in this issue di portfolio is in good hands with allstate tdi portfolio is in good hands with...

DI Portfolio Is in Good Hands With Allstate The fallout from the coronavirus pandemic continues to weigh on the U.S.

economy, which contracted at a 4.8% rate from January 2020 through March 2020. It is the biggest quarterly drop in gross domestic product (GDP)—the measure of all the goods and services produced in the U.S.—since the 2008 financial crisis, when GDP plummeted by 8.4% in the fourth quarter.

Last week, the Federal Reserve said that the central bank is committed to using its “full range of tools to support the U.S. economy in this challenging time.” These tools include keeping short-term interest rates near zero, continu-ing to expand its balance sheet with purchases of Treasury debt and mortgage-backed securities, as well as using facilities to maintain liquidity and the flow of credit to households, businesses and state and local governments.

The Fed has been very aggressive since the coronavirus and related shutdowns hit the economy and will continue its wide-ranging emergency measures for the foreseeable future. So far, the Fed has pumped $2.3 trillion into the economy in the past few weeks, and some economists expect it to rise to at least $5 trillion in support by the end of the year.

The coronavirus is on everyone’s minds these days. This is an unprecedented time for the U.S. economy and stock market, with much of the action being driven by coronavirus pandemic numbers and questions about when the U.S. economy will “reopen,” as well as what lasting impact the pandemic will have on the U.S. and global economies. From everyone here at AAII and Dividend Investing, we sincerely hope that you are safe and healthy.

DI Portfolio AlertsThis month, there is one deletion and one addition to the Dividend Investing

portfolio. Cracker Barrel (CBRL) is being removed from the portfolio to make room for Allstate Corp. (ALL).

Members need not rush to add or delete stocks immediately after a portfo-lio alert. You should be cautious about trading early in the day, particularly at the open, the first day after a portfolio alert. If you are a buyer, give the sellers time to get involved in the market. Depending on market action, you may wish to try to buy on weak days and employ limit orders. The stocks in the Dividend Investing portfolio are reasonably liquid, and a portfolio alert alone should not affect a stock’s price significantly for any extended period of time. Members who are buying a large number of shares might buy some one day and some another. While we generally suggest taking action within the week, you can wait longer if you feel the stock is moving in your favor.

Since Cracker Barrel announced the suspension of dividends and share repur-chases, its market action has been volatile. An effort will be made to delete the stock from the tracking portfolio on strong days.

Portfolio Deletion: Cracker Barrel (CBRL)Cracker Barrel operates hundreds of full-service restaurants in the U.S., mainly

through its Cracker Barrel Old Country Store concept and its newly acquired Maple Street Biscuit Company brand. If you have taken a road trip, chances are

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 ReportsAllstate Corp. (ALL) 8

Leading property-liability insurer offers stability and dividend protection amid uncertainty.

Cummins Inc. (CMI) 10Innovative heavy-duty engine manufacturer tries to jump-start operations after stalling amid global shutdown in response to the coronavirus pandemic.

Union Pacific Corp. (UNP) 12Recent dividend increases offer downside protection during uncertain market environment.

UnitedHealth Group Inc. (UNH) 14Largest private health insurance provider in the U.S. expected to announce next dividend increase in June.

DI Article Share Repurchases Poised to Slow Down 16

The buyback yield is an effective tool that measures whether companies are benefitting their shareholders with cash beyond dividends.

Next Publication Date: June 5, 2020

May 2020Volume IX Issue 5

www.AAIIDividendInvesting.com

TM

2 May 2020

distribution channels, including auto (its larg-est segment by sales), home, life and other insurance offered mainly through its Allstate, Esurance, Encompass and SquareTrade brands. The company was founded in 1931 and has more than 113 million proprietary

policies in place across North America, sold primarily by its 10,000 dedicated local company agencies.

Morningstar notes that the corona-virus may have a mix of impacts on Allstate, with the company also benefit-ting from relatively lower catastrophic losses. On the positive side, Allstate enters the current period from a posi-tion of strength, as evidenced by its trailing 12-month return on equity (ROE) of 10.5%. Growth in its personal property-liability business is driven by increased premiums earned and a lower frequency of auto accidents, reflecting a reduction in miles driven from quar-antine efforts. This has been partially offset by higher cost (severity) of claims and shelter-in-place payback rebates offered by Allstate, which are expected to total more than $600 million. The rebates should have a positive long-term retention impact.

On the negative side, net income could be down slightly over the near term due to investment losses. However, Allstate’s proactive portfolio management strategy mitigated the impact of the recent market downturn. The company is predominately allo-cated to investment-grade fixed-income investments and reduced its public equity exposure by approximately $4 billion in February 2020, limiting losses.

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, $278.

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, 2020. 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 Month

on increasing liquidity and maximizing its financial flexibility until the crisis abates and market conditions stabi-lize. To preserve cash, Cracker Barrel made extensive cuts to operational expenses, suspended its dividend payments and deferred the payment of its most recent dividend declared on March 3. This dividend will now be paid September 2 to shareholders of record as of August 14. The stock will now trade ex-dividend on Thursday, August 13. Share repurchases are also suspended for the time being.

The dividend suspension is the first for the company in nearly 38 years, and it ends a 17-year streak of con-secutive dividend increases. A dividend suspension is one of the triggers of the Dividend Investing approach to remove a stock from the portfolio.

Cracker Barrel has lost 38.6% since being added to the DI tracking portfolio on February 6, 2017. The performance is significantly below the 30.7% total return realized by the Dow Jones U.S. Index ETF (IYY) over the same period.

Portfolio Addition: Allstate Corp. (ALL)Allstate is one of the largest U.S.

property-casualty insurers based on premium sales. The company offers a broad array of insurance products through multiple brands and diverse

you have seen or even stopped at a Cracker Barrel restaurant near a major highway or interstate.

Cracker Barrel operates in a highly competitive marketplace, competing for consumer dollars with other casual and fast-casual concepts. Comparable res-taurant traffic has been sluggish the last couple of years, with the company rely-ing on price increases to drive growth. It has been growing its off-premises business, including catering and heat-and-serve offerings, and investing in new concepts to drive growth.

Cracker Barrel is highly dependent upon dine-in service, car travelers and customers shopping for unique in-store gift shop items. Travelers make up 40% of its business, and retail sales from the gift shop account for roughly a quarter of total sales.

On Wednesday, March 25, with nearly all of its restaurants closed for dine-in service, Cracker Barrel announced its preliminary plans for responding to the rapidly changing market conditions caused by the coronavirus pandemic and related significant disruptions to the restaurant industry in the U.S. During the week ended March 27, comparable restaurant sales for Cracker Barrel locations were about 85% below the same week in 2019.

The company’s immediate focus is

May Portfolio Deletion:

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price* Alert Date Purchase* Purchase*Cracker Barrel (CBRL) 5/8/2020 $86.89 2/3/2017 (38.6%) 30.7%

May Portfolio Addition:

Company (Ticker)Latest Price*

Dividend Yield* Sector: Industry

Allstate Corp. (ALL) $102.15 2.1%*Data as of 5/5/2020.

Company (Ticker)Portfolio Deletion Alert

Financials: Insurance - Property & Casualty

May 2020 3

AAII DIvIDeND INvesTING

DI Pur- Latest Aprchase Price Gain/ Div

Ticker Company Date Price Price (5/5/20) (Loss) Stock Index Yield IndustryALL Allstate Corp. 5/8/20 na na $102.15 10.9% na na 2.1% Insurance - Property & CasualtyAMGN Amgen, Inc. 10/27/17 $175.28 $174.93 $236.36 18.0% 45.3% 17.4% 2.7% PharmaceuticalsBLK BlackRock, Inc. 10/5/18 $470.86 $463.47 $485.49 14.1% 9.6% 0.7% 3.0% Investment Mgmt & Fund OpersCMA Comerica Inc. 12/7/18 $74.03 $72.16 $31.57 18.8% (53.9%) 8.4% 8.6% BanksCMI Cummins Inc. 10/3/14 $135.10 $127.75 $153.83 20.8% 32.9% 57.3% 3.4% Auto, Truck & Motorcycle PartsEMN Eastman Chemical Co. 2/6/15 $73.20 $74.59 $60.11 29.9% (6.8%) 49.7% 4.4% Chemicals - CommodityETN Eaton Corporation 12/31/11 $43.53 $39.80 $80.80 7.5% 133.4% 140.7% 3.6% Electrical Components & EquipHD Home Depot Inc. 9/1/17 $150.78 $152.88 $225.61 17.7% 56.9% 19.7% 2.7% Retailers-Home Improve Prod/ServHUBB Hubbell Incorporated 3/27/20 $106.97 $111.00 $121.58 8.4% 9.5% 14.3% 3.0% Electrical Components & EquipHBAN Huntington Bancshares 1/12/18 $15.85 $15.86 $8.28 12.5% (42.7%) 5.5% 7.2% BanksIBM IBM Corp. 10/2/15 $144.58 $155.86 $122.58 13.2% (1.3%) 51.9% 5.3% IT Services & ConsultingIP International Paper Co. 4/4/14 $45.81 $45.23 $33.10 10.0% (8.9%) 67.8% 6.2% Paper PackagingMDT Medtronic PLC 1/6/17 $72.87 $75.05 $97.90 8.3% 40.0% 30.7% 2.2% Medical Equip, Supplies & DistribPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $131.67 10.1% 151.3% 140.7% 2.9% Non-Alcoholic BeveragesPII Polaris Inc. 12/9/16 $85.84 $86.34 $69.10 47.3% (13.1%) 30.7% 3.6% Recreational ProductsPFG Principal Financial Group 12/9/16 $60.30 $57.72 $34.86 16.2% (34.1%) 30.7% 6.4% Insurance - Life & HealthRSG Republic Services, Inc. 3/27/20 $75.20 $74.70 $77.48 4.4% 3.7% 14.3% 2.1% Environmental Servs & EquipSNA Snap-on Incorporated 9/7/18 $180.60 $182.03 $121.67 19.7% (31.1%) 0.0% 3.6% Industrial Machinery & EquipTXN Texas Instruments 4/5/13 $34.20 $34.80 $111.54 16.2% 289.3% 102.4% 3.2% SemiconductorsTSN Tyson Foods, Inc. 3/8/19 $62.78 $64.74 $56.99 7.5% (10.7%) 2.6% 2.9% Food ProcessingUNP Union Pacific Corp. 7/2/15 $96.66 $97.23 $156.38 13.3% 79.4% 46.6% 2.5% Freight & Logistics - GroundUNH UnitedHealth Group Inc. 9/6/19 $229.00 $233.44 $293.04 17.3% 27.0% (4.7%) 1.5% Managed Health CareWBA Walgreens Boots Alliance 6/7/19 $51.97 $53.64 $42.02 (5.4%) (17.6%) (0.3%) 4.4% Retailers - DrugWSM Williams-Sonoma, Inc. 6/3/16 $53.25 $53.28 $65.01 45.4% 35.1% 42.7% 3.0% Retailers - Home FurnishingsData as of 5/5/2020. Sources: AAII Stock Investor Pro, Refinitiv, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

Investment income is also likely to decline due to an extended low-interest-rate environment. Other risks include the varied effect on new business of lower vehicle sales and increased unemployment.

The company is exposed to longer-term headwinds, including limited growth prospects, given its dependence on a declining local agent channel and potential large loss years caused by Midwestern catastrophes. The company has successfully reduced its exposure to some coastal areas. Allstate’s direct-to-consumer channel is not as developed as some of its competitors. Progressive and Geico have proven experience in this increasingly popular distribution method, and Allstate’s Esurance opera-tions are much less profitable.

Industry competition is fierce, and the products are essentially commodities, but Allstate’s customers are less likely to shop their policies around and they value the service a dedicated local agent can provide.

Allstate has been paying a dividend since 1993 and has increased its annual dividend in each of the last 10 years. The company has been steadily

increasing its dividend, with a five-year average growth rate of 11.8%. The com-pany’s current dividend yield of 2.1% is above its five-year average of 1.9%. The company returned $670 million to shareholders during first-quarter 2020, composed of $159 million in dividend payments and $511 million in share repurchases. For more information on Allstate, see pages 8 and 9.

Buyback Yield: A Proxy for Share Repurchases

Corporate share repurchases have boosted U.S. stock returns in recent years, but investors should prepare for returns to be lower as buybacks look poised for a near-term slowdown amid the economic uncertainty related to the coronavirus pandemic.

Our focus article on the back page of this issue discusses the buyback yield. Research indicates that stocks reducing their share counts through buybacks outperform stocks with an increasing number of shares. The share reduction can be measured with the buyback yield, which indicates whether the percentage of shares decreased (posi-tive percentage) or increased (negative

percentage). Buyback yield figures are provided for each of the stocks in the DI tracking portfolio on page 16. Comerica Inc. (CMA) holds the recent record of share reductions through buybacks among the stocks in the DI portfolio, with a buyback yield of 10.8% for the latest quarter.

DI portfolio holdings have a strong recent record of share reductions through buybacks, but the need to pre-serve cash is as important as ever. Seven DI portfolio companies have suspended their share buyback programs for the immediate future.

April Portfolio PerformanceThe Dividend Investing real-dollar

tracking portfolio’s gain of 15.3% during the month of April was the strongest monthly increase over its more than eight-year history. This follows the worst month in the tracking portfolio’s history in March. The portfolio’s benchmark, the Dow Jones U.S. Index ETF, was up 13.2% in April. Comparing to a more dividend-growth focused strategy, the S&P 500 Dividend Aristocrats index rose 10.6% over the same period.

Over the life of the Dividend Investing

4 May 2020

portfolio through May 5, 2020, it has provided a total return of 106.1%, with dividend income contributing 46.2% to the total return. The Dow Jones U.S. Index ETF has a total return of 159.1% over this same period, with income con-tributing 35.6% to the total return.

The average dividend yield of the stocks in the DI portfolio is 3.5% while the Dow Jones U.S. Index fund has a

dividend yield of 2.0%.

Dividend News Ten stocks in the DI portfolio declared

dividends during April, nine of which were in line with the previous quar-ter’s payment: Comerica, Eaton Corp. (ETN), Hubbell Incorporated (HUBB), Huntington Bancshares Inc. (HBAN),

Principal Financial Group (PFG), Republic Services Inc. (RSG), Snap-on Incorporated (SNA), Texas Instruments (TXN) and Walgreens Boots Alliance (WBA).

IBM Corp. (IBM) declared a dividend in April, raising its quarterly cash divi-dend by 0.6%, from $1.62 to $1.63 per share. IBM’s current dividend yield of 5.3% is above its five-year average high of 4.9%. The company has increased its dividend for 25 consecutive years. The company’s dividends have expanded at an 8.6% average annual rate over the last five fiscal years.

Polaris Inc. (PII) has historically announced a dividend declaration with its second-quarter earnings report. During the earnings call on April 28, the company reassured investors that it does not plan to suspend or reduce its dividend. Instead, at its next board meeting, the company plans on pro-posing that they delay the declaration of the second-quarter dividend until late May. This will give Polaris more time to assess its financial perfor-mance while still allowing the com-pany to pay the dividend at the same time in mid-June.

As previously discussed, Cracker Barrel suspended its dividend pay-ments and is being deleted from the DI portfolio.

Portfolio NewsStrongest DI Stocks During April

Polaris Inc. (PII) was the top-perform-ing stock in the DI portfolio during April, up 47.3%. The company announced several actions in response to the coro-navirus pandemic, including additional financing and reducing operational expenses.

Polaris is temporarily delaying merit wage increases for employees through the end of the year, implementing a hiring freeze and furloughing most employees for two weeks in the second quarter of 2020. Several members of the company’s leadership team will have their pay reduced by nearly 20% from April 13 through the end of the second quarter. Polaris chairman and

$90,000$100,000$110,000$120,000$130,000$140,000$150,000$160,000$170,000$180,000$190,000$200,000$210,000$220,000$230,000$240,000$250,000$260,000$270,000$280,000

2012 2013 2014 2015 2016 2017 2018 2019 2020

AAII Dividend Investing Portfolio

Growth of $100,000

AAII Dividend Investing Portfolio

Performance

Dividend Yield 3.5% 2.0%

Total Return

Income Return

Capital Gain/(Loss)

Total Return

Income Return

Capital Gain/(Loss)

April 15.3% 0.2% 15.1% 13.2% 0.0% 13.2%2020 YTD (22.6%) 0.9% (23.5%) (11.8%) 0.0% (11.8%)2019 29.9% 4.1% 25.8% 30.8% 2.5% 28.3%2018 (11.5%) 2.6% (14.1%) (5.2%) 1.7% (6.9%)2017 22.3% 3.4% 18.9% 21.3% 2.0% 19.3%2016 18.2% 3.9% 14.3% 12.0% 2.1% 9.9%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% 14.4% 2.3% 12.1%From Inception 106.1% 46.2% 59.9% 159.1% 35.6% 123.5%Performance as of 5/5/2020.

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.

Performance of DI Portfolio

May 2020 5


CEO Scott Wine will forgo his salary for the remainder of 2020.

Polaris is also reviewing all operat-ing expenses, postponing non-essential capital expenditures and suspending share repurchases. However, as men-tioned, the company has said it does not plan to suspend or cut its dividend payment. As of March 31, Polaris has more than $420 million in cash on hand to help weather the current crisis.

Williams-Sonoma Inc. (WSM) saw a 45.4% gain in April, as investors grew more optimistic about the company’s ability to withstand a period of store closures amid the coronavirus pan-demic. Shares of several apparel and home-goods retail companies saw sizeable gains during the month as plans for reopening the U.S. economy are coming into focus. In addition, there is a growing number of data points sug-gesting that consumers have continued to spend discretionary income online during the shutdown.

Williams-Sonoma reported strong operating results in late March, with diluted earnings per share of $2.10 gain-ing 9% year over year and outpacing the I/B/E/S consensus estimate by nearly 4%. The company also declared a regular quarterly dividend of $0.48 per share, in line with the previous declaration.

Eastman Chemical Co. (EMN) was the third-best-performing stock in the DI portfolio for the month of April, up by 29.9%. Eastman reported solid first-quarter 2020 results, with adjusted earnings per diluted share of $2.03 that grew year over year and beat the I/B/E/S consensus estimate by 18.0%.

Revenues for the quarter declined by 5.8% to $2.24 billion year over year, compared to $2.38 billion in the first quarter of 2019. Adjusted operating profits increased by 8.5% to $382 mil-lion year over year, primarily driven by higher sales volumes and lower raw materials costs. During the first quarter, the coronavirus pandemic impacted operating profits by approximately $20 million to $30 million. In addition, sales volumes declined by 15% in April versus March.

In the first quarter of 2020, the company returned $120 million to

stockholders, with $90 million of divi-dends and $30 million of share repur-chases. The company set priorities for uses of available cash, which includes the payment of its quarterly dividend, debt repayment of more than $400 million and modest share repurchases to offset dilution. Furthermore, Eastman has the option to borrow $1 billion from its existing credit facility and has no public debt maturities for 2020.

Cummins Inc. (CMI) was the fourth-best-performing stock in April, up 20.8%. During the month, the company reported first-quarter 2020 financial results, announcing earnings which beat estimates but declined on a year-over-year basis. Net income for the quarter decreased by 22.9% to $511 million, and diluted earnings per share decreased by 18.8% to $3.41. Earnings per share beat the I/B/E/S consen-sus estimate of $2.165 by a notable 46.9%. First-quarter 2020 sales in North America declined by 16% and interna-tional revenues decreased by 17%.

Cummins ended the quarter with cash, cash equivalents and marketable securities of $2.0 billion and a commit-ted borrowing capacity of $1.9 billion. Previously announced restructuring actions were completed during the quarter and will yield annual cost sav-ings of approximately $250 million to

$300 million in 2020.Cummins withdrew its full-year 2020

guidance amid coronavirus pandemic-related uncertainty. To conserve cash, Cummins is implementing a set of cost-reduction initiatives—including tempo-rary salary reductions.

Weakest DI Stocks During AprilWalgreens Boots Alliance (WBA)

was the worst-performing stock in the DI portfolio during April, down 5.4%. The company said that impacts from the coronavirus pandemic began at the end of the second quarter and did not have a material effect on overall results. Adjusted earnings per share of $1.52 beat the I/B/E/S consensus estimate by 4.3%. Sales increased by 3.7% to $35.8 billion year over year.

Walgreens is not providing long-term guidance due to the coronavirus pan-demic, but it does not expect to alter its dividend policy or suspend its share repurchase program. The company declared a regular quarterly dividend in April of $0.4575 per share, in line with the previous declaration.

The company also announced addi-tional funding with a new one-year $500 million senior unsecured revolving credit facility, in addition to $3.1 billion of new revolving credit facilities and an extension to the maturity of the existing

Recent earnings AnnouncementsRecent Earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %AMGN Amgen, Inc. Apr 30 $4.170 $3.763 10.8%BLK BlackRock, Inc. Apr 16 $6.600 $6.361 3.8%CMA Comerica Inc. Apr 21 ($0.460) $0.954 (148.2%)CMI Cummins Inc. Apr 28 $3.180 $2.165 46.9%EMN Eastman Chemical Co. Apr 30 $2.030 $1.720 18.0%ETN Eaton Corporation Apr 30 $1.090 $1.069 2.0%HUBB Hubbell Incorporated Apr 30 $1.640 $1.519 8.0%HBAN Huntington Bancshares Apr 23 $0.030 $0.169 (82.2%)IBM IBM Corp. Apr 20 $1.840 $1.795 2.5%IP International Paper Co. Apr 30 $0.570 $0.425 34.1%PEP PepsiCo, Inc. Apr 28 $1.070 $1.029 4.0%PII Polaris Inc. Apr 28 $0.220 $0.551 (60.1%)PFG Principal Financial Group Apr 27 $1.150 $1.136 1.2%SNA Snap-on Incorporated Apr 21 $2.600 $2.697 (3.6%)TXN Texas Instruments Apr 21 $1.240 $1.002 23.8%UNP Union Pacific Corp. Apr 23 $2.150 $1.898 13.3%UNH UnitedHealth Group Inc. Apr 15 $3.720 $3.626 2.6%WBA Walgreens Boots Alliance Apr 2 $1.520 $1.458 4.3%Data as of 5/5/2020. Sources: I/B/E/S and company releases.

6 May 2020

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

Ticker Company Paid Date Payable Div Yield Invest PlanALL Allstate Corp. 1, 4, 7, 10 Fri Feb 28, 2020 Wed Apr 1, 2020 $0.5400 � $2.16 2.1% Yes YesAMGN Amgen, Inc. 3, 6, 9, 12 Fri May 15, 2020 Mon Jun 8, 2020 $1.6000 $6.40 2.7% -- YesBLK BlackRock, Inc. 3, 6, 9, 12 Wed Mar 4, 2020 Mon Mar 23, 2020 $3.6300 � $14.52 3.0% -- --CMA Comerica Inc. 1, 4, 7, 10 Fri Jun 12, 2020 Wed Jul 1, 2020 $0.6800 $2.72 8.6% Yes YesCMI Cummins Inc. 3, 6, 9, 12 Thu Feb 20, 2020 Thu Mar 5, 2020 $1.3110 $5.24 3.4% No YesEMN Eastman Chemical Co. 1, 4, 7, 10 Fri Mar 13, 2020 Fri Apr 3, 2020 $0.6600 $2.64 4.4% Yes YesETN Eaton Corporation 3, 5, 8, 11 Wed May 13, 2020 Fri May 29, 2020 $0.7300 $2.92 3.6% Yes YesHD Home Depot Inc. 3, 6, 9, 12 Wed Mar 11, 2020 Thu Mar 26, 2020 $1.5000 � $6.00 2.7% Yes YesHUBB Hubbell Incorporated 3, 6, 9, 12 Thu May 28, 2020 Mon Jun 15, 2020 $0.9100 $3.64 3.0% No NoHBAN Huntington Bancshares 1, 4, 7, 10 Tue Jun 16, 2020 Wed Jul 1, 2020 $0.1500 $0.60 7.2% Yes YesIBM IBM Corp. 3, 6, 9, 12 Thu May 7, 2020 Wed Jun 10, 2020 $1.6300 � $6.52 5.3% Yes YesIP International Paper Co. 3, 6, 9, 12 Thu Feb 20, 2020 Mon Mar 16, 2020 $0.5125 $2.05 6.2% Yes YesMDT Medtronic PLC 1, 4, 7, 10 Thu Mar 26, 2020 Fri Apr 17, 2020 $0.5400 $2.16 2.2% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Thu Jun 4, 2020 Tue Jun 30, 2020 $1.0225 � $4.09 3.1% Yes YesPII Polaris Inc. 3, 6, 9, 12 Fri Feb 28, 2020 Mon Mar 16, 2020 $0.6200 � $2.48 3.6% -- YesPFG Principal Financial Group 3, 6, 9, 12 Fri May 29, 2020 Fri Jun 26, 2020 $0.5600 $2.24 6.4% Yes YesRSG Republic Services, Inc. 1, 4, 7, 10 Tue Jun 30, 2020 Wed Jul 15, 2020 $0.4050 $1.62 2.1% -- --SNA Snap-on Incorporated 3, 6, 9, 12 Wed May 20, 2020 Wed Jun 10, 2020 $1.0800 $4.32 3.6% Yes YesTXN Texas Instruments 2, 5, 8, 11 Fri May 1, 2020 Mon May 18, 2020 $0.9000 $3.60 3.2% Yes YesTSN Tyson Foods, Inc. 3, 6, 9, 12 Fri May 29, 2020 Mon Jun 15, 2020 $0.4200 $1.68 2.9% Yes YesUNP Union Pacific Corp. 3, 6, 9, 12 Thu Feb 27, 2020 Tue Mar 31, 2020 $0.9700 $3.88 2.5% Yes YesUNH UnitedHealth Group Inc. 3, 6, 9, 12 Fri Mar 13, 2020 Tue Mar 24, 2020 $1.0800 $4.32 1.5% -- --WBA Walgreens Boots Alliance 3, 6, 9, 12 Tue May 19, 2020 Fri Jun 12, 2020 $0.4575 $1.83 4.4% Yes YesWSM Williams-Sonoma, Inc. 2, 5, 8, 11 Thu Apr 23, 2020 Fri May 29, 2020 $0.4800 $1.92 3.0% -- --

� 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, Refinitiv, I/B/E/S and company releases.

Data as of 5/5/2020.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

$1.0 billion from 2020 to May 2021.Walgreens has opened 15 new corona-

virus drive-through testing locations in seven states, in collaboration with the U.S. Department of Health and Human Services (HHS).

Republic Services Inc. (RSG) was among the worst-performing stocks in the DI portfolio in April, up 4.4%. There was no company-specific news related to its underperformance for the month.

During the month, it declared a regular quarterly dividend of $0.405 per share, in line with its previous declara-tion. Republic Services has paid a divi-dend since 2003 and has consecutively raised its dividend for 10 years.

Republic Services also committed $20 million to a coronavirus initiative to help its employees, customers and communi-ties across the country. Over the next two months, plans include a weekly meal for all frontline employees, weekly

dinner for frontline employees and their families and biweekly $100 gift cards to all frontline employees.

Tyson Foods Inc. (TSN) was the third-worst-performing stock in the DI portfo-lio for the month of April, up by 7.5%. Tyson’s facilities have been running at reduced production levels due to worker absenteeism. Meat processing plants are labor-intensive with employ-ees working in close quarters, which has resulted in coronavirus outbreaks at several of Tyson’s plants. The closures of many of the plants and the slowdown in production speed will likely impact beef and pork capacity.

The disruption has resulted in declines for livestock prices, while prices are increasing for processed meat, which entails lower costs and higher selling prices for Tyson. This will likely benefit the company since livestock is one of Tyson’s largest component costs for its

beef and pork segments, which makes up approximately half of its operating profit.

Eaton Corp. (ETN) tied as the DI portfolio’s third-worst-performing stock in April, up 7.5% for the month. First-quarter 2020 earnings beat consensus estimates, but deteriorated from 2019, subsequently highlighting the company’s sensitivity to the economic cycle. Sales for the quarter declined by 10% to $4.8 billion year over year. Eaton’s earnings per share beat the I/B/E/S consensus estimate of $1.07 by 2.0%.

In late April, it declared a regular quarterly dividend of $0.73 per share, in line with the previous declaration. The current dividend yield of 3.6% compares to the five-year average high-low range of 4.3% to 3.0%.

Looking forward, Eaton expects full-year 2020 free cash flow to be between $2.3 billion and $2.7 billion. ▪

May 2020 7


Est Consec- PayoutEPS Div First utive Ratio:

P/E Growth Growth Year Years FCFPS LiabRatio 1 Yr Rate Rate Div Div 12 5 Yr (12 to

Ticker (TTM) Current Ago Avg High Low (3-5 Yr) (5 Yr) Paid Raised Month Avg Month) AssetsALL 7.3 2.1% 1.8% 1.9% 2.2% 1.6% (0.7%) 11.8% 1993 10 26% 22% 13% 78%AMGN 18.5 2.7% 3.2% 2.6% 3.1% 2.3% 5.9% 18.9% 2011 8 46% 66% 40% 85%BLK 18.0 3.0% 2.9% 2.6% 3.2% 2.2% 2.4% 11.3% 2003 11 50% 43% 107% 80%CMA 6.0 8.6% 3.2% 2.2% 2.9% 1.8% na 28.7% 1936 9 51% 30% 23% 90%CMI 11.3 3.4% 3.0% 3.0% 3.9% 2.5% (7.4%) 11.8% 1948 10 37% 46% 31% 65%EMN 10.2 4.4% 3.5% 2.6% 3.2% 2.3% 2.6% 12.1% 1994 10 44% 31% 29% 63%ETN 15.9 3.6% 3.6% 3.5% 4.3% 3.0% 4.7% 7.7% 1923 11 56% 50% 44% 54%HD 22.0 2.7% 2.2% 2.3% 2.7% 2.0% 7.1% 23.7% 1987 11 53% 46% 53% 106%HUBB 16.5 3.0% 2.8% 2.5% 3.0% 2.1% 9.3% 10.9% 1934 12 46% 50% 35% 61%HBAN 8.5 7.2% 5.1% 3.2% 3.8% 2.7% 4.9% 29.2% 1971 9 60% 39% 41% 90%IBM 11.9 5.3% 4.9% 4.0% 4.9% 3.4% 3.9% 8.6% 1915 25 64% 61% 48% 87%IP 19.9 6.2% 4.7% 3.9% 4.9% 3.3% na 6.8% 1946 8 121% 59% 35% 79%MDT 25.1 2.2% 2.1% 2.0% 2.3% 1.7% 7.5% 12.3% 1977 42 54% 62% 43% 44%PEP 25.5 3.1% 2.9% 3.0% 3.4% 2.7% 4.6% 8.4% 1952 48 74% 70% 107% 84%PII 16.0 3.6% 3.0% 2.3% 3.1% 1.9% na 4.9% 1995 25 56% 55% 38% 79%PFG 7.8 6.4% 4.1% 3.4% 4.4% 2.8% 6.0% 11.2% 2002 11 49% 36% 10% 95%RSG 23.2 2.1% 1.7% 2.2% 2.5% 2.0% 5.9% 7.6% 2003 10 45% 49% 43% 64%SNA 10.4 3.6% 2.3% 1.9% 2.2% 1.7% 10.0% 16.3% 1939 10 34% 29% 37% 40%TXN 21.4 3.2% 2.7% 2.6% 3.3% 2.2% 6.7% 21.0% 1962 16 63% 52% 55% 55%TSN 10.5 2.9% 1.8% 1.4% 1.8% 1.1% 8.0% 38.0% 1976 8 29% 17% 36% 57%UNP 18.2 2.5% 1.9% 2.4% 3.0% 2.0% 10.2% 15.4% 1899 9 44% 39% 49% 74%UNH 20.5 1.5% 1.4% 1.6% 1.9% 1.4% 12.8% 24.1% 1990 10 28% 29% 30% 67%WBA 10.8 4.4% 3.4% 2.1% 2.5% 1.8% 2.0% 6.9% 1933 44 46% 37% 30% 74%WSM 14.4 3.0% 2.9% 2.7% 3.3% 2.3% (6.7%) 7.5% 2006 10 41% 43% 34% 70%Data as of 5/5/2020.

5 Yr Avg

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 continu-ously 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 inves-tors 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 divi-dends 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 Averages: The stock’s average and average high and low dividend yields 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 one trading day 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.).

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 percent-age 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 per-centage 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 com-pany’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 track-ing portfolio, expressed as a percentage.

Definitions of Terms Used in Tables

8 May 2020

Allstate Corp. is one of the largest U.S. property-casualty insurers based on premium sales. The company offers a broad array of insurance products through multiple brands and diverse distribution channels, including auto (its largest seg-ment by sales), home, life and other insurance offered mainly through its Allstate, Esurance, Encompass and SquareTrade brands.

Allstate’s non property-casualty insurance operations are organized into three separate divisions including Allstate Life, Allstate Benefits and Allstate Annuities. These divisions offer a variety of life insurance, annuity, savings and investment and pension products through Allstate agents, financial institu-tions, independent agents and brokers and direct marketing.

The company was founded in 1931 and has more than 113 million proprietary policies in place across North America sold primarily by its 10,000 dedicated local company agencies.

Allstate’s slogan “You’re in good hands,” created in the 1950s, still ranks as one of the most recognizable in the U.S. today.

Growth TrendsThe company has been increasing prices on many of its poli-

cies, which has led to improved underlying profitability and steady growth.

Sales have increased at a 4.7% annual rate of growth over the last five years. Diluted earnings from continuing opera-tions are much stronger, with a five-year annual growth rate of 17.5% over the same period.

Industry competition is fierce, and insurance products are essentially commodities, but Allstate’s customers are less likely to shop their policies around and they value the service a dedicated local agent can provide.

Pro forma (non-GAAP) earnings are expected to decline 20.4% this year, as the consensus earnings estimate for the fiscal year ending December 31, 2020, is currently $11.16 per share. Analysts are projecting pro forma earnings to drop by 3.8% in fiscal 2021 then grow by 4.3% the year after.

Allstate has paid quarterly cash dividends since 1993 and has increased its annual dividend in each of the last 10 years. The company has been steadily increasing its dividend, with a five-year average growth rate of 11.8%. Its last dividend increase, of 8.0%, was on February 20, 2020.

Financial StrengthAllstate generated strong operating cash flows of over $5.25

billion over the last four quarters. Free cash flow per share continues to improve year over year, rising from $8.26 per share in 2015 to $15.22 share over the last 12-month period.

Currently, Allstate is paying out 26.4% of earnings as divi-dends, which is above the five-year average of 22.0%. The company is paying out 12.6% of pre-dividend free cash flow, which is below the five-year average of 13.3%.

The operating margin was 7.0% over the last four quarters, lower than its 9.7% five-year average and slightly below the industry median of 9.0%. The net profit margin was 5.3%, below its 7.0% five-year average, but in line with the industry median of 5.9%.

The company’s ability to pay interest is strong, as measured by the times interest earned ratio of 19.7, significantly higher than the industry median of 10.0.

The company returned $670 million to shareholders during first-quarter 2020, composed of $159 million in dividend pay-ments and $511 million in share repurchases.

ValuationShares of Allstate have risen 5% over the last year, but its

dividend has increased by nearly 10%, pushing the dividend yield higher to 2.1%. This is slightly below the five-year aver-age high yield of 2.2%.

The company is trading at a trailing price-earnings ratio of 7.3, which is below its five-year average of 12.2 and below the property and casualty insurance industry median of 10.8.

RisksInvestment income is likely to decline due to an extended

low-interest-rate environment. The ongoing coronavirus pandemic has led to other risks, including the varied effect on new business of lower vehicle sales and increased unemploy-ment. Shelter-in-place payback rebates offered by Allstate are expected to total more than $600 million but should have a positive long-term retention impact.

The company is exposed to longer-term headwinds, includ-ing limited growth prospects given its dependence on a declining local agent channel and potential large loss years caused by Midwestern catastrophes. The company has suc-cessfully reduced its exposure to some coastal areas. Allstate’s direct-to-consumer channel is not as developed as some of its competitors. Progressive and Geico have proven experience in this increasingly popular distribution method, and Allstate’s Esurance operations are much less profitable. ▪

Allstate Corp. (ALL)

Bullish Factors• Proven ability to increase premiums across many of its

insurance policies is driving profitability• Current customer base values local agent network,

helping to limit policy shopping• Exited some coastal areas, reducing potential large loss

catastrophe claims

Bearish Factors• Direct-to-consumer channel is not as developed as some

competitors and is less profitable • New customer growth prospects are limited, given its

dependence on a declining captive agent channel• Investment income is likely to decline due to an

extended low-interest-rate environment

May 2020 9


ALL $102.15 ($125.92 - $64.13)

Addition Alert Date: 5/8/2020Price at Alert: N/A Risk Index: 1.12Market Cap (Million): $31,748.1Avg Daily Dollar Volume (Million): $262.7Primary Sector: FinancialsPrimary Industry: Insurance - Property & Casualty

Indicated Annual Dividend: $2.16 Multiples Current 12/2019 12/2018 12/2017 12/2016 12/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 2.1% 2.0 1.9 1.6 2.0 1.9Latest Dividend Increase: % 8.0% Dividend Yield (%): High 2.4 2.3 2.0 2.3 2.2Dividend Yield: Current 2.1% Dividend Yield (%): Low 1.7 1.7 1.4 1.7 1.6Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 7.3 6.9 16.2 11.2 14.0 12.6Dividend Paid Since: 1993 Price/Earnings (Industry) 10.8 12.3 17.3 22.4 14.0 13.9Number of Years of Div Increases: 10 Price/Book Value 1.4 1.3 1.6 1.6 1.3 1.4Direct Invest Option: Yes Price/Sales 0.7 0.7 0.8 0.8 0.7 0.7DRIP Plan: Yes Ratios Current 12/2019 12/2018 12/2017 12/2016 12/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 26.4 13.8 30.3 15.2 27.3 23.4

$0.5400 Payout Ratio: FCFPS (%) 12.6 13.7 12.4 13.0 13.1 14.5$0.5000 Gross Margin (%) -- -- -- -- -- --$0.5000 Operating Margin (%) 7.0 13.6 6.6 11.5 7.5 9.1$0.5000 Operating Margin (%) (Ind) 9.0 11.9 9.2 8.5 12.5 12.4$0.5000 Net Margin (%) 5.3 10.5 5.1 8.7 4.8 5.7$0.4600 ROE (%) 10.5 21.7 10.0 17.3 9.5 11.1

Rel Strgth ROE (%) (Industry) 7.8 10.7 7.6 7.4 8.8 9.0Rank ROA (%) 2.0 4.0 1.8 3.1 1.7 1.9

4 Week 55% Current Ratio -- -- -- -- -- --13 Week 65% Liabilities to Assets (%) 78.3 78.3 81.0 79.9 81.1 80.926 Week 74% Liab to Assets (%) (Ind) 70.6 70.7 73.0 71.6 69.2 68.752 Week 82% Asset Turnover -- -- -- -- -- --

Financial Statements TTM 12/2019 12/2018 12/2017 12/2016 12/2015Growth 5 Year Sales ($M) 44,723 44,723 39,828 39,553 36,847 36,105Dividends 11.8% Gross Income ($M) 37,246 12,535 9,201 10,309 7,493 8,143Sales 4.7% Depreciation & Amort. ($M) 611 647 511 483 382 371Net Income 11.2% Unusual/Extra ($M) 138 189 74 347 338 488EPS Basic 17.9% Operating Income ($M) 3,148 6,089 2,628 4,549 2,754 3,282EPS Dil Cont 17.5% Interest Expense ($M) 0 0 0 0 0 0

Pretax Income ($M) 6,089 6,089 2,628 4,549 2,754 3,282SUE Score Net Income ($M) 2,386 4,678 2,012 3,438 1,761 2,055

(0.40) Operating Cash Flow ($M) 5,252 5,129 5,175 4,314 3,993 3,6160.90 Investing Cash Flow ($M) (2,498) (2,807) (1,719) (1,210) (2,526) 742

Annual Financing Cash Flow ($M) (2,627) (2,483) (3,574) (2,923) (1,526) (4,520)12/2021 Capital Expenditures ($M) 375 433 277 299 313 303

19 Net Cash Flow ($M) 127 (161) (118) 181 (59) (162)$10.74 EPS Basic ($) 7.27 14.25 5.79 9.50 4.72 5.12$10.95 EPS Diluted Cont ($) 14.07 14.03 5.61 7.96 4.67 5.05

# Rev Up 5 EPS DC Year/Year Chg (%) 150.6 149.9 (29.5) 70.6 (7.6) (19.4) # Rev Down 8 Dividends/Share ($) 1.92 1.96 1.75 1.44 1.29 1.20Three Mos. Ago $11.08 Dividend Year/Year Chg (%) 9.7 12.0 21.5 11.6 7.5 7.1Year/Year Chg (3.8%) Free Cash Flow/Share ($) 15.22 14.31 14.08 11.09 9.87 8.26

12/2019 9/2019 6/2019 3/2019 Total Cash ($M) 338 338 499 617 436 495$5.22 $2.67 $2.44 $3.74 $14.07 Goodwill/Intangibles ($M) 2,545 2,545 2,530 2,181 1,219 1,219

($1.70) $2.59 $2.01 $2.72 $5.61 Total Assets ($M) 119,950 119,950 112,249 112,422 108,610 104,656Long-Term Debt ($M) 6,631 6,631 6,451 6,350 6,347 5,124

12/2019 9/2019 6/2019 3/2019 Total Total Liabilities ($M) 93,952 93,952 90,937 89,871 88,037 84,631$35.82 $33.83 $33.60 $33.09 $136.34 Book Value/Share ($) 74.13 72.36 55.73 57.47 50.50 45.57$27.73 $30.26 $30.43 $27.59 $116.01 Avg Shares Outst'g (M) 320.40 328.20 347.80 362.00 372.80 401.10

Sources: AAII Stock Investor Pro, Refinitiv and I/B/E/S. Data as of 5/5/2020.

$10.45

Apr 1, 2019Jan 2, 2019

$11.16

Annual12/2020

19

11$10.50

7.7%

TTM

Feb 20, 2020

6

17

$2.98$3.50

125

150.6%

12.3%18.6%

44.5%

% Surp(3.3%)

44.3%

$2.84Feb 4, 2020

EPS (Qtr)

Oct 30, 2019

(6.4%)

Quarterly3/2020EPS Estimates

$2.93

CurrentMonth Ago

# of Estimates

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

Allstate Corp. is one of the largest U.S. property-casualty insurers based on premium sales. The company offers a broad array of insurance products through multiple brands and diverse distribution channels, including auto (its largest segment by sales), home, life and other insurance products offered mainly through its Allstate, Esurance, Encompass and SquareTrade brands. The company was founded in 1931 and has more than 113 million proprietary policies in place across North America, sold primarily by its 10,000 dedicated local company agencies. Allstate is licensed to write policies across all 50 U.S. states, the District of Columbia, Puerto Rico and Canada.

May 21, 2019

3 Year

Jul 1, 2019

Rel StrgthIndex

Nov 16, 2018 Nov 29, 2019

Feb 20, 2020Nov 15, 2019Jul 17, 2019

May 30, 2019

10%(15%)(4%)

Gain

Aug 29, 2019Nov 27, 2019Feb 28, 2020

Feb 8, 2019

(20.4%)

15.0%

5%

Stock

6.7%38.5%

9.7%

Feb 27, 2019

Est Surprise EPS

25.0%

$3.13

1.9% (2.2% - 1.6%)

0.981.031.07

Apr 1, 2020Jan 2, 2020Oct 1, 2019

1.02

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jun 2015 Jun 2016 Jun 2017 Jun 2018 Jun 2019$0

$20

$40

$60

$80

$100

$120

$140

Divi

dend

Yie

ld Share Price

10 May 2020

Cummins Inc. is a well-run industrial company specializing in diesel engines. It operates in four segments: engine, distribu-tion, components and power generation.

The engine segment, which accounted for 34% of first- quarter 2020 sales, offers a range of diesel and natural-gas-powered engines under the Cummins name and other customer brand names. It serves the heavy- and medium-duty truck, bus, recreational vehicle, light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail and governmental equipment markets.

The distribution segment (28% of sales) provides main-tenance contracts, engineering services and integrated products.

The components segment (23% of sales) supplies aftertreat-ment systems, turbochargers, filtration products and fuel sys-tems for commercial diesel applications (on and off highway). This segment serves engine and distribution markets, truck manufacturers and other original equipment manufacturers.

The power systems segment (14% of sales) designs and manufactures components that include engines, controls, alternators, transfer switches and switchgear, as well as power generation systems and services.

Growth TrendsTop-line revenue growth has expanded at a 4.2% annual

rate over the last five years but declined 6.7% over the trailing four quarters. Cummins has global operations and is seeing segments of its operations come to a halt in different parts of the world as nations deal with the coronavirus pandemic. For example, operations in China are coming back online, while those in India and Mexico remain constrained.

Cummins reported a positive 46.9% earnings surprise this past April, when it reported adjusted quarterly earnings of $3.18 per share.

The consensus earnings estimate for the current year has been slashed over the last three months and now stands at $7.15 per share, a 45.1% decrease that now represents a 50.6% year-over-year decline. The range of estimates is quite high for 2020 from a low of $5.10 to a high of $8.34 per

share. For 2021, analysts see earnings bouncing back 44.9% to $10.36 per share with a high estimate of $12.95 and a low estimate of $8.60.

The company has historically targeted a return of 50% of operating cash flow to shareholders in the form of dividends and share repurchases but must now focus on cash preserva-tion and liquidity until the global economy recovers.

Cummins has paid a dividend every year since 1948 and has increased its annual payout for 10 consecutive years. The company last increased its dividend in July of 2019 by 15.0%.

Financial StrengthCummins’ interest coverage ratio was 27.4 over the last four

quarters. While the ratio has fluctuated over the last five years, it remains high and is well above the industry median of 2.2.

Cummins has positive operating cash flow, which has been stable over the last five years. From 2016 to the end of first-quarter 2020 it has increased from $1.9 billion to over $3.1 billion.

Over the last four quarters, the operating margin was 11.2%, matching its five-year average and well above the industry median of 5.0%. Over the same period, the net profit margin was 9.3%, above its 7.8% five-year average and well above the industry median of 3.2%.

Cummins’ current earnings payout ratio of 37.1% and the free cash flow payout ratio of 30.5% are below the five-year averages of 46.1% and 41.8%, respectively. If earnings decline to $7.15 per share, the payout ratio will jump to 73.3% if the dividend is maintained. The company ended the first quarter with cash, cash equivalents and marketable securities of $2 bil-lion and committed to a borrowing capacity of $1.9 billion. The firm just entered into an agreement to provide an additional $2 billion in revolving credit that terminates on April 30, 2021.

ValuationThe stock currently trades with a 3.4% dividend yield, which

is above the five-year average of 3.0%. The stock’s current price-earnings ratio is 11.3 times trailing

earnings and is 21.5 times consensus 2020 earnings.

RisksWhile there is competition in the industrial space, Cummins

has been able to grow market share and earnings over the long term. The barriers to entry by a competitor are high. Over the last decade, several competitors have exited the market due to challenges with meeting emissions reduction targets in the U.S. and abroad.

As with all industrial companies, Cummins’ results are tied to the overall strength of the U.S. and global economies (cycli-cality). The impact of the coronavirus pandemic will be felt for some time.

Around 44% of Cummins’ revenue is derived from outside the U.S., exposing the company to foreign exchange rate risk as well as the trade tariffs. ▪

Cummins Inc. (CMI)

Bullish Factors• Strong market share compared to competitors• Stricter pollution standards are favorable for Cummins’

proven diesel engines and components• Reasonably valued on a dividend basis compared to

historical trends

Bearish Factors• Global economic slowdown hurts demand for products• Operations impacted by coronavirus pandemic response

worldwide• Movement toward electric drivetrains may limit demand

for combustion engines

May 2020 11


Addition Alert Date: 10/3/2014Price at Alert: $135.10 Risk Index: 1.58Market Cap (Million): $22,713.1Avg Daily Dollar Volume (Million): $248.5Primary Sector: Consumer CyclicalsPrimary Industry: Auto, Truck & Motorcycle Parts

Indicated Annual Dividend: $5.24 Multiples Current 12/2019 12/2018 12/2017 12/2016 12/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 3.4% 3.1 2.8 2.7 3.5 3.0Latest Dividend Increase: % 15.0% Dividend Yield (%): High 3.8 3.6 3.1 5.0 4.1Dividend Yield: Current 3.4% Dividend Yield (%): Low 2.6 2.3 2.3 2.7 2.4Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 11.3 10.9 12.0 14.8 13.8 14.9Dividend Paid Since: 1948 Price/Earnings (Industry) 11.0 13.7 15.0 14.3 13.3 16.8Number of Years of Div Increases: 10 Price/Book Value 3.3 3.3 3.5 3.6 2.8 2.8Direct Invest Option: No Price/Sales 1.0 1.0 1.1 1.3 1.1 1.1DRIP Plan: Yes Ratios Current 12/2019 12/2018 12/2017 12/2016 12/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 37.1 33.7 33.6 70.2 48.5 44.7

$1.3110 Payout Ratio: FCFPS (%) 30.5 30.7 43.1 39.6 48.0 47.3$1.3110 Gross Margin (%) 25.4 25.4 24.1 25.0 25.5 25.9$1.3110 Operating Margin (%) 11.2 11.5 11.7 11.4 10.7 10.8$1.1400 Operating Margin (%) (Ind) 5.0 5.0 7.0 7.3 7.0 6.9$1.1400 Net Margin (%) 9.3 9.6 9.0 4.9 8.0 7.3$1.1400 ROE (%) 27.5 30.4 29.3 14.1 19.5 18.5


4 Week 43% Current Ratio 1.4 1.5 1.5 1.6 1.8 2.113 Week 78% Liabilities to Assets (%) 64.8 62.0 61.5 59.8 54.2 51.126 Week 64% Liab to Assets (%) (Ind) 65.3 66.6 66.2 61.2 58.5 57.452 Week 72% Asset Turnover 1.1 1.2 1.3 1.2 1.2 1.2

Financial Statements TTM 12/2019 12/2018 12/2017 12/2016 12/2015Growth 5 Year Sales ($M) 22,578 23,571 23,771 20,428 17,509 19,110Dividends 11.8% Gross Income ($M) 5,742 5,980 5,737 5,100 4,458 4,947Sales 4.2% Depreciation & Amort. ($M) 683 672 611 583 530 514Net Income 6.5% Unusual/Extra ($M) 143 141 19 9 156 376EPS Basic 10.0% Operating Income ($M) 2,535 2,700 2,786 2,334 1,880 2,057EPS Dil Cont 9.9% Interest Expense ($M) 100 111 113 82 73 69

Pretax Income ($M) 2,644 2,834 2,753 2,365 1,930 2,025SUE Score Net Income ($M) 2,108 2,260 2,141 999 1,394 1,399

3.40 Operating Cash Flow ($M) 3,148 3,181 2,378 2,277 1,939 2,0650.80 Investing Cash Flow ($M) (1,178) (1,150) (974) (1,052) (917) (918)

Annual Financing Cash Flow ($M) (1,514) (2,095) (1,400) (1,074) (1,413) (1,650)12/2021 Capital Expenditures ($M) 666 700 709 506 531 744

21 Net Cash Flow ($M) 363 (174) (66) 249 (591) (590)$10.36 EPS Basic ($) 13.69 14.54 13.20 6.00 8.25 7.86$11.22 EPS Diluted Cont ($) 13.63 14.48 13.23 10.64 8.23 7.84

# Rev Up 14 EPS DC Year/Year Chg (%) (8.0) 9.5 24.3 29.3 5.0 (13.0) # Rev Down 7 Dividends/Share ($) 5.07 4.90 4.44 4.21 4.00 3.51Three Mos. Ago $13.95 Dividend Year/Year Chg (%) 12.7 10.4 5.5 5.3 14.0 24.9Year/Year Chg 44.9% Free Cash Flow/Share ($) 16.62 15.97 10.29 10.63 8.33 7.42

3/2020 12/2019 9/2019 6/2019 Total Cash ($M) 2,030 1,470 1,525 1,567 1,380 1,811$3.41 $1.97 $3.97 $4.27 $13.63 Goodwill/Intangibles ($M) 2,248 2,289 2,035 2,055 812 810$4.20 $3.19 $4.07 $3.35 $14.81 Total Assets ($M) 20,076 19,737 19,062 18,075 15,011 15,134

Long-Term Debt ($M) 1,580 1,576 1,597 1,588 1,568 1,5763/2020 12/2019 9/2019 6/2019 Total Total Liabilities ($M) 13,008 12,230 11,714 10,816 8,136 7,728

$33.56 $36.89 $37.00 $39.52 $146.98 Book Value/Share ($) 47.34 48.31 45.31 43.56 40.67 41.60$38.19 $38.58 $36.84 $37.44 $151.05 Avg Shares Outst'g (M) 149.30 155.40 162.17 166.63 169.04 178.04


(11.6%)

Jul 9, 2019

9$13.05

11

Annual

1312/2020

% Surp46.9%5.7%

20.7%

Jun 5, 2019

Rel Strgth

Mar 7, 2019Dec 3, 2018

EPS (Qtr)

$1.97

18

$9.33$0.90

(79.0%)

514

$3.58

Month Ago

10.4%17.5%20.8%

$7.15

(50.6%)

Quarterly

# of EstimatesCurrent

Oct 9, 2018 Nov 14, 2019Stock

6/2020

EPS$3.18$2.56

(6.7%)

Est Surprise

Feb 4, 2020

(8.0%)

EPS Estimates

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Index

Cummins Inc. designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, fuel systems, controls systems, air handling systems and electric power. The company sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. It serves its customers through a network of more than 500 company-owned and independent distributor locations and more than 7,500 dealer locations in more than 190 countries and territories. It has four segments: engine, power systems, components and distribution.

May 14, 2019

Apr 28, 2020

Feb 11, 2020Oct 7, 2019Jul 9, 2019 Aug 20, 2019

Nov 13, 2019

Feb 12, 2019

7.0%

May 23, 2019

5%(4%)

(13%)(8%)

Feb 21, 2019

(15.0%)

3.0% (3.9% - 2.5%)

12.7%3 Year

Mar 5, 2020Dec 2, 2020Sep 3, 2019

0.98

0.94

1.100.93

TTM

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Divi

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ld Share PriceCMI $153.83 ($186.73 - $101.03)

12 May 2020

Union Pacific Corp. operates the largest U.S. railroad, with a network that spans over 32,000 route miles, linking Pacific Coast and Gulf Coast ports to Midwestern and Eastern gate-ways. Its rail lines touch 23 states in the western two-thirds of the U.S., as well as the Mexican and Canadian borders.

The Union Pacific system captures about half of the rail volume in the Western U.S., from the Pacific Ocean to the Mississippi River. The company also owns roughly one-quarter of Mexican railroad Ferromex.

In 2019, the company generated freight revenues totaling $20.2 billion (down 5.3% from a year ago) from four seg-ments: agricultural products (22.0% of 2019 total freight revenues and 13.1% of revenue carloads), energy (18.6% of revenue; 16.9% of carloads), industrial (28.6% of revenue; 21.4% of carloads) and premium (30.8% of freight revenue; 48.6% of carloads).

Growth TrendsRailroads are reliant on the strength of the overall economy

and become more attractive relative to trucking as gas prices rise. The ongoing coronavirus pandemic has led to a sharp decline in gas prices and has reduced the demand for steel, driving down the need for coal shipments.

Sales have increased by an average of 0.5% a year over the last seven years, while net income has expanded on aver-age by 6.0% annually and diluted earnings from continuing operations grew on average by 10.6% annually over the same period.

Pro forma (non-GAAP) earnings are expected to decline 9.2% this year, as the consensus earnings estimate for the fiscal year ending December 31, 2020, is currently $7.61 per share. Analysts are projecting pro forma earnings to grow by roughly 18.9% in fiscal 2021 and by 11.3% the year after.

Union Pacific has paid a dividend for 121 consecutive years and has increased its distribution in each of the last nine cal-endar years. The company last raised its dividend by 10.2% in July 2019. Over the previous five years, dividends have been growing by an average of 15.4% a year.

Financial StrengthThe U.S. rail industry has an oligopoly-like structure, with

over 80% of revenues generated by four large railroads (including Union Pacific), giving the company’s industry the benefit of high barriers to entry. The network of track and assets that U.S. Class I railroads have in place is impossible to replicate.

Union Pacific enjoys cost advantages and efficient scale relative to its competitors and alternate shipping means. Railroads claim quadruple the fuel efficiency of trucking per ton-mile of freight. They make more effective use of work-force due to greater railcar capacity and train length. On a cost basis, rail charges an estimated 10% to 30% less than truckers to transport containers.

Union Pacific has improved its efficiency in the face of challenging operating environments. Its current gross margin of 80.5% is higher than the 79.9% at the end of 2019 and is higher than the 57.1% median of the ground freight & logis-tics industry. Union Pacific also has a current operating margin of 40.5%, which is up from 39.4% at the end of 2019.

ValuationShares of Union Pacific have fallen 12% over the last year,

but its dividend has increased by more than 18%, pushing the dividend yield higher to 2.5%. This is in the middle of the five-year high-low average yield range of 3.0% to 2.0%.

Currently, Union Pacific is paying out 43.9% of earnings as dividends, which is above the five-year average of 38.9%. The company is paying out 49.0% of pre-dividend free cash flow, which is below the five-year average of 55.5%.

Union Pacific repurchased 35 million shares in 2019 at aggregate cost of $5.8 billion. This was after spending $8.2 bil-lion in 2018 to buy back 57.2 million shares. Since the end of 2013, the company has lowered its weighted average shares outstanding by more than 26%. The company suspended its share repurchase activity in April 2020, with the exception of the final settlement on its $2 billion accelerated share repur-chase program initiated on February 18, 2020.

RisksUnion Pacific is subject to regulation by a significant num-

ber of federal, state and local authorities. It carries more chemicals than other railroads, so it has greater exposure to the liabilities associated with hazardous material spills. Any unfavorable regulation could severely affect the company’s operations, financial condition and/or liquidity.

The company is also impacted by the economic cycle, espe-cially trends in industrial products. Coal demand has been driven sharply lower in recent years, as utilities substitute renewable energy sources and inexpensive natural gas, and the general downward trend in demand for coal is expected to continue. ▪

Union Pacific Corp. (UNP)

Bullish Factors• Strong position in Western U.S., with access to goods

from Asia• Rail shipping costs are less than trucking for long

distances and rail is far more fuel efficient• Economies of scale as largest U.S. railroad operator

Bearish Factors• Railroads are closely tied to the economic cycle• Subject to a wide range of governmental regulation• High exposure to automotive shipments should auto

demand decline

May 2020 13


Addition Alert Date: 7/2/2015Price at Alert: $96.66 Risk Index: 1.33Market Cap (Million): $105,055.9Avg Daily Dollar Volume (Million): $799.8Primary Sector: IndustrialsPrimary Industry: Freight & Logistics - Ground

Indicated Annual Dividend: $3.88 Multiples Current 12/2019 12/2018 12/2017 12/2016 12/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 2.5% 2.4 2.1 2.1 2.6 2.7Latest Dividend Increase: % 10.2% Dividend Yield (%): High 2.8 2.5 2.5 3.4 3.6Dividend Yield: Current 2.5% Dividend Yield (%): Low 2.0 1.8 1.8 2.1 2.2Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 18.2 18.7 18.1 19.6 17.1 18.2Dividend Paid Since: 1899 Price/Earnings (Industry) 19.8 19.2 17.4 24.6 19.2 18.9Number of Years of Div Increases: 9 Price/Book Value 6.7 6.1 5.3 3.8 3.6 4.2Direct Invest Option: Yes Price/Sales 5.0 5.1 4.7 4.5 3.6 4.0DRIP Plan: Yes Ratios Current 12/2019 12/2018 12/2017 12/2016 12/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 43.9 44.0 38.5 18.5 44.3 49.0

$0.9700 Payout Ratio: FCFPS (%) 49.0 50.5 43.8 49.6 46.7 86.8$0.9700 Gross Margin (%) 80.5 79.9 78.2 80.0 81.2 79.7$0.9700 Operating Margin (%) 40.5 39.4 36.9 38.5 36.3 36.9$0.8800 Operating Margin (%) (Ind) 7.7 5.2 7.1 6.4 7.1 7.5$0.8800 Net Margin (%) 27.8 27.3 26.1 50.4 21.2 21.9$0.8000 ROE (%) 34.1 30.7 26.4 47.8 20.8 22.8


4 Week 48% Current Ratio 0.8 0.8 0.9 1.0 1.0 1.313 Week 66% Liabilities to Assets (%) 74.3 70.6 65.5 57.0 64.2 62.126 Week 68% Liab to Assets (%) (Ind) 60.3 60.3 58.7 56.4 61.9 61.352 Week 70% Asset Turnover 0.3 0.4 0.4 0.4 0.4 0.4

Financial Statements TTM 12/2019 12/2018 12/2017 12/2016 12/2015Growth 5 Year Sales ($M) 21,553 21,708 22,832 21,240 19,941 21,813Dividends 15.4% Gross Income ($M) 17,344 17,347 17,858 16,986 16,194 17,379Sales (2.0%) Depreciation & Amort. ($M) 2,214 2,216 2,191 2,105 2,038 2,012Net Income 2.7% Unusual/Extra ($M) -- 2 85 (65) 0 --EPS Basic 7.8% Operating Income ($M) 8,735 8,552 8,432 8,171 7,243 8,052EPS Dil Cont 7.8% Interest Expense ($M) 1,081 1,050 870 719 698 622


4.20 Operating Cash Flow ($M) 8,805 8,609 8,686 7,230 7,525 7,344(0.50) Investing Cash Flow ($M) (3,458) (3,435) (3,411) (3,086) (3,393) (4,476)

Annual Financing Cash Flow ($M) (5,238) (5,646) (5,222) (4,146) (4,246) (3,063)12/2021 Capital Expenditures ($M) 3,508 3,453 3,437 3,238 3,505 4,650

28 Net Cash Flow ($M) 109 (472) 53 (2) (114) (195)$9.05 EPS Basic ($) 8.63 8.41 7.95 13.42 5.09 5.51$9.69 EPS Diluted Cont ($) 8.60 8.38 7.91 6.05 5.07 5.49

# Rev Up 12 EPS DC Year/Year Chg (%) 5.1 6.0 30.7 19.4 (7.7) (4.5) # Rev Down 15 Dividends/Share ($) 3.79 3.70 3.06 2.48 2.26 2.70Three Mos. Ago $10.71 Dividend Year/Year Chg (%) 18.1 20.9 23.4 10.0 (16.5) 49.6Year/Year Chg 18.9% Free Cash Flow/Share ($) 7.74 7.33 6.99 5.00 4.83 3.11

3/2020 12/2019 9/2019 6/2019 Total Cash ($M) 1,190 891 1,333 1,365 1,337 1,391$2.15 $2.02 $2.22 $2.22 $8.60 Goodwill/Intangibles ($M) 0 0 0 0 0 0$1.93 $2.12 $2.15 $1.98 $8.18 Total Assets ($M) 62,216 61,673 59,147 57,806 55,718 54,600

Long-Term Debt ($M) 26,365 23,943 20,925 16,144 14,249 13,6073/2020 12/2019 9/2019 6/2019 Total Total Liabilities ($M) 46,225 43,545 38,724 32,950 35,786 33,898$7.64 $7.53 $7.89 $7.93 $30.99 Book Value/Share ($) 23.37 25.77 27.20 31.13 23.95 23.90$7.51 $7.89 $8.04 $7.46 $30.90 Avg Shares Outst'g (M) 684.30 703.50 750.90 798.40 832.40 866.20


2.4% (3.0% - 2.0%)

0.980.970.91

Mar 31, 2020Dec 30, 2019Sep 30, 2019

0.99

Aug 29, 2019Nov 27, 2019Feb 27, 2020

Feb 7, 2019

(9.2%)

17.9%

(12%)

Stock

2.9%11.8%

18.1%

Feb 27, 2019

Est Surprise EPS

5.0%

$2.15

Union Pacific Corp. is a railroad operating in the U.S. that has more than 32,000 route miles and maintains coordinated schedules with other rail carriers to move freight. It links 23 states in the western two-thirds of the country by rail, providing a supply chain link around the world. Its business mix includes agricultural products, automotive, chemicals, coal, industrial products and intermodal. The company serves U.S. population centers, operates from West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems and serves Mexico's six major gateways. Union Pacific's freight traffic consists of bulk, manifest and premium business.

May 16, 2019

3 Year

Jun 28, 2019

Rel StrgthIndex

Nov 15, 2018 Nov 29, 2019

Feb 6, 2020Nov 14, 2019Jul 25, 2019

May 30, 2019

7%(15%)(9%)

Gain

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

$2.02Apr 23, 2020

EPS (Qtr)

Jan 23, 2020

(30.4%)

Quarterly6/2020EPS Estimates

$2.36

CurrentMonth Ago

# of Estimates

TTM

Jul 25, 2019

18

24

$2.19$1.54

520

5.1%

(5.2%)(0.7%)

18.3%

% Surp13.3%

18.3%

$9.61

Mar 29, 2019Dec 28, 2018

$7.61

Annual12/2020

28

9$8.34

(1.1%)

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ld Share PriceUNP $156.38 ($188.96 - $105.08)

14 May 2020

UnitedHealth Group Inc. (UNH)UnitedHealth Group Inc. is the largest private health

insurance provider in the U.S. It offers a diversified range of products and services through two distinct platforms: UnitedHealthcare and Optum.

The UnitedHealthcare segment provides global health care benefits, serving individuals and employers as well as benefi-ciaries of government-backed insurance plans like Medicare and Medicaid. It served more than 48.5 million people as of March 31, 2020. The segment generated first-quarter gross revenues of $51.1 billion and earnings from operations of $2.9 billion and an operating margin of 5.7%. This segment provides services through a network of physicians, health care professionals and hospitals.

The Optum segment provides everything from medical and pharmaceutical benefits to information and technology-enabled health services, including data analytics to pay-ers, care providers, employers, governments, life sciences companies and consumers. The Optum franchises include OptumHealth, OptumInsight and OptumRx. It serves 96 mil-lion customers as of March 31, 2020. This segment generated second-quarter gross revenues of $32.8 billion and earnings from operations of $2.1 billion.

Growth TrendsRevenue for UnitedHealth has increased at a 13.2% annual

rate of growth over the last five years. During the first quarter of 2020, revenue grew by 6.8%.

Net income has a five-year compound annual growth rate (CAGR) of 19.8%.

UnitedHealth operates in a competitive and relatively low-margin industry. Its operating margin of 7.8% is near the high end of the fairly narrow seven-year range and compares to a 4.8% average for the managed health care industry.

First-quarter adjusted earnings of $3.72 per share were $0.09 better than analysts had expected. UnitedHealth

maintained its full-year guidance for adjusted earnings of $16.25 to $16.55. On the conference call, CEO David Wichmann described the forecast “as the most reasonable baseline posture in these uncertain times.”

The I/B/E/S consensus estimate for 2020 currently stands at $16.23 per share. This is down from $16.40 a month ago and $16.49 three months ago. Five analysts are projecting a long-term growth rate of 12.8%.

UnitedHealth has paid a cash dividend since 1990 with a current streak of 10 consecutive annual increases. In recent years, UnitedHealth has aggressively increased its dividend, with a five-year compound annual growth rate of 24.1%. It raised its dividend 20.0% last year. Responding to a question on the conference call, CFO John Rex explained that while “long-term capital deployment strategies remain,” how the financial markets are behaving “may impact the timing of how we think about different capital allocation activities.”

Dividend increases historically have been announced in early June. We will be looking for the next dividend increase during the first week of next month.

Financial StrengthUnitedHealth’s return on equity has been holding steady

since 2017, currently at 24.5%. In comparison, the industry average is 10.1%.

The company’s ability to pay interest is strong, as measured through the times interest earned ratio of 12.0. This com-pares to the industry average of 9.1%.

UnitedHealth has an earnings payout ratio of 28.3%, below its five-year average of 29.1% and low overall. Its free-cash-flow-payout ratio is 29.6% versus a five-year average of 24.2%.

ValuationUnitedHealth’s dividend yield of 1.5% is slightly below its

five-year average yield of 1.6%. The current yield is below the iShares Dow Jones U.S. Index ETF’s (IYY) yield of 2.0%.

The stock trades at a price-earnings ratio of 20.5. This is above the five-year average of 19.1 and compares to the managed health care industry median of 17.8.

RisksThe coronavirus pandemic is a dual threat. It can both

increase costs and reduce the member count. UnitedHealth’s medical care ratio—the percentage of medical costs relative to premiums paid—declined slightly in the first quarter as elective care was postponed. Rex anticipates that this ratio “could be meaningfully elevated” in the second half of the year as demand for non-coronavirus-related care rebounds. UnitedHealth expects commercial membership to be down due to reductions in employer payrolls but says it’s too early to know by how much.

Health care reform is expected to be a recurring topic throughout the 2020 election cycle. ▪

Bullish Factors• Largest private health insurance provider in the U.S. • Scale across multiple health care services creates

competitive advantage in building provider networks• Best-in-class health costs per member enables it to

price services attractively and deliver strong enrollment growth

Bearish Factors• Coronavirus pandemic could hurt membership due to

reductions in employer payrolls• Medical care costs could increase in the second half of

the year as many have currently deferred care because of the pandemic

• Health care reform rhetoric likely to intensify as the November elections near

May 2020 15


UNH $293.04 ($306.71 - $187.72)Addition Alert Date: 9/6/19Price at Alert: $229.00 Risk Index: 1.38Market Cap (Million): $272,422.9Avg Daily Dollar Volume (Million): $1,894.7Primary Sector: HealthcarePrimary Industry: Managed Health Care

Indicated Annual Dividend: $4.32 Multiples Current 12/2019 12/2018 12/2017 12/2016 12/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 1.5 1.6 1.4 1.5 1.7 1.7Latest Dividend Increase: % 20.0% Dividend Yield (%): High 2.0 1.7 1.8 2.2 2.0Dividend Yield: Current 1.5% Dividend Yield (%): Low 1.4 1.2 1.2 1.4 1.5Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 20.5 17.7 20.4 20.4 18.7 18.4Dividend Paid Since: 1990 Price/Earnings (Industry) 17.8 14.8 20.4 18.5 19.2 19.8Number of Years of Div Increases: 10 Price/Book Value 4.8 4.2 4.6 3.9 3.4 3.1Direct Invest Option: No Price/Sales 1.1 1.0 1.1 0.9 0.7 0.7DRIP Plan: No Ratios Current 12/2019 12/2018 12/2017 12/2016 12/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 28.3 28.4 27.7 26.3 32.2 30.7

$1.08 Payout Ratio: FCFPS (%) 29.6 23.9 24.0 23.6 27.8 21.7$1.08 Gross Margin (%) -- -- -- -- -- --$1.08 Operating Margin (%) 7.8 8.1 7.7 7.6 7.0 7.0$1.08 Operating Margin (%) (Ind) 4.8 4.9 4.1 2.9 3.2 3.1$0.90 Net Margin (%) 5.4 5.7 5.3 5.2 3.8 3.7$0.90 ROE (%) 24.5 25.3 24.1 24.5 19.5 17.5


4 Week 70% Current Ratio -- -- -- -- -- --13 Week 86% Liabilities to Assets (%) 66.9 66.9 66.0 65.6 68.8 69.626 Week 86% Liab to Assets (%) (Ind) 64.6 66.5 64.7 65.6 68.8 69.652 Week 88% Asset Turnover -- -- -- -- -- --

Financial Statements TTM 12/2019 12/2018 12/2017 12/2016 12/2015Growth 5 Year Sales ($M) 246,268 242,155 226,247 201,159 184,840 157,107Dividends 24.1% Gross Income ($M) -- 85,715 80,844 71,123 67,802 53,232Sales 13.2% Depreciation ($M) 2,639 2,720 2,428 2,245 2,055 1,693Net Income 19.8% Unusual/Extra ($M) 0 0 0 0 0 0EPS Basic 20.6% Operating Income ($M) 19,087 19,685 17,344 15,209 12,930 11,021EPS Dil Cont 20.2% Interest Expense ($M) 1,641 1,704 1,400 1,186 1,067 790


0.90 Operating Cash Flow ($M) 14,654 18,463 15,713 13,596 9,795 9,7403.80 Investing Cash Flow ($M) (12,451) (12,699) (12,385) (8,599) (9,355) (18,395)

Annual Financing Cash Flow ($M) (85) (5,625) (4,365) (3,441) (1,011) 12,23912/2021 Capital Expenditures ($M) 1,979 2,071 2,063 2,023 1,705 1,556

25 Net Cash Flow ($M) 2,100 119 (1,115) 1,551 (493) 3,428$18.44 EPS Basic ($) 13.97 14.55 12.45 10.95 7.37 6.10$18.85 EPS Diluted Cont ($) 14.28 14.33 12.19 9.50 7.25 6.01

# Rev Up 5 EPS DC Year/Year Chg (%) 17.5 17.5 28.3 31.1 20.6 5.5 # Rev Down 17 Dividends/Share ($) 3.96 4.14 3.45 2.88 2.38 1.88Three Mos. Ago $18.96 Dividend Year/Year Chg (%) 20.0 20.0 20.0 21.1 26.7 33.5Year/Year Chg 13.7% Free Cash Flow/Share ($) 13.37 17.29 14.40 12.21 8.53 8.63

12/2019 9/2019 6/2019 3/2019 Total Cash ($M) 10,985 10,985 10,866 11,981 10,430 10,923$3.68 $3.67 $3.42 $3.56 $14.32 Goodwill/Intangibles ($M) 76,008 76,008 68,235 63,045 56,125 61,235$3.10 $3.24 $2.98 $2.87 $12.19 Total Assets ($M) 173,889 173,889 152,221 139,058 122,810 111,254

Long-Term Debt ($M) 36,808 36,808 34,581 28,835 25,777 25,33112/2019 9/2019 6/2019 3/2019 Total Total Liabilities ($M) 116,273 116,273 100,525 91,282 84,536 77,424$64.24 $63.59 $63.78 $62.95 $254.57 Book Value/Share ($) 60.78 60.58 53.68 49.56 40.20 35.50$60.66 $70.86 $58.36 $57.13 $247.01 Avg Shares Outst'g (M) 948.00 948.00 948.00 948.00 948.00 948.00


13.3%

25

193

$4.23

5

$16.4912

Annual12/2020

$4.24 $16.40$4.73 $16.23

Year Ago

TTM

TTMSales/Sh (Qtr)

Quarterly

EPS (Qtr)

Year Ago

CurrentMonth Ago

6/202021

33.1%

$3.90

Est Surprise

EPS Estimates# of Estimates

Jan 15, 2020Apr 15, 2020

% Surp2.6%3.3%

Index

Mar 8, 2019

17.5%

20.3%9.4%25.4%25.4%25.5%

20.0%7.0%

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Gain

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EPS$3.72

Feb 27, 2019Nov 9, 2018 Nov 30, 2018

18%4%

16%22%

Stock

1.6% (1.9% - 1.4%)

1.20

UnitedHealth Group Inc. is a health and well-being company. It operates through four segments: UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. It conducts its operations through two business platforms: health benefits operating under UnitedHealthcare and health services operating under Optum. UnitedHealthcare provides healthcare benefits to many customers and markets. Optum is a health services business serving the health care marketplace, including payers, care providers, employers, governments, life sciences companies and consumers, through its OptumHealth, OptumInsight and OptumRx businesses. OptumInsight provides services, technology and healthcare solutions to participants in the healthcare industry. OptumRx provides retail network contracting, purchasing and clinical solutions.

Jun 5, 2019

Feb 17, 2020Nov 18, 2019Aug 13, 2019 Sep 13, 2019

Dec 6, 2019Mar 13, 2020

Mar 19, 2019Dec 13, 2018

Jun 5, 2019

Jun 14, 2019

1.25

3 Year

Mar 24, 2020Dec 17, 2019Sep 24, 2019

1.09

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16 May 2020

against the average shares outstanding for another fiscal period.The table here lists the buyback yield for all of the stocks in

the Dividend Investing tracking portfolio over different peri-ods. In the first column, the Q1 figure compares the average shares outstanding for the latest fiscal quarter to the average shares outstanding in the same fiscal quarter a year ago.

Comerica Inc. (CMA) had 158 million shares outstanding during its 2019 first quarter, but it reduced the number of outstanding shares to 141 million by the end of the 2020 first quarter. The 10.8% reduction in the number of shares is the buyback yield. Note that the signs are reversed, so a positive buyback yield indicates that the average number of shares outstanding declined while a negative number indicates that the average number of shares outstanding is increasing.

Over the last 12 months, 23 of the 24 Dividend Investing holdings had a positive buyback yield—meaning the average number of shares outstanding has declined. Comerica, which has the highest buyback yield for the current fiscal quarter also led all DI stocks with a 10.7% buyback yield for its last fiscal year. Comerica has the strongest recent record of share reductions through buybacks, but the need to preserve cash amid the economic uncertainty resulted in the company sus-pending its share repurchase plan as of March 2020.

Looking at the 24 stocks in the model portfolio, Allstate Corp. (ALL), the newest addition to the portfolio, had the

highest five-year average buy-back yield at 5.6%. A company that issues more shares will have a negative buyback yield. Polaris Inc. (PII) is the only DI holding to have a negative buy-back yield of 1.0% for the latest quarter; it is the direct result of shares issued for employee stock compensation.

Dividends Are Sticky, Buybacks Are Not

AAII Dividend Investing favors dividends in comparison to share repurchases. Dividends are more “sticky” because once a dividend payment is implemented, man-agement is apprehensive to cut it because of the potential reper-cussions to the company’s stock price. On the other hand, share repurchases aren’t necessarily “expected” by shareholders and can be curtailed without much pushback from investors. A com-pany can, however, also slow or halt future dividend increases to conserve cash. ▪

There is sufficient evidence that shares of companies that aggressively buy back shares have better returns. Share buybacks are one mechanism that companies use to return excess cash to shareholders, the other being through divi-dends. When a company reduces the number of outstanding shares, remaining shares gain a slightly larger proportional claim to the company and its profits. This allows earnings per share to expand more quickly than net income. A share buy-back is also a signal to the market that management thinks the stock is undervalued, and the company is repurchasing shares at a discount.

Corporate share repurchases have boosted U.S. stock returns in recent years, but investors should prepare for returns to be lower as buybacks look poised for a near-term slowdown. Share repurchases have come to a screeching halt for most companies as the coronavirus pandemic shut down major parts of the economy. Buybacks have also come under fire recently from politicians who would rather see companies reinvest excess cash flow to retain employees.

Despite plans to slowly reopen the economy, there is intense pressure for companies to preserve cash amid the uncertainty. Companies are pursuing actions to improve their liquidity by reducing or postponing capital expenditures and reviewing all operating expenses. To further preserve cash, companies have suspended their share repurchasing programs for the time being, while others have had to cut or eliminate their dividend.

Buyback Yield Measures Repurchases

When a company repurchases shares, it simply buys back its shares trading in the open mar-ket, or it offers shareholders the option of tendering their shares directly to the company at a fixed price. Since share repur-chases reduce the number of shares outstanding, it increases earnings, cash flow and equity attributable to each of the remaining shares and elevates the market value of the remain-ing shares (all else equal).

While there are a couple of ways to calculate the buyback yield, the easiest is to look at the change in the number of outstanding shares. A stock’s buyback yield is determined by comparing the average shares outstanding for one fiscal period

share Repurchases Poised to slow Down

Share5-Yr Buybacks

Company (Ticker) Q1 Y1 Avg SuspendedComerica Inc. (CMA) 10.8 10.7 3.4 YesAllstate Corp. (ALL) 6.3 5.6 5.6 NoAmgen, Inc. (AMGN) 5.1 8.5 4.4 NoCummins Inc. (CMI) 5.0 4.2 3.2 NoWalgreens Boots Alliance (WBA) 4.7 7.0 0.5 NoUnion Pacific Corp. (UNP) 4.5 6.3 4.7 YesEaton Corpora�on (ETN) 3.5 3.5 2.4 NoHome Depot Inc. (HD) 2.9 3.9 4.0 YesHun�ngton Bancshares (HBAN) 2.8 3.9 (5.3) NoEastman Chemical Co. (EMN) 2.7 2.7 1.7 NoWilliams-Sonoma, Inc. (WSM) 2.7 4.1 3.6 NoBlackRock, Inc. (BLK) 2.3 2.7 1.5 NoInterna�onal Paper Co. (IP) 2.0 3.4 1.6 YesSnap-on Incorporated (SNA) 1.8 2.1 1.1 NoUnitedHealth Group Inc. (UNH) 1.6 1.2 0.7 NoPrincipal Financial Group (PFG) 1.3 2.5 1.4 YesRepublic Services, Inc. (RSG) 1.3 1.8 2.1 NoPepsiCo, Inc. (PEP) 1.1 1.1 1.5 NoTexas Instruments (TXN) 0.9 3.5 2.5 NoTyson Foods, Inc. (TSN) 0.3 0.5 (0.7) NoHubbell Incorporated (HUBB) 0.2 0.4 1.5 NoIBM Corp. (IBM) 0.2 2.7 2.4 YesMedtronic PLC (MDT) 0.2 0.8 (6.7) NoPolaris Inc. (PII) (1.0) 1.7 1.5 YesAverage for All DI Companies 2.6 3.5 1.6Source: AAII's Stock Investor Pro, Refini�v. Data as of 5/4/2020.

Buyback Yield (%)

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