in this issue evolving the di portfolio rules, and a new ... · evolving the di portfolio rules,...

Evolving the DI Portfolio Rules, and a New Addition

There is one portfolio deletion and one portfolio addition this month. Newell Brands Inc. (NWL) is being removed from the portfolio to make room for Black-Rock Inc. (BLK). For more information about the addition and deletion, see the Portfolio Alerts section on page 3.

Determining the framework for analyzing stocks both on the buy side and the sell side is something many individual investors struggle with. Having a set of financially sound quantitative rules that are followed is key to a successful invest-ment strategy. Dividend Investing has always had quantitative rules for additions and deletions, but these rules are evolving as new research comes to light. The rules will of course continue to have a focus on dividend growth, but a new rule involving a price change/decline component is being considered. As the DI port-folio rules evolve, one of the main “pillars” is dividend sustainability, which ties into financial strength.

Why Dividend Sustainability Is Important for Dividend-Paying Stocks

Many companies pay dividends, but those that can sustain their dividend payments are more desirable to the DI portfolio. What makes dividend-paying stocks attractive over non-dividend-paying stocks is the “stickiness” of dividends. Essentially, managers are apprehensive about decreasing their dividend pay-ments, as investors come to expect the payments. The company is aware that its stock price will likely be punished in the event of a dividend decrease or suspen-sion. Dividends can’t be considered sticky if they aren’t sustainable—the market knows better than that.

There are a couple of different measures that can help determine dividend sustainability. One has to do with whether earnings are sufficient enough to cover the dividend payment, and that can be measured with the payout ratio. The payout ratio is calculated by dividing annual dividends per share by annual earnings per share. “Normal” payout ratios can differ significantly from sector to sector, or even industry to industry, but any earnings payout ratio above 100% is unsustainable. An earnings payout of 100% means a company is paying out more than 100% of its earnings as dividends—something it can’t continue to do over the long term. Another way to think of it is in terms of “margin of safety.” If you subtract a company’s payout ratio from 100%, you get a “payout margin of safety.” For example, if a stock’s payout is 55%, then the company’s earnings could fall 45% before the dividend becomes unsustainably funded. A lower pay-out ratio means the company’s dividend has more room to grow.

On the buy side, the payout ratio is fairly clear cut: Anything below 100% is sought after and then the stock’s industry and its historical average is consid-ered. It’s a good sign if the stock’s payout ratio is below its historical average, or below that of its industry. On the sell side, payout ratios can be a little tricky. Limiting investments or causing excess turnover is not beneficial—since pay-out ratios use earnings per share in the calculation, they can be volatile. If a

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 ReportsBlackRock, Inc. (BLK) 8

Leading asset manager has raised its dividend twice this year.

Cummins Inc. (CMI) 10Well-run engine manufacturer committed to returning 75% of operating cash flow to shareholders.

Home Depot Inc. (HD) 12World’s largest home improvement store offers a growing dividend stream.

PepsiCo, Inc. (PEP) 14North American beverage volumes improving as the company promotes new offerings to consumers.

DI Article Why Would You Sell a Stock? 16

The main reasons investors decide to sell a stock fall into several categories.

Next Publication Date: November 9, 2018

October 2018Volume VII Issue 10

www.AAIIDividendInvesting.com

TM

2 October 2018

period. The larger and more stable the ratio, the lower the risk of the company defaulting. In addition, the higher the ratio, the more flexibility a company has to meet its financial obligations and have money left over for dividends, expansion, etc. We wrote in more detail about the interest

coverage ratio in “Analyzing the Interest Coverage Ratio,” that can be found in the Articles section of the DI website (www.aaiidividendinvesting.com). On the buy side a minimum of 3.0x is desired for a greater margin of safety. Although many companies easily beat this level, it helps to rule out some of the unsustainable payments. On the sell side, 2.0x is considered the minimum acceptable level.

Financial strength is often measured by a company’s debt level, or its debt in relation to its total capital, or even total assets. While these measures aren’t necessarily ignored in the DI portfolio approach, financial strength is analyzed on a case-by-case basis. A company’s financial structure can be a strategic decision, and increasing debt levels may be good in some cases. The interest coverage ratio helps prevent putting too much focus on overall debt level—although higher debt levels are riskier. Like the payout ratio, the inter-est coverage ratio and other financial leverage measures can depend on a company’s sector or industry. Table 1 shows the median payout ratios and interest coverage ratios for the different sectors included in AAII’s Stock Investor Pro fundamental research and database program.

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, 2018. 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.”

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Portfolio Alerts This MonthOctober Portfolio Deletion:

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price* Alert Date Purchase* Purchase*Newell Brands Inc. (NWL) 10/5/2018 $30.96 12/8/2017 -32.9% 18.5%

October Portfolio Addition:

Latest DividendCompany (Ticker) Price* Yield* Sector: IndustryBlackRock, Inc. (BLK) $477.21 2.6%*Data as of 10/2/2018.

Portfolio Deletion AlertCompany (Ticker)

Financial: Investment Services

Another measure of dividend sustain-ability is the interest coverage ratio. It determines how easily a (non-financial) company can pay its interest expenses on outstanding debt with operating earnings. The measure is usually com-bined with other measures of financial leverage.

The interest coverage ratio is calcu-lated by dividing a company’s earn-ings before interest and taxes (EBIT) by its interest expenses for the same

company has a large write-off one quar-ter that causes earnings to decline, a stock’s payout ratio will be inflated. If a stock meets all the other requirements of the DI portfolio, a little leeway can be given in this regard. However, if the payout ratio remains above 100% and continues to rise, there may be cause for concern. We also publish the cash flow–based payout ratio to confirm the quality of the earnings-based payout ratio.

Sector

Payout Ra�o 12 Mo. (%)

No. of Stocks

Interest Coverage

12 Mo. (X)No. of Stocks

Basic Materials 29.6 117 6.8 103Capital Goods 30.9 97 9.0 84Conglomerates 16.1 2 4.9 2Consumer Cyclical 36.3 73 11.3 59Consumer Non-Cyclical 40.1 67 8.3 60Energy 68.7 95 2.7 107Financials 40.2 604 3.8 462Health Care 38.0 47 7.5 47Services 50.4 349 3.1 336Technology 33.4 149 7.5 118Transporta�on 21.4 57 3.4 61U�li�es 65.6 75 3.4 85Source: AAII Stock Investor Pro/Thomson Reuters. Data as of 10/3/2018.

Table 1. Median Figures for Exchange-Listed Dividend-Paying Stocks

October 2018 3

AAII DIvIDEND INvEsTINg

These financial strength/dividend sus-tainability rules for the DI portfolio are helpful in seeking attractive candidates and letting go of holdings.

Portfolio AlertsThere is one portfolio deletion and

one portfolio addition for October. Newell Brands Inc. (NWL) is being re-moved from the portfolio to make room for BlackRock Inc. (BLK).

Portfolio Deletion: Newell Brands Inc. (NWL)

Through October 2, Newell Brands has lost 32.9% since being added to the DI portfolio, compared to the IYY’s gain of 18.5%. Newell’s “trouble” started shortly after it was purchased for the DI tracking portfolio. The company decided to sell off $3 billion of its total $14 bil-lion revenue reported in 2016. Then the company had some issues with its management and board of directors. Newell faced disagreement over the re-structuring from former board members of Jarden Corp. (whom Newell acquired in 2016 for $15 billion) and from activist investor Carl Icahn.

In March, Newell announced the fifth resignation of a board member. The

company struck a deal with Carl Icahn, who revealed his roughly 7% stake in the company, to immediately appoint four new board directors of Icahn’s choosing and a fifth at a later time. However, the bankruptcy of Toys ‘R’ Us—one of Newell’s largest customers—outweighed support of Newell’s plans.

In May, the company announced additional restructuring. It stated that all aftertax proceeds from two more divestitures—estimated to be about $10 billion—were expected to be al-located to share repurchase and debt repayment. According to Newell, those proceeds, in combination with free cash flow after dividends, are expected to enable the company to repurchase more than 40% of its outstanding shares by 2020—assuming the current share price—and deleverage the company to maintain an investment-grade credit rat-ing. The company reiterated its commit-ment to continue its dividend at current per-share levels through 2019, growing thereafter within its target 30% to 35% payout ratio range.

While Newell’s valuation is attrac-tive, its current financial stability isn’t. Newell’s excessive changes to its busi-ness structure also make measuring

its fundamentals more difficult. For example, Newell’s interest coverage ratio is 1.5x, but the company did state that it would be selling assets/business units to pay off debt.

Another big consideration is that Newell stated it doesn’t intend to raise its dividend until after 2019 (meaning 2020), which doesn’t fit the DI portfo-lio’s “dividend growth” objective.

Portfolio Addition: BlackRock, Inc. (BLK)

BlackRock Inc. is an investment management company, and its $6.3 trillion in assets under management (AUM) makes it the largest investment management company by AUM. Its product offerings include equities (53% of AUM), fixed income (30% of AUM), multi-asset (8% of AUM), cash (7% of AUM) and alternative investments (2% of AUM). These instruments include exchange-traded funds (ETFs)—you may have heard of “iShares”—mutual funds, closed-end funds (CEFs) and many more. Investment management firms are, to some extent, dependent on the performance of the investment instruments they manage. In the case of BlackRock, its relatively diversified mix

DI Pur- Latest Sep Marketchase Price Gain/ Div Cap

Ticker Company Date Price Price (10/2/18) (Loss) Stock Index Yield (Mil) IndustryAMGN Amgen, Inc. 10/27/17 $175.28 $174.93 $207.67 3.7% 22.2% 18.5% 2.5% $133,927 Biotechnology & DrugsBLK BlackRock, Inc. 10/5/18 na na $477.21 (1.6%) na na 2.6% $75,558 Investment ServicesCBRL Cracker Barrel 2/3/17 $158.50 $158.80 $146.74 (1.3%) (1.0%) 32.0% 3.4% $3,544 RestaurantsCMI Cummins Inc. 10/3/14 $135.10 $136.18 $148.95 3.0% 22.8% 58.8% 3.1% $24,168 Misc. Capital GoodsCVS CVS Health 4/7/17 $77.08 $77.56 $79.24 4.6% 6.4% 26.6% 2.5% $80,936 Healthcare FacilitiesEMN Eastman Chemical Co. 2/6/15 $73.20 $74.67 $97.29 (1.4%) 42.7% 51.1% 2.3% $13,686 Chemical ManufacturingETN Eaton Corporation 12/31/11 $43.53 $45.52 $87.85 4.3% 140.7% 143.0% 3.0% $37,892 Electronic Instruments & ControlsHD Home Depot Inc. 9/1/17 $150.78 $152.88 $204.75 3.2% 36.8% 20.8% 2.0% $237,523 Retail (Home Improvement)HBAN Huntington Bancshares Inc. 1/12/18 $15.85 $15.86 $14.86 (8.0%) (4.1%) 6.5% 3.8% $16,486 Regional BanksIBM IBM Corp. 10/2/15 $144.58 $149.54 $153.75 3.2% 15.4% 53.4% 4.1% $139,654 Computer ServicesIP International Paper Co. 4/4/14 $45.81 $45.69 $50.30 (3.9%) 29.3% 69.4% 3.8% $20,432 Paper & Paper ProductsIVZ Invesco Ltd. 6/6/14 $38.18 $37.82 $22.98 (5.1%) (29.6%) 60.2% 5.2% $9,454 Investment ServicesMDT Medtronic PLC 1/6/17 $72.87 $75.05 $99.02 2.0% 37.9% 32.0% 2.0% $134,362 Medical Equipment & SuppliesOXY Occidental Petroleum 1/9/15 $77.54 $75.96 $82.87 2.9% 28.1% 52.9% 3.8% $63,571 Oil & Gas - IntegratedPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $108.72 (0.2%) 119.9% 143.0% 3.4% $156,580 Beverages (Non-Alcoholic)PII Polaris Industries Inc. 12/9/16 $85.84 $86.34 $99.51 (6.9%) 20.0% 32.0% 2.4% $6,256 Recreational ProductsPFG Principal Financial Group 12/9/16 $60.30 $59.55 $58.86 6.2% 4.4% 32.0% 3.6% $16,686 Insurance (Accident & Health)PG Procter & Gamble Co. 12/7/12 $70.29 $70.89 $84.36 0.3% 43.0% 125.8% 3.4% $208,268 Personal & Household ProductsSNA Snap-on Incorporated 9/7/18 $180.60 $183.36 $185.54 3.9% 1.2% 1.0% 1.8% $10,373 Appliances & ToolsTXN Texas Instruments 4/5/13 $34.20 $34.80 $108.46 (4.5%) 259.7% 104.3% 2.8% $104,744 SemiconductorsUNP Union Pacific Corp. 7/2/15 $96.66 $97.23 $163.15 8.1% 81.1% 48.0% 2.0% $121,499 RailroadsUTX United Technologies 10/7/16 $100.58 $99.10 $141.45 6.2% 49.4% 40.0% 2.0% $112,749 Aerospace and DefenseWEC WEC Energy Group 12/31/11 $34.96 $34.68 $67.67 (1.2%) 171.4% 143.0% 3.3% $21,030 Electric UtilitiesWSM Williams-Sonoma, Inc. 6/3/16 $53.25 $54.00 $63.08 (6.4%) 23.1% 44.1% 2.7% $5,237 Furniture & FixturesData as of 10/2/2018. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

4 October 2018

of equity and fixed income has helped it weather changing market conditions.

Investment management firms have faced many struggles in the last several years, including poor relative active investment performance, investor preferences shifting to passive invest-ments (away from active investments) and fee compression. BlackRock is unique in that roughly two-thirds of its managed assets, and nearly half of

its annual revenue, come from passive investments. BlackRock prides itself on technology innovation in the invest-ment world, giving it a leg up on its competition.

BlackRock’s dividend yield of 2.6% is above its five-year average low of 2.1%. BlackRock’s dividend growth is attractive: Over the last five years, the company has grown its dividend by 10.8% on an annualized basis. Its most

recent dividend increase in July was 8.7%. BlackRock’s earnings payout ratio of 32.1% is below its five-year average of 40.4%.

September DI PerformanceThe DI tracking portfolio had a total

return of 0.2% during September, composed of a 0.3% capital loss (price decline) and 0.5% in income return (dividend payments). The portfolio’s benchmark, the Dow Jones U.S. Index ETF (IYY), gained 0.3% in September, composed of a 0.1% capital loss and 0.4% in income return. The ETF will dis-tribute its next dividend in December.

Texas Instruments (TXN) announced a 24.2% increase in its quarterly dividend during September.

Dividend increase announcements are expected from United Technologies (UTX) and International Paper Co. (IP) during October. United Technologies has historically increased its dividend every five quarters (as opposed to four, like most companies).

So far this year, six DI holdings have announced double-digit increases in their quarterly dividends: Eaton Corp. (ETN), Home Depot Inc. (HD), Huntington Bancshares Inc. (HBAN), PepsiCo Inc. (PEP), Texas Instruments and Williams-Sonoma Inc. (WSM).

Portfolio News

Strongest Stocks in SeptemberUnion Pacific Corp. (UNP) climbed

8.1% in September, making it the strongest member of the DI portfolio for the month. UNP shares rose to a new 52-week high mid-month after Loop Capital Markets raised its rating on the company to buy from hold. UNP shares have risen more than 22% over the last 52 weeks. However, over that period the company has also increased its dividend by roughly 13%. As a result, the company’s yield of 2.0% (based on an annual indicated dividend of $3.20 per share) is just outside its five-year average high-low range of 2.1% to 3.0%.

Principal Financial Group (PFG) tied for the DI portfolio’s second-best

Performance

Dividend Yield 2.9% 1.6%

Total Return

Income Return

Capital Gain/(Loss)

Total Return

Income Return

Capital Gain/(Loss)

September 0.2% 0.5% (0.3%) 0.3% 0.4% (0.1%)2018 YTD 3.0% 2.3% 0.7% 10.2% 1.3% 8.9%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 131.8% 42.3% 89.5% 157.3% 29.6% 127.7%Performance as of 10/3/2018.

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.

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

$240,000

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

AAII Dividend Investing Portfolio

Growth of $100,000

Performance of DI Portfolio

October 2018 5


performance last month, gaining 6.2%. A sizeable portion of the gain occurred on a single day, September 14, when shares of the stock rose by 3.8%. There was no news on that day or throughout the month to explain the increase. Even the full-year I/B/E/S consensus earn-ings estimate is unchanged relative to a month ago.

From a valuation standpoint, Principal remains cheap. Its yield of 3.6% is at the high end of its average five-year range. Its price-earnings ratio of 9.0 ranks in the bottom 13% of all stocks.

United Technologies (UTX) was among the top-performing stocks for September, also gaining 6.2%. United Technologies and other industrial com-panies benefited from lessening con-cerns over a possible trade war during the month. The company also gained momentum when CEO Greg Hayes says that he expects to close the $23 billion acquisition of Rockwell Collins Inc. (COL) by the end of the month. The acquisition was originally expected to close by June or July but was slightly delayed because a stipulation of ap-proval stated that United Technologies had to sell a business unit (which it now has reached an agreement to do). He also mentioned that, in the mean-time, the company will move forward with possible plans for a breakup of its businesses. This is a change in tone; previously Hayes seemed uninterested in entertaining the idea of splitting up United Technologies’ operations. The split up is expected to be three ways: United Technologies’ aerospace busi-ness, including Rockwell Collins, would combine with jet engine maker Pratt & Whitney. The Otis elevator business would be separate, and so would UTX’s climate, controls and security segment. Should the company split, its dividend policy may change; its inclusion in the DI portfolio would have to be re-evalu-ated at that time.

Adding 4.6% for the month, CVS Health (CVS) was the fourth-strongest DI stock in September. CVS shares got a bump after it was reported that U.S. Justice Department (DOJ) antitrust enforcers are preparing to approve

CVS’ planned acquisition of Aetna Inc. (AET). Although CVS has not raised its dividend since December of 2016, it still has a dividend yield of 2.5%, based on the annual indicated dividend of $2.00 per share. This is above the five-year average high-low yield range of 1.5% to 2.1% and above the five-year average yield of 1.8%. The company has sus-pended dividend increases and share buybacks in order to focus on paring down the debt load it took on to fund its acquisition of Aetna.

Weakest Stocks in SeptemberHuntington Bancshares Inc. (HBAN)

was the DI portfolio’s worst-performing stock in September, falling 8.0% last month. Many of its peers also fell, leading the iShares U.S. Regional Banks ETF (IAT) to lose 5.7% of its value. Both HBAN and the ETF declined throughout the month, giving up even more ground following the Federal Open Market Committee’s decision to raise interest rates for a third time this year.

During a mid-month presentation, Huntington executives said the company was on pace to meet its 2018 financial goals, including revenue growth of 5% to 6%. This, and other financial metrics, matched the guidance that the com-pany gave in its August investor presen-tation. The consensus I/B/E/S full-year earnings estimates for this year and next were also unchanged last month.

Shares of Huntington yield 3.8%. This is well above the stock’s five-year average high of 2.8%. Huntington’s P/E of 14.2 is also cheap, ranking in the bot-tom 30% of all stocks.

Polaris Industries Inc. (PII) lost 6.9% during September, making it the second-worst-performing stock in the DI portfolio for the month. Polaris’ decline wasn’t seemingly caused by any compa-ny-specific news, but tariffs between the U.S. and China likely contributed to the

decline. Polaris hasn’t been shy about the fact that tariffs will hurt its business. During the second-quarter conference call, CEO Scott Wine said, “The current approach is imposing a $40 million cost we must offset in 2018 with a much larger, but not estimable impact on 2019. This very material current-year impact includes List 1 of the 301 tariffs, the market effective 232 steel and aluminum tariffs and the retaliatory impacts from Canada and Europe. I’m very pleased with the countermeasures our team has implemented to enable us to hold our guidance, but there is a limit to how much more we can cover, particularly since the numerous addi-tional tariffs that have been threatened, if implemented, are expected to far exceed the damage than those already implemented.” Polaris will likely give more guidance on how the recently implemented tariffs will affect its busi-ness operations in its third-quarter conference call on October 22.

Newell Brands Inc. (NWL) was the third-worst-performing stock in the DI Portfolio during September, down 6.5%. Even though Newell is being removed from the portfolio, it’s still included here in the top-bottom list because it impacted the portfolio’s performance during September. Although there was no Newell-specific news, the com-pany’s share price was brought down in relation to a proposal from customer Sears Holding Corp.’s (SHLD) CEO to restructure the company’s debt to avoid bankruptcy.

As Newell continues to execute its re-structuring plan with the sale of assets, the company remains susceptible to the turbulence of the retail and consumer product industries. Newell fell in late September due to concern that the effect of a Sears bankruptcy on Newell would be similar to that from the bank-ruptcy of Toys ‘R’ Us. However, a Wells

Recent Earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %CBRL Cracker Barrel Sep 18 $2.550 $2.687 (5.1%)Data as of 10/2/2018. Sources: I/B/E/S and company releases.

6 October 2018

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

Ticker Company Paid Date Payable Div Yield Invest PlanAMGN Amgen, Inc. 3, 6, 9, 12 Thu Aug 16, 2018 Fri Sep 7, 2018 $1.3200 $5.28 2.5% -- YesBLK BlackRock, Inc. 3, 6, 9, 12 Thu Sep 6, 2018 Mon Sep 24, 2018 $3.1300 � $12.52 2.6% -- --CBRL Cracker Barrel 2, 5, 8, 11 Thu Oct 18, 2018 Mon Nov 5, 2018 $1.2500 $5.00 3.4% Yes YesCMI Cummins Inc. 3, 6, 9, 12 Tue Aug 21, 2018 Tue Sep 4, 2018 $1.1400 � $4.56 3.1% Yes YesCVS CVS Health 2, 5, 8, 11 Tue Jul 24, 2018 Wed Aug 1, 2018 $0.5000 $2.00 2.5% Yes YesEMN Eastman Chemical Co. 1, 4, 7, 10 Thu Sep 13, 2018 Fri Oct 5, 2018 $0.5600 $2.24 2.3% Yes YesETN Eaton Corporation 3, 5, 8, 11 Thu Aug 2, 2018 Fri Aug 17, 2018 $0.6600 $2.64 3.0% Yes YesHD Home Depot Inc. 3, 6, 9, 12 Wed Aug 29, 2018 Thu Sep 13, 2018 $1.0300 $4.12 2.0% Yes YesHBAN Huntington Bancshares Inc. 1, 4, 7, 10 Fri Sep 14, 2018 Mon Oct 1, 2018 $0.1400 � $0.56 3.8% Yes YesIBM IBM Corp. 3, 6, 9, 12 Thu Aug 9, 2018 Mon Sep 10, 2018 $1.5700 $6.28 4.1% Yes YesIP International Paper Co. 3, 6, 9, 12 Tue Aug 14, 2018 Mon Sep 17, 2018 $0.4750 $1.90 3.8% Yes YesIVZ Invesco Ltd. 3, 6, 9, 12 Wed Aug 15, 2018 Tue Sep 4, 2018 $0.3000 $1.20 5.2% Yes YesMDT Medtronic PLC 1, 4, 7, 10 Thu Sep 27, 2018 Fri Oct 19, 2018 $0.5000 $2.00 2.0% Yes YesOXY Occidental Petroleum 1, 4, 7, 10 Fri Sep 7, 2018 Mon Oct 15, 2018 $0.7800 � $3.12 3.8% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Thu Sep 6, 2018 Fri Sep 28, 2018 $0.9275 $3.71 3.4% Yes YesPII Polaris Industries Inc. 3, 6, 9, 12 Thu Aug 30, 2018 Mon Sep 17, 2018 $0.6000 $2.40 2.4% -- YesPFG Principal Financial Group 3, 6, 9, 12 Wed Sep 5, 2018 Fri Sep 28, 2018 $0.5300 � $2.12 3.6% Yes YesPG Procter & Gamble Co. 2, 5, 8, 11 Thu Jul 19, 2018 Wed Aug 15, 2018 $0.7172 $2.87 3.4% Yes YesSNA Snap-on Incorporated 3, 6, 9, 12 Thu Aug 16, 2018 Mon Sep 10, 2018 $0.8200 $3.28 1.8% Yes YesTXN Texas Instruments 2, 5, 8, 11 Tue Oct 30, 2018 Mon Nov 19, 2018 $0.7700 � $3.08 2.8% Yes YesUNP Union Pacific Corp. 3, 6, 9, 12 Thu Aug 30, 2018 Fri Sep 28, 2018 $0.8000 � $3.20 2.0% Yes YesUTX United Technologies 3, 6, 9, 12 Thu Aug 16, 2018 Mon Sep 10, 2018 $0.7000 $2.80 2.0% Yes YesWEC WEC Energy Group 3, 6, 9, 12 Mon Aug 13, 2018 Sat Sep 1, 2018 $0.5525 $2.21 3.3% Yes YesWSM Williams-Sonoma, Inc. 2, 5, 8, 11 Thu Oct 25, 2018 Wed Nov 21, 2018 $0.4300 $1.72 2.7% -- --

� 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 10/2/2018.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

Fargo analyst argued that the concern surrounding Newell’s relationship with Sears is overblown, since Newell is not as exposed to Sears as it was to Toys ‘R’ Us (Sears isn’t even one of Newell’s 10 largest customers).

Despite the buffeting of news within the retail and consumer product industries, Newell remains steady with its plans to offload assets with the expectation to generate $10 billion in aftertax proceeds. So far, Newell has yielded more than $2.5 billion from the sale of three brands: Rawlings Sporting

Goods; packaging manufacturer The Waddington Group; and hair products business Goody Products Inc.

Williams-Sonoma Inc. (WSM) lost 6.4% in September, making it the fourth-weakest holding in the DI portfolio for the month. There was no company-specific news; however, con-tinued trade tensions between the U.S. and China undoubtedly created head-winds for the company’s shares. The company imports goods from China that have been hit with tariffs instituted by the Trump administration, which could

eat into the company’s bottom line. The company’s CEO, Laura Alber, told investors that her company had done all that it could to absorb inevitable price increases. “We are aggressively working to mitigate the potential impact of these tariffs on our financial results,” Alber stated. Williams-Sonoma has an annual indicated dividend of $1.72 per share, which translates into a dividend yield of 2.7%. This is above the five-year average yield of 2.4% and is in the middle of the five-year average high-low dividend yield range of 2.0% to 2.9%. ▪

October 2018 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) AssetsAMGN 17.3 2.5% 2.5% 2.2% 2.6% 1.9% 5.4% 26.1% 2011 7 135% 61% 30% 78%BLK 18.4 2.6% 2.0% 2.5% 3.0% 2.1% 13.9% 10.8% 2003 9 32% 40% 45% 84%CBRL 12.7 3.4% 2.9% 2.7% 3.3% 2.3% 7.3% 32.0% 1982 16 47% 52% 57% 59%CMI 12.9 3.1% 2.3% 2.6% 3.3% 2.1% 11.7% 18.5% 1948 9 68% 45% 53% 61%CVS 54.2 2.5% 2.7% 1.8% 2.1% 1.5% 10.8% 25.2% 1986 14 68% 29% 30% 73%EMN 12.7 2.3% 2.1% 2.1% 2.5% 1.9% 11.0% 14.4% 1994 8 21% 25% 31% 65%ETN 12.7 3.0% 3.7% 3.2% 3.9% 2.8% 9.5% 9.6% 1923 9 35% 47% 57% 48%HD 23.2 2.0% 1.9% 2.1% 2.6% 1.9% 14.9% 25.1% 1987 9 45% 43% 44% 96%HBAN 14.2 3.8% 2.2% 2.3% 2.8% 2.0% 14.7% 14.9% 1971 8 31% 30% 22% 89%IBM 12.6 4.1% 3.7% 3.0% 3.5% 2.6% 1.0% 12.3% 1915 23 97% 47% 40% 85%IP 15.0 3.8% 3.2% 3.4% 4.1% 2.9% 15.0% 11.0% 1946 6 na 68% 0% 80%IVZ 9.1 5.2% 3.2% 3.1% 3.7% 2.7% 5.8% 12.4% 1994 14 41% 45% 57% 73%MDT 24.0 2.0% 2.2% 2.2% 2.6% 1.9% 7.0% 12.1% 1977 41 na 57% 0% 44%OXY 28.6 3.8% 4.7% 3.9% 4.6% 3.4% 68.5% 6.3% 1975 16 106% na nmf 53%PEP 19.8 3.4% 2.8% 2.9% 3.3% 2.6% 7.2% 8.3% 1952 46 94% 69% 74% 87%PII 20.3 2.4% 1.9% 1.9% 2.5% 1.5% na 9.4% 1995 23 57% 48% 42% 73%PFG 9.0 3.6% 2.7% 2.9% 3.6% 2.4% 7.9% 19.1% 2002 10 23% 33% 15% 95%PG 21.7 3.4% 3.1% 3.2% 3.6% 2.9% 6.8% 4.0% 1890 62 74% 71% 63% 56%SNA 17.5 1.8% 1.7% 1.6% 1.9% 1.4% 10.0% 16.1% 1939 8 30% 27% 29% 41%TXN 24.9 2.8% 1.9% 2.6% 3.2% 2.2% 14.4% 24.1% 1962 15 53% 51% 40% 43%UNP 23.5 2.0% 2.0% 2.5% 3.0% 2.1% 18.0% 0.2% 1899 8 18% 38% 44% 66%UTX 19.5 2.0% 2.2% 2.4% 2.7% 2.1% 8.8% 6.0% 1936 23 44% 38% 81% 69%WEC 20.2 3.3% 3.0% 3.2% 3.7% 2.8% 4.5% 11.6% 1939 15 53% 60% 66% 70%WSM 17.2 2.7% 2.9% 2.4% 2.9% 2.0% 6.1% 11.8% 2006 9 51% 43% 33% 59%Data as of 10/2/2018.

Payout Ratio:Dividend Yield EPS

5 Yr Avg

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 of-fer 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 an-nual 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 Averages: The stock’s av-erage 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 re-cord 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 October 2018

BlackRock (BLK) is one of the world’s largest money man-agement firms. As of June 30, 2018, the company oversaw nearly $6.3 trillion in assets under management (AUM). BlackRock provides a range of exchange-traded funds (ETF), mutual funds, separately managed accounts and invest-ment trusts. The company’s investment offerings range from traditional index funds to alternative investments that are not frequently traded (illiquid alternatives).

Many individual investors are familiar with its ETF business, which markets funds under the iShares brand. What may not be as well known is that iShares only accounts for 28% of BlackRock’s total AUM. Investment products and advisory ser-vices offered to institutional investors account for more than half (54%) of the company’s AUM. Mutual funds and related products offered to individual investors account for most of the remaining AUM.

Why Own BLK?BlackRock’s size and its market share in the ETF space give it

competitive advantages. IShares, which was an early entrant into the ETF space, is the second-largest ETF family. It trails only State Street’s SPDRs in terms of AUM. The low fees, bro-ker relationships and brand awareness position the company to take advantage of the growing shift to passive investments. BlackRock thinks the overall ETF space could double in size over the next five years.

The company is leveraging its experience with asset man-agement and its relationships within the investment industry to build out its technological offerings. The Aladdin platform provides risk management, stock and bond trading services, data analytics for investment managers and a platform for advisers to use in their business.

During the past five years, BlackRock’s revenues have grown at a 6.0% annualized pace. Earnings have grown at a faster 10.9% pace. Though gross margins have compressed some-what (from 89.3% to 84.8%), the company has maintained its operating margins and widened its net profit margins. BlackRock’s return on equity of 17.2% is well above the in-vestment services industry’s average of 13.5.

BlackRock’s price-earnings ratio of 18.4 ranks in the bottom 46% of all stocks. Its yield of 2.6% is slightly above the stock’s five-year average of 2.5%. BlackRock has also been returning cash to shareholders via share buybacks. During the second quarter of 2018, the company repurchased $300 million of its own stock.

Dividend AnalysisAs noted above, shares of BlackRock yield 2.6%. During the

past five years, the stock has traded within a range of 2.1% to 3.0%.

The quarterly dividend has been raised twice this year. First to $2.88 per share (from $2.50 per share) in January and then to $3.13 per share in July. This year was the ninth consecutive year that BlackRock has raised its dividend. Since a dividend was first paid in 2003, it has never been cut. The dividend was kept steady in 2009, however, as the company endured and then emerged from the financial crisis.

BlackRock has the financial capacity to continue raising its dividend. The current earnings payout ratio is 32.1%.

RisksBlackRock has flourished in the ETF space, and several of

its actively managed funds have all lived up to expectations also. Last year, the company made headlines when it an-nounced its intention to eschew active management for many of its funds and instead use quantitative, computer-driven strategies to run them. Active strategies are still prevalent at BlackRock, accounting for almost 18% of AUM at the end of the second quarter. Regulatory changes and a push for lower fees could have a potential negative impact on the company’s mutual fund business.

Like other asset management companies, BlackRock’s rev-enues and profits are influenced by the health of the financial markets. Weakness in stocks, bonds or other asset classes can both reduce AUM and cause clients to withdraw money. Tough conditions can also lead to less demand for the com-pany’s investment service products.

Even with its large size, BlackRock still faces tough competi-tion. Vanguard’s mutual ownership structure provides it with certain cost advantages. In the ETF business, BlackRock faces competition from both new entrants as well as established players. The latter include Vanguard, PIMCO, Fidelity and State Street and Invesco. ▪

BlackRock (BLK)

Bullish Factors• One of the world’s largest asset managers; the iShares

ETF business ranks second in total assets among ETF providers

• Has grown revenues at a 6.0% pace and earnings per share at a 10.9% rate over the past five years

• Nine consecutive years of dividend increases, including two increases this year

Bearish Factors• Disappointing performance led to changing some of its

mutual funds from active to quantitive management• Revenues and earnings are dependent on the health

of the financial markets; downturns could hurt both revenues and investment dollar flows

• Faces tough competition over fund expense ratios from Vanguard, as well as from both new entrants and established players in the ETF business

October 2018 9


BLK $477.21 ($594.52 - $448.99)

Addition Alert Date: 10/5/2018Price at Alert: NA Risk Index: 1.92Market Cap (Million): $75,558.2Avg Daily Dollar Volume (Million): $304.0Primary Sector: FinancialPrimary Industry: Investment Services

Indicated Annual Dividend: $12.52 Multiples Current 12/2017 12/2016 12/2015 12/2014 12/2013Latest Dividend Increase: Date Dividend Yield (%): Avg 2.6 2.3 2.7 2.7 2.4 2.5Latest Dividend Increase: % 8.7% Dividend Yield (%): High 2.7 3.3 3.2 2.7 3.2Dividend Yield: Current 2.6% Dividend Yield (%): Low 1.9 2.3 2.3 2.1 2.1Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 18.4 19.2 17.9 16.6 17.0 15.8Dividend Paid Since: 2003 Price/Earnings (Industry) 13.6 15.7 15.1 19.5 19.3 17.5Number of Years of Div Increases: 9 Price/Book Value 2.4 2.3 1.9 1.9 2.0 1.7Direct Invest Option: No Price/Sales 5.5 5.8 5.0 4.8 5.0 4.4DRIP Plan: No Ratios Current 12/2017 12/2016 12/2015 12/2014 12/2013Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 32.1 32.6 47.5 43.4 39.4 39.0

$3.1300 Payout Ratio: FCFPS (%) 45.4 44.1 74.0 52.1 43.1 32.2$2.8800 Gross Margin (%) 84.8 88.7 89.0 89.3 89.5 89.6$2.8800 Operating Margin (%) 41.0 42.2 41.0 40.9 40.4 37.9$2.5000 Operating Margin (%) (Ind) 25.7 25.2 25.6 22.6 26.9 24.3$2.5000 Net Margin (%) 39.0 39.8 28.4 29.3 29.7 28.8$2.5000 ROE (%) 17.2 16.3 11.0 12.0 12.2 11.3

Rel Strgth ROE (%) (Industry) 13.5 11.9 10.8 9.8 10.8 11.0Rank ROA (%) 2.5 2.3 1.4 1.4 1.4 1.4

4 Week 59% Current Ratio -- -- -- -- -- --13 Week 47% Liabilities to Assets (%) 83.6 85.6 86.8 87.3 88.6 88.026 Week 29% Liab to Assets (%) (Ind) 65.4 70.8 68.3 70.1 64.8 70.252 Week 59% Asset Turnover 0.1 0.1 0.1 0.0 0.0 0.0

Financial Statements TTM 12/2017 12/2016 12/2015 12/2014 12/2013Growth 5 Year Sales ($M) 13,890 12,491 11,155 11,401 11,081 10,180

Dividends 10.8% Gross Income ($M) 11,784 11,078 9,926 10,177 9,913 9,118Sales 6.0% Depreciation & Amort. ($M) 222 240 263 295 278 291Net Income 15.1% Unusual/Extra ($M) -- 0 76 0 0 0EPS Basic 16.9% Operating Income ($M) 5,698 5,272 4,570 4,664 4,474 3,857EPS Dil Cont 10.9% Interest Expense ($M) 184 205 205 204 232 211

Pretax Income ($M) 5,669 5,277 4,460 4,602 4,395 3,973SUE Score Net Income ($M) 5,413 4,970 3,172 3,345 3,294 2,932

1.20 Operating Cash Flow ($M) 3,976 3,828 2,154 3,004 3,081 3,6422.40 Investing Cash Flow ($M) (368) (587) (188) (465) 239 (483)

Annual Financing Cash Flow ($M) (2,640) (2,630) (1,685) (2,064) (1,855) (3,392)12/2019 Capital Expenditures ($M) 163 155 119 221 66 94

16 Net Cash Flow ($M) 1,031 803 8 360 1,333 (216)$30.45 EPS Basic ($) 33.56 30.65 19.29 20.10 19.58 17.23$30.48 EPS Diluted Cont ($) 25.94 23.08 19.04 19.79 19.25 16.87

# Rev Up 0 EPS DC Year/Year Chg (%) 24.6 21.2 (3.8) 2.8 14.1 22.3 # Rev Down 4 Dividends/Share ($) 10.76 10.00 9.16 8.72 7.72 6.72Three Mos. Ago $30.43 Dividend Year/Year Chg (%) 12.3 9.2 5.0 13.0 14.9 12.0Year/Year Chg 10.0% Free Cash Flow/Share ($) 23.69 22.65 12.38 16.73 17.92 20.85

6/2018 3/2018 12/2017 9/2017 Total Cash ($M) 6,724 7,038 6,175 6,231 6,001 4,551$6.62 $6.68 $6.85 $5.78 $25.93 Goodwill/Intangibles ($M) 30,582 30,609 30,481 30,495 30,305 30,481$5.22 $5.21 $5.13 $5.26 $20.82 Total Assets ($M) 195,549 220,241 220,177 225,261 239,792 219,873

Long-Term Debt ($M) 4,994 5,014 4,915 4,930 8,311 7,3086/2018 3/2018 12/2017 9/2017 Total Total Liabilities ($M) 163,419 188,443 191,079 196,758 212,426 193,413

$22.39 $22.22 $21.51 $19.97 $86.10 Book Value/Share ($) 199.59 196.09 176.97 171.30 162.68 155.48$18.25 $18.97 $17.68 $17.29 $72.18 Avg Shares Outst'g (M) 160.98 162.16 164.43 166.39 168.23 170.19

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 10/2/2018.

19.9%

16

13

$6.91

2

$27.663

Annual12/2018

$6.90 $27.66$6.89 $27.67

Year Ago

TTM

TTMSales/Sh (Qtr)

Quarterly

EPS (Qtr)

Year Ago

CurrentMonth Ago

9/201813

19.2%

$6.70

Est Surprise

EPS Estimates# of Estimates

Apr 12, 2018Jul 16, 2018

% Surp1.6%4.9%

Index

Aug 31, 2017

24.6%

9.0%4.1%

14.7%16.1%6.2%

12.3%17.9%

TTM

Gain

57.3%59.2%

EPS$6.66

Jul 20, 2017May 25, 2017 Jun 1, 2017

(0%)(3%)

(11%)6%

Stock

2.5% (3% - 2.1%)

0.90

BlackRock Inc. is one of the leading investment management firms, overseeing nearly $6.3 trillion of assets under management (AUM). The company's investment products include open-end and closed-end mutual funds, iShares exchange-traded funds (ETFs), separate accounts, collective investment trusts and other pooled investment vehicles. In addition, its investment and risk management technology platform Aladdin provides risk analytics, advisory and technology services to institutional clients and wealth management firms.

Nov 16, 2017

Jul 17, 2018May 23, 2018Jan 12, 2018 Mar 6, 2018

Jun 6, 2018Sep 6, 2018

Sep 22, 2017Jun 23, 2017

Jul 17, 2018

Dec 1, 2017

0.92

3 Year

Sep 24, 2018Jun 21, 2018Mar 22, 2018

0.99

Dec 21, 2017

Rel Strgth

0.80

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Nov 2013 Nov 2014 Nov 2015 Nov 2016 Nov 2017$0

$100

$200

$300

$400

$500

$600

$700

Div

iden

d Yi

eld Share Price

10 October 2018

Cummins Inc. designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products. It operates in four segments: engine, distribution, components and power generation.

The engine segment, which accounted for 34% of full-year 2017 sales and 40% of operating earnings (earnings before interest and taxes, or EBIT), 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 (27% of sales, 16% of EBIT) provides maintenance contracts, engineering services and integrated products.

The components segment (23% of sales, 32% of EBIT) supplies after-treatment systems, turbochargers, filtration products and fuel systems 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 (16% of sales, 12% of EBIT) designs and manufactures components that include engines, controls, alternators, transfer switches and switchgear, as well as power generation systems and services.

Why Own CMI?Cummins is a well-run industrial company specializing

in diesel engines. While there is competition in the space, Cummins has been able to grow market share and earnings over the long term. Additionally, with the costs and time involved in development, setup and establishing a distribution and servicing network, 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.

Diluted continuing earnings per share have increased at a 4.2% annual rate over the last five years, and over the last year diluted continuing earnings have grown 30.4% as the company is starting to face fewer cyclical headwinds.

The stock’s current price-earnings ratio of 12.9 is below the 21.4 median for the capital goods sector and the 23.7 median for the miscellaneous capital goods industry.

Second-quarter 2018 revenue grew 21% compared to the second quarter of 2017, with growth in all of Cummins’ operating segments and most of its major geographic markets. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $897 million, or 14.6% of sales, compared to $764 million, or 15% of sales, a year ago. Cummins expects full-year 2018 revenue to grow 15% and 17% over that of full-year 2017, higher than its previous guidance of up 10% to 14% year over year, reflecting a stronger outlook for industrial, power generation and construction markets as well as stronger market share in North America on-highway markets.

Dividend AnalysisCummins is committed to returning cash to shareholders

through dividends and share repurchases. The company is targeting a return of 50% of operating cash flow to shareholders in the form of dividends and share repurchases.

The stock currently trades with a 3.1% dividend yield, which is slightly above the five-year historical average of 2.6%.

Cummins has paid a dividend every year since 1948 and has increased its annual payout for nine consecutive years. The company last increased its dividend in July of 2018 by 5.6%. Cummins’ current earnings payout ratio of 67.9% and free cash flow payout ratio of 52.9% are above the five-year averages of 44.6% and 41.5%, respectively. The company’s dividend has grown at a 14.4% annualized rate over the last three years and at an 18.5% annualized rate over the last five years. Although growth has slowed over the last two years, Cummins remains committed to increasing its payment.

In July 2018, Cummins announced a plan to repurchase $500 million of stock. The company has stated its intention to return 75% of operating cash flow to shareholders, up from its previous goal of 50%.

RisksAs with all industrial companies, Cummins’ results are tied

to the overall strength of the U.S. and global economies (cyclicality).

This year Cummins had to recall 500,000 trucks produced in 2010 through 2015 due to a defective emissions control component that causes excess nitrogen oxide emissions. Cummins ultimately reached an agreement with the U.S. Environmental Protection Agency (EPA) regarding the recall, which resulted in a pretax charge of $181 million. While this is a one-time charge, it shows oversight on Cummins’ part at the very least. The product campaign combined with a cost of roughly $100 million related to trade tariffs is expected to drag Cummins’ EBITDA margin down from the previous guidance of between 15.4% and 15.8% to between 14.8% and 15.2%.

Cummins has missed I/B/E/S consensus earnings estimates for the last two quarters. ▪

Cummins Inc. (CMI)

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

proven diesel engines and components• Rebounding market environment; fewer headwinds

Bearish Factors• Global economic slowdown could affect bottom line • Potential for headwinds with changes in trade regulation • Can be negatively affected by the strong U.S. dollar and

other foreign exchange changes

October 2018 11


Addition Alert Date: 10/3/2014Price at Alert: $135.10 Risk Index: 2.45Market Cap (Million): $24,168.4Avg Daily Dollar Volume (Million): $214.1Primary Sector: Capital GoodsPrimary Industry: Misc. Capital Goods

Indicated Annual Dividend: $4.56 Multiples Current 12/2017 12/2016 12/2015 12/2014 12/2013Latest Dividend Increase: Date Dividend Yield (%): Avg 3.1% 2.7 3.5 3.0 2.0 1.8Latest Dividend Increase: % 5.6% Dividend Yield (%): High 3.1 5.0 4.1 2.3 2.2Dividend Yield: Current 3.1% Dividend Yield (%): Low 2.3 2.7 2.4 1.7 1.6Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 12.9 14.8 13.8 14.9 15.7 15.5Dividend Paid Since: 1948 Price/Earnings (Industry) 23.7 22.5 22.4 18.7 19.7 21.0Number of Years of Div Increases: 9 Price/Book Value 3.3 3.6 2.8 2.8 3.3 3.1Direct Invest Option: No Price/Sales 1.1 1.3 1.1 1.1 1.4 1.3DRIP Plan: Yes Ratios Current 12/2017 12/2016 12/2015 12/2014 12/2013Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 67.9 70.2 48.5 44.7 31.1 28.4

$1.1400 Payout Ratio: FCFPS (%) 52.9 41.5 50.3 49.4 35.0 31.2$1.0800 Gross Margin (%) 23.8 24.9 25.4 25.9 25.3 (49.9)$1.0800 Operating Margin (%) 11.0 11.6 11.1 10.8 12.3 12.1$1.0800 Operating Margin (%) (Ind) 7.0 5.2 6.7 6.5 6.4 7.3$1.0800 Net Margin (%) 4.7 4.9 8.0 7.3 8.6 8.6$1.0250 ROE (%) 14.2 14.1 19.5 18.5 21.6 21.0


4 Week 79% Current Ratio 1.6 1.6 1.8 2.1 2.3 2.613 Week 83% Liabilities to Assets (%) 61.4 59.8 54.2 51.1 50.8 49.026 Week 34% Liab to Assets (%) (Ind) 56.7 56.7 54.2 55.3 52.9 50.152 Week 34% Asset Turnover 1.2 1.2 1.2 1.2 1.3 1.3


Dividends 18.5% Gross Income ($M) 5,353 5,090 4,452 4,947 4,861 (8,638)Sales 3.3% Depreciation & Amort. ($M) 607 583 530 514 455 407Net Income (9.5%) Unusual/Extra ($M) -- 4 1 316 26 (8)EPS Basic (7.2%) Operating Income ($M) 2,476 2,365 1,945 2,057 2,365 2,101EPS Dil Cont 4.2% Interest Expense ($M) 94 82 73 69 68 41

Pretax Income ($M) 2,456 2,365 1,930 2,025 2,434 2,119SUE Score Net Income ($M) 1,049 999 1,394 1,399 1,651 1,483

(1.50) Operating Cash Flow ($M) 1,924 2,277 1,939 2,065 2,266 2,089(6.10) Investing Cash Flow ($M) (1,128) (1,052) (917) (918) (1,234) (846)

Annual Financing Cash Flow ($M) (783) (1,074) (1,413) (1,650) (1,343) 5212/2019 Capital Expenditures ($M) 586 587 594 799 798 740

27 Net Cash Flow ($M) 25 249 (591) (590) (398) 1,330$15.04 EPS Basic ($) 6.37 6.00 8.25 7.86 9.04 7.93$14.97 EPS Diluted Cont ($) 11.54 10.64 8.23 7.84 9.02 7.91

# Rev Up 0 EPS DC Year/Year Chg (%) 30.4 29.3 5.0 (13.0) 14.0 (8.8) # Rev Down 1 Dividends/Share ($) 4.32 4.21 4.00 3.51 2.81 2.25Three Mos. Ago $14.07 Dividend Year/Year Chg (%) 5.4 5.3 14.0 24.9 24.9 25.0Year/Year Chg 13.0% Free Cash Flow/Share ($) 8.17 10.14 7.96 7.11 8.04 7.21

7/2018 4/2018 12/2017 10/2017 Total Cash ($M) 1,532 1,567 1,380 1,811 2,394 2,849$3.35 $2.41 $3.06 $2.71 $11.54 Goodwill/Intangibles ($M) 2,019 2,055 812 810 1,165 818$2.53 $2.36 $2.25 $1.72 $8.85 Total Assets ($M) 18,915 18,075 15,011 15,134 15,764 14,728


$37.44 $33.78 $33.09 $31.78 $136.08 Book Value/Share ($) 44.56 43.56 40.67 41.60 42.43 40.16$30.35 $27.40 $26.86 $24.95 $109.56 Avg Shares Outst'g (M) 163.80 166.63 169.04 178.04 182.64 186.99


Aug 16, 2017

(29.5%)

2.6% (3.3% - 2.1%)

5.4%3 Year

Sep 4, 2018Jun 1, 2018Mar 8, 2018

1.04

0.76

1.060.84

TTM

Gain

Aug 21, 2018

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.

Oct 10, 2017

Jul 31, 2018

Jul 10, 2018May 8, 2018Feb 12, 2018 Feb 22, 2018

May 17, 2018

Jul 11, 2017

14.4%

Nov 16, 2017

5%14%(7%)

(12%)

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Quarterly

# of EstimatesCurrent

May 9, 2017 May 17, 2017Stock

9/2018

EPS$3.29$2.43

22.4%

Est Surprise

May 1, 2018

30.4%

EPS Estimates

2.1%(15.4%)(12.8%)

$13.30

25.0%EPS (Qtr)

$3.72

23

$13.29$3.73

37.3%

10

$3.51

Month Ago

(28.3%)

Jul 10, 2018

0$13.26

0

Annual

1612/2018

% Surp(9.4%)

(17.0%)

5.7%

Dec 1, 2017

Rel Strgth

Sep 1, 2017Jun 1, 2017

0%

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8%

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Nov 2013 Nov 2014 Nov 2015 Nov 2016 Nov 2017

Div

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eld Share Price

CMI $148.95 ($194.18 - $129.90)

12 October 2018

Home Depot Inc. opened its first two stores in Atlanta back in 1979. Today, Home Depot is the world’s largest home improvement retailer, with 2,286 stores in the U.S., Canada and Mexico. Home Depot sells to three primary groups: the do-it-yourself (DIY) customer who is buying, installing and completing projects for their own home; the do-it-for-me (DIFM) customer who is purchasing items and then hiring a handyman to install or complete the project; and the professional customer who is a general contractor, remodeler, tradesman or repairman.

Record of Growth Revenues have grown at a 6.2% annualized rate over the

past five years. The net income growth rate has been stronger at 13.7%, reflecting an improvement in operating and net profit margins over each of the last five years. Aggressive share repurchasing has pushed up earnings per share growth to 20.5% annually over the last five years. Like most retailers, Home Depot’s fiscal year ends in January to better reflect the full holiday shopping cycle. Analysts are expecting earnings to grow 25.4% during this calendar year and 7.6% during 2019. Estimates have been bumped up over the last three months. Long term, the consensus among seven analysts is for 14.8% earnings growth, ranging from a low of 10.0% to a high estimate of 17.4%.

Household formation and average age of the housing stock are key drivers of the home improvement market. Household formation has finally climbed back toward its long-term average after being suppressed by the financial crisis. As homes age, they normally require additional maintenance and updates. Homes that are 25 years old or older are most likely to need meaningful work. The percentage of older homes is growing, and the median age is listed as 35 years.

Financial StrengthHome Depot’s interest coverage ratio is currently 14.2 and

has been improving over the last five years. The ratio is well

above the retail (home improvement) industry median of 9.9.Home Depot has positive operating cash flow, which has

expanded over each of the last five years. The company’s operating and net profit margins have been

expanding over the last five years. The operating margin was 14.5% over the last four quarters, above its 13.2% five-year average and well above the industry median of 6.5%.

The company has a target earnings per share payout ratio of 55% and intends to increase its dividend every year. The current earnings payout ratio is 45.0%, implying there is still room for growth. The company generates strong and growing free cash flow. Its free-cash-flow payout ratio is 44.2%. Home Depot is planning on spending $12.5 billion for share repurchases over the next three years, funded by internally generated cash flow.

Dividend GrowthHome Depot’s dividend has grown at a compound annual

growth rate of 25.1% over the last five fiscal years. The dividend has been raised every year over the last nine years. Home Depot increased its dividend 15.7% in February.

ValuationThe stock trades with a dividend yield of 2.0%. This is below

the five-year average of 2.1%, but still above the five-year average low of 1.9%.

The stock’s price-earnings ratio of 23.2 is above the firm’s five-year average of 20.0 and matches the 23.2 median of the retail home improvement industry.

The strong dividend growth, earnings growth and profit margin expansion has attracted investor attention, pushing up the stock price into more of a fairly valued level.

RisksEconomic and demographic trends are a key driver of

consumer confidence and spending. We are in an old and slow-growing economic expansion that the company has no control over. Pent-up housing demand and a low interest rate environment helped fuel growth in the past, but rising interest and inflation rates increase uncertainty and risk.

Home Depot has returned cash to shareholders via both dividends and share buybacks. While cash flow is strong, Home Depot has increased its level of long-term debt, while decreasing its equity. The firm has the cash flow to cover its interest rate obligations, but an increase in the long-term interest rate would impact Home Depot’s interest payments and could also slow consumer spending. The company has issued some variable rate notes.

Amazon has reshaped the retail marketplace. Home Depot is growing its online business, but online sales only represent a small percentage (6.4%) of total sales. Future growth of physical stores has limited potential ▪

Home Depot Inc. (HD)

Bullish Factors• The dividend has been growing at a 25.1% annualized

rate over the past five years• Strong record of cash flow growth and margin

expansion.• Aging housing stock helps create demand for home

improvement products and services

Bearish Factors• The dividend yield has fallen below its five-year average• Price-earnings ratio is above its five-year average and

the percentile rank is 60%• Inflationary cost pressure seems likely for both wages

and inventory

October 2018 13


Addition Alert Date: 9/1/2017Price at Alert: $150.78 Risk Index: 1.82Market Cap (Million): $237,523.1Avg Daily Dollar Volume (Million): $829.0Primary Sector: ServicesPrimary Industry: Retail (Home Improvement)

Indicated Annual Dividend: $4.12 Multiples Current 1/2018 1/2017 1/2016 2/2015 2/2014Latest Dividend Increase: Date Dividend Yield (%): Avg 2.0 2.2 2.2 2.1 2.1 2.2Latest Dividend Increase: % 15.7% Dividend Yield (%): High 2.7 2.5 2.6 2.5 2.5Dividend Yield: Current 2.0% Dividend Yield (%): Low 1.9 2.0 1.7 1.8 1.9Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 23.2 21.3 19.3 20.8 19.1 19.3Dividend Paid Since: 1987 Price/Earnings (Industry) 23.2 21.3 19.3 23.5 27.8 20.2Number of Years of Div Increases: 9 Price/Book Value 116.6 131.5 35.3 23.0 12.9 8.2Direct Invest Option: No Price/Sales 2.3 1.9 1.6 1.6 1.5 1.3DRIP Plan: No Ratios Current 1/2018 1/2017 1/2016 2/2015 2/2014Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 45.0 48.6 42.6 43.0 39.6 41.3





Dividends 25.1% Gross Income ($M) 35,723 34,356 32,313 30,265 28,389 26,915Sales 6.2% Depreciation & Amort. ($M) 2,109 2,062 1,973 1,863 1,786 1,757Net Income 13.7% Unusual/Extra ($M) 0 0 0 0 0 0EPS Basic 19.3% Operating Income ($M) 15,151 14,681 13,427 11,774 10,469 9,166EPS Dil Cont 20.5% Interest Expense ($M) 1,071 1,057 972 919 830 711


5.80 Operating Cash Flow ($M) 12,076 12,031 9,783 9,373 8,242 7,6280.90 Investing Cash Flow ($M) (2,212) (2,228) (1,583) (2,982) (1,271) (1,507)

Annual Financing Cash Flow ($M) (11,035) (8,870) (7,870) (5,787) (7,071) (6,652)1/2020 Capital Expenditures ($M) 2,142 1,897 1,621 1,503 1,442 1,389

34 Net Cash Flow ($M) (1,340) 1,057 322 493 (206) (565)$10.29 EPS Basic ($) 8.54 7.33 6.47 5.49 4.74 3.78$10.28 EPS Diluted Cont ($) 8.84 7.63 6.45 5.46 4.71 3.76

# Rev Up 1 EPS DC Year/Year Chg (%) 27.0 18.3 18.0 15.9 25.5 25.1 # Rev Down 0 Dividends/Share ($) 3.84 3.56 2.76 2.36 1.88 1.56Three Mos. Ago $10.20 Dividend Year/Year Chg (%) 21.5 29.0 16.9 25.5 20.5 34.5Year/Year Chg 7.6% Free Cash Flow/Share ($) 8.68 8.60 6.64 6.16 5.08 4.38



$26.63 $21.66 $20.59 $21.43 $90.30 Book Value/Share ($) 1.76 1.23 3.53 4.95 6.97 8.79$23.76 $19.94 $18.38 $18.92 $81.00 Avg Shares Outst'g (M) 1,144.00 1,178.00 1,229.00 1,277.00 1,338.00 1,425.00


1.08

3 Year

Sep 13, 2018Jun 14, 2018Mar 22, 2018

0.99

Nov 30, 2017

Rel Strgth

1.04

2.1% (2.6% - 1.9%)

0.98

Home Depot Inc. is a home improvement retailer that sells an assortment of building materials, home improvement products, and lawn and garden products and provides various services. Home Depot stores serve three primary customer groups: do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers and professional customers. Its DIY customers are homeowners purchasing products and completing their own projects and installations. Its DIFM customers are homeowners purchasing materials themselves and hiring third parties to complete the project or installation. Professional customers are primarily professional remodelers, general contractors and repairmen.

Nov 16, 2017

Aug 16, 2018May 17, 2018Feb 19, 2018 Mar 7, 2018

May 30, 2018Aug 29, 2018

Sep 14, 2017Jun 15, 2017

Feb 19, 2018

Nov 29, 2017

22.1%

EPS$3.05

Aug 18, 2017May 18, 2017 May 30, 2017

0%6%15%25%

Stock

% Surp7.4%1.5%

Index

Aug 29, 2017

27.0%

23.7%6.7%

10.8%15.6%17.4%

21.5%7.2%

TTM

Gain

17.3%

$2.08

Est Surprise

EPS Estimates# of Estimates

May 15, 2018Aug 14, 2018

Year Ago

TTM

TTMSales/Sh (Qtr)

Quarterly

EPS (Qtr)

Year Ago

CurrentMonth Ago

10/201830

23.2%

Annual1/2019

$2.27 $9.56$2.27 $9.56

25.4%

34

02

$2.31

1

$9.451

0%

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HD $204.75 ($215.43 - $160.53)

14 October 2018

PepsiCo, Inc. (PEP)PepsiCo Inc. is a global food and beverage company that

makes, markets, sells and distributes a variety of foods and beverages in over 200 countries. The company’s principal businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker Oats foods. As of the end of 2017, the company had 22 billion- dollar brands (in terms of annual revenues): 14 beverage brands and eight food brands.

The company is organized into six reportable product segments: Frito-Lay North America (24.9% of 2017 sales, 41.9% of division operating profit before corporate overhead), Quaker Foods North America (3.9% of sales, 5.6% of operating profit), Latin America Foods (11.3% of sales, 7.9% of operating profit), North America Beverages (33.0% of sales, 23.5% of operating profit), Europe Sub-Saharan Africa (17.4% of sales, 11.8% of operating profit) and Asia, Middle East & Africa (9.5% of sales, 9.3% of operating profit).

Why Own PEP?While PepsiCo is in second place, behind Coca-Cola Co.

(KO), in the global cola market, it controls a greater share of the U.S. non-carbonated beverage market than its peers, including Coca-Cola, with brands such as Gatorade and Tropicana and joint ventures with Starbucks and Unilever (Lipton brand). It is also the world’s largest snack food company through its Frito-Lay division, with an estimated global market share of more than 25%. PepsiCo controls around 64% of the U.S. salty snack market, 60% of the market in Brazil and 46% in the U.K.

PepsiCo generates roughly 50% of its revenue outside the U.S. and continues to invest in developing and emerging markets, which have significant growth opportunities due to their relatively low per-capita consumption and rising

income levels. The company expects, going forward, that two-thirds of revenues will come from emerging and developing markets.

The company is in the midst of a multi-year restructuring program, which is expected to save it $5 billion through 2019. As a result, the company’s core operating margin has expanded by 280 basis points over the last two fiscal years.

PepsiCo has also responded to trends in health and wellness by eliminating trans fats from many of its snack foods and introducing “guilt-free” foods under the Quaker Oats brand. These products now account for roughly 45% of total revenue. By 2025, PepsiCo is aiming for two-thirds of its global beverage portfolio volumes to contain fewer than 100 calories from added sugar per 12-ounce serving. Currently, roughly 40% of its beverage volumes meet that standard.

Dividend AnalysisPEP shares currently yield 3.4%, based on an indicated

dividend of $3.71 per share. This is above the five-year average yield of 2.9% as well as the five-year average high yield of 3.3%. PepsiCo has been paying a dividend since 1952 and has increased its annual dividend in each of the last 46 years. The company increased its annualized dividend by 15.2%, effective in May 2018. Over the last five fiscal years, the dividend has grown, on average, by 8.3%. PepsiCo’s strong operating cash flows ($10 billion in 2017) and free cash flows ($7.3 billion excluding certain items in 2017) give the company flexibility to continue returning capital to investors. In fiscal-year 2017, the company returned $6.5 billion to shareholders via dividends and share repurchases. For fiscal 2018, the company expects to return approximately $7 billion to investors through dividends and share buybacks.

RisksThe carbonated soft drink business has been hurt

by changing consumer preferences and rising health consciousness. In 2016, soda consumption fell to its lowest level in 31 years. As a result, sales over the last five years, on average, have contracted by 0.6% per year. Also, several municipalities have levied or are considering levying taxes on sugary beverages, which have been shown to lower demand.

PepsiCo has been under pressure from activist investors to spin off its beverage business, which management has flatly rejected. The company estimates that its strategy of operating both a beverage and snack food portfolio generates $800 million to $1 billion in synergies.

Commodity prices make up a large percentage of the company’s costs, and while PepsiCo hedges roughly three-quarters of its raw material costs, it is still vulnerable to commodities price fluctuations and rising labor costs. ▪

Bullish Factors• World’s largest snack food company, controlling roughly

40% of the world’s salty snack market• Innovation has led to a robust pipeline of new products• Focus on international businesses with better growth

prospects is showing promising results

Bearish Factors• Competitor Coca-Cola has been widening its lead in the

carbonated soft drink category in recent years• Shrinking North American carbonated soft drink market

due to increasing costs and changing consumer tastes• Currency fluctuations can have a measurable negative

impact on sales and earnings

October 2018 15


PEP $108.72 ($122.51 - $95.94)Addition Alert Date: 12/31/2011Price at Alert: $66.35 Risk Index: 1.53Market Cap (Million): $156,579.5Avg Daily Dollar Volume (Million): $587.2Primary Sector: Consumer Non-CyclicalPrimary Industry: Beverages (Non-Alcoholic)

Indicated Annual Dividend: $3.71 Multiples Current 12/2017 12/2016 12/2015 12/2014 12/2013Latest Dividend Increase: Date Dividend Yield (%): Avg 3.4% 2.9 2.9 3.1 2.9 2.9Latest Dividend Increase: % 15.2% Dividend Yield (%): High 3.1 3.2 3.6 3.3 3.3Dividend Yield: Current 3.4% Dividend Yield (%): Low 2.6 2.7 2.7 2.5 2.6Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 19.8 21.8 23.4 24.5 20.8 18.0Dividend Paid Since: 1952 Price/Earnings (Industry) 20.4 23.1 25.6 25.3 27.6 24.1Number of Years of Div Increases: 46 Price/Book Value 15.2 14.3 13.1 11.0 7.6 4.9Direct Invest Option: Yes Price/Sales 2.4 2.5 2.3 2.1 2.0 1.8DRIP Plan: Yes Ratios Current 12/2017 12/2016 12/2015 12/2014 12/2013Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 94.1 93.0 67.4 74.5 58.8 51.3





Dividends 8.3% Gross Income ($M) 35,057 34,740 34,590 5,941 35,445 35,298Sales (0.6%) Depreciation ($M) NA NA 70 75 92 110Net Income (4.7%) Unusual/Extra ($M) 276 295 160 1,589 418 173EPS Basic (3.0%) Operating Income ($M) 10,383 10,509 9,785 8,353 9,581 9,705EPS Dil Cont 5.3% Interest Expense ($M) 1,027 1,234 1,050 779 909 812


0.90 Operating Cash Flow ($M) 8,878 9,994 10,673 10,864 10,506 9,6884.00 Investing Cash Flow ($M) (3,276) (4,403) (7,148) (3,569) (4,937) (2,625)

Annual Financing Cash Flow ($M) (1,761) (4,186) (3,211) (4,112) (8,264) (3,789)12/2019 Capital Expenditures ($M) 2,687 2,969 3,040 2,758 2,859 2,795

24 Net Cash Flow ($M) 3,894 1,452 62 2,962 (3,241) 3,078$6.04 EPS Basic ($) 3.42 3.41 4.39 3.71 4.31 4.37$6.06 EPS Diluted Cont ($) 5.48 5.08 4.36 3.67 4.27 4.32

# Rev Up 1 EPS DC Year/Year Chg (%) 16.0 16.6 18.7 (13.9) (1.3) 10.1 # Rev Down 10 Dividends/Share ($) 3.22 3.17 2.96 2.76 2.53 2.24Three Mos. Ago $6.08 Dividend Year/Year Chg (%) 5.1 7.0 7.1 9.1 13.1 5.3Year/Year Chg 6.2% Free Cash Flow/Share ($) 4.37 4.93 5.30 5.52 5.07 4.47



$11.35 $8.85 $13.76 $11.40 $45.36 Book Value/Share ($) 7.14 7.75 7.82 8.22 11.65 15.84$11.00 $8.44 $13.68 $11.15 $44.26 Avg Shares Outst'g (M) 1,417.00 1,425.00 1,439.00 1,469.00 1,509.00 1,541.00


2.9% (3.3% - 2.6%)

0.930.890.86

Sep 28, 2018Jun 29, 2018Mar 30, 2018

0.95

Mar 1, 2018May 31, 2018Sep 6, 2018

Jul 14, 2017

11.8%

7.7%

(0%)

Stock

(1.6%)(9.3%)

5.1%

Aug 30, 2017

Est Surprise EPS

(28.1%)

$1.59

PepsiCo Inc. is a global food, snack and beverage company with brands that include Quaker Oats, Tropicana, Gatorade, Lay's and Pepsi. The company is organized into four business units: PepsiCo Americas Foods, which includes Frito-Lay North America, Quaker Foods North America and all of its Latin American food and snack businesses; PepsiCo Americas Beverages, which includes PepsiCo Beverages Americas and Pepsi Beverages Company; PepsiCo Europe; and PepsiCo Asia, Middle East and Africa. The company manufactures, markets and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages, dairy products and other foods.

Nov 17, 2017

3 Year

Jan 8, 2018

Rel StrgthIndex

May 2, 2017 May 31, 2017

Jul 13, 2018May 1, 2018Feb 5, 2018

Nov 30, 2017

(4%)(0%)(1%)

Gain

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

$1.61Oct 2, 2018

EPS (Qtr)

Jul 10, 2018

2.5%

Quarterly12/2018EPS Estimates

$1.54

CurrentMonth Ago

# of Estimates

TTM

May 1, 2018

9

20

$1.54$1.53

17

16.0%

1.8%(28.4%)

(7.5%)

% Surp1.2%

6.0%

$5.70

Sep 29, 2017Jun 30, 2017

$5.68

Annual12/2018

25

0$5.69

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16 October 2018

Why Would You sell a stock?payments. A stock is “overvalued” when its yield is below its historical average in that an investor is paying more for a given level of dividends than other investors were historically willing to pay.

Assuming no change in the dividend payment, a stock’s divi-dend yield declines as its price rises. Research has shown that dividend yields go in cycles (high to low); to follow a “buy low sell high” methodology, you would buy at a historically high dividend yield and sell at a historically low dividend yield.

If an investor sells a stock because its price-earnings (P/E) ratio reached an unreasonable level (as determined by the investor), that would also be a valuation-based sell.

This rule forces the DI portfolio to lock in gains and reinvest the cash in an attractive dividend growth stock that is per-ceived to be undervalued.

Technical IndicatorsWhile the DI portfolio doesn’t consider technical indicators,

many investors do—particularly those focused on short-term results. Technical indicators often have an element of price decline/gain, but they may also consider chart patterns or trading volume.

RebalancingSome investors choose to rebalance their holdings based on

the time of year (calendar rebalancing), while others may set maximum thresholds that a holding’s price can drift between before rebalancing. Some investors use a combination of calendar and threshold rebalancing. This ties in to the price change sell rules, but differs slightly, particularly in the case of calendar rebalancing. An investor who rebalances in January every year isn’t focused on specific price thresholds (allowed gain or loss), but simply buys underweight and sells over-weight holdings because of the time of year.

Opportunity CostsSometimes a stock is sold because a better investment op-

portunity presents itself. For example, assume two stocks are exactly the same except for their expected dividend growth rate. For example, stock A has a dividend yield of 2.5% and a historical annualized dividend growth rate of 3.0% (which is expected to continue into the future), while stock B has a dividend yield of 2.5% and a 15% historical annualized growth rate that is expected to continue into the future. Stock B may be perceived as a more attractive investment opportunity and one would be willing to sell stock A in favor of stock B.

Need-BasedSome investors simply sell because they need to. While

fundamentals or price performance may be considered when determining which stock to sell to meet distribution needs, this type of investor may be less focused on the specifics of individual holdings, as long as they can receive that check in the mail. ▪

The main reasons investors decide to sell a stock fall into several categories.

Fundamental ReasonsIf you purchased a stock because of its strong dividend

growth, attractive dividend yield and impressive return on equity (ROE), and those factors are no longer applicable, it may be time to sell. In this month’s commentary on page 1, we discussed the payout ratio and the interest coverage ratio; both could be considered fundamental sell triggers if a specific limit is set, such as selling a stock because its interest coverage ratio declined below 2.0x.

The Dividend Investing portfolio focuses primarily on funda-mental and valuation factors when determining what stocks to add or remove from the portfolio.

Macro-Economic FactorsSome investors place bets on overall market direction, as

determined by economic factors or expectations for a given sector or industry. For example, an investor may sell a stock because they believe its industry or sector has poor prospects going forward. Or the investor could see a financial crisis on the horizon and expects consumer discretionary stocks to underperform.

Price DeclineA sale may be triggered for some investors if a stock’s

decline hits a pre-determined threshold. “Relative strength from high” is a common sell consideration for growth stocks; it determines an allowable price decline percentage from a stock’s 52-week high price.

Other investors may specify an allowable decline from pur-chase price. For example, if a stock was purchased for $100 and the allowed decline was 30% from purchase, the stock would be sold once it hit $70 [100 – (100 × 0.30)].

Another investor might consider a stock’s price decline in relation to the overall market or some other benchmark. For example, if stock A gained 30% since being added to the portfolio, but the S&P 500 gained 60%, the relative gain is 0.81x [(1 + 0.30) ÷ (1 + 0.60)]. Setting a minimum relative gain threshold of 0.70x would mean that any stock with a relative gain below 0.70x is sold.

In the DI portfolio, there is currently no rule for maximum acceptable decline, although one is being considered.

Price GainAn investor may also sell a stock because its price has gone

up too much on a relative basis. In the case of the DI port-folio, overvalued stocks are removed from the portfolio. The DI approach is usually to consider a stock overvalued if its current dividend yield (annual indicated dividend per share divided by price per share) is below its five-year average low dividend yield. The dividend yield shows what price investors are willing to pay for the stock for a given level of dividend

in this issue evolving the di portfolio rules, and a new ... · evolving the di portfolio rules,...

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