in this issue a strong september, but shutdown effect ... · wells fargo & co. (wfc) has twice...

A Strong September, But Shutdown Effect Uncertain

We start this month’s commentary with two words: systematic risk. System-atic risk is a financial term for describing the risk you take by simply making an investment. It is the inherent chance of a broad market event adversely impact-ing the value of the securities or funds you own. Other terms for systematic risk include “market risk” or “un-diversifiable risk.”

As we started to write this month’s report, systematic risk was being created by our elected officials in Washington, D.C. The failure to agree on a budget led to the government shutting down on October 1, 2013. In a couple of weeks, we’ll get another dose of systematic risk if the federal debt ceiling is hit without an agreement for raising it in place.

Often, systematic risk is difficult to predict in advance. The financial crisis of five years ago is an example. Other times, we can see the potential for system-atic risk forming, but cannot accurately predict if an event will occur or what its consequences will be. The current government shutdown fits into this category. We have all been witnesses to the dysfunction in Washington and the inability of politicians on both sides of the aisle to find common ground on key issues. What we couldn’t predict with accuracy was whether a shutdown would occur, much less its duration or impact on the markets.

What we do know is that a government shutdown negatively impacts the economy and the United States’ fiscal health. There are costs to shutting down government operations, and there is the loss of money that would otherwise circulate into the economy. There are also costs to companies, particularly those that do business with the government and those that do business with orga-nizations dependent on the federal government being open. Then there is the potential psychological impact on consumers and businesses, which may change their behavior even if they are not directly impacted by the shutdown. The economy is interconnected and big events such as the government’s shutdown send a ripple throughout the entire economy.

None of the DI stocks are significantly dependent on government spending, but some do count the federal government as customers. United Technologies (UTX) for instance does business with the Defense Department. United Tech-nologies will be forced to furlough thousands of workers due to the absence of Defense Department inspectors who audit and approve operations throughout the manufacturing process for military products. The FDA has furloughed around 45% of its employees and ceased all but essential activities, likely impacting companies such as Baxter International Inc. (BAX) and Medtronic Inc. (MDT). Another example is ABM Industries Inc. (ABM), which is losing billable days. However, the loss of business only impacts a portion of these companies’ overall revenues and profits.

There are many other companies both in and out of the DI portfolio that have some exposure to the U.S. government, but not enough to create any immediate concern. For example, Chevron Corp. (CVX) and Microsoft Corp. (MSFT) could conceivably be affected, but there are probably hundreds of other companies we could add to this list as well.

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 ReportsGentex Corporation (GNTX) 8

Auto parts supplier moves forward with advanced rearview mirrors.

McDonald’s Corp. (MCD) 10World’s largest fast-food chain facing increasingly challenging operating environment due to global economic weakness, changing consumer tastes and increased competition.

Texas Instruments, Inc. (TXN) 12Global chip maker renewing its focus and returning cash to shareholders.

Wisconsin Energy Corp. (WEC) 14Utility has announced two dividend increases this year.

DI ArticleUsing Enterprise Value to Measure a Firm’s Worth 16

Boldly going to a stock’s valuation aboard the enterprise multiple.

Next Publication Date: November 8, 2013

October 2013Volume II Issue 10

www.AAIIDividendInvesting.com

TM

2 October2013

The timing of the shutdown also mat-ters. Since it is occurring at the start of the fourth quarter for many companies, its impact on corporate earnings may be offset by business transactions occur-ring later in the quarter. The challenge in forecasting the actual impact is that it quickly becomes a game of assumptions based on incomplete data. This is why the best course to take with systematic risk is to stay diversified and to look past the short-term uncertainties (regardless of how scary or frustrating they may be) and stay focused on your long-term financial plan. Companies are not going to stop paying dividends just because the politicians in Washington can’t find common ground.

Rising Interest RatesAnother current systematic risk

event is higher interest rates. Though the Federal Open Market Committee (FOMC) decided to keep its bond-buying program unchanged at its recent meet-ing, speculation about tapering future purchases will likely intensify as the end of October meeting nears. Yields on the benchmark 10-year Treasury note rose significantly from May until early September, when they peaked at 2.98%. Yields have pulled back some since then, but are still a full percentage point higher than where they were at the

start of May.Rising interest rates have several

impacts. First and foremost they make debt more expensive. We can see this impact on the mortgage market. Wells Fargo & Co. (WFC) has twice announced layoffs in its home lending unit due to a lower number of mortgage originations. Rising interest rates also pose a po-tential hurdle for companies with high levels of debt that need to regularly refinance their debt or tap credit lines (a key reason why we look at a com-pany’s debt level and demand positive free cash flow from the stocks we hold in the DI portfolio).

Rising interest rates can also make bonds more attractive to investors. If similar yields can be found in bonds as can be found in equities, some inves-tors will opt for the higher amount of income certainty that fixed-income securities provide. The mere percep-tion of this happening caused telecom, utility and consumer staples stocks to underperform the broad market indexes since the start of May.

If interest rates are rising because the economy is growing or because inves-tors perceive stronger economic growth will occur in the future, a greater prefer-ence for growth can be exhibited. The combination of greater competition from bond yields and the risk of losing

purchasing power from potentially higher infla-tion can make stocks with stronger dividend growth more attractive. Investors may opt for higher levels of growth over higher yields as a hedge against inflation and to take advantage of economic expansion.

These reasons are why interest rates and the company debt levels matter. Companies restricted by their debt obli-gations have less upside potential than companies with lower levels of debt and enough free cash flow to fund dividend increases. And while rising bond yields will provide competition for high-yield-ing dividend stocks, stocks with rising dividends have historically outperformed stocks that don’t pay any dividends. So, the key is to stick with stocks paying moderate dividends during a period of rising interest rates, but be selective when choosing which ones to invest in.

September DI PerformanceThe DI tracking portfolio got back on

the winning track with a total return of 4.6% in September 2013. This gain consisted of 4.2% in capital gains (stock price increases) and 0.4% of income return (dividends received). The port-folio’s benchmark, the Dow Jones U.S. Index fund (IYY), had a total return of 3.6% in September, composed of 3.1% in capital gains and 0.5% of income. The exchange-traded fund paid a quarterly distribution of $0.385621 per share on September 30, 2013.

Year-to-date as of October 2, 2013, the DI tracking portfolio has a total re-turn of 23.8%. This number is composed of 21.3% in capital gains and 2.5% in

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, 2013. 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 MonthOctober Portfolio Additions:

ecirP tsetaL)rekciT( ynapmoCDividend

Yield Sector: Industryno portfolio additions for OctoberPortfolio Deletions Since Last Monthly Issue:

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price Alert Date Purchase Purchaseno portfolio deletions since last monthly issueCompany (Ticker)

Portfolio Deletion Alert

October2013 3

AAII DIvIDEND INvESTINg

income return. In comparison, the Dow Jones U.S. Index fund has a total return of 21.3% for 2013. The benchmark’s performance reflects 19.7% in capital gains and 1.6% in income return.

Both the DI portfolio and the Dow Jones U.S. Index fund mostly gained back the losses they incurred in August. Though historically the worst month of the year for stocks, September re-warded those investors who did not try to time the market. Signs of continued economic growth and a possible agree-ment on Syria helped stocks. Septem-ber was also a month that saw a rare three-stock change in the Dow Jones industrial average.

The industrial holdings in our portfolio had a particularly good month. Gentex Corp. (GNTX) gained 13.6%, Eaton Corp. (ETN) gained 8.7% and United Technolo-gies rose 7.7%. Their gains in part re-flected sentiment toward domestic and global economic growth. ABM Indus-tries and Walgreen Co. (WAG) realized double-digit gains, thanks to favorable company news.

The DI portfolio and its benchmark have now realized gains for 13 out of the past 16 months. This run comes

as the S&P 500 index has experienced its fifth-longest stretch in the past 50 years without incurring a drop of 10% or more. BTN Research calculated the current streak as reaching 720 days as of September 22, 2013. The S&P 500’s longest such streak over the last 50 years ran for 2,553 days, from October 11, 1990, through October 7, 1997. Bull markets have historically lasted longer than bear markets, so to see the cur-rent streak is not completely surprising. Nonetheless, realize that a price trend only lasts until it doesn’t.

Though September has statistically experienced the lowest returns since World War II, October has a worse repu-tation. Both the 1929 and the 1987 mar-ket crashes occurred in October. Though spooky, the month’s reputation has been worse than its bite. This said, there are events we will be watching: the current budget standoff, the debt ceiling nego-tiations, third-quarter earnings and the Federal Reserve. The FOMC holds a two-day meeting at the end of the month, and speculation about whether or not they will taper their bond purchases will once again be front and center.

Five stocks in the DI portfolio will pay

dividends this month: Baxter Interna-tional, Gentex Corp., Leggett & Platt Inc. (LEG), Medtronic Inc. (MDT) and Omnicom Group Inc. (OMC). The ex-dividend dates and payment dates for the stocks in the DI portfolio are always presented in the dividend payments table on page 6.

DI Portfolio AlertsNo changes were made to the DI

portfolio.Current holdings Eaton, Leggett &

Platt and United Technologies are all trading with yields at or below their respective five-year average low yields. We’re not thrilled about United Tech-nologies’ absolute yield of 2.0% either, though we are waiting for a dividend increase announcement from the company before the end of the year. It should be United Technologies’ first divi-dend increase since acquiring Goodrich, and we are interested to get a feel for their dividend policy post-acquisition.

We did, admittedly, approach this month’s decision about whether to make any changes with a sense of caution because of the government shutdown and the lack of an agreement

DI Pur- Latest Sepchase viD/niaGecirP

Ticker Company Date Price Price (9/30/13) (Loss) Stock Index Yield IndustryABM ABM Industries, Inc. 12/31/11 $20.48 $20.89 $26.62 10.2% 33.6% 37.8% 2.3% Business ServicesAFL AFLAC Incorporated 12/31/11 $43.26 $45.04 $61.99 7.3% 44.4% 37.8% 2.3% Insurance (Accident & Health)T AT&T Inc. 12/31/11 $30.24 $30.48 $33.82 (0.0%) 21.6% 37.8% 5.3% Communications ServicesBAX Baxter International 9/6/13 $70.01 $71.34 $65.69 (5.6%) (7.9%) 0.2% 3.0% Medical Equipment & SuppliesCVX Chevron Corporation 12/31/11 $106.40 $110.91 $121.50 0.9% 16.0% 37.8% 3.3% Oil & Gas - IntegratedETN Eaton Corporation 12/31/11 $43.53 $45.52 $68.84 8.7% 59.2% 37.8% 2.4% Electronic Instruments & ControlsGNTX Gentex Corporation 3/8/13 $19.58 $19.83 $25.59 13.6% 31.5% 9.8% 2.2% Auto & Truck PartsINTC Intel Corporation 12/31/11 $24.25 $24.70 $22.92 4.3% (1.1%) 37.8% 3.9% SemiconductorsLEG Leggett & Platt, Inc. 5/4/12 $21.49 $21.48 $30.15 4.3% 49.6% 27.5% 4.0% Furniture & FixturesMCD McDonald's Corp. 12/31/11 $100.33 $99.19 $96.21 2.0% 2.5% 37.8% 3.4% RestaurantsMDT Medtronic, Inc. 12/31/11 $38.25 $38.89 $53.25 2.9% 43.6% 37.8% 2.1% Medical Equipment & SuppliesMSFT Microsoft Corp. 12/31/11 $25.96 $26.94 $33.28 (0.4%) 29.9% 37.8% 3.4% Software & ProgrammingNSC Norfolk Southern Corp. 12/31/11 $72.86 $74.18 $77.35 7.2% 9.4% 37.8% 2.7% RailroadsOMC Omnicom Group Inc. 6/7/13 $63.93 $63.33 $63.44 4.6% 0.8% 3.7% 2.5% AdvertisingPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $79.50 (0.3%) 25.6% 37.8% 2.9% Beverages (Non-Alcoholic)PG Procter & Gamble Co. 12/7/12 $70.29 $70.89 $75.59 (3.0%) 9.1% 20.7% 3.2% Personal & Household ProductsTGT Target Corporation 12/31/11 $51.22 $51.28 $63.98 1.1% 29.8% 37.8% 2.7% Retail (Department & Discount)TXN Texas Instruments, Inc. 4/5/13 $34.20 $34.80 $40.29 5.5% 17.5% 9.2% 3.0% SemiconductorsTRV Travelers Companies 9/7/12 $65.21 $65.60 $84.77 6.1% 32.4% 21.4% 2.4% Insurance (Property & Casualty)UTX United Technologies 12/31/11 $73.09 $74.97 $107.82 7.7% 50.0% 37.8% 2.0% Aerospace and DefenseWDR Waddell & Reed Fin'l 12/31/11 $24.77 $25.36 $51.48 8.1% 118.7% 37.8% 2.2% Investment ServicesWAG Walgreen Company 2/8/13 $41.40 $41.57 $53.80 11.9% 31.8% 12.8% 2.3% Retail (Drugs)WFC Wells Fargo & Co. 12/7/12 $33.23 $33.40 $41.32 0.6% 26.4% 20.7% 2.9% Regional BanksWEC Wisconsin Energy Corp. 12/31/11 $34.96 $34.68 $40.38 (1.6%) 23.4% 37.8% 3.8% Electric UtilitiesData as of 9/30/2013. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

4 October2013

AAII Dividend Inves�ng Por�olio

Performance

Dividend Yield %8.1%8.2

TotalReturn

IncomeReturn

CapitalGain/(Loss)

TotalReturn

IncomeReturn

CapitalGain/(Loss)

September 4.6% 0.4% 4.2% 3.6% 0.5% 3.1%2013 YTD 23.8% 2.5% 21.3% 21.3% 1.6% 19.7%2012* 10.2% 3.5% 6.7% 14.3% 2.3% 12.0%From Inception 36.4% 7.0% 29.4% 38.7% 4.5% 34.2%Performance as of 10/2/2013

*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.

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

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

Performance of DI Portfolio

on raising the debt ceiling. The bigger question for us, however, is what do we buy as a replacement? Due to the mar-ket’s upward run this year, many stocks are trading with yields below their five-year averages, as we have detailed in previous monthly reports. The rise in interest rates and the potential for a shift in monetary policy has left us not very enthused about utility stocks, even though we continue to like Wisconsin Energy Corp. (WEC). We also want to be sure there is a clear advantage to making a change beyond simply buying a stock with a higher yield.

After looking at potential candidates,

we decided the best move was not to transact. Nothing appeared attractive enough to warrant a change. We also did not see anything that would add to the portfolio’s diversification as our two last additions—Baxter and Omnicom—have done. We did not reinvest into any current holdings either, because the DI tracking portfolio’s cash level is too low to offset the transaction costs involved in doing so.

Portfolio News

Strongest Stocks in SeptemberThe share price of Gentex Corp.

(GNTX) popped 13.6% during Septem-ber on the continued strength of the domestic auto industry. Gentex’s prima-ry business is auto-dimming automotive mirrors found in around 24% of cars. On September 27, 2013, the company completed its purchase of HomeLink from Johnson Controls. HomeLink is a vehicle-based control system that en-ables drivers to remotely activate garage door openers, entry door locks, home lighting, security systems, entry gates, and other radio frequency products. HomeLink has been integrated into Gen-tex automatic-dimming rearview mirrors for more than 10 years. Gentex expects that the acquisition will add from $125 million to $150 million in revenue per year once it is integrated into company.

Also during the month Gentex declared a quarterly cash dividend of $0.14 per share that will be payable October 18, 2013, to shareholders of record of the common stock at the close of business on October 4, 2013. The stock traded ex-dividend on Wednesday, October 2, 2013. The quarterly payment was unchanged from the previous quar-ter. Gentex has a 2.2% dividend yield, which is below its five-year average of 2.5%, but well above its five-year aver-age low yield of 1.8%. Gentex increased its dividend 7.7% last February, an increase above the 5.4% annual divi-dend growth rate over the last five fiscal years. For more on Gentex, see pages 8 and 9.

Walgreen Co. (WAG) was the second-best-performing DI stock for the month for September, gaining 11.9%. The drug-store chain reported that same-store sales climbed 4.8% in August, beating analyst expectations. Pharmacy sales rose 6.4% and front-end sales were up 2.2%. The company’s split with the nation’s largest pharmacy benefits man-ager, Express Scripts Holding Co., hurt Walgreen in 2012, but made August’s comparable-store sales look good.

Shares of Walgreen received another boost after Goldman Sachs said the drug retailer was “underappreciated” and raised its rating on the company’s shares from buy to conviction buy. Goldman analyst Robert P. Jones noted

October2013 5


that Walgreen has put its dispute with Express Scripts firmly behind it and now is looking forward to at least a 25% upside due to the $1 billion in savings it should achieve through its partnership with European drug retailer Alliance Boots. The report went on to say that Walgreen was better positioned than drug retailers CVS Caremark Corp. and Rite Aid Corp.

A strong quarterly earnings report on September 3, 2013, helped to lift the stock price of ABM Industries Inc. (ABM) 10.2% during the month. Rev-enues were $1.2 billion in the quarter, up almost 13% compared to $1.08 bil-lion last year. Much of the gain was due to contributions from acquisitions, but organic growth of 3% added to the year-over-year gain. Adjusted income from continuing operations for the fiscal-2013 third quarter was $0.41 per diluted share, up 10.8% compared to $0.37 per diluted share in the prior year. The adjusted earnings per share number beat the consensus earnings estimate by $0.02 per share. ABM Industries nar-rowed its guidance for fiscal 2013 and now anticipates income from continuing operations to be in the range of $1.26 to $1.31 per share, compared with earlier projections of $1.21 to $1.31 a share. Adjusted income is expected to be in the range of $1.45 to $1.50 per share compared with previous expecta-tions of $1.40 to $1.50.

ABM’s board of directors declared a fourth-quarter cash dividend of $0.15 per common share payable on Novem-ber 4, 2013, to stockholders of record on October 3, 2013. The stock traded ex-dividend on Tuesday, October 1, 2013. The dividend was unchanged from the previous quarter.

Eaton Corp.’s (ETN) 8.7% gain dur-ing September cannot be tied to any specific company event. The increase reflects continued strength in residential construction in the U.S. and Canada, which should help its electrical segment. The European economy seems ready to turn the corner and the market is an-ticipating improvements over the next few years. Events such as the failure of the electrical system of the Metro-North

Railroad’s New Haven Line and even the improving demand for electrical car recharging stations reminds investors of the need for electrical power compo-nents made by firms such as Eaton.

Weakest Stocks in SeptemberBaxter International Inc. (BAX) shares

lost 5.6% during September after J.P. Morgan initiated coverage of Baxter with a neutral rating. The rating is being treated as a downgrade by the market because J.P. Morgan was Baxter’s ad-viser in its $4 billion acquisition of Gam-bro and the firm did not provide analyst rankings while the deal was pending. Now that Baxter’s purchase of Gambro is closed, J.P. Morgan’s newly issued neutral rating is below the outperform rating for Baxter before the restriction began.

Analyst Michael Weinstein noted that Baxter’s anti-hemophiliac business may see additional competition from firms such as Biogen with its Eloctate product. Biogen is coming to market with products that offer longer-lasting blood-clotting proteins (Factor VIII, or FVIII). These long-acting therapies may improve the quality of life of patients by reducing the number of infusions re-quired to manage this chronic condition. Weinstein is seeing some evidence that these longer-acting FVIII proteins may cause a disruption in the marketplace. J.P. Morgan notes that VFIII treatment accounts for around 16% of Baxter’s revenue and as much as 30% of profits. Baxter also has longer-acting treatments in the pipeline, but is behind firms such as Biogen.

Procter & Gamble Co. (PG) was the second-worst-performing stock in the DI portfolio during September, falling 3.0%. The fall followed downgrades by several brokerage and research firms. There was also mixed market reaction to Procter & Gamble’s announcement that

it was once again trying a lower-priced Tide laundry detergent. The move could set off an industry-wide price battle. According to an industry report, Procter & Gamble is talking to retailers about plans for a new bargain version of its flagship Tide laundry detergent. It would be priced just above rival bargain brands, such as Church & Dwight Co.’s Arm & Hammer.

While P&G leads the North American laundry detergent market, it is weak in the growing segment of budget soaps. However, offering a lower-priced version of their premium brand carries the risk that buyers of regular Tide could trade down and stay there. Three years ago P&G dropped a lower-priced powdered detergent called Tide Basic, which was tested for about a year. P&G said consumers were having a hard time dis-tinguishing between the bargain version and the regular-priced variety.

Wisconsin Energy Corp. (WEC) was the DI portfolio’s third-worst-performing stock, falling by 1.6%. The stock has been hurt by the rise in bond yields. In-vestors have eschewed utility stocks on concern about greater competition from bonds for income-seeking investors.

Nothing about the company has changed. Wisconsin Energy’s executives have stuck with their profit and divi-dend forecasts. The third-quarter and full-year consensus earnings estimates are essentially unchanged from a month ago.

The upside of the pessimism is a more attractive valuation. The stock’s indi-cated yield of 3.8% is above its average five-year high of 3.5%. The price-earn-ings ratio of 17.0 is close to the electric utilities’ industry median of 17.2. For more on Wisconsin Energy, see pages 14 and 15.

Microsoft Corp. (MSFT) was the fourth-worst-performing stock of the DI portfolio, losing 0.4% during the month

Recent Earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %ABM ABM Industries, Inc. Sep 3 $0.410 $0.390 5.1%Data as of 9/30/2013. Sources: I/B/E/S and company releases.

6 October2013

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viDelbayaPetaDdiaPynapmoCrekciT Yield Invest PlanABM ABM Industries, Inc. 2, 5, 8, 11 Tue Oct 1, 2013 Mon Nov 4, 2013 $0.1500 $0.60 2.3% -- --AFL AFLAC Incorporated 3, 6, 9, 12 Mon Aug 19, 2013 Tue Sep 3, 2013 $0.3500 $1.40 2.3% Yes YesT AT&T Inc. 2, 5, 8, 11 Tue Oct 8, 2013 Fri Nov 1, 2013 $0.4500 $1.80 5.3% Yes YesBAX Baxter International 1,4,7,10 Wed Sep 4, 2013 Tue Oct 1, 2013 $0.4900 $1.96 3.0% Yes YesCVX Chevron Corporation 3, 6, 9, 12 Thu Aug 15, 2013 Tue Sep 10, 2013 $1.0000 $4.00 3.3% Yes YesETN Eaton Corporation 3, 5, 8, 11 Thu Aug 1, 2013 Fri Aug 23, 2013 $0.4200 $1.68 2.4% Yes YesGNTX Gentex Corporation 1, 4, 7, 10 Wed Oct 2, 2013 Fri Oct 18, 2013 $0.1400 $0.56 2.2% -- --INTC Intel Corporation 3, 6, 9, 12 Tue Nov 5, 2013 Sun Dec 1, 2013 $0.2250 $0.90 3.9% Yes YesLEG Leggett & Platt, Inc. 1, 4, 7, 10 Wed Sep 11, 2013 Tue Oct 15, 2013 $0.3000 � $1.20 4.0% -- YesMCD McDonald's Corp. 3, 6, 9, 12 Thu Nov 28, 2013 Mon Dec 16, 2013 $0.8100 � $3.24 3.4% Yes YesMDT Medtronic, Inc. 1, 4, 7, 10 Wed Oct 2, 2013 Fri Oct 25, 2013 $0.2800 $1.12 2.1% Yes YesMSFT Microsoft Corp. 3, 6, 9, 12 Tue Nov 19, 2013 Thu Dec 12, 2013 $0.2800 � $1.12 3.4% Yes YesNSC Norfolk Southern Corp. 3, 6, 9, 12 Wed Jul 31, 2013 Tue Sep 10, 2013 $0.5200 � $2.08 2.7% Yes YesOMC Omnicom Group Inc. 1, 4, 7, 10 Fri Sep 20, 2013 Wed Oct 9, 2013 $0.4000 $1.60 2.5% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Wed Sep 4, 2013 Mon Sep 30, 2013 $0.5675 $2.27 2.9% Yes YesPG Procter & Gamble Co. 2, 5, 8, 11 Wed Jul 17, 2013 Thu Aug 15, 2013 $0.6015 $2.41 3.2% Yes YesTGT Target Corporation 3, 6, 9, 12 Mon Nov 18, 2013 Tue Dec 10, 2013 $0.4300 $1.72 2.7% Yes YesTXN Texas Instruments, Inc. 2, 5, 8, 11 Tue Oct 29, 2013 Mon Nov 18, 2013 $0.3000 � $1.20 3.0% Yes YesTRV Travelers Companies 3, 6, 9, 12 Fri Sep 6, 2013 Mon Sep 30, 2013 $0.5000 $2.00 2.4% -- YesUTX United Technologies 3, 6, 9, 12 Wed Aug 14, 2013 Tue Sep 10, 2013 $0.5350 $2.14 2.0% Yes YesWDR Waddell & Reed Fin'l 2, 5, 8, 11 Wed Oct 9, 2013 Fri Nov 1, 2013 $0.2800 $1.12 2.2% -- --WAG Walgreen Company 3, 6, 9, 12 Fri Aug 16, 2013 Thu Sep 12, 2013 $0.3150 � $1.26 2.3% Yes YesWFC Wells Fargo & Co. 3, 6, 9, 12 Wed Aug 7, 2013 Sun Sep 1, 2013 $0.3000 $1.20 2.9% Yes YesWEC Wisconsin Energy Corp. 3, 6, 9, 12 Mon Aug 12, 2013 Sun Sep 1, 2013 $0.3825 � $1.53 3.8% Yes Yes

� .htnom siht gnirud snoitca dnedivid etacidni setad dloB.retrauq roirp morf desaercni dnedivid ylretrauQ� Quarterly dividend decreased from prior quarter. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

of September. The company’s return figure is actually a little misleading. Right at the beginning of the month, Microsoft announced that it will pur-chase substantially all of Nokia’s (NOK) devices & services business, license Nokia’s patents and license and use Nokia’s mapping services. The company paid approximately $7 billion and will draw upon its overseas cash resources to fund the transaction. The acquisition is a clear attempt by Microsoft to find a footing in the smartphone arena. Inves-tors did not like the news and punished Microsoft shares, sending them down 7% on the day of the announcement.

For rest of the month, MSFT shares slowly crept back upward. During September, the company declared a quarterly dividend of $0.28 per share,

reflecting a $0.05, or 22%, increase over the previous quarter’s dividend. The dividend is payable December 12, 2013, to shareholders of record on Novem-ber 21, 2013. The ex-dividend date is Tuesday, November 19, 2013. The board of directors also approved a new share repurchase program authorizing up to $40 billion in share repurchases.

Microsoft also announced two new Surface models, Surface 2 and Surface Pro 2, along with an expanded port-folio of new Surface accessories. The company stated that the products will be available starting October 22. The release of the Surface 2 tablets marks Microsoft’s second attempt at creating a tablet. The device is more of a “hybrid” that combines elements of a laptop and a tablet. It is heavier than an iPad and

the vast majority of Android tablets but, in the case of the Surface Pro 2, comes with a full Windows 8 operating system and all of its capabilities.

While we see the Surface as a good product, it faces significant challenges. The more expensive and more capable Surface Pro starts at around $900 and goes up to $1,400, a price point that may be too high for most consumers. The lower-priced Surface RT does not run the full version of Windows, and with the iPad and Android tablets domi-nating the market, it’s hard to see a fundamental shift in consumer demand toward the Surface tablet. Of course, Surface revenues represent a very small portion of Microsoft’s overall sales. But we are keeping an eye on this lucrative market nonetheless. ▪

October2013 7


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

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

tuoyaP-cesnoCtsE:oitaRevitutsriFviDSPE

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

Ticker (TTM) Current Ago Avg (3-5 Yr) (5 Yr) Paid Raised Month Avg Month) Assets (Mil)ABM 19.4 2.3% 3.2% 2.6% 5.9% 3.9% 1965 46 43% 48% 26% 58% $1,468AFL 8.6 2.3% 2.9% 2.7% 5.8% 10.9% 1973 29 19% 29% 5% 88% $28,831T 25.6 5.3% 4.7% 5.8% 6.4% 3.8% 1984 29 135% na 50% 68% $179,618BAX 16.3 3.0% 2.3% 2.2% 8.8% 16.9% 1934 7 34% 35% 49% 69% $35,656CVX 9.8 3.3% 3.2% 3.4% 7.0% 9.2% 1912 26 30% 30% 249% 42% $234,741ETN 20.8 2.4% 3.4% 3.2% 11.9% 12.1% 1923 4 48% 47% 55% 56% $32,623GNTX 20.5 2.2% 3.2% 2.5% 9.9% 5.4% 2003 3 43% 64% 30% 12% $3,692INTC 12.4 3.9% 3.0% 3.1% 11.3% 7.5% 1992 9 36% 44% 37% 37% $114,192LEG 17.5 4.0% 4.6% 5.3% 15.0% 7.9% 1939 42 64% 114% 48% 57% $4,282MCD 17.6 3.4% 3.3% 3.1% 8.4% 13.9% 1976 37 55% 48% 74% 56% $96,176MDT 15.3 2.1% 2.5% 2.3% 6.4% 15.8% 1977 36 30% 32% 26% 47% $53,115MSFT 12.8 3.4% 3.1% 2.5% 8.7% 15.9% 2003 3 35% 31% 31% 45% $277,221NSC 14.3 2.7% 3.1% 2.6% 11.9% 15.1% 1901 11 37% 35% 84% 67% $24,130OMC 17.0 2.5% 2.7% 2.1% 8.7% 15.9% 1998 4 37% 26% 31% 85% $16,316PEP 18.8 2.9% 3.0% 3.0% 8.3% 8.3% 1952 41 50% 50% 44% 70% $122,606PG 19.6 3.2% 3.3% 3.3% 8.2% 9.6% 1890 57 57% 48% 58% 51% $206,992TGT 15.4 2.7% 2.3% 1.9% 10.5% 20.6% 1967 43 34% 24% 27% 64% $40,379TXN 22.4 3.0% 3.2% 2.0% 9.0% 19.1% 1962 10 48% 32% 33% 43% $44,366TRV 11.0 2.4% 2.7% 2.8% 8.6% 9.6% 2003 8 24% 28% 22% 76% $31,659UTX 19.6 2.0% 2.7% 2.5% 13.7% 11.7% 1936 18 31% 34% 48% 70% $98,926WDR 21.0 2.2% 3.2% 3.0% 16.3% 8.0% 1998 3 54% 54% 48% 53% $4,412WAG 23.7 2.3% 3.0% 1.9% 13.0% 23.7% 1932 38 48% 27% 40% 47% $50,841WFC 11.2 2.9% 2.9% 2.3% 7.2% (5.7%) 1939 3 27% 53% 12% 89% $219,400WEC 17.0 3.8% 3.4% 3.0% 5.2% 19.1% 1939 10 53% 43% 54% 71% $9,193Data as of 9/30/2013. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Payout Ratio:SPEdleiY dnediviD

Dividend Analysis

Definitions of Terms Used in Tables

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

8 October2013

Gentex started in 1974 as a manufacturer of commercial fire protection products, such as dual-sensor photoelectric smoke detectors. It leveraged its knowledge of electro-optical sensing technologies to introduce the world’s first electro-mechanical (motorized) auto-dimming mirror in 1982. The rearview mirrors use sensors and electronic circuitry to detect headlights from trailing approaching cars and darken the mir-ror. The mirror was quickly adopted and Gentex today offers auto-dimming mirrors on nearly 300 vehicle models around the world and deals with 22 automakers. Gentex has also used its electrochromic technology to create electronically dimmable window shades on commercial aircraft such as the Boeing 787 Dreamliner. Gentex just completed the acquisition of the HomeLink business from Johnson Controls. HomeLink is a vehicle-based control system for remotely activating garage door openers, home lighting, security systems, entry gates, and other radio frequency convenience products.

Why Own GNTX?Gentex has approximately an 88% market share of the

auto-dimming rearview mirror marketplace. Auto-dimming rearview mirrors are found in around 24% of all cars sold today, and Gentex estimates that this penetration has the potential to expand to 45% over the next 10 to 12 years. It has designed mirrors with additional capabilities such as rear camera displays and Bluetooth microphones, as well as smart exterior mirrors with turn signal lights and blind-side warnings. Its mirror sales account for approximately 98% of revenue. The Detroit big three automakers account for 23% of sales, North American transplants 17% and Europe 41%, while Asia-Pacific and others account for 19% of sales. North American light vehicle production is expected to expand 5% this year, but it will likely decline around 3% in Europe during 2013 and decline 5% in Japan and Korea. Analysts are expect-ing earnings to expand 13.8% for Gentex during 2013, but only 8.3% during 2014. These growth rates will likely shift as impact of the HomeLink acquisition is digested.

Gentex trades at a discount to its five-year average price-

earnings ratio of 25.0. Its current price-earnings ratio of 20.8 is above the 17.6 median for the auto and truck parts indus-try, but it has normally traded around 1.7 times the industry.

The forward price-earnings ratio is 19.5 for 2013 earnings and 18.0 using 2014 estimates. The forward price-earnings multiples are now above the dividend-adjusted long-term ex-pected growth rate of 12.1% (2.2% dividend yield + 9.9% con-sensus growth estimate). Strong price gains have stretched some of the valuations.

Sales have increased at an 11.0% annual rate over the last five years, while net income has expanded at a 6.7% annual growth rate and diluted earnings from continuing operations expanded at a 6.6% annual growth rate.

Gentex has averaged around $152 million per year in oper-ating cash flow over the last five years. Capital expenditures (capex) have averaged around $70 million per year. Capex is expected to decline this year as Gentex has moved more of its engineering services in-house and finished a factory expansion. These figures exclude the $700 million HomeLink acquisition.

Gentex’s current ratio of 8.2x is below its five-year average of 8.6x, but much better than the industry median of 1.5x. Its percentage of total liabilities to total assets is 11.7%, below the 66.7% median for the industry. These ratios will change as Gentex finances HomeLink but will remain strong.

Dividend AnalysisGentex has a current dividend yield of 2.2%, now below its

five-year average yield of 2.5%. One year ago, Gentex traded with a yield of 3.2%.

Gentex started paying dividends in 2003 after the lowered tax rate for qualified dividends put them on an equal footing with long-term capital gains. Gentex has regularly increased its annual dividend payout but held it steady during the finan-cial crisis, so it has increased its annual payout for only three consecutive years. Dividends have expanded at a 5.4% annual rate over the last five fiscal years. Its last dividend increase was 7.7%, declared on February 19, 2013.

Gentex has an acceptable current earnings payout ratio of 43.2%, below the five-year average of 64.2%. The pre-divi-dend free-cash-flow payout ratio is 30.2%.

RisksIn some ways Gentex’s biggest competitor is the LCD display

panel in a car. Gentex has been able to sell higher-priced mir-rors that contain a rear camera display (RCD). However, some auto manufacturers have decided to switch to multiple-use displays on the car console that can also be used with a GPS system, climate control display, radio display, etc. RCD mirror unit shipments decreased by approximately 8% in calendar-year 2012 and are expected to decrease by approximately 25% to 35% during 2013.

While North American car sales have taken off, the rest of the world is still struggling. ▪

gentex Corporation (gNTX)

Bullish Factors• Strong domestic car sales • Dominant supplier of auto-dimming rearview mirrors

with room to penetrate a higher percentage of cars • Record of significant free cash flow and strong balance

sheet

Bearish Factors• Operates in highly cyclical industry • Attempt to offer higher-priced mirrors with advanced

features faces competition with in-dash displays• Price-earnings and dividend valuations reasonable, but

not deeply undervalued

October2013 9


gNTX $25.94 ($26.26 - $15.25)Addition Alert Date: 3/8/2013

98.2 :xednI ksiR : $19.58trelA ta ecirPMarket Cap (Million): $3,691.6Avg Daily Dollar Volume (Million): $25.8Primary Sector: Consumer CyclicalPrimary Industry: Auto & Truck Parts

Indicated Annual Dividend: $0.56 8002/219002/210102/211102/212102/21tnerruCselpitluMLatest Dividend Increase: (Date) Dividend Yield (%): Avg 2.2% 2.3 1.7 1.9 3.5 3.3Latest Dividend Increase: (%) 6.63.67.22.26.3hgiH :)%( dleiY dnediviD %7.7Dividend Yield: Current 2.2% 2.24.24.14.17.1woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) 5.920.729.321.526.918.02sgninraE/ecirPDividend Paid Since: 2003 Price/Earnings (Industry) 17.6 10.4 12.1 16.7 16.8 17.0Number of Years of Div Increases: 3 Price/Book Value 3.0 2.9 4.0 3.7 2.4 2.6Direct Invest Option: No 9.22.30.40.40.34.3selaS/ecirPDRIP Plan: No 8002/219002/210102/211102/212102/21tnerruCsoitaRDeclared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 43.2 44.1 41.4 44.4 93.6 97.7

$0.1400 Payout Ratio: FCFPS (%) 30.2 53.0 318.1 75.5 67.4 80.7$0.1400 Gross Margin (%) 34.6 33.9 35.3 36.2 32.6 32.6$0.1400 Operating Margin (%) 23.2 21.3 22.6 23.4 17.1 14.6$0.1300 Operating Margin (%) (Ind) 5.8 5.8 5.0 6.3 0.4 2.2

0.019.119.611.613.515.61)%( nigraM teN0031.0$3.80.99.612.717.516.51)%( EOR0031.0$

Rel Strgth ROE (%) (Industry) 15.2 15.1 17.7 13.7 9.8 7.8Rank 5.71.81.511.518.317.31)%( AOR

2.96.81.95.75.82.8oitaR tnerruC%58keeW 45.85.019.017.214.117.11)%( stessA ot seitilibaiL%36keeW 31

%97keeW 62 Liab to Assets (%) (Ind) 66.7 64.6 65.2 64.0 67.4 71.68.07.09.09.09.08.0revonruT tessA%08keeW 25

Financial Statements TTM 12/2012 12/2011 12/2010 12/2009 12/2008raeY 5 htworG 426545618420,1001,1580,1)M$( selaS

302871692263373573)M$( emocnI ssorG%4.5sdnediviDANANANANANAN)M$( noitaicerpeD%0.11selaS8110055)M$( artxE/lausunU%7.6emocnI teN1939191132532252)M$( emocnI gnitarepO%8.6cisaB SPE000000)M$( esnepxE tseretnI%6.6tnoC liD SPE

Pretax Income ($M) 263 250 244 203 96 92SUE Score Net Income ($M) 179 169 165 138 65 62

4.20 Operating Cash Flow ($M) 329 258 142 128 111 1212.20 Investing Cash Flow ($M) (114) (132) (104) (125) (16) 16

Annual Financing Cash Flow ($M) (87) (94) (29) 9 (53) (160)12/2014 Capital Expenditures ($M) 72 118 120 47 21 46

10 Net Cash Flow ($M) 127 32 10 12 42 (23)44.074.099.061.181.152.1)$( cisaB SPE44.1$

$1.44 EPS Diluted Cont ($) 1.25 1.17 1.14 0.98 0.47 0.448.65.8013.616.29.5)%( ghC raeY/raeY CD SPE0pU veR # (48.2)

34.044.044.084.025.045.0)$( erahS/sdnediviD0nwoD veR # 5.73.20.01.93.80.8)%( ghC raeY/raeY dnediviD73.1$ogA .soM eerhT35.056.085.051.089.097.1)$( erahS/wolF hsaC eerF%3.8ghC raeY/raeY

6/2013 3/2013 12/2012 9/2012 Total 423353534914154595)M$( hsaC$0.36 $0.32 $0.28 $0.29 $1.25 Goodwill/Intangibles ($M) 28 29 13 13 11 10$0.28 $0.32 $0.28 $0.30 $1.18 Total Assets ($M) 1,366 1,266 1,176 1,003 823 763

Long-Term Debt ($M) 0 0 0 0 0 06/2013 3/2013 12/2012 9/2012 Total Total Liabilities ($M) 159 145 149 109 87 65$2.00 $1.89 $1.83 $1.88 $7.60 Book Value/Share ($) 8.43 7.83 7.21 6.41 5.36 4.96$1.95 $2.03 $1.82 $1.89 $7.68 Avg Shares Outst'g (M) 143.24 143.10 142.49 139.36 137.23 140.90

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 10/1/2013.

2.5% (4.3% - 1.8%)

1.051.20

Oct 18, 2013Jul 19, 2013Apr 19, 2013

1.11

Aug 21, 2013May 29, 2013Feb 19, 2013 Apr 3, 2013

Jul 2, 2013Oct 2, 2013

Gentex Corporation is a supplier of automatic-dimming rear-view mirrors and camera-based lighting-assist features to the automotive industry. Gentex designs, develops, manufactures and markets interior and exterior auto-dimming automotive rear-view mirrors that utilize electrochromic technology to dim headlight glare. Safety features can also provide drivers with side blind-zone warnings, automatic lighting assistance and rear camera displays. Gentex alsoprovides commercial smoke alarms and fire protection signaling devices, as well as dimmable aircraft windows for the commercial, business and general aviation markets. On September 27, 2013, the company acquired Johnson Controls' HomeLink business.

Nov 26, 2012

Jul 24, 2013Apr 23, 2013

Jan 3, 2013

14%10%29%51%

Stock

35.5%

Gain

Jan 18, 2013

Rel StrgthIndex

Oct 3, 2012

TTM

1.29

3 Year5.7%26.4%37.7%35.9%

Month Ago $0.32

11EPS Estimates

Quarterly

Est Surprise

5.9%

EPS (Qtr)

Year Ago

11.7%

00

$0.31

EPS

5.9%

2102 ,91 tcO2102 ,12 guAMay 24, 2012 Jul 2, 2012 Jul 20, 2012

8.0%(1.4%)4.7%

Year Ago

TTM

TTMSales/Sh (Qtr)

13.8%

Feb 19, 2013

0$1.26

0

Annual12/2013

% Surp

$1.34

11

13.2%7.4%

# of EstimatesCurrent $0.32 $1.33

9/2013

$0.36$0.32

$0

$5

$10

$15

$20

$25

$30

$35

$40

Share Price

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Oct 2008 Oct 2009 Oct 2010 Oct 2011 Oct 2012

Div

iden

d Yi

eld

10 October2013

McDonald’s Corp. (MCD)McDonald’s Corp. is the largest fast-food company in the

world, franchising and operating McDonald’s restaurants. As of the end of June 2013, there were 34,700 restaurants in 120 countries. Of these, 28,100 were franchised or licensed and 6,600 were operated by the company.

McDonald’s restaurants offer a substantially uniform menu, with some geographic variations, and also tests new products on an ongoing basis. McDonald’s menu includes hamburgers, Filet-O-Fish, chicken sandwiches, Chicken McNuggets, Snack Wraps, french fries, salads, ice cream drinks and desserts, beverages and other products during limited-time promo-tions. In the U.S. and many international markets, McDonald’s restaurants also offer a full or limited breakfast menu.

The company is managed as distinct geographic segments that include the U.S. (32% of 2012 revenues); Europe (39%); Asia Pacific, Middle East and Africa—APMEA (23%); and other countries & corporate (6%).

Why Own MCD?While McDonald’s is the world’s largest fast-food restaurant

company, there is still plenty of room for expansion. Accord-ing to Euromonitor International, McDonald’s accounted for only about 8% of global Informal Eating Out segment sales in 2011 and 0.7% of total outlets. The company is focusing its expansion activities on emerging markets, such as China, where it expects more people to eat out as living standards improve.

Over the last three years, sales, on average, have been increasing by 6.6% a year, while fully diluted earnings from continuing operations have been rising by 9.3% a year. Look-ing forward, analysts polled by I/B/E/S are expecting earnings to grow, on average, by 8.4% over the next three to five years. The company has set long-term financial goals of system-wide sales growth of 3% to 5% per year and operating income growth of 6% to 7% a year.

The company is currently trading at a premium to its histori-cal five- and seven-year price-earnings ratios (17.6, versus

15.6 and 17.5, respectively). However, looking forward, its price-earnings ratio based on 2014 earnings is 15.7 and is 14.3 based on 2015 projected earnings.

While the company has been facing strong macroeconomic headwinds around the globe and increased competition here at home, we feel that MCD is well-positioned to face these challenges. The company’s focus on value attracts cost-con-scious consumers and should allow it to gain market share of those “trading down” to save money. However, McDonald’s broad menu selections and premium products mean that it will benefit once macroeconomic conditions improve and consumers start “trading up” or buying more per visit.

Dividend AnalysisMcDonald’s has a long history of returning cash to inves-

tors. Since its first dividend payout in 1976, the company has increased it every year. MCD shares currently trade with a 3.4% dividend yield, which is slightly above its five-year aver-age yield of 3.1%. Last month the company announced a 5.2% dividend increase, bringing the estimated value of dividend payments and share repurchases for fiscal 2013 to between $4.5 billion and $5.0 billion. Over the last three years the dividend has grown, on average, by 11.9%; over the last five years it has grown by 13.9% a year.

McDonald’s current earnings payout ratio is 54.7%, which is at the high end of its seven-year range. Over the last 12 months, the company paid out 74.2% of free cash flow as dividends, which is the highest this ratio has been during the last five years.

The recent 5.2% dividend increase is well below the histori-cal dividend growth rate. We are monitoring the company’s dividend policy to see if this deceleration is a long-term trend or a short-term slowdown.

RisksMcDonald’s has been facing difficult comparable sales

for the last few quarters, a trend the company expects to continue in the near term. In addition, it has missed analyst earnings forecasts for the past two quarters. The company is facing challenges on multiple fronts: a weak global economy, changing consumer tastes and increased competition.

McDonald’s has been able to boost traffic in recent quarters by focusing on its value menu. However, this value focus has narrowed operating margins, hurting earnings.

Continued weakness in Europe, McDonald’s largest market, will also hamper results, as will decelerating growth in Asia and rising commodity costs in the U.S.

McDonald’s operates in a fiercely competitive marketplace. Historical rivals such as Burger King and Wendy’s have been aggressively revamping their menus and lowering prices. Yum! Brands (KFC, Pizza Hut and Taco Bell) is looking to ex-pand its footprint in prime markets such as Russia, India and Europe. In addition, U.S. “gourmet” hamburger concepts have been posting strong growth. ▪

Bullish Factors• Maintains leading market position in almost every

country in which it operates• Strong brand recognition• Long history of dividend increases

Bearish Factors• Continued weakness in Europe and decelerating growth

in Asia will hurt results• Rising operating costs associated with focus on

value menu, rising wages worldwide and increasing commodity costs

• Fierce competition from historical rivals and new concept restaurants will hurt sales and margins

October2013 11


MCD $96.13 ($103.70 - $83.31) Addition Alert Date: 12/31/2011Price at Alert: $100.33 Risk Index: 0.92Market Cap (Million): $96,175.9Avg Daily Dollar Volume (Million): $464.9Primary Sector: ServicesPrimary Industry: Restaurants

Indicated Annual Dividend: $3.24 8002/219002/210102/211102/212102/21tnerruCselpitluMLatest Dividend Increase: Date Dividend Yield (%): Avg 3.4 3.1 2.9 3.2 3.6 2.9Latest Dividend Increase: % 5.31.47.35.34.3hgiH :)%( dleiY dnediviD %2.5Dividend Yield: Current 3.4% 4.22.38.25.28.2woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 5.7 5.8 6.1 6.5 7.1 6.7Dividend Paid Since: 0.510.415.514.613.716.71sgninraE/ecirP6791Number of Years of Div Increases: 37 Price/Earnings (Industry) 23.9 18.1 15.3 16.0 13.7 15.5Direct Invest Option: Yes Price/Book Value 6.4 6.1 6.2 5.2 4.5 4.8DRIP Plan: 7.28.21.33.34.35.3selaS/ecirPseY

8002/219002/210102/211102/212102/21tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.8100 Payout Ratio: EPS (%) 54.7 53.0 47.5 48.7 49.2 42.4$0.7700 Payout Ratio: FCFPS (%) 74.2 74.0 59.1 57.3 58.9 48.4$0.7700 Gross Margin (%) 39.0 39.2 39.6 40.0 38.7 36.7$0.7700 Operating Margin (%) 30.2 31.2 31.6 31.0 30.1 27.4$0.7700 Operating Margin (%) (Ind) 6.9 6.4 7.1 6.7 5.6 5.2

3.810.025.024.028.919.91)%( nigraM teN0007.0$Rel Strgth 1.032.335.439.738.630.73)%( EOR

Rank ROE (%) (Industry) 13.8 13.7 16.8 13.4 11.0 7.99.415.519.519.610.610.61)%( AOR%64keeW 44.11.15.13.14.17.1oitaR tnerruC%03keeW 310.356.352.454.658.650.65)%( stessA ot seitilibaiL%63keeW 62

%54keeW 25 Liab to Assets (%) (Ind) 56.0 56.6 59.1 59.0 58.9 60.48.08.08.08.08.08.0revonruT tessA

8002/219002/210102/211102/212102/21MTTstnemetatS laicnaniFraeY 5 htworG225,32547,22570,42600,72765,72497,72)M$( selaS%9.31sdnediviD936,8297,8736,9786,01618,01238,01)M$( emocnI ssorG%9.3selaSANANANANANAN)M$( noitaicerpeD%9.71emocnI teN

88)M$( artxE/lausunU%8.12cisaB SPE (4) 29 (61) 6344,6148,6374,7035,8506,8383,8)M$( emocnI gnitarepO%7.22tnoC liD SPE

Interest Expense ($M) 516 533 507 463 485 535SUE Score Pretax Income ($M) 8,098 8,079 8,012 7,000 6,487 6,158

(1.20) Net Income ($M) 5,518 5,465 5,503 4,946 4,551 4,313(0.30) Operating Cash Flow ($M) 7,046 6,966 7,150 6,342 5,751 5,917

Annual Investing Cash Flow ($M) (2,965) (3,167) (2,571) (2,056) (1,655) (1,625)12/2014 Financing Cash Flow ($M) (4,319) (3,850) (4,533) (3,729) (4,421) (4,115)

29 Capital Expenditures ($M) 2,982 3,049 2,730 2,136 1,952 2,136$6.11 Net Cash Flow ($M) (206) 0 (51) 591 (267) 82

38.371.446.433.514.505.5)$( cisaB SPE11.6$67.311.485.472.563.564.5)$( tnoC detuliD SPE4pU veR # 36.150.262.235.278.210.3)$( erahS/sdnediviD1nwoD veR # 63.384.359.382.488.360.4)$( erahS/wolF hsaC eerF32.6$ogA .soM eerhT

6/2013 3/2013 12/2012 9/2012 Total 360,2697,1783,2633,2633,2872,2)M$( hsaC$1.38 $1.26 $1.38 $1.43 $5.45 Goodwill/Intangibles ($M) 2,779 2,804 2,653 2,586 2,425 2,237$1.32 $1.23 $1.33 $1.45 $5.33 Total Assets ($M) 34,453 35,387 32,990 31,975 30,225 28,462

Long-Term Debt ($M) 13,370 13,633 12,134 11,497 10,560 10,1866/2013 3/2013 12/2012 9/2012 Total Total Liabilities ($M) 19,283 20,093 18,600 17,341 16,191 15,079$7.07 $6.59 $6.94 $7.11 $27.71 Book Value/Share ($) 15.15 15.14 13.94 13.73 12.85 11.88$6.82 $6.43 $6.59 $6.97 $26.81 Avg Shares Outst'g (M) 1,001.40 1,010.10 1,032.10 1,066.00 1,092.20 1,126.60


2$5.69

52

$1.55

4

Annual12/2013

29

Sep 18, 2013

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

% Surp(1.6%)(0.5%)

Month Ago $1.50 $5.60$5.61Current

EPS Estimates

EPS (Qtr)

EPS$1.38$1.26

# of Estimates$1.51

Est Surprise

Quarterly9/2013

26

2.4%2.6%

11.9%6.6%6.3%9.1%9.3%

0.4%1.2%

Index

0.900.93

TTM 3 Year

0.90

11.1%

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

Jan 30, 2013

Jul 22, 2013Apr 19, 2013

Feb 27, 2013

2%(4%)(3%)5%

Stock

0.99

Sep 18, 2013Jul 17, 2013May 22, 2013 May 30, 2013

Aug 29, 2013

Mar 15, 2013

Gain

Sep 18, 2012

3.1% (3.7% - 2.7%)

Dec 2, 2013

Jul 19, 2012 Aug 31, 2012

Dec 16, 2013Sep 17, 2013Jun 17, 2013

Rel Strgth

Nov 29, 2012 2102 ,71 ceD2102 ,02 peS

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12 October2013

Texas Instruments is the world’s fourth-largest semicon-ductor company, as measured by revenues. The company has design, manufacturing or sales operations in more than 35 countries and sells its chips to electronics designers and manufacturers globally. Texas Instruments operates in four segments: analog, embedded processing, wireless and other. TXN sells custom semiconductor products, which are designed for a specific customer for a specific application and are sold only to that customer. The life cycles of custom products are determined by end-equipment upgrade cycles and can be as short as 12 to 24 months. It also sells catalog semiconductor products through both distribution and direct channels.

Texas Instruments is the world’s largest maker of analog chips. Analog semiconductors are used to condition, amplify or convert signals such as sound, temperature, pressure or images to data that can be processed by other semiconduc-tors. Analog semiconductors are also used to manage power in every electronic device, whether plugged into a wall or running off a battery.

Why Own TXN?End products for Texas Instruments’ chips include con-

sumer electronics, automotive, computing and other portable and handheld devices. Its broad range of offerings shipped worldwide enables Texas Instruments to supply over 100,000 customers. In addition to its leading position in analog chips, Texas Instruments is the world’s second-largest maker of embedded processing products, which include digital signal processors and microcontrollers. Digital signal processors are designed to almost instantaneously calculate mathematical computations and improve digital data. Microcontrollers are designed to control a set of specific tasks for electronic equip-ment.

The company recently wound down its wireless business and is focusing its resources on analog chips and embedded processing. This renewed focus, especially on analog chips, should be beneficial to Texas Instruments’ long-term earnings, as its analog chips generate the highest margins. In addition, the changes will result in lower resource and investment

demands. However, the loss of wireless business profits will place some short-term pressure on revenues.

We are also encouraged by the rebound in chip demand. TXN recently narrowed its guidance, forecasting earnings of $0.51 to $0.55 per share. The current I/B/E/S consensus esti-mate of $0.53 per share is at the mid-point of TXN’s guidance and is up from the $0.51 per share expectation three months ago.

Dividend AnalysisWe continue to be drawn to Texas Instruments’ commit-

ment to returning cash to shareholders through dividends and repurchasing shares. TXN currently trades with a 3.0% divi-dend yield, which is above its five-year average of 2.0%. The company has paid a dividend every year since 1962 and in-creased its annual payout for 10 consecutive years. Recently, TXN more aggressively increased its dividend. In September of last year, the company increased its dividend by 23.5% and then increased it in February 2013 and again in September of this year by 33% and 7.1%, respectively. In addition to the dividend increases, the company has an outstanding authori-zation to repurchase $8.4 billion in shares.

Texas Instruments has a current earnings payout ratio of 47.8%, which is slightly above historical norms, but fair. The company currently has a free-cash-flow payout ratio of 33.1%, which is close to its historical norm and very reasonable. The company generates strong operating cash flows, around $3.4 billion in 2012, while capital expenditures were $495 million.

TXN has increased its dividend payment an average of 19.1% a year over the last five years and, given its strong free cash flows and earnings coverage, we expect the company to continue increasing its dividend payments going forward as well as repurchasing shares.

RisksOwning TXN comes with various risks. The semiconduc-

tor industry is highly cyclical. On top of that, the cyclicality is exacerbated by companies that typically hold smaller invento-ries during economic downturns and larger inventories during economic expansion, causing many semiconductor firms to go through large variances in product orders during changing market cycles. The semiconductor industry is also highly frag-mented and deeply competitive. However, TXN does benefit from customer loyalty. Analog chips, which account for the majority of TXN’s revenues, are built from proprietary designs and tend to have long useful lives. Once customers select a chip design, they tend to stick with it since it is costly to rede-sign a product in order to change to a competing analog chip.

TXN is also essentially walking away from its wireless busi-ness, which will weigh on sales and earnings in the short run. Though the company is increasing focus on a higher-margin segment, there is no guarantee that it will be able to make up the lost revenues. ▪

Texas Instruments, Inc. (TXN)

Bullish Factors• Aggressive dividend increases over the past year and

strong share repurchase program• Leader in lucrative analog chip market• Renewed focus on its primary growth segments (analog

chips and embedded processors)

Bearish Factors• Operates in a high cyclical and competitive marketplace• Winding down wireless business will create near-term

headwinds for revenues and profitability

October2013 13


TXN $40.40 ($40.94 - $27.00)Addition Alert Date: 4/5/2013

86.Risk Index: 102.43$ :trelA ta ecirPMarket Cap (Million): $44,366.3Avg Daily Dollar Volume (Million): $269.6Primary Sector: TechnologyPrimary Industry: Semiconductors

Indicated Annual Dividend: $1.20 8002/219002/210102/211102/212102/21tnerruCselpitluMLatest Dividend Increase: Date Dividend Yield (%): Avg 3.0% 2.4 1.8 1.7 2.2 1.8Latest Dividend Increase: % 1.33.32.23.28.2hgiH :)%( dleiY dnediviD %1.7Dividend Yield: Current 3.0% 2.17.14.15.11.2woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) 2.617.717.012.610.024.22sgninraE/ecirPDividend Paid Since: 1962 Price/Earnings (Industry) 22.4 19.5 18.8 12.6 21.5 21.2Number of Years of Div Increases: 10 Price/Book Value 4.0 3.1 3.2 3.2 2.6 3.3Direct Invest Option: 4.25.24.26.27.26.3selaS/ecirPseYDRIP Plan: Yes 8002/219002/210102/211102/212102/21tnerruCsoitaRDeclared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 47.8 47.1 29.3 18.4 38.8 28.1

$0.3000 Payout Ratio: FCFPS (%) 33.1 27.9 26.4 22.4 30.0 20.9$0.2800 Gross Margin (%) 49.8 49.7 49.3 53.6 47.9 50.0$0.2800 Operating Margin (%) 19.5 15.4 21.8 32.3 19.1 19.5$0.2100 Operating Margin (%) (Ind) 2.6 2.1 6.0 11.9 0.0 (3.4)

3.510.418.220.615.315.61)%( nigraM teN0012.0$8.913.516.136.028.513.81)%( EOR0012.0$

Rel Strgth ROE (%) (Industry) 0.8 1.4 6.5 11.5 (2.7) (3.3)Rank 5.511.210.520.315.82.01)%( AOR

8.39.36.32.24.29.2oitaR tnerruC%26keeW 48.128.911.226.643.549.24)%( stessA ot seitilibaiL%27keeW 31

%56keeW 62 Liab to Assets (%) (Ind) 31.1 31.7 30.0 31.8 31.8 28.80.19.01.18.06.06.0revonruT tessA%87keeW 25

Financial Statements TTM 12/2012 12/2011 12/2010 12/2009 12/2008raeY 5 htworG 105,21724,01669,31537,31528,21103,21)M$( selaS

542,6999,4294,7277,6863,6031,6)M$( emocnI ssorG%1.91dnediviDSales (1.5%) Depreciation ($M) NA NA NA NA NA NANet Income (8.2%) Unusual/Extra ($M) 255 714 427 (111) 212 254EPS Basic (4.0%) Operating Income ($M) 2,400 1,973 2,992 4,514 1,991 2,437EPS Dil Cont (3.8%) Interest Expense ($M) 91 85 42 0 0 0

Pretax Income ($M) 2,254 1,935 2,955 4,551 2,017 2,481SUE Score Net Income ($M) 2,033 1,728 2,201 3,184 1,456 1,908

16.90 Operating Cash Flow ($M) 3,325 3,414 3,256 3,820 2,643 3,3301.70 Investing Cash Flow ($M) (1,299) (1,039) (6,172) (1,057) (1,096) (1,182)

Annual Financing Cash Flow ($M) (2,038) (1,951) 2,589 (2,626) (1,411) (2,430)12/2014 Capital Expenditures ($M) 428 495 816 1,199 753 763

35 Net Cash Flow ($M) (12) 424 (327) 137 136 (282)64.161.166.219.135.128.1)$( cisaB SPE42.2$

$2.24 EPS Diluted Cont ($) 1.80 1.51 1.88 2.62 1.15 1.444.13)%( ghC raeY/raeY CD SPE5pU veR # (19.7) (28.2) 127.8 (20.1) (21.3)

14.054.094.065.027.078.0)$( erahS/sdnediviD3nwoD veR # 7.638.99.83.416.829.53)%( ghC raeY/raeY dnediviD11.2$ogA .soM eerhT69.105.191.221.285.236.2)$( erahS/wolF hsaC eerF%5.51ghC raeY/raeY

6/2013 3/2013 12/2012 9/2012 Total 045,2529,2270,3539,2569,3442,3)M$( hsaC$0.58 $0.32 $0.23 $0.67 $1.80 Goodwill/Intangibles ($M) 6,909 7,062 7,558 1,205 1,169 1,113$0.38 $0.22 $0.25 $0.51 $1.36 Total Assets ($M) 19,398 20,021 20,497 13,401 12,119 11,923

Long-Term Debt ($M) 4,165 4,186 4,211 0 0 06/2013 3/2013 12/2012 9/2012 Total Total Liabilities ($M) 8,330 9,060 9,545 2,964 2,397 2,597$2.76 $2.61 $2.67 $3.00 $11.04 Book Value/Share ($) 10.03 9.68 9.52 8.70 7.72 7.13$2.93 $2.73 $3.01 $3.03 $11.69 Avg Shares Outst'g (M) 1,103 1,132 1,151 1,199 1,260 1,308


(20.7%) 28.5%

2% (2.7% - 1.6%)

1.101.071.25

Nov 18, 2013Aug 19, 2013May 20, 2013

1.03

Apr 22, 2013

Jan 29, 2013

5%15%15%46%

Stock

TTM 3 Year

Texas Instruments (TI) designs and makes semiconductors, which it sells to electronics designers and manufacturers globally. TI has design, manufacturing or sales operations in more than 35 countries. The company operates in four segments: analog, embedded processing, wireless and other. TI sells custom and catalog semiconductor products. Custom products are designed for a specific customer for a specific application and are sold only to that customer. The life cycles of custom products are determined by end-equipment upgrade cycles and can be as short as 12 to 24 months. Catalog products are sold through both distribution and direct channels.

Jan 17, 2013

Sep 19, 2013Jul 18, 2013Feb 21, 2013 Apr 26, 2013

Jul 29, 2013Oct 29, 2013

Gain

Feb 11, 2013

Rel StrgthIndex

Feb 19, 2013

17.0%7.1%5.9%9.7%

Annual12/2013

32

31.4% 9.5%

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

28.4%30.9%

# of Estimates

EPS (Qtr)

CurrentMonth Ago

EPS$0.58$0.32

Jul 22, 2013

Quarterly9/2013

Nov 18, 2012Sep 18, 2012 Nov 13, 2012

Est Surprise

EPS Estimates

35.9%(7.8%)

Sep 19, 2013

1$1.71

Mar 14, 2013Dec 13, 2012

$1.94

% Surp41.1%5.6%

$1.94$0.53

$0.51

530

32

$0.53

$0

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14 October2013

Wisconsin Energy Corp. (WEC)Wisconsin Energy is an electric and natural gas utility that is

benefiting from higher cash flows. It is using reduced capital expenditures to both raise its dividend payout ratio and grow its dividend.

Wisconsin Energy is the largest utility in the state of Wis-consin. It serves 1.1 million electric customers and 1.1 million natural gas customers in Wisconsin and in the Upper Penin-sula of Michigan.

The company operates in two primary segments: utility energy and non-utility energy. The utility energy segment is composed of Wisconsin Electric and Wisconsin Gas, both of which operate under the name of We Energies. The non-utili-ty energy segment is primarily composed of We Power, which owns and leases four power generation plants to Wisconsin Electric. As a percentage of revenues, coal is estimated to ac-count for 56.0% of electricity generated in 2013.

Why Own WEC?Utility companies are not traditionally associated with

growth, but this company bucks the sector’s reputation. Wisconsin Energy is the only member of the S&P utilities index and the Dow Jones utilities index to have grown both earnings per share and dividends every year since 2003. Dur-ing the past five years, earnings per share have risen at an annualized rate of 10.6% and dividends have grown by 19.1%. Growth should continue, with the company targeting earnings per share growth of 4% to 6%, as well as 7% to 8% dividend growth in the years 2015 through 2017.

The other area where Wisconsin Energy should see growth is in cash flow. The completion of its “Power the Future” strategy has reduced the company’s annual capital expendi-tures from $1.2 billion in 2007 to a projected $656 million in 2013. For the years of 2013 through 2017, Wisconsin Energy

expects to invest between $3.2 billion and $3.5 billion (about $670 million per year) to modernize its grid, meet new envi-ronmental standards and add additional renewable energy production.

The stock’s price-earnings ratio of 17.0 is about even with the electric utilities industry median of 17.2; however, the valuation ratio is below the utilities’ sector median of 19.5. Given the company’s intent and ability to sustain strong divi-dend growth, a higher valuation could be justified.

Dividend AnalysisWisconsin Energy first paid dividends in 1939 and has raised

them for 10 consecutive years. The company hiked its divi-dend twice this year: A 13.3% increase in January and a 12.5% increase in July. The second increase was an acceleration of the increase that would have otherwise been announced in January.

The stock yields 3.8%, which is above the industry and sector medians of 3.6%. Wisconsin Energy’s current yield is above its five-year average of 3.0%. This indicates that the stock is not overvalued on a relative basis, despite a total return of 23.4% since being added to the DI tracking portfolio at the start of 2012.

The earnings payout ratio is 53.3%. The company’s execu-tives have publicly expressed their intent to raise the payout ratio to 60% by 2014 and to 65% to 70% in 2017. In compari-son, the median earnings payout ratios for the electric utilities industry and the utilities sector are 57.2% and 64.2%, respec-tively. Wisconsin Energy generated free cash flow of $2.39 per share over the past four quarters. (Unlike many utilities, Wisconsin Energy realizes free cash flow even after dividend payments are accounted for.) In December 2012, Wisconsin regulators granted a 4.8% increase in base electric rates for 2013 and a 1% increase for 2014, as well as a 1.6% recovery for fuel costs expected to occur this year.

RisksThe stock has underperformed the Dow Jones U.S. index

fund (IYY) since bond yields began to rise in mid-May. Con-cerns that higher yields on U.S. Treasuries will provide com-petition for income-oriented investor dollars pushed down prices on utility stocks overall, dragging Wisconsin Energy down with its sector.

The July dividend increase was characterized as an “accel-eration of the dividend action that was planned for the first quarter of 2014.” It is unclear whether a dividend increase will occur in 2014.

Like all utility stocks, the company’s earnings are influenced by weather patterns, which are unpredictable. Last year was a record year for the company’s region in terms of warmth. Earnings are also influenced by outages at and conversions to self-generation by large customers. Two of Wisconsin Energy’s largest customers (two iron ore mines) and two large indus-trial customers switched to self-generation last year. ▪

Bullish Factors• Two dividend increases have been announced this year,

helping to drive yield up to 3.8%• A forecast reduction in capital spending and projected

increases in the payout ratio should drive future dividend growth

• Only member of S&P and Dow Jones utilities indexes to grow earnings and dividends every year since 2003

Bearish Factors• The rise in bond yields since May has created concerns

that U.S. Treasuries will compete with utility stocks for investor dollars

• July 2013 dividend increase raises questions about whether or not the dividend will be raised in January 2014

• Weather patterns and self-generation conversions and planned outages by large customers can adversely impact revenues

October2013 15


WEC $40.49 ($45.00 - $36.01) Addition Alert Date: 12/31/2011Price at Alert: $34.96 Risk Index: 0.98Market Cap (Million): $9,193.2Avg Daily Dollar Volume (Million): $61.4Primary Sector: UtilitiesPrimary Industry: Electric Utilities

Indicated Annual Dividend: $1.53 Multiples Current 12/2012 12/2011 12/2010 12/2009 12/2008Latest Dividend Increase: (Date) Dividend Yield (%): Avg 3.8 3.2 3.3 3.0 3.1 2.6Latest Dividend Increase: (%) 12.5% Dividend Yield (%): High 3.6 3.9 3.4 3.7 3.1Dividend Yield: Current 3.8% Dividend Yield (%): Low 2.9 2.9 2.6 2.7 2.2Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 17.0 16.0 14.3 14.0 13.7 14.1Dividend Paid Since: 1939 Price/Earnings (Industry) 17.2 15.7 14.4 13.2 12.7 14.1Number of Years of Div Increases: 10 Price/Book Value 2.2 2.1 1.8 1.7 1.4 1.5Direct Invest Option: Yes Price/Sales 2.1 2.0 1.6 1.5 1.2 1.1DRIP Plan: Yes Ratios Current 12/2012 12/2011 12/2010 12/2009 12/2008Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 53.3 50.6 46.0 41.0 41.2 35.1

$0.3825 Payout Ratio: FCFPS (%) 53.5 59.2 148.8 1,533.1 (85.0) (31.8)$0.3400 Gross Margin (%) 85.9 35.0 29.7 24.4 21.5 13.6$0.3400 Operating Margin (%) 23.5 23.6 19.8 19.3 16.1 14.9$0.3000 Operating Margin (%) (Ind) 17.9 16.7 16.6 15.9 14.6 14.1$0.3000 Net Margin (%) 12.5 12.9 11.7 10.9 9.3 8.2$0.3000 ROE (%) 13.2 13.5 13.6 12.4 11.1 11.2

Rel Strgth ROE (%) (Industry) 9.1 8.6 9.7 9.8 9.5 9.9Rank ROA (%) 3.9 3.9 3.9 3.5 3.0 3.0

4 Week 27% Current Ratio 1.0 0.9 1.0 0.8 0.8 1.013 Week 42% Liabilities to Assets (%) 70.5 70.8 71.2 70.7 71.7 73.326 Week 33% Liab to Assets (%) (Ind) 70.4 70.9 71.3 70.2 70.2 71.152 Week 47% Asset Turnover 0.3 0.3 0.3 0.3 0.3 0.4

Financial Statements TTM 12/2012 12/2011 12/2010 12/2009 12/2008Growth 5 Year Sales ($M) 4,398 4,246 4,486 4,203 4,101 4,402

Dividends 19.1% Gross Income ($M) 3,779 1,486 1,331 1,024 883 597Sales 0.1% Depreciation ($M) 379 364 330 306 343 324Net Income 10.2% Unusual/Extra ($M) 0 0 0 (198) (231) (488)EPS Basic 10.5% Operating Income ($M) 1,033 1,000 887 810 660 655EPS Dil Cont 10.6% Interest Expense ($M) 267 264 263 259 235 240

Pretax Income ($M) 865 853 777 704 591 570SUE Score Net Income ($M) 551 546 526 457 382 359

2.90 Operating Cash Flow ($M) 1,247 1,174 993 810 629 7362.70 Investing Cash Flow ($M) (754) (730) (893) (634) (736) (906)

Annual Financing Cash Flow ($M) (485) (423) (111) (173) 96 17512/2014 Capital Expenditures ($M) 700 707 831 798 815 1,134

19 Net Cash Flow ($M) 8 22 (10) 4 (12) 5$2.57 EPS Basic ($) 2.40 2.37 2.26 1.95 1.64 1.54$2.56 EPS Diluted Cont ($) 2.38 2.35 2.18 1.92 1.59 1.50

# Rev Up 0 EPS DC Year/Year Chg (%) 3.9 7.8 13.5 20.8 6.0 5.6 # Rev Down 0 Dividends/Share ($) 1.28 1.20 1.04 0.80 0.68 0.54Three Mos. Ago $2.56 Dividend Year/Year Chg (%) 14.3 15.4 30.0 18.5 25.0 8.0Year/Year Chg 4.8% Free Cash Flow/Share ($) 2.39 2.03 0.70 0.05 (0.79) (1.70)

6/2013 3/2013 12/2012 9/2012 Total Cash ($M) 21 36 14 25 20 33$0.52 $0.76 $0.43 $0.67 $2.38 Goodwill/Intangibles ($M) 442 442 442 442 442 442$0.51 $0.74 $0.49 $0.55 $2.29 Total Assets ($M) 14,317 14,285 13,862 13,060 12,698 12,618

Long-Term Debt ($M) 4,383 4,454 4,614 3,932 3,876 4,0756/2013 3/2013 12/2012 9/2012 Total Total Liabilities ($M) 10,091 10,120 9,868 9,227 9,101 9,251$4.43 $5.57 $4.67 $4.51 $19.18 Book Value/Share ($) 18.37 17.96 17.04 16.26 15.26 14.27$4.10 $5.17 $4.82 $4.53 $18.62 Avg Shares Outst'g (M) 228.4 230.2 232.6 233.8 233.8 233.8


(15.4%) 4.2%

3% (3.5% - 2.7%)

0.960.880.92

3 Year

Sep 1, 2013Jun 1, 2013Mar 1, 2013

0.96

Jul 18, 2013Apr 18, 2013Jan 17, 2013 Feb 12, 2013

May 10, 2013Aug 12, 2013

Gain

Dec 1, 2012

Wisconsin Energy Corp. is a diversified holding company that operates through two segments: a utility energy segment and a non-utility energy segment. Primary subsidiaries include Wisconsin Electric Power Company, Wisconsin Gas LLC and W.E. Power LLC. Wisconsin Electric and Wisconsin Gas operate together under the trade name of We Energies. WEC's non-utility energy segment derives its revenues primarily from the ownership of electric power generating facilities for long-term lease to Wisconsin Electric. As of December 31, 2010, the company had a 26.2% interest in American Transmission Company LLC (ATC).

Oct 18, 2012

Jul 31, 2013Apr 30, 2013

Nov 12, 2012

(2%)0%(5%)7%

Stock Rel StrgthIndex

Aug 10, 2012

TTM14.3%2.2%2.5%3.0%3.9%

21.1%1.2%12.6%13.1%13.9%

Month Ago $0.56 $2.45$0.57

EPS$0.52$0.76

% Surp12.6%7.6%

EPS Estimates# of Estimates

EPS (Qtr)

Year Ago

Annual12/2013

19$2.45Current

Year Ago

TTM

TTMSales/Sh (Qtr)

Jul 19, 2012 Sep 1, 2012Apr 19, 2012 May 10, 2012 Jun 1, 2012

Est Surprise

Jul 18, 2013

0$2.44

00

$0.66

0

Quarterly9/2013

7

0%

1%

2%

3%

4%

5%

6%

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Div

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16 October2013

Enterprise value has become a common way to measure the purchase value of a company that takes into consider-ation the firm’s capital structure (debt versus equity). It is the sum of claims of all security-holders: common and preferred equity holders, minority shareholders, debt holders, and oth-ers. A more simplistic way to look at enterprise value is as the sum of a company’s market capitalization and its net debt.

For this calculation, you start with the company’s mar-ket capitalization (share price multiplied by the number of shares outstanding) and add total debt (short- and long-term debt reported on the balance sheet), and then subtract the company’s excess cash and cash equivalents (which are also reported on the balance sheet).

Alternative to Market CapA company’s enterprise value represents its economic value,

which is the minimum value that would be paid to purchase the company outright. Some analysts believe it provides a clearer picture of the “real value” than just market capitaliza-tion or trading value of the firm.

Market cap tells you how much you would have to pay to buy every share of the company. However, market cap leaves out several important factors, namely the company’s obliga-tions (debt) and its cash reserves. Therefore, rather than tell-ing you the company’s value, market capitalization represents the company’s price tag.

Role of Debt and CashWhen a company is sold to a new owner, the buyer pays

for the equity but also assumes the firm’s debts. Adding debt to market capitalization makes a company less attractive and more expensive to acquire. However, the buyer also gets to keep the cash that the firm has on hand. This is why the cash balance is deducted from the firm’s enterprise value. Other asset values are usually ignored in the calculation of enter-prise value.

Consider, as an example, two firms with the same market cap. One has no debt on its balance sheet, while the other has a heavy debt burden. The high-debt firm must make interest payments on this debt. Likewise, preferred stock and convertible securities that also pay interest should be consid-ered when calculating the company’s value. So the company with debt has a higher enterprise value, or takeover cost.

If a company with a market cap of $1 billion also carries $400 million in long-term debt, the buyer would ultimately pay more than $1 billion if they were to buy all of the com-pany’s stock. This is because the buyer must also assume the $400 million in debt, which means the total acquisition price would be $1.4 billion. So, long-term debt effectively increases the takeover cost (enterprise value) of a company.

In contrast, cash and cash equivalents have the opposite im-pact on a company’s enterprise value. They actually decrease the net price a buyer ultimately pays during an acquisition. Let’s consider two companies with the same market cap and no debt. However, this time one company carries little or no cash or cash equivalents on its balance sheet while the other carries $300 million in cash. If you paid $1 billion to buy either firm, you actually paid more to acquire the company with no cash on hand. Your final purchase price of the latter company is reduced by the $300 million in cash you get to pocket.

Interpreting Enterprise ValueThere are several ways to use enterprise value when

evaluating a company, but the one that is used most is the EV-to-EBITDA ratio, or the enterprise multiple. This metric compares enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA ignores non-cash expenses such as depreciation of fixed assets that have already been purchased and amortization of intangible assets such as goodwill, since these expenses do not impact cash flow. EBITDA also ignores taxes and operating interest payments, which are likely to change following an acquisition or merger.

Generally speaking, the enterprise multiple relates a firm’s takeover cost to its earnings potential. As such, it serves as a rough proxy of how long it would take for an acquisition to earn enough to pay off its costs (assuming that EBITDA does not change following the acquisition). Therefore, a company with a lower multiple is more attractive.

Companies with debt must pay interest on the debt and eventually pay off the debt. This makes the debt’s true acqui-sition cost higher. Adding debt to market capitalization raises the enterprise multiple, making a company less attractive.

Excess cash is subtracted from enterprise value because the un-needed cash reduces the overall cost of acquiring a busi-ness. Excess cash lowers the enterprise multiple, making the company more attractively priced.

Testing has revealed that firms with lower enterprise mul-tiples outperform firms with high enterprise value multiples. In Richard Tortoriello’s book, “Quantitative Strategies for Achieving Alpha” (McGraw-Hill, 2009), Tortoriello noted that companies with EV-to-EBITDA ratios of 8x or lower outper-formed over the 20-year test period, and companies with EV-to-EBITDA ratios of 11x or higher underperformed.

Like any kind of ratio analysis, enterprise multiples can vary depending on the industry. Therefore, it is important to com-pare multiples of companies in the same industry. In general, expect higher enterprise multiples in high-growth industries and lower multiples in industries with slow growth. ▪

Using Enterprise value to Measure a Firm’s Worth

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