$160

May 2011 May 2012 May 2013 May 2014 May 2015 May 2016

Div

iden

d Yi

eld Share Price

10 May 2016

Deere & Co. is best known for its John Deere farming equipment. The company, along with its subsidiaries, oper-ates in three segments: agriculture and turf, construction and forestry, and financial services. The agriculture and turf seg-ment (which contributed 70% to fiscal-2015 sales) primarily manufactures and distributes a full line of agriculture and turf equipment and related service parts. The construction and forestry segment (21% of fiscal-2015 sales) primarily manufac-tures and distributes a broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. The products and services produced by these two segments are marketed primarily through inde-pendent retail dealer networks and major retail outlets. The financial services segment (9% of fiscal-2015 sales) primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment.

Why Own DE?Deere & Co. is the largest manufacturer of farm equipment

in the world. It makes a broad range of industrial equipment, primarily used by the construction and forestry industries. Morningstar estimates that Deere holds more than a 50% share of the North American farm equipment market, largely due to the machinery’s high resale value and solid support system.

Deere’s return on equity (ROE) of 24.7% is roughly three times its industry median of 8.1%. The company’s ROE has been at least double that of its industry median in each of the last five years.

While revenue and earnings have taken a hit due to a challenging global agricultural market, analysts are expecting earnings of $4.09 per share in fiscal 2016 ending in October, slightly pulling back to $4.05 per share in fiscal 2017 before increasing to $4.71 per share in fiscal 2018.

Deere & Co. has an attractive valuation, with a current price-earnings ratio of 15.3. This is slightly above its five-year average of 11.4 and below the 21.2 median for the

construction and agricultural machinery industry. Although the company’s operations are cyclical and are ex-

periencing difficulty (as explained in the risks section below), Deere is well-positioned for the long term.

Dividend AnalysisDeere & Co. has a history of returning excess cash to its

shareholders in the form of dividends and share buybacks. The company has paid a dividend every year since 1971 and has increased its annual payout for 11 consecutive years. Its latest increase was announced on May 28, 2014, when the quarterly dividend payment went up 17.6%, to $0.60 per share. The dividend has grown at a 15.7% annual rate over the last five years. The company did not increase its quarterly dividend in calendar-year 2015; however, its total annual payout was higher in 2015 than 2014.

Deere currently trades with a 2.9% dividend yield, above its five-year average of 2.4%. Deere has a low current earn-ings payout ratio of 43.8%. On its year-end 2015 Investor Day, the company restated its commitment to “consistently and moderately” raising the dividend and targeting a 25% to 35% payout ratio of mid-cycle earnings.

The company has also been consistently using excess cash to repurchase shares, spending $14.3 billion since 2004. Deere remains committed to looking at share repurchases as an option to enhancing shareholder value. Since 2004, Deere has returned roughly 65% of its cash from operations to shareholders.

RisksDeere operates in a variety of highly competitive global and

regional markets. The company competes worldwide with a number of other manufacturers and distributors of similar products. Aggressive pricing, unanticipated product or manu-facturing delays, or a failure to price its products competi-tively could adversely affect Deere’s results.

Deere’s sales are strongly influenced by commodity prices and farm income. A drop in these may negatively affect the demand for large farm equipment. An extended downturn in crop prices can significantly dampen revenues and prof-its. The company cited these issues in its first-quarter 2016 earnings announcement: Sales were heavily weighed down by weak global demand and are expected to decline 7% in fiscal-year 2016 compared to 2015. Deere’s agriculture and turf segment is seeing weakness throughout the U.S., Canada, Asia and South America.

Poor or unusual weather conditions, particularly during the planting and early growing season, can significantly affect the purchasing decisions of Deere’s customers, particularly the purchasers of agriculture and turf equipment. The timing and quantity of rainfall are two of the most important factors in agricultural production. Natural disasters such as regional floods, hurricanes and droughts can all have significant nega-tive effects. ▪

Deere & Company (De)

Bullish Factors• Dominant position in farm equipment industry with a

wide range of products• Current price-earnings ratio below industry and sector

medians• Company has a low payout ratio and is aggressive at

repurchasing shares

Bearish Factors• Operates in highly competitive industry • Sales influenced by commodity prices and farming

income, neither of which Deere has influence over• Analysts predict pullback in fiscal 2016 earnings

May 2016 11


Addition Alert Date: 2/7/2014Price at Alert: $86.56 Risk Index: 1.38Market Cap (Million): $26,465.3Avg Daily Dollar Volume (Million): $292.6Primary Sector: Capital GoodsPrimary Industry: Construction & Agricultural Machinery

Indicated Annual Dividend: $2.40 Multiples Current 10/2015 10/2014 10/2013 10/2012 10/2011Latest Dividend Increase: (Date) Dividend Yield (%): Avg 2.9 2.8 2.6 2.3 2.2 1.9Latest Dividend Increase: (%) 17.6% Dividend Yield (%): High 3.3 2.8 2.5 2.6 2.5Dividend Yield: Current 2.9% Dividend Yield (%): Low 2.4 2.3 2.1 2.0 1.5Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 15.3 14.7 10.1 9.6 10.4 12.1Dividend Paid Since: 1971 Price/Earnings (Industry) 21.2 19.6 18.6 18.1 14.9 15.2Number of Years of Div Increases: 11 Price/Book Value 4.0 4.2 3.5 3.3 4.6 4.9Direct Invest Option: Yes Price/Sales 1.0 1.0 0.9 0.9 0.9 1.0DRIP Plan: Yes Ratios Current 10/2015 10/2014 10/2013 10/2012 10/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 43.8 41.3 25.5 21.7 23.2 22.7

$0.6000 Payout Ratio: FCFPS (%) 180.8 87.6 93.0 87.2 (74.6) 98.3$0.6000 Gross Margin (%) 30.1 27.6 30.0 31.2 29.8 30.6$0.6000 Operating Margin (%) 11.6 11.9 15.5 16.7 15.3 15.6$0.6000 Operating Margin (%) (Ind) 6.9 7.6 9.7 8.9 10.6 8.5$0.6000 Net Margin (%) 6.5 6.8 8.8 9.4 8.5 8.7$0.6000 ROE (%) 24.7 24.5 32.7 41.3 44.9 42.8


4 Week 77% Current Ratio -- -- -- -- -- --13 Week 56% Liabilities to Assets (%) 88.2 88.4 85.2 82.8 87.8 85.926 Week 73% Liab to Assets (%) (Ind) 59.3 55.4 53.2 52.6 56.5 58.752 Week 55% Asset Turnover 0.5 0.5 0.6 0.7 0.7 0.7

Financial Statements TTM 10/2015 10/2014 10/2013 10/2012 10/2011Growth 5 Year Sales ($M) 28,004 28,436 36,067 37,795 36,157 32,013

Dividends 15.7% Gross Income ($M) 8,442 7,853 10,816 11,781 10,782 9,785Sales 1.8% Depreciation ($M) 0 577 494 389 339 306Net Income 0.8% Unusual/Extra ($M) 0 0 0 0 0 0EPS Basic 5.7% Operating Income ($M) 3,237 3,378 5,586 6,309 5,517 4,982EPS Dil Cont 5.8% Interest Expense ($M) 673 974 659 741 783 759


1.20 Operating Cash Flow ($M) 3,473 3,740 3,526 3,254 1,168 2,3266.30 Investing Cash Flow ($M) (1,592) (1,059) (2,881) (4,821) (4,004) (2,621)

Annual Financing Cash Flow ($M) (2,280) (2,119) (288) 407 3,880 14010/2017 Capital Expenditures ($M) 3,053 2,826 2,659 2,375 2,121 1,681

23 Net Cash Flow ($M) (515) 375 283 (1,148) 1,005 (143)$4.05 EPS Basic ($) 5.48 5.81 8.71 9.18 7.72 6.71$4.15 EPS Diluted Cont ($) 5.45 5.77 8.63 9.09 7.63 6.63

# Rev Up 0 EPS DC Year/Year Chg (%) (30.0) (33.2) (5.0) 19.1 15.2 52.3 # Rev Down 4 Dividends/Share ($) 2.40 2.40 2.22 1.99 1.79 1.52Three Mos. Ago $4.42 Dividend Year/Year Chg (%) 3.9 8.1 11.6 11.2 17.8 31.0Year/Year Chg (1.0%) Free Cash Flow/Share ($) 1.33 2.74 2.39 2.28 (2.40) 1.55

1/2016 10/2015 7/2015 4/2015 Total Cash ($M) 3,460 4,162 3,787 3,504 4,652 3,647$0.80 $1.08 $1.53 $2.03 $5.45 Goodwill/Intangibles ($M) 778 790 860 922 1,710 1,719$1.12 $1.83 $2.18 $2.65 $7.79 Total Assets ($M) 56,036 57,948 61,336 59,521 56,266 48,207

Long-Term Debt ($M) 24,533 23,833 24,381 21,578 22,453 16,9601/2016 10/2015 7/2015 4/2015 Total Total Liabilities ($M) 49,446 51,204 52,274 49,256 49,424 41,407

$17.46 $20.82 $22.91 $24.24 $85.44 Book Value/Share ($) 20.83 20.21 24.97 26.64 17.23 16.29$18.60 $25.50 $24.61 $27.14 $95.85 Avg Shares Outst'g (M) 316 334 363 385 397 417

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 5/3/2016.

2.4% (2.8% - 2.1%)

May 2, 2016Feb 1, 2016Nov 2, 2015

Est Surprise

Mar 2, 2015Mar 27, 2015Feb 25, 2015

8%

Deere & Company is organized in three major business segments. The agriculture and turf segment manufactures and distributes a full line of agriculture and turf equipment and related service parts. The construction and forestry segment manufactures and distributes a broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. The financial services segment finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment.

May 27, 2015 Jun 26, 2015

Rel StrgthDec 3, 2014 Dec 29, 2014

Feb 24, 2016Dec 2, 2015Aug 26, 2015 Sep 28, 2015

Dec 29, 2015Mar 29, 2016

May 1, 2015

Nov 25, 2015

% Surp

Gain

10.3%(7.7%)

TTM3.9%

(19.5%)

(30.2%)

Index

$0.80$1.08

Feb 19, 2016

(8.9%)(9.0%)

0.94

4/2016Quarterly

Stock

1.031.09

1.0911%10%

10/2016

3 Year

(8%)

(37.0%)

(30.0%)

EPS

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Current

EPS (Qtr)

2$4.24

(27.1%)

01

$1.51

0

(29.2%)

EPS Estimates# of Estimates

Month Ago

May 28, 2014

13.6%44.8%Annual

(14.1%)

Aug 3, 2015

19

$4.09$1.48

23$4.09

$1.48

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$20

$40

$60

$80

$100

$120

May 2011 May 2012 May 2013 May 2014 May 2015

Div

iden

d Yi

eld Share Price

De $83.40 ($98.23 - $70.16)

12 May 2016

McDonald’s Corp. is the largest fast-food company in the world, franchising and operating McDonald’s restaurants. At the end of December 2015, there were 36,525 restaurants in 119 countries. Of these, 30,081 are franchised, licensed or affiliated and the company operates the rest. In 2015, 64.9% of sales came from company-owned stores and 35.1% from franchised, licensed and affiliated restaurants.

The company began operating under a new organizational structure on July 1, 2015: U.S. (50.5% of 2015 operating in-come); international lead markets, which includes established markets such as Australia, Canada, France, Germany and the U.K. (38.0%); high-growth markets, which consists of markets with relatively higher restaurant expansion and franchising potential such as China, Russia, and South Korea (11.8%); and foundational markets, which are the remaining markets in the system and which also includes corporate activities.

Why Own MCD?On November 10, 2015, senior management provided an

update on the company’s turnaround plan. This included an increased refranchising target to 4,000 restaurants through 2018 with a new long-term goal of increasing global fran-chised stores to 95% from the previous goal of 90%; a net an-nual general and administrative savings target increase from $300 million to $500 million by the end of 2017; and plans to optimize the company’s capital structure and increase the cash returned to shareholders target to roughly $30 billion for the three-year period ending 2016.

Accelerating its refranchising program will reduce the com-pany’s capital requirements and boost margins and profitabil-ity, while not negatively affecting free cash flow.

The company has also been revamping its menu, including the rollout last year of all-day breakfast menu items and the new “McPick2” value menu.

Early indications are that these initiatives may be working. Worldwide sales at its existing restaurants rose 6.2% dur-ing the first quarter, spurred by growth in U.S. comparable

sales of 5.4%. Same-store sales for its high growth markets increased 3.6%. Results were especially encouraging in China and Japan, as comparable sales for the quarter climbed 7.2% and 27%, respectively, after the company had been struggling in the wake of a food quality scandal with one of its suppliers.

Looking ahead, the company expects system-wide sales growth of 3% to 5% in 2016 and operating income growth of 5% to 7%. McDonald’s is also projecting capital expenditures of approximately $2 billion, split between opening roughly 1,000 new restaurants and reinvesting in existing locations.

Consensus earnings estimates now forecast 15.6% earnings growth in fiscal 2016, followed by an 11.9% increase in 2017. Analysts polled by I/B/E/S are expecting earnings to grow, on average, by 10.6% over the next three to five years.

While the stock is currently trading at a premium to its historical five-year price-earnings ratio (24.7 versus 18.5), its price-earnings ratio based on 2016 forecasted earnings of $5.54 is a bit more reasonable at 23.2.

Dividend AnalysisSince its first dividend payment in 1976, the company has

increased it every year. Shares currently trade with a 2.8% dividend yield, which is below the five-year average yield of 3.2%. On November 10, 2015, the company announced a 4.7% dividend increase. Over the last five years the dividend has grown by 8.8% on average.

McDonald’s current earnings payout ratio is 66.7%, off its seven-year peak of 71.3% last year, which may be the reason that last year’s dividend increase was well below the histori-cal average. Last year, the company issued $10 billion in debt to fund its share buybacks and dividend increase. As long as the company is able to meet its debt obligations, taking on additional debt should improve shareholder returns.

McDonald’s has a long history of returning cash to share-holders via share repurchases. The company plans to return $30 billion to shareholders between 2014 and 2016, 80% more than it returned between 2011 and 2013.

RisksUp until the last three quarters, McDonald’s had been fac-

ing difficult comparable sales for several quarters in a row. The company is facing challenges on multiple fronts: a weak global economy, changing consumer tastes and increased competition. It has also had some product and marketing mis-steps in recent years.

McDonald’s focus on its value menu offerings boosted traf-fic in recent quarters but has narrowed operating margins, hurting earnings.

The company operates in a fiercely competitive market-place. Historical rivals such as Burger King Worldwide (BKW) and Wendy’s Co. (WEN) have been aggressively revamping their menus and lowering prices. Yum! Brands (YUM) is look-ing to expand its footprint in prime markets such as Russia, India and Europe. ▪

McDonald’s Corp. (MCD)

Bullish Factors• Indications are that turnaround plan is gaining traction

and boosting results• Rising number of franchises should boost margins and

earnings, while lowering capital expenditures• Long history of dividend increases and solid dividend

yield

Bearish Factors• Rising operating costs associated with value menu focus,

rising wages worldwide and increasing commodity costs• Fierce competition from historical rivals and new

concept restaurants may hurt sales and margins• Tepid macro environment will pressure margins and

earnings in the short term

May 2016 13


MCD $128.40 ($129.80 - $87.50)

Addition Alert Date: 12/31/2011Price at Alert: $100.33 Risk Index: 1.19Market Cap (Million): $112,272.2Avg Daily Dollar Volume (Million): $870.2Primary Sector: ServicesPrimary Industry: Restaurants

Indicated Annual Dividend: $3.56 Multiples Current 12/2015 12/2014 12/2013 12/2012 12/2011Latest Dividend Increase: Date Dividend Yield (%): Avg 2.8% 3.3 3.4 3.2 3.1 2.9Latest Dividend Increase: % 4.7% Dividend Yield (%): High 3.9 3.7 3.5 3.4 3.5Dividend Yield: Current 2.8% Dividend Yield (%): Low 2.9 3.2 3.0 2.8 2.5Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 24.7 21.7 19.8 17.4 17.3 16.4Dividend Paid Since: 1976 Price/Earnings (Industry) 25.3 29.3 28.5 27.2 19.5 15.3Number of Years of Div Increases: 38 Price/Book Value -- 13.8 7.3 6.0 6.1 6.2Direct Invest Option: Yes Price/Sales -- 3.8 3.4 3.4 3.4 3.3DRIP Plan: Yes Ratios Current 12/2015 12/2014 12/2013 12/2012 12/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 66.7 71.3 67.6 55.8 53.0 47.4

$0.8900 Payout Ratio: FCFPS (%) -- 68.4 77.6 72.5 74.0 59.1$0.8900 Gross Margin (%) 39.0 38.5 38.1 38.8 39.2 39.6$0.8500 Operating Margin (%) 29.7 28.1 29.0 31.2 31.2 31.6$0.8500 Operating Margin (%) (Ind) 7.2 6.5 6.9 6.6 7.2 6.5$0.8500 Net Margin (%) 19.0 17.8 17.3 19.9 19.8 20.4$0.8500 ROE (%) -- 45.4 33.0 35.7 36.8 37.9

Rel Strgth ROE (%) (Industry) 7.9 8.4 11.2 10.2 11.3 12.8Rank ROA (%) -- 12.6 13.4 15.5 16.0 16.9

4 Week 31% Current Ratio -- 3.3 1.5 1.6 1.4 1.313 Week 38% Liabilities to Assets (%) -- 81.3 62.4 56.3 56.8 56.426 Week 79% Liab to Assets (%) (Ind) 62.4 61.5 63.1 56.4 56.3 57.952 Week 90% Asset Turnover -- 0.7 0.8 0.8 0.8 0.8

Financial Statements TTM 12/2015 12/2014 12/2013 12/2012 12/2011Growth 5 Year Sales ($M) 25,358 25,413 27,441 28,106 27,567 27,006Dividends 8.8% Gross Income ($M) 9,902 9,789 10,456 10,903 10,816 10,687Sales 1.1% Depreciation ($M) -- -- -- -- -- --Net Income (1.7%) Unusual/Extra ($M) -- 89 (137) (199) (144) (86)EPS Basic 0.8% Operating Income ($M) 7,540 7,146 7,949 8,764 8,605 8,530EPS Dil Cont 0.9% Interest Expense ($M) 709 638 571 522 517 493


2.40 Operating Cash Flow ($M) -- 6,539 6,730 7,121 6,966 7,1501.60 Investing Cash Flow ($M) -- (1,420) (2,305) (2,674) (3,167) (2,571)

Annual Financing Cash Flow ($M) -- 735 (4,618) (4,043) (3,850) (4,533)12/2017 Capital Expenditures ($M) -- 1,814 2,583 2,825 3,049 2,730

31 Net Cash Flow ($M) -- 5,608 (721) 463 0 (51)$6.20 EPS Basic ($) 5.22 4.82 4.85 5.60 5.41 5.33$6.04 EPS Diluted Cont ($) 5.19 4.80 4.82 5.55 5.36 5.27

# Rev Up 27 EPS DC Year/Year Chg (%) 16.7 (0.6) (13.1) 3.7 1.7 15.0 # Rev Down 2 Dividends/Share ($) 3.48 3.44 3.28 3.12 2.87 2.53Three Mos. Ago $6.03 Dividend Year/Year Chg (%) 4.8 4.9 5.1 8.7 13.4 11.9Year/Year Chg 11.9% Free Cash Flow/Share ($) -- 5.03 4.23 4.30 3.88 4.28

3/2016 12/2015 9/2015 6/2015 Total Cash ($M) -- 7,686 2,078 2,799 2,336 2,336$1.23 $1.31 $1.40 $1.26 $5.20 Goodwill/Intangibles ($M) -- 2,516 2,735 2,873 2,804 2,653$0.84 $1.13 $1.09 $1.40 $4.45 Total Assets ($M) -- 37,939 34,227 36,626 35,387 32,990

Long-Term Debt ($M) -- 24,122 14,936 14,130 13,633 12,1343/2016 12/2015 9/2015 6/2015 Total Total Liabilities ($M) -- 30,851 21,374 20,617 20,093 18,600

-- $6.94 $7.11 $6.82 -- Book Value/Share ($) -- 7.55 13.11 16.04 15.14 13.94$6.20 $6.80 $7.14 $7.27 $27.42 Avg Shares Outst'g (M) -- 939.40 980.50 998.40 1,010.10 1,032.10


16.5%

Nov 10, 2015

1$5.38

29

Annual

3212/2016

% Surp5.7%6.2%

(3.6%)

Jun 15, 2015

Rel Strgth

Mar 16, 2015Dec 15, 2014

EPS (Qtr)

$1.37

27

$5.40$1.40

11.1%

213

$1.36

Month Ago

(2.7%)(6.1%)(3.8%)

$5.54

15.6%

Quarterly

# of EstimatesCurrent

Sep 18, 2014 Nov 26, 2014Stock

6/2016

EPS$1.23$1.31

(5.0%)

Est Surprise

Jan 25, 2016

16.7%

EPS Estimates

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Index

McDonald's Corp. franchises and operates McDonald's restaurants in the global restaurant industry. These restaurants serve a varied, limited, value-priced menu in more than 100 countries around the world. All restaurants are operated either by the company or by franchisees, including conventional franchisees under franchise arrangements and foreign affiliated markets and developmental licensees under license agreements. The company and its franchisees purchase food, packaging, equipment and other goods from various independent suppliers.

May 21, 2015

Apr 22, 2016

Jan 27, 2016Nov 10, 2015Jul 16, 2015 Aug 28, 2015

Nov 27, 2015

Jan 28, 2015

6.2%

May 28, 2015

(1%)2%

12%29%

Feb 26, 2015

10.4%

3.2% (3.6% - 2.9%)

4.8%3 Year

Mar 15, 2016Dec 15, 2015Sep 16, 2015

0.98

1.32

0.951.14

TTM

Gain

Feb 26, 2016

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$20

$40

$60

$80

$100

$120

$140


Div

iden

d Yi

eld Share Price

14 May 2016

WeC energy group (WeC)WEC Energy Group, formerly known as Wisconsin Energy un-

til the June 2015 acquisition of Integrys Energy Group, serves 1.6 million electric customers and 2.8 million gas customers in Illinois, Michigan, Minnesota and Wisconsin. It also holds a 60% ownership in electric transmission company ATC. WEC Energy is the eighth-largest natural distribution company and one of the 15 largest investor-owned utility systems in the U.S.

More than 99% of earnings come from regulated opera-tions. Electric generation and distribution accounts for nearly two-thirds of the company’s regulated business. Prior to the merger, WEC Energy was mostly dependent on the state of Wisconsin for its revenues and earnings. Though the com-pany’s geographic base has expanded significantly, Wisconsin still accounts for 70% of WEC Energy’s rate base investment.

Why Own WEC?WEC Energy is the only member of both the S&P utili-

ties index and the Dow Jones utilities index to have grown earnings per share and increased dividends every year since 2003. During the past five years, diluted earnings per share from continuing operations has risen at an annualized rate of 4.1% and dividends have grown at a 16.8% rate. Growth should continue. The company has been forecasting earnings per share growth of between 6% and 8% in 2016 followed by long-term annual growth of 5% to 7%. WEC Energy reiterated its long-term earnings guidance during its first-quarter earn-ings conference call. Dividend growth should be in line with earnings growth. The Integrys Energy acquisition is expected to add to earnings per share this year, the first full calendar year of operations.

The completion of WEC Energy’s “Power the Future” strategy reduced the company’s annual capital expenditures from $1.2 billion in 2007 to $687.4 million in 2013. With its new “Deliver the Future” capital spending plan, WEC Energy

announced a five-year plan to spend between $7.5 billion and $8.0 billion through 2020. The capital spending will be used to modernize the company’s delivery networks, meet new en-vironmental standards and reduce operating costs with more than half of spending devoted to gas delivery.

Dividend AnalysisWEC Energy first paid dividends in 1939 and has increased

the payment during each of the last 13 years. This past January, the company announced an 8.2% increase. The increase raised the quarterly dividend payment to $0.495 per share. WEC Energy continues to guide for dividend increases being similar to earnings growth.

The earnings payout ratio is currently 73.4%. In comparison, the median earnings payout ratio for the electric utilities in-dustry is 63.5%. The company is targeting an earnings payout ratio of 65% to 70% going forward.

The stock yields 3.4%, which is slightly above its five-year average of 3.3%; the current median for the electric utilities industry group is 3.2%. Over the past five years, WEC Energy’s yield has fluctuated between an average high of 3.8% and an average low of 3.0%.

Risks Along with releasing its first-quarter results a few days

before press time, WEC Energy increased its planned capi-tal expenditures to $1.6 billion for 2016 and $1.9 billion for 2017. As recently as four weeks ago, the company had guided for $1.5 billion and $1.6 billion, respectively. When asked about the impact of the higher spending, CFO Scott Lauber responded, “When you look at 2016 and 2017, we are not cash flow positive.” He added that the company intends to keep its debt-to-capitalization levels steady, but does not have any plans to conduct a secondary offering of its shares. WEC Energy will release an updated five-year capital spending forecast no later than this November.

The stock’s price performance is affected by the direction of bond yields. It is not unusual to see utility stocks in general move inversely to the yield of the 10-year Treasury bond over short periods of time.

Like all utility companies, WEC Energy’s earnings are influenced by weather patterns, which are unpredictable. Unseasonably temperate weather reduced first-quarter mar-gins for Wisconsin Electric and Wisconsin Gas by $29 billion.

Though the completion of the Integrys Energy acquisition brings benefits, it also exposes WEC Energy to a larger num-ber of regulators. In addition, the hoped-for cost savings may not be realized (a risk with any merger).

The stock’s price-earnings ratio of 25.0 is above the electric utilities industry median of 20.6 and the utilities sector me-dian of 22.3. During the past five years, shares of WEC Energy have traded at an average price-earnings ratio of 17.4.

Self-generation is an ongoing threat to the company. Adoption of solar energy could also siphon off customers. ▪

Bullish Factors• The acquisition of Integrys Energy Group is expected to

add to earnings this year• Dividend raised this past January and dividend growth is

projected for the foreseeable future• Only member of S&P and Dow Jones utilities indexes to

grow earnings and dividends every year since 2003

Bearish Factors• Increased planned capital expenditures are projected to

keep the company from realizing free cash flow in 2016 and 2017

• The price-earnings ratio is high based on trailing earnings, though the yield is slightly above its five-year average

• The stock, like other utility stocks, is sensitive to changes in Treasury bond yields and can move inversely to bond yields over short periods of time

May 2016 15


Addition Alert Date: 12/31/2011Price at Alert: $34.96 Risk Index: 1.68Market Cap (Million): $18,333.1Avg Daily Dollar Volume (Million): $117.0Primary Sector: UtilitiesPrimary Industry: Electric Utilities

Indicated Annual Dividend: $1.98 Multiples Current 12/2015 12/2014 12/2013 12/2012 12/2011Latest Dividend Increase: (Date) Dividend Yield (%): Avg 3.4% 3.4 3.3 3.5 3.2 3.3Latest Dividend Increase: (%) 8.2% Dividend Yield (%): High 3.9 3.9 3.9 3.6 3.9Dividend Yield: Current 3.4% Dividend Yield (%): Low 3.0 2.8 3.2 2.9 2.9Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 25.0 22.0 18.5 16.3 16.0 14.3Dividend Paid Since: 1939 Price/Earnings (Industry) 20.6 18.7 17.3 16.9 15.7 14.3Number of Years of Div Increases: 13 Price/Book Value 2.1 1.6 2.4 2.2 2.1 1.8Direct Invest Option: Yes Price/Sales 3.1 2.4 2.2 2.1 2.0 1.6DRIP Plan: Yes Ratios Current 12/2015 12/2014 12/2013 12/2012 12/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 73.4 73.9 59.8 57.0 50.6 46.0

$0.4950 Payout Ratio: FCFPS (%) 2,005.4 1,721.6 76.2 60.5 59.2 148.8$0.4950 Gross Margin (%) 71.8 35.2 32.5 34.0 35.0 29.7$0.4575 Operating Margin (%) 21.1 21.1 22.3 23.9 23.6 19.8$0.2337 Operating Margin (%) (Ind) 17.8 17.4 16.9 16.6 16.6 16.6$0.2067 Net Margin (%) 10.8 10.8 11.8 12.8 12.9 11.7$0.4225 ROE (%) 8.4 9.8 13.6 13.8 13.5 13.6


4 Week 29% Current Ratio 0.8 0.8 0.8 1.0 0.9 1.013 Week 43% Liabilities to Assets (%) 70.4 70.4 70.1 71.1 70.8 71.226 Week 80% Liab to Assets (%) (Ind) 70.6 70.6 70.3 70.0 70.8 71.352 Week 85% Asset Turnover 0.2 0.3 0.3 0.3 0.3 0.3

Financial Statements TTM 12/2015 12/2014 12/2013 12/2012 12/2011Growth 5 Year Sales ($M) 5,926 5,926 4,997 4,519 4,246 4,486

Dividends 16.8% Gross Income ($M) 4,257 2,084 1,625 1,537 1,486 1,331Sales 7.1% Depreciation ($M) 567 562 409 388 364 330Net Income 6.9% Unusual/Extra ($M) 0 108 -- -- 0 0EPS Basic 3.8% Operating Income ($M) 1,251 1,251 1,112 1,080 1,000 887EPS Dil Cont 4.1% Interest Expense ($M) 331 331 242 252 248 236

Pretax Income ($M) 1,074 1,074 950 915 853 777SUE Score Net Income ($M) 639 639 588 577 546 526

(0.30) Operating Cash Flow ($M) 1,294 1,294 1,198 1,231 1,174 9930.70 Investing Cash Flow ($M) (2,518) (2,518) (757) (746) (730) (893)

Annual Financing Cash Flow ($M) 1,212 1,212 (405) (495) (423) (111)12/2017 Capital Expenditures ($M) 1,266 1,266 736 687 707 831

15 Net Cash Flow ($M) (12) (12) 36 (10) 22 (10)$3.10 EPS Basic ($) 2.37 2.36 2.61 2.54 2.37 2.26$3.10 EPS Diluted Cont ($) 2.36 2.34 2.59 2.51 2.35 2.18

# Rev Up 0 EPS DC Year/Year Chg (%) (8.9) (9.5) 2.9 7.1 7.8 13.4 # Rev Down 1 Dividends/Share ($) 1.74 1.74 1.56 1.45 1.20 1.04Three Mos. Ago $3.11 Dividend Year/Year Chg (%) 11.5 11.5 8.0 20.4 15.4 30.0Year/Year Chg 6.5% Free Cash Flow/Share ($) 0.09 0.10 2.05 2.39 2.03 0.70

12/2015 9/2015 6/2015 3/2015 Total Cash ($M) 50 50 62 26 36 14$0.57 $0.58 $0.35 $0.86 $2.36 Goodwill/Intangibles ($M) 3,024 3,024 442 442 442 442$0.53 $0.56 $0.58 $0.91 $2.59 Total Assets ($M) 29,355 29,355 14,905 14,769 14,285 13,862

Long-Term Debt ($M) 9,124 9,124 4,171 4,363 4,454 4,61412/2015 9/2015 6/2015 3/2015 Total Total Liabilities ($M) 20,670 20,670 10,455 10,506 10,120 9,868

$5.85 $5.38 $4.36 $6.15 $21.75 Book Value/Share ($) 27.41 31.92 19.59 18.60 17.96 17.04$5.43 $4.58 $4.63 $7.51 $22.15 Avg Shares Outst'g (M) 315.80 271.10 225.60 227.60 230.20 232.60


Month Ago

Quarterly

# of EstimatesCurrent

Jan 21, 2016

Annual12/2016

% Surp

15

(0.8%)3.4%

$2.91

(0.1%)

Jun 1, 2016Mar 1, 2016

Aug 12, 2015

EPS (Qtr)

Jan 15, 2015 May 12, 2015

3/2016

EPS$0.63

17.4%

$1.04

9

Nov 4, 2015

(9.1%)

18.6%

EPS Estimates

Est Surprise

1

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

24.3%

$2.93$1.01

$0.61

$1.042 2

$2.93

0

WEC Energy Group is the eighth-largest natural distribution company and one of the 15 largest investor-owned utility systems in the U.S. Formerly known as Wisconsin Energy, the company serves 1.6 million electric customers and 2.8 million gas customers in Illinois, Michigan, Minnesota and Wisconsin. It also holds a 60% ownership in electric transmission company ATC. More than 99% of earnings come from regulated operations, with the state of Wisconsin accounting for 70% of WEC Energy’s rate base investment.

Jun 12, 2015

Feb 4, 2016

Jan 21, 2016Oct 15, 2015Jun 12, 2015 Nov 11, 2015

Feb 10, 2016

Apr 16, 2015

13.2%11.8%5.3%(0.3%)

(8.9%)

11.5%3 Year

(1%)4%13%17%

StockGain

Jun 25, 2015

8.5%

3.3% (3.8% - 3%)

Jul 6, 2015Jun 1, 2015

May 11, 2016

Index0.98

1.20

Sep 1, 2015

Rel Strgth

Dec 1, 2015

0.971.15

TTM

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$10

$20

$30

$40

$50

$60

$70


Div

iden

d Yi

eld Share Price

WeC $58.95 ($60.32 - $44.93)

16 May 2016

The biggest calamity that can befall equity investors is corporate bankruptcy, which wipes out the equity of a firm and knocks the stock’s investment value down to zero. To help identify companies that may he headed for bankruptcy, NYU professor Edward Altman developed the “Z-Score” in the late 1960s. This first installment of a multi-part series offers an introduction to the Z-Score and its elements.

Z-Score FormulaThe Altman Z-Score actually consists of five performance

ratios that are combined into a single score. These five ratios are weighted using the following formula:

Z-Score = (1.2 × A) + (1.4 × B) + (3.3 × C) + (0.6 × D) + (1.0 × E)Where:A = working capital ÷ total assetsB = retained earnings ÷ total assetsC = earnings before interest & taxes ÷ total assetsD = market value of equity ÷ total liabilitiesE = sales ÷ total assetsBased on Altman’s original analysis, the lower the value, the

higher the odds that the company is headed toward bank-ruptcy. Altman came up with the following rules for interpret-ing a firm’s Z-Score:

• Below 1.8 indicates a firm is headed for bankruptcy;• Above 3.0 indicates a firm is unlikely to enter bank-

ruptcy; and• Between 1.8 and 3.0 is a statistical “gray area.”

Deconstructing the Z-ScoreWorking Capital to Total Assets: Working capital is a com-

pany’s current assets less its current liabilities and measures a company’s efficiency and its short-term financial health. Positive working capital means that the company is able to meet its short-term obligations. Negative working capital means that a company’s current assets cannot meet its short-term liabilities; it could have problems paying back creditors in the short term, ultimately forcing it into bankruptcy.

Retained Earnings to Total Assets: The retained earnings of a company are the percentage of net earnings not paid out as dividends; they are “retained” to be reinvested in the firm or used to pay down debt.

The ratio of retained earnings to total assets helps measure the extent to which a company relies on debt, or leverage. The lower the ratio, the more a company is funding assets by borrowing instead of through retained earnings which, again, increases the risk of bankruptcy if the firm cannot meet its debt obligations.

Earnings Before Interest & Taxes to Total Assets: This is a variation on return on assets, which is net income divided by total assets. This ratio assesses a firm’s ability to generate profits from its assets before deducting interest and taxes.

Market Value of Equity to Total Liabilities: This ratio shows how much a company’s market value (as measured by market capitalization, or share price times shares outstanding) could

decline before liabilities exceeded assets. Generally speaking, the higher the market capitalization of a company, the higher the likelihood that the firm can survive going forward.

Sales to Total Assets: The ratio of sales to total assets, more commonly referred to as asset turnover, measures the amount of sales generated by a company for every dol-lar’s worth of its assets. In other words, asset turnover is an indication of how efficiently a company is using its assets to generate sales. The higher the number the better, while low or falling asset turnover can signal a failure by the company to expand its market share.

Weaknesses of the Z-ScoreWhenever you use financial ratios to analyze a company,

it is important to keep in mind that no analysis technique is perfect, and the Z-Score is no exception.

Altman has observed that, over time, the average Z-score of American companies has declined. More companies have access to capital markets and the current low-interest-rate en-vironment has encouraged companies to raise their leverage. Furthermore, Altman believes that global competition has diminished corporate profitability over the years. As a result, using the cutoff values we mentioned earlier, more firms would be classified as likely bankruptcy candidates.

The table here lists the companies in the DI portfolio along with their Z-scores for the last two fiscal years. Like most ra-tios, analyzing values over time can offer insights into a company’s financial con-dition. At a minimum, a sharp decline in a compa-ny’s Z-score may be cause for further investigation.

Texas Instruments (TXN) has the highest Z-score of 10.3 as of April 29, 2016. On the other end of the scale is Wells Fargo & Co. (WFC), with a Z-Score of 0.3. Based on Altman’s original scale, Wells Fargo would seemingly be a bankruptcy candidate. However, this financial company’s Z-score has been steady. Furthermore, it is important to realize that Altman created the original Z-score to analyze manufacturing companies. Altman says that abid-ing by his original cutoff scores is not the best thing to do. ▪

Checking Company Health With the Altman Z-score

Company (Ticker) Y1 Y2Texas Instruments (TXN) 10.3 9.3McDonald's Corp. (MCD) 5.3 6.0Qualcomm, Inc. (QCOM) 4.7 10.4Emerson Electric Co. (EMR) 4.5 4.6Microso� Corp. (MSFT) 4.3 4.5Apple Inc. (AAPL) 4.2 5.5Cummins Inc. (CMI) 4.2 4.9IBM Corp. (IBM) 4.0 4.0PepsiCo, Inc. (PEP) 3.9 4.0Procter & Gamble Co. (PG) 3.8 3.7Target Corpora�on (TGT) 3.6 3.6Stage Stores Inc. (SSI) 2.9 4.0Union Pacific Corp. (UNP) 2.9 3.8Eaton Corpora�on (ETN) 2.2 2.3Occidental Petroleum (OXY) 2.1 3.2Eastman Chemical (EMN) 2.0 1.9Caterpillar Inc. (CAT) 1.8 2.1Wyndham Worldwide (WYN) 1.7 1.8Interna�onal Paper Co. (IP) 1.6 1.9Deere & Company (DE) 1.6 1.8Invesco Ltd. (IVZ) 1.1 1.6AT&T Inc. (T) 1.1 1.2WEC Energy Group (WEC) 1.0 1.6Wells Fargo & Co. (WFC) 0.3 0.3Source: AAII's Stock Investor Pro/Thomson

Z-Score

Reuters. Data as of 4/29/2016.

in this issue 6 di holdings increase dividends in april o · · 2016-05-066 di holdings increase...

Documents