in this issue three minutes of your time for 2020 market ... · the dividend investing (di)...

Three Minutes of Your Time for 2020 Market Forecasts

Legendary investor and former manager of Fidelity’s Magellan Fund Peter Lynch said, “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”

Lynch believes in the power of investing in the best companies. These companies will outperform regardless of macroeconomic or analyst reports. By focusing on such companies, an investor can largely ignore unpredictable economic cycles and find investing success over the long term, through both the ups and the downs.

The Dividend Investing (DI) portfolio uses a bottom-up investment approach, so we generally agree with Lynch’s thoughts on analyzing economic and market forecasts. Despite Lynch’s sound advice, with 22 of the 24 holdings (92% of the DI portfolio) included in the S&P 500 index, we think it is worthwhile to check in with leading market strategists from time to time especially if it helps us assess potential impacts to specific DI holdings.

With the end of the year and decade fast-approaching, Wall Street strate-gists have begun to publish their expectations for 2020. The next year will bring a myriad of market-moving events, including the 2020 U.S. elections and the next phases in U.S.-China trade negotiations. We look at a few of the analysts’ ideas for how these and other catalysts will shape equity markets in 2020. The commentary below is a sampling from a longer compilation from Yahoo Finance reporter Emily McCormick.

So according to Lynch, you have a total of three minutes to read this piece on broader economic activity, and then move on to more useful analysis.

Jefferies (2020 S&P 500 target: 3,300): ‘Focused on the traditional drivers for U.S. markets’

Stocks will stabilize and appreciate slightly in 2020 after more than a year’s worth of choppy equity trading, which had been driven by gyrating interest rates and an ongoing U.S.-China trade war, according to Jefferies.

“If 2018 was a year of policy over-tightening then 2019 was a year of unwind-ing policy mistakes,” equity strategist Sean Darby said. “Hence, 2020 looks to be the year of normalization as a number of macro factors recede.

“[The year] 2020 ought to see some normalization as earnings growth moves back in tandem with GDP [gross domestic product]. In summary, equity investors are likely to be focused on the traditional drivers for U.S. markets, namely earn-ings growth.”

Darby conceded that the 2020 elections could generate some idiosyncratic risks for sectors like health care, financials and technology, depending on the prevailing policies of newly elected officials. His base case, however, is that nei-ther party will win both the House and the Senate, creating a hurdle for politi-cians trying to implement policies that could impact any of these companies’ operations.

“Heading into 2020, sector leadership will likely be driven by cyclicals, assum-ing the recent upturn in global economic data carries through next year,” Darby said.

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 ReportsAmgen, Inc. (AMGN) 8

Biotech company adds worldwide rights to blockbuster psoriasis drug Otezla to strengthen its inflammatory drugs portfolio.

Eastman Chemical Co. (EMN) 10Chemical company’s dividend ranks among the highest 20% in the S&P 500.

Medtronic PLC (MDT) 12Global medical technology firm offers attractive product mix and growth potential, but valuations are getting stretched.

Walgreen Boots Alliance (WBA) 14Pharmacy-led health and well-being company with strong dividend growth trading at an attractive valuation relative to its historical levels.

DI Article Why DI Holdings May Not Pass the DI Ideas Quant Screen Today 16

Current DI portfolio holdings don’t always pass the DI Ideas quantitative filters but are still worth holding.

Next Publication Date: January 10, 2020

December 2019Volume VIII Issue 12

www.AAIIDividendInvesting.com

TM

2 December 2019

U.S.“With many valua-

tions across major equity markets already having rebounded to slightly above five-year averages, we don’t think it prudent to rely on more multiple expansion in what is still a fairly tepid growth

environment. This means that forward returns at this point need to be driven by a realization of the earnings growth that is already in the price.

“The U.S. remains our least preferred region, given limited scope for multiple rerating or incremental flows, and earn-ings expectations that look materially too high to us,” the analysts said.

Morgan Stanley didn’t highlight bullish or bearish sectors in this report.

Our three minutes are up.

Market Forecasts: Implications for the DI Portfolio

The DI portfolio holds several stocks in the sectors mentioned by Jefferies and Credit Suisse. Both firms are bullish on economically sensitive sectors, including financials, consumer cyclicals, industrials and materials. They are bearish on con-sumer staples, real estate and utilities.

If the market forecasts by Jefferies and Credit Suisse are accurate, they could favor some DI holdings: Comerica Inc. (CMA) and Huntington Bancshares Inc. (HBAN) in financials; Royal Caribbean Cruises Ltd. (RCL) and Williams-Sonoma Inc. (WSM) in consumer cyclicals; and Eaton Corp. (ETN) and Snap-on Incorporated (SNA) in industrials, to name a few.

Conversely, DI holdings in non-cyclicals such as PepsiCo Inc. (PEP), Tyson Foods Inc. (TSN) and Walgreens Boots Alliance

Published monthly by the American Association of Individual Investors 625 N. Michigan Ave., Chicago, IL 60611 312-280-0170, www.aaii.com. Annual DI subscription, $278.

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

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

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

© American Association of Individual Investors, 2019. 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 MonthDecember Portfolio Deletions

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price Alert Date Purchase Purchaseno portfolio deletions for December

December Portfolio Additions

Company (Ticker) Latest PriceDividend

Yield Sector: Industryno portfolio additions for December

Company (Ticker)Portfolio Deletion Alert

Credit Suisse upgraded “economically sensitive groups” including financials, industrials and materials from market weight to overweight, and upgraded energy from underweight to market weight.

The firm downgraded defensive sec-tors including staples, utilities and real estate investment trusts (REITs) from market weight to underweight, and communications from overweight to market weight.

Morgan Stanley (2020 S&P 500 target: 3,000): ‘U.S. remains our least pre-ferred region’

U.S. equities may underperform their global counterparts next year, according to Morgan Stanley. The firm set its base case S&P 500 target at 3,000, implying a 4.2% decline from closing prices on December 10.

“In the U.S., we continue to expect earnings growth to remain under pres-sure as our earnings model projects another year of flat to modestly down earnings as margin pressures continue to mount,” strategists Andrew Sheets and Michael Wilson said. “The forecasts from our economics team, which have slow growth and accelerating wage gains, are likely to amplify these margin pressures and weigh on the outlook for earnings further, which should translate into better earnings growth outside the

“We expect earnings to accelerate back to trend of circa 10%, real interest rates to remain negative alongside a steep yield curve,” Darby said.

Jefferies is bullish on the consumer discretionary, energy, financials, indus-trial and materials sectors heading into 2020. The firm is bearish on consumer staples, real estate and utilities.

Jefferies 2020 S&P 500 target of 3,300 implies a 5.4% increase from December 10.

Credit Suisse (2020 S&P 500 target: 3,425): ‘Cyclical leadership’

Cyclical stocks will lead next year’s market rally, according to Credit Suisse’s chief U.S. equity strategist, Jonathan Golub. The firm’s S&P 500 price tar-get of 3,425 implies a 9.3% gain from December 10 closing prices.

The upbeat outlook assumes that S&P 500 revenues will grow in line with nominal GDP, margin headwinds will recede and become “substantially less onerous” and buybacks will remain robust.

Next year’s reacceleration in econom-ic growth will drive a rotation to cyclical stocks, Golub added. The Federal Reserve’s actions appear to support the analyst’s forecast. The Fed has been ag-gressively cutting interest rates—cutting them in October for the third time in four months.

December 2019 3

AAII DIvIDeND INvesTINg

DI Pur- Latest Novchase Price Gain/ Div

Ticker Company Date Price Price (12/10/19) (Loss) Stock Index Yield IndustryAMGN Amgen, Inc. 10/27/17 $175.28 $174.93 $233.84 10.1% 42.8% 29.1% 2.5% PharmaceuticalsBLK BlackRock, Inc. 10/5/18 $470.86 $463.47 $494.03 7.2% 10.7% 10.7% 2.7% Investment Mgmt & Fund OperatorsCMA Comerica Inc. 12/7/18 $74.03 $73.13 $69.91 7.6% (0.8%) 19.2% 3.8% BanksCBRL Cracker Barrel 2/3/17 $158.50 $158.80 $152.32 (1.1%) 6.9% 43.8% 3.4% Restaurants & BarsCMI Cummins Inc. 10/3/14 $135.10 $136.18 $179.65 6.0% 54.0% 73.0% 2.9% Auto, Truck & Motorcycle PartsEMN Eastman Chemical Co. 2/6/15 $73.20 $74.67 $76.25 3.1% 15.6% 64.6% 3.5% Chemicals - CommodityETN Eaton Corporation 12/31/11 $43.53 $45.52 $92.68 6.2% 165.2% 164.7% 3.1% Electrical Components & EquipmentHD Home Depot Inc. 9/1/17 $150.78 $152.88 $215.90 (6.0%) 49.1% 31.6% 2.5%HBAN Huntington Bancshares 1/12/18 $15.85 $15.86 $15.37 5.4% 3.5% 16.0% 3.9% BanksIBM IBM Corp. 10/2/15 $144.58 $149.54 $133.91 0.5% 6.7% 67.1% 4.8% IT Services & ConsultingIP International Paper Co. 4/4/14 $45.81 $45.69 $46.25 6.1% 25.8% 84.5% 4.4% Paper PackagingMDT Medtronic PLC 1/6/17 $72.87 $75.05 $111.04 2.3% 57.2% 43.8% 1.9% Medical Equip, Supplies & DistributionOXY Occidental Petroleum 1/9/15 $77.54 $75.96 $37.57 (4.8%) (37.2%) 66.5% 8.4% Oil & Gas - Exploration and ProductionPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $136.27 (1.0%) 158.3% 164.7% 2.8% Non-Alcoholic BeveragesPII Polaris Inc. 12/9/16 $85.84 $86.34 $96.98 (1.0%) 21.0% 43.8% 2.5% Recreational ProductsPFG Principal Financial Group 12/9/16 $60.30 $59.55 $53.24 3.2% (0.5%) 43.8% 4.1% Insurance - Life & HealthRCL Royal Caribbean Cruises Ltd. 11/8/19 $114.53 $113.80 $121.59 10.3% 6.8% 1.4% 2.6% Hotels, Motels & Cruise LinesSNA Snap-on Incorporated 9/7/18 $180.60 $183.36 $165.16 (1.4%) (7.1%) 10.0% 2.6% Industrial Machinery & EquipmentTXN Texas Instruments 4/5/13 $34.20 $34.80 $121.37 1.9% 317.2% 122.6% 3.0% SemiconductorsTSN Tyson Foods, Inc. 3/8/19 $62.78 $64.74 $88.61 8.6% 38.8% 12.8% 1.9% Food ProcessingUNP Union Pacific Corp. 7/2/15 $96.66 $97.23 $171.85 6.4% 96.0% 61.2% 2.3% Freight & Logistics - GroundUNH UnitedHealth Group Inc 9/6/19 $229.00 $233.59 $279.52 10.8% 20.7% 4.8% 1.5% Managed Health careWBA Walgreens Boots Alliance 6/7/19 $51.97 $52.32 $58.41 8.8% 13.5% 9.6% 3.1% Retailers - DrugWSM Williams-Sonoma, Inc. 6/3/16 $53.25 $54.00 $69.47 3.9% 42.1% 57.0% 2.8% Retailers - Home FurnishingsData as of 12/10/2019. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Retailers - Home Improve Prods & Servs

Portfolio Holdings

(WBA) could be in for a rough year, if you believe the strategists.

We will need to wait until the end of 2020 to see how these forecasts fared. In the meantime, the DI portfolio will continue to rely on the three pillars of dividend investing when decisions are made.

Bottom-Up InvestingBottom-up investing is an approach

that focuses on the analysis of individual stocks and with less emphasis placed on the significance of macroeconomic and market cycles. In bottom-up investing, the investor focuses their attention on a specific company and its funda-mentals, rather than on the industry in which that company operates or on the greater economy overall. This approach assumes individual companies can do well even in an industry that is not per-forming, at least on a relative basis.

With a top-down approach, investors instead look at the broad performance of the economy, and then seek indus-tries that are performing well, investing in the best opportunities within that industry. The market forecasts from Jefferies, Credit Suisse and Morgan

Stanley are examples of top-down investing.

Bottom-up investors typically follow a long-term, buy-and-hold strategy based on fundamental analysis of a company. Bottom-up investing enables an investor to gain a deep understand-ing of a company’s long-term growth potential. Top-down investors, on the other hand, can be more opportunistic in their investment strategy, and may seek to enter and exit positions quickly to make profits off short-term market movement.

As mentioned earlier, the DI portfolio uses a bottom-up investment approach. We look at dividend investing through the lens of the three pillars: a firm’s growth trends, financial strength/quality and valuation. Successful dividend- paying stocks must possess good busi-ness models, strong balance sheets, growth in sales and earnings, positive free cash flow, attractive valuations and a history of rising dividend payments.

November DI Performance The DI tracking portfolio increased

3.7% for the month of November and is up 25.9% for the year through the close

on Tuesday, December 10. The Dow Jones U.S. Index ETF (IYY) grew 3.8% for the month and through December 10 is up 26.8% from the start of the year.

The DI tracking portfolio’s monthly gain of 3.7% was composed of 3.5% price appreciation and 0.2% income return. The Dow Jones U.S. Index fund’s 3.8% increase during the month was composed of a 3.8% price rise and no distributed income return.

Over the life of the DI portfolio, it has provided a total return of 150.9%, with dividend income contributing 53.3% to the total return. The Dow Jones U.S. Index fund has a total return of 180.8%, with income contributing 37.2% to the total return.

The average dividend yield of the stocks in the DI portfolio is 3.0%, in line with the previous month. The Dow Jones U.S. Index fund has a dividend yield of 1.8%, also in line with the previ-ous month.

Portfolio AlertsThere are no portfolio additions or de-

letions for the DI portfolio this month.

Portfolio Watch: Medtronic PLC (MDT)

4 December 2019

and UnitedHealth Group Inc. (UNH)Medtronic PLC (MDT) is being

watched due to valuation. The com-pany’s dividend yield of 1.9% is in line with its five-year average low. When a stock’s dividend yield goes below its historical average low, an inves-tor is paying more (higher stock price) for a given level of anticipated annual

dividends. Medtronic’s stock price has outpaced its dividend growth, which has driven the dividend yield down. If Medtronic’s dividend yield goes below its five-year average low yield and a suitable replacement is identified, it will be deleted from the DI portfolio.

UnitedHealth Group is being watched because its dividend yield of 1.5% is

approaching a level considered to be too low for the portfolio. If a stock’s yield is less than 75% of the IYY’s aver-age yield, then a stock may be deleted from the portfolio. So, if UnitedHealth’s dividend yield goes below 1.33% (IYY’s current yield 1.77% × 0.75), it is a can-didate for deletion. UnitedHealth’s yield has decreased because its stock price has appreciated significantly over the last two months.

DI Portfolio Versus DI Ideas Quant Screen

There may be some DI subscribers wondering why only six companies in the DI portfolio currently pass the DI Ideas quantitative screen. We look at this question on page 16, and the results may surprise you.

To be sure, for the other 18 compa-nies in the DI portfolio, they all passed the filter when they were added to the portfolio.

Dividend NewsTen stocks in the DI portfolio declared

dividends during November, of which nine were in line with the previous quarter’s payment: BlackRock Inc. (BLK), Comerica, Cracker Barrel (CBRL), Home Depot Inc. (HD), Occidental Petroleum (OXY), PepsiCo, Tyson Foods, Union Pacific Corp. (UNP) and UnitedHealth Group.

Snap-on also declared a dividend in November, raising its quarterly cash divi-dend by 13.7%, from $0.95 per share to $1.08. Snap-on’s current dividend yield of 2.6% is above its five-year average of 1.7%. The company has paid a dividend since 1939 and has increased it for 10 consecutive years.

Portfolio NewsStrongest Stocks During November

UnitedHealth Group Inc. (UNH) was up 10.8% during November, making it the top-performing stock in the DI portfolio for the second consecutive month. UnitedHealth continued its solid performance in November, building on the momentum it gained in October

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

2012 2013 2014 2015 2016 2017 2018 2019

AAII Dividend Investing Portfolio

Growth of $100,000

AAII Dividend Investing Portfolio

Performance

Dividend Yield 3.0% 1.8%

Total Return

Income Return

Capital Gain/(Loss)

Total Return

Income Return

Capital Gain/(Loss)

November 3.7% 0.2% 3.5% 3.8% 0.0% 3.8%2019 YTD 25.9% 3.6% 22.3% 26.8% 1.7% 25.1%2018 (11.5%) 2.6% (14.1%) (5.2%) 1.7% (6.9%)2017 22.3% 3.4% 18.9% 21.3% 2.0% 19.3%2016 18.2% 3.9% 14.3% 12.0% 2.1% 9.9%2015 (7.7%) 2.9% (10.6%) 0.4% 1.9% (1.5%)2014 12.2% 3.0% 9.2% 12.9% 2.0% 10.9%2013 36.5% 3.6% 32.9% 32.6% 2.3% 30.3%2012* 10.2% 3.5% 6.7% 14.4% 2.3% 12.1%From Inception 150.9% 53.3% 97.6% 180.8% 37.2% 143.6%Performance as of 12/10/2019.

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

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

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

Performance of DI Portfolio

December 2019 5


after its stronger-than-expected third-quarter earnings.

UnitedHealth’s November perfor-mance might be considered counter-intuitive in light of the Trump adminis-tration’s proposed rules for increasing health price transparency, which is expcted to empower patients and in-crease competition among all hospitals, group health plans and health insurance issuers. The new rules would require hospitals to disclose their standard charges for services, negotiated prices with insurers and the discounted price the institution is willing to accept from a patient.

A coalition of hospital industry groups and some individual hospital operators intend to file a lawsuit challenging the new rule. The rule is expected to be enacted in 2021, if upheld.

During November, UnitedHealth declared a quarterly cash dividend of $1.08 per share, in line with the previ-ous dividend. The company’s current dividend yield of 1.5% compares to its five-year average high of 1.9% and its five-year average low of 1.3%.

Royal Caribbean Cruises Ltd. (RCL) was the second-best-performing stock in the DI portfolio for the month of November with a gain of 10.3%. Shares recovered after the company reported marginally disappointing third-quarter 2019 earnings in late October. Royal Caribbean’s adjusted earnings per share of $4.27 missed the I/B/E/S consensus estimate of $4.31.

CEO Richard D. Fain stated, “Our busi-ness continues to thrive and exceed our expectations. While Hurricane Dorian had a negative impact, stronger demand for our brands and our key itineraries exceeded our expectations. Excluding the hurricane impact, we are not only able to maintain our yield and earnings guidance, but to raise both slightly as a result of particularly strong performance in the U.S. and China.”

The company expects full-year 2019 adjusted earnings to be in the range of $9.50 to $9.55 per share.

The company is experiencing strong early booking trends for 2020. Rates are higher than the same time last year in

all four quarters and booked load fac-tors are ahead of last year on a like-for-like basis.

Royal Caribbean’s dividend yield of 2.6% compares to its five-year average high of 2.5% and its five-year average low of 1.6%.

Amgen Inc. (AMGN) gained 10.1% in the month of November, making it the third-strongest-performer in the DI port-folio for the second consecutive month.

The company announced financial results that beat analyst expectations on October 29. Amgen’s adjusted earnings per share of $3.66 for the third quarter fell marginally year over year, though it beat the I/B/E/S consensus estimate of $3.53 by 3.8%. Total quarterly revenue also saw a 3% decline from last year, facing headwinds such as a 4% decrease in net selling prices and increased com-petition. Despite the decline in revenue and earnings per share, Amgen gener-ated $3.2 billion of free cash flow in the third quarter, which represented a 3.2% increase from last year.

On November 22, the company an-nounced the completion of its acquisi-tion of worldwide rights to psoriasis drug Otezla for $13.4 billion in cash. With the closing of the acquisition, Amgen also updated its overall guidance for 2019. For the full year, Amgen now expects total revenues in the range of $23.1 billion to $23.3 billion and earn-ings per share in the range of $14.50 to $14.70. Previously, the company expected total revenues in the range of $22.8 billion to $23.0 billion and earn-ings per share in the range of $14.20 to $14.45.

The company’s dividend yield of 2.5% compares to its five-year average high of 2.8% and its five-year average low of

2.1%.For more on Amgen, see pages 8 and 9.

Weakest Stocks During November

Home Depot Inc. (HD) was the worst-performing stock in the DI portfolio for November, down 6.0%. The company’s underperformance is largely attributed to impacts from tariffs, declining lumber prices and issues relating to its multi-year investment plan.

During the month, Home Depot re-ported third-quarter 2019 net earnings of $2.8 billion, or $2.53 per diluted share, compared to net earnings of $2.9 billion, or $2.51 per diluted share, in the prior-year quarter. Earnings per diluted share were largely in line with the I/B/E/S consensus estimate. Sales for the quarter were $27.2 billion, up 3.5% year over year.

Last year, the company outlined an ambitious One Home Depot digital transformation strategy to improve its physical store and online connected-ness/experience. The project is deliver-ing returns slower than expected and will cut into near-term sales growth.

The company estimated that fiscal- 2019 sales will grow by about 1.8% compared to previous guidance of 2.3%. The company also predicts that comparable-store sales will increase by about 3.5% compared to previous guid-ance of 4.0%.

Despite these lower forecasts, the home improvement market remains robust. Millennials are increasingly en-tering the housing market, and spend-ing by baby boomers on home improve-ment continues to increase.

Home Depot declared a regular quarterly dividend of $1.36 per share on

Recent earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %CBRL Cracker Barrel Nov 26 $2.150 $2.062 4.3%HD Home Depot Inc. Nov 19 $2.530 $2.525 0.2%MDT Medtronic PLC Nov 19 $1.310 $1.283 2.1%OXY Occidental Petroleum Nov 4 $0.110 $0.371 (70.4%)TSN Tyson Foods, Inc. Nov 12 $1.210 $1.286 (5.9%)WSM Williams-Sonoma, Inc. Nov 21 $1.020 $1.017 0.3%Data as of 12/10/2019. Sources: I/B/E/S and company releases.

6 December 2019

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 Nov 14, 2019 Fri Dec 6, 2019 $1.4500 $5.80 2.5% -- YesBLK BlackRock, Inc. 3, 6, 9, 12 Thu Dec 5, 2019 Mon Dec 23, 2019 $3.3000 $13.20 2.7% -- --CMA Comerica Inc. 1, 4, 7, 10 Thu Dec 12, 2019 Wed Jan 1, 2020 $0.6700 $2.68 3.8% Yes YesCBRL Cracker Barrel 2, 5, 8, 11 Thu Jan 16, 2020 Wed Feb 5, 2020 $1.3000 $5.20 3.4% Yes YesCMI Cummins Inc. 3, 6, 9, 12 Wed Nov 13, 2019 Mon Dec 2, 2019 $1.3110 $5.24 2.9% No YesEMN Eastman Chemical Co. 1, 4, 7, 10 Fri Dec 13, 2019 Fri Jan 3, 2020 $0.6600 � $2.64 3.5% Yes YesETN Eaton Corporation 3, 5, 8, 11 Thu Oct 31, 2019 Fri Nov 15, 2019 $0.7100 $2.84 3.1% Yes YesHD Home Depot Inc. 3, 6, 9, 12 Wed Dec 4, 2019 Thu Dec 19, 2019 $1.3600 $5.44 2.5% Yes YesHBAN Huntington Bancshares 1, 4, 7, 10 Tue Dec 17, 2019 Thu Jan 2, 2020 $0.1500 $0.60 3.9% Yes YesIBM IBM Corp. 3, 6, 9, 12 Thu Nov 7, 2019 Tue Dec 10, 2019 $1.6200 $6.48 4.8% Yes YesIP International Paper Co. 3, 6, 9, 12 Thu Nov 14, 2019 Mon Dec 16, 2019 $0.5125 � $2.05 4.4% Yes YesMDT Medtronic PLC 1, 4, 7, 10 Thu Dec 26, 2019 Fri Jan 17, 2020 $0.5400 $2.16 1.9% Yes YesOXY Occidental Petroleum 1, 4, 7, 10 Mon Dec 9, 2019 Wed Jan 15, 2020 $0.7900 $3.16 8.4% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Thu Dec 5, 2019 Tue Jan 7, 2020 $0.9550 $3.82 2.8% Yes YesPII Polaris Inc. 3, 6, 9, 12 Fri Nov 29, 2019 Mon Dec 16, 2019 $0.6100 $2.44 2.5% -- YesPFG Principal Financial Group 3, 6, 9, 12 Mon Dec 2, 2019 Fri Dec 27, 2019 $0.5500 $2.20 4.1% Yes YesRCL Royal Caribbean Cruises Ltd.1, 4, 7, 10 Thu Dec 19, 2019 Mon Jan 6, 2020 $0.7800 $3.12 2.6% -- --SNA Snap-on Incorporated 3, 6, 9, 12 Tue Nov 19, 2019 Tue Dec 10, 2019 $1.0800 � $4.32 2.6% Yes YesTXN Texas Instruments 2, 5, 8, 11 Wed Oct 30, 2019 Mon Nov 18, 2019 $0.9000 � $3.60 3.0% Yes YesTSN Tyson Foods, Inc. 3, 6, 9, 12 Thu Feb 27, 2020 Fri Mar 13, 2020 $0.4200 $1.68 1.9% Yes YesUNP Union Pacific Corp. 3, 6, 9, 12 Wed Nov 27, 2019 Mon Dec 30, 2019 $0.9700 $3.88 2.3% Yes YesUNH UnitedHealth Group Inc 3, 6, 9, 12 Fri Dec 6, 2019 Tue Dec 17, 2019 $1.0800 $4.32 1.5% -- --WBA Walgreens Boots Alliance 3, 6, 9, 12 Fri Nov 15, 2019 Thu Dec 12, 2019 $0.4575 $1.83 3.1% Yes YesWSM Williams-Sonoma, Inc. 2, 5, 8, 11 Thu Oct 24, 2019 Fri Nov 29, 2019 $0.4800 $1.92 2.8% -- --

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

Data as of 12/10/2019.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

November 21, in line with the previous declaration. The company’s dividend yield of 2.5% compares to its five-year average high of 2.6% and its five-year average low of 1.9%.

Occidental Petroleum (OXY) was the second worst-performing stock in the DI portfolio for November, down 4.8%. Occidental reported adjusted earn-ings per diluted share of $0.11, which missed the I/B/E/S consensus estimate of $0.37 and declined year over year from $1.77. Total revenue declined 5% year over year to $5.86 billion.

Headwinds of more than $1 billion included transaction costs and debt financing fees related to the Anadarko Petroleum merger and oil and gas impairment charges. CEO Vicki Hollub commented that reducing debt remains a primary target in the coming quar-ters. Occidental plans to slash capital spending by 40%, cutting oil and gas

production growth to 2% from the previous target of 5% in order to meet its priorities.

To this end, Occidental opened solicitation of bids for its oil and gas properties in Wyoming and Colorado acquired as parts of Anadarko, valued at as much as $700 million. The company also affirmed the sale of a 49% stake of Anadarko properties in west Texas for $750 million. The company expects to close transactions with proceeds of $15 billion by mid-2020.

Publicly opposed to the Anadarko acquisition, activist investor Carl Icahn cut his $1.6 billion stake in Occidental to $900 million but vowed to launch a proxy fight against the board next year.

Occidental declared a regular quar-terly dividend of $0.79 per share during the month, in line with the previous declaration. Occidental has paid a dividend since 1975 and has increased

its dividend for 17 consecutive years. The company’s dividend yield of 8.4% compares to its five-year average high of 4.9% and five-year average low of 3.6%.

Snap-on Incorporated (SNA) was the third worst-performing stock in November, down 1.4% for the month. There was no company-specific news to explain the price decline. The company faces headwinds across its tools group division and has been adversely impact-ed by foreign currency translations.

There was weak manufactur-ing data released at the end of the month that may provide some insight into the stock’s performance. The Institute for Supply Management (ISM) Manufacturing index fell to 48.1 in November. The number missed expecta-tions and represented the fourth con-secutive month of contraction, as trade remained the most significant challenge across industries. ▪

December 2019 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 17.9 2.5% 2.6% 2.4% 2.8% 2.1% 7.0% 22.9% 2011 8 43% 64% 37% 82%BLK 19.1 2.7% 2.9% 2.5% 3.0% 2.1% 5.5% 12.3% 2003 10 50% 42% 107% 80%CMA 8.9 3.8% 2.7% 1.8% 2.3% 1.5% 3.6% 22.8% 1936 8 33% 28% 27% 90%CBRL 16.7 3.4% 3.0% 3.2% 3.8% 2.7% na 10.8% 1982 17 55% 54% 55% 72%CMI 11.5 2.9% 3.3% 2.8% 3.6% 2.3% 0.0% 14.6% 1948 10 29% 46% 28% 62%EMN 14.3 3.5% 3.0% 2.3% 2.8% 2.0% 4.3% 13.3% 1994 10 44% 28% 30% 63%ETN 16.5 3.1% 3.8% 3.4% 4.1% 2.9% 6.9% 9.5% 1923 10 49% 49% 42% 50%HD 21.4 2.5% 2.3% 2.2% 2.6% 1.9% 8.3% 21.4% 1987 10 51% 43% 50% 102%HBAN 12.1 3.9% 3.4% 2.5% 3.0% 2.2% 5.2% 21.2% 1971 9 43% 33% 43% 89%IBM 12.2 4.8% 5.4% 3.5% 4.3% 3.0% 1.4% 10.9% 1915 24 74% 56% 44% 88%IP 13.3 4.4% 4.7% 3.5% 4.4% 2.9% na 9.0% 1946 8 58% 68% 34% 78%MDT 32.5 1.9% 2.1% 2.2% 2.5% 1.9% 7.6% 12.3% 1977 42 60% 62% 44% 45%OXY 27.0 8.4% 5.0% 4.1% 4.9% 3.6% (20.2%) 3.9% 1975 17 238% na 128% 71%PEP 16.8 2.8% 3.1% 3.0% 3.4% 2.7% 4.2% 9.9% 1952 47 43% 67% 86% 82%PII 19.0 2.5% 3.1% 2.0% 2.8% 1.6% na 7.4% 1995 24 47% 51% 49% 78%PFG 11.3 4.1% 4.6% 3.1% 4.0% 2.6% 6.1% 16.5% 2002 11 46% 34% 10% 95%RCL 13.3 2.6% 2.6% 1.9% 2.5% 1.6% 10.2% 28.6% 1995 7 31% 33% 174% 60%SNA 13.3 2.6% 2.3% 1.7% 2.0% 1.5% 6.8% 16.6% 1939 10 30% 28% 35% 41%TXN 22.5 3.0% 2.6% 2.6% 3.1% 2.2% 10.0% 19.7% 1962 16 56% 49% 48% 50%TSN 15.9 1.9% 2.2% 1.5% 2.0% 1.3% 9.6% 38.0% 1976 8 27% 17% 43% 58%UNP 20.3 2.3% 2.0% 2.1% 2.6% 1.8% 10.3% 15.4% 1899 9 39% 34% 46% 71%UNH 20.3 1.5% 1.3% 1.6% 1.9% 1.3% 13.4% 26.8% 1990 10 28% 28% 30% 68%WBA 13.6 3.1% 2.3% 2.0% 2.4% 1.8% 2.3% 6.9% 1933 44 41% 37% 41% 65%WSM 16.0 2.8% 3.2% 2.5% 3.1% 2.1% 2.8% 7.9% 2006 10 40% 43% 47% 71%Data as of 12/10/2019.

5 Yr Avg

Payout Ratio:Dividend Yield EPS

Dividend Analysis

Ann’l Ind Div: The total dollar amount of cash dividends forecast to be paid over the next 12 months.

Consecutive Years Div Raised: The number of current years the company has continu-ously increased the annual dollar amount of the dividend.

Date Payable: The date a company will distribute (or has distributed) the most recent quarterly dividend.

DI Purchase Price: The average cost basis per share of the stocks purchased for the real DI tracking portfolio. The average cost basis includes any commissions incurred for the purchase and is adjusted for stock splits and spin-offs, if appropriate.

Direct Invest: Denotes companies that 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 December 2019

Amgen Inc. is a biotechnology company that discov-ers, develops, manufactures and delivers various human therapeutics.

Some of Amgen’s main products include: Enbrel, which treats moderate-to-severe active rheumatoid arthritis and chronic plaque psoriasis (23% of third-quarter 2019 revenue); Neulasta, which helps boost the immune system (12%); Prolia, which increases bone mass in osteoporosis patients (11%); XGEVA, which aides in the prevention of skeletal-related events in patients with bone metastases from solid tumors (8%); and Aranesp, which treats anemia caused by specific disorders (8%). The company recently acquired worldwide rights to Otezla, a treatment for plaque psoriasis and psoriatic arthritis that generated sales of $1.6 billion in 2018. Based on current estimates, Otezla will be Amgen’s best-selling product in 2020.

Growth TrendsAmgen has continued to grow despite steady regulatory

and competitive headwinds. In aggregate, the company re-ported that portfolio volume has grown for seven consecutive years. The catalyst for the company’s future growth depends on it rapidly advancing its oncology portfolio.

Revenue for Amgen has increased at a 4.9% annual rate of growth over the last five years but has slowed to 3.1% over the last three years.

Net income is much stronger, with a five-year compound an-nual growth rate (CAGR) of 10.6% and three-year CAGR of 6.6%.

Gross profit margins currently at 82.1% are robust but may experience a slight decline going forward, reflecting the impact of biosimilar and generic competition against key products. By comparison, the industry average is 65.8%.

Analysts expect adjusted earnings per share to increase by 16.3% this fiscal year to $14.69 and expand 8.6% to $15.95 per share for 2020. The I/B/E/S consensus estimate calls for earnings per share to expand 7.0% over the next three to five years.

Amgen has been paying a dividend since 2011 and has increased its annual dividend in each of the last eight years. Over the last five years, the dividend has increased at an

annualized rate of 22.9%.

Financial StrengthAmgen is a well-diversified, financially sound biotechnology

company with a healthy pipeline. While the industry is very competitive, Amgen has managed to maintain its competitive edge by introducing new drugs and acquiring other compa-nies that strategically fit its portfolio.

The ratio of total liabilities to total assets has worsened over the last five years from 62.6% to 81.6%, with a large spike in 2018 mainly due to its $10 billion modified Dutch auction tender offer. The current industry median is 48.6%.

Amgen’s current earnings payout ratio is 43.3% and its free-cash-flow payout ratio is 37.0%, which is above its five-year average of 29.2%.

Amgen’s strong operating and free cash flows should allow it to continue returning capital to investors. Amgen generated operating cash flow of $9.8 billion over the last four quarters and has seen a positive trend in free cash flow per share over the last five years.

In the third quarter of 2019, Amgen returned $1.2 billion to shareholders through stock repurchases and $900 million in dividends paid.

ValuationAmgen shares currently yield 2.5%, based on an indicated

annual dividend of $5.80 per share, above the five-year aver-age yield of 2.4%.

Amgen is trading with a trailing price-earnings ratio of 17.9, above the five-year average of 16.7, and well below the pharmaceuticals industry median of 20.9. The forward price-earnings ratio is 15.9 times expected 2019 earnings and 14.7 times consensus 2020 earnings.

RisksThe biotechnology industry is very competitive, and Amgen

faces significant competition on many fronts. Biosimilars have a large impact on Amgen’s business model. Two of Amgen’s key products already face biosimilar competition in Europe, and the U.S. Food and Drug Administration (FDA) is beginning to approve biosimilars in the U.S.

As patents expire on current drugs, new products need to be ready to help support revenue and earnings growth.

Regulatory and reimbursement changes, including Medicare dialysis reimbursement cuts, may continue to harm Amgen’s Aranesp and Epogen drug products.

Before the Otezla acquisition, Amgen’s two largest products as a percentage of revenue (Enbrel and Neulasta) had seen de-clining demand and subsequent declining sales. Sales growth has declined as the company works on launching new prod-ucts to mitigate the loss of revenue from legacy products. This is illustrated by Amgen’s third-quarter revenue results: Newer brands like Prolia, Repatha and Aimovig delivered double-digit growth year over year, but total portfolio revenue was flat. ▪

Amgen, Inc. (AMgN)

Bullish Factors• Worldwide rights to blockbuster psoriasis drug Otezla

strengthen its inflammatory drugs portfolio• Robust pipeline, including branded biosimilars and

recent launch of potential blockbuster cholesterol drug Repatha and migraine drug Aimovig

• Strong dividend growth

Bearish Factors• Legacy products facing headwinds• Strong competition, particularly with biosimilars• Pipeline drugs could fail to become marketable

December 2019 9


AMgN $233.84 ($236.25 - $166.30)

Addition Alert Date: 10/27/2017Price at Alert: $175.28 Risk Index: 1.74Market Cap (Million): $138,337.8Avg Daily Dollar Volume (Million): $558.7Primary Sector: HealthcarePrimary Industry: Pharmaceuticals

Indicated Annual Dividend: $5.80 Multiples Current 12/2018 12/2017 12/2016 12/2015 12/2014Latest Dividend Increase: Date Dividend Yield (%): Avg 2.5% 2.8 2.7 2.6 2.0 1.7Latest Dividend Increase: % 9.8% Dividend Yield (%): High 3.2 3.1 3.0 2.4 2.3Dividend Yield: Current 2.5% Dividend Yield (%): Low 2.5 2.4 2.3 1.7 1.4Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 17.9 14.8 15.4 15.2 17.2 21.0Dividend Paid Since: 2011 Price/Earnings (Industry) 20.9 23.4 23.1 24.2 26.6 25.1Number of Years of Div Increases: 8 Price/Book Value 12.8 9.9 4.9 3.9 4.2 4.1Direct Invest Option: No Price/Sales 6.0 5.2 5.4 5.1 5.5 5.3DRIP Plan: Yes Ratios Current 12/2018 12/2017 12/2016 12/2015 12/2014Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 43.3 41.6 169.9 38.7 34.5 35.9

$1.4500 Payout Ratio: FCFPS (%) 37.0 33.1 32.0 31.1 26.2 23.6$1.4500 Gross Margin (%) 82.1 82.7 82.2 81.9 80.5 78.0$1.4500 Operating Margin (%) 42.8 43.6 43.6 42.6 39.1 30.9$1.4500 Operating Margin (%) (Ind) (7.8) (10.2) (1.9) (2.4) 3.3 1.6$1.3200 Net Margin (%) 34.5 35.3 8.7 33.6 32.0 25.7$1.3200 ROE (%) 71.6 44.5 7.2 26.6 25.8 21.5

Rel Strgth ROE (%) (Industry) (22.9) (16.9) (1.6) 1.1 9.1 12.8Rank ROA (%) 12.9 11.5 2.5 10.4 9.9 7.6

4 Week 76% Current Ratio 2.9 2.8 5.5 4.1 4.4 5.013 Week 87% Liabilities to Assets (%) 81.6 81.2 68.4 61.5 60.7 62.626 Week 89% Liab to Assets (%) (Ind) 48.6 47.7 42.9 52.9 48.7 47.652 Week 71% Asset Turnover 0.4 0.3 0.3 0.3 0.3 0.3

Financial Statements TTM 12/2018 12/2017 12/2016 12/2015 12/2014Growth 5 Year Sales ($M) 23,395 23,747 22,849 22,991 21,662 20,063

Dividends 22.9% Gross Income ($M) 19,196 19,646 18,780 18,829 17,435 15,641Sales 4.9% Depreciation & Amort. ($M) 1,994 1,946 1,955 2,105 2,108 2,092Net Income 10.6% Unusual/Extra ($M) -- 292 367 105 171 377EPS Basic 13.5% Operating Income ($M) 10,008 10,343 9,973 9,794 8,470 6,191EPS Dil Cont 13.7% Interest Expense ($M) 1,340 1,392 1,304 1,260 1,079 1,061

Pretax Income ($M) 9,340 9,545 9,597 9,163 7,978 5,585SUE Score Net Income ($M) 8,067 8,394 1,979 7,722 6,939 5,158

1.00 Operating Cash Flow ($M) 9,830 11,296 11,177 10,354 9,731 8,5553.30 Investing Cash Flow ($M) 7,035 14,339 (4,024) (8,658) (5,547) (5,752)

Annual Financing Cash Flow ($M) (17,406) (22,490) (6,594) (2,599) (3,771) (2,877)12/2020 Capital Expenditures ($M) 655 738 664 738 594 718

23 Net Cash Flow ($M) (541) 3,145 559 (903) 413 (74)$15.95 EPS Basic ($) 13.11 12.70 2.71 10.32 9.15 6.80$15.78 EPS Diluted Cont ($) 13.03 12.62 10.99 10.24 9.06 6.70

# Rev Up 9 EPS DC Year/Year Chg (%) 7.5 14.8 7.3 13.0 35.2 0.9 # Rev Down 1 Dividends/Share ($) 5.67 5.28 4.60 4.00 3.16 2.44Three Mos. Ago $15.77 Dividend Year/Year Chg (%) 11.0 14.8 15.0 26.6 29.5 29.8Year/Year Chg 8.6% Free Cash Flow/Share ($) 15.32 15.97 14.38 12.86 12.05 10.33

9/2019 6/2019 3/2019 12/2018 Total Cash ($M) 20,853 29,304 41,678 38,085 31,382 27,026$3.27 $3.57 $3.18 $3.01 $13.03 Goodwill/Intangibles ($M) 21,407 22,142 23,370 25,030 26,428 27,481$2.86 $3.48 $3.25 $2.53 $12.13 Total Assets ($M) 59,535 66,416 79,954 77,626 71,449 69,009

Long-Term Debt ($M) 27,742 29,510 34,190 30,193 29,182 30,2159/2019 6/2019 3/2019 12/2018 Total Total Liabilities ($M) 48,608 53,916 54,713 47,751 43,366 43,231$9.58 $9.67 $8.93 $9.78 $37.96 Book Value/Share ($) 18.24 18.91 34.53 39.94 37.05 33.96$9.15 $9.24 $7.86 $8.00 $34.25 Avg Shares Outst'g (M) 599.00 661.00 731.00 748.00 758.00 759.00

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 12/10/2019.

Nov 15, 2018

266.3%

2.4% (2.8% - 2.1%)

11.0%3 Year

Dec 6, 2019Sep 6, 2019Jun 7, 2019

1.04

1.02

1.141.23

TTM

Gain

Nov 14, 2019

Index

Amgen Inc. is a biotechnology company that discovers, develops, manufactures and delivers various human therapeutics for the treatment of serious illness in the areas of oncology/hematology, cardiovascular disease and neuroscience. Amgen's products portfolio includes Enbrel for inflammatory diseases; immune system boosters Neulasta and Neupogen; and bone-strengthening drug Prolia. Recent drug launches include Repatha (cholesterol-lowering) and Aimovig (migraine). The company completed its $13.4 billion acquisition of worldwide rights to Otezla, a treatment for plaque psoriasis and psoriatic arthritis in November 2019.

Dec 7, 2018

Oct 29, 2019

Oct 22, 2019Aug 2, 2019Mar 7, 2019 May 16, 2019

Aug 14, 2019

Oct 23, 2018

18.7%

Feb 14, 2019

6%19%33%20%

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Quarterly

# of EstimatesCurrent

Jul 31, 2018 Aug 16, 2018Stock

12/2019

EPS$3.66$3.97

0.3%

Est Surprise

Jul 30, 2019

7.5%

EPS Estimates

3.1%6.6%

11.5%

$14.69

16.3%EPS (Qtr)

$3.27

9

$14.43$3.51

16.7%

81

$3.32

Month Ago

247.6%

Dec 7, 2018

0$14.32

12

Annual

1012/2019

% Surp3.8%

10.6%

11.7%

Mar 8, 2019

Rel Strgth

Dec 7, 2018Sep 7, 2018

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$50

$100

$150

$200

$250

Jan 2015 Jan 2016 Jan 2017 Jan 2018 Jan 2019

Div

iden

d Yi

eld Share Price

10 December 2019

Eastman Chemical Co. was originally founded in 1920 to produce chemicals for Eastman Kodak (KODK). Since then, the company has evolved into a global producer of spe-cialty chemicals. Eastman’s products have a wide variety of end uses and the company ranks either number one or two in terms of market share for the markets that it serves. Significant revenues are realized in North America, Asia Pacific, Europe, the Middle East and Africa.

Eastman has four business reporting segments: additives & functional products (36% of year-to-date 2019 revenues), advanced materials (29%), chemical intermediates (26%) and fibers (9%). The additives & functional products segment manufactures chemicals for a variety of end uses including tires, coatings, consumables and feed additives. The chemi-cal intermediates segment manufactures products used for industrial chemicals and processing, building and construc-tion, health and wellness and agrochemicals. The advanced materials segment produces specialty plastics, interlayers and films. The fibers segment produces acetate products.

Growth Trends

Eastman has sought growth through both existing products and strategic acquisitions. Since the $2.8 billion acquisition of Taminco Corp. in 2014, most of the acquisitions have been relatively small. The company has referred to these purchases as “bolt-ons,” a reference to the fact that they have added to existing business segments instead of having a substantial impact on revenues and earnings.

Sales have grown at a 1.7% annualized pace over the past five years. The company’s streak of annual sales growth was interrupted in 2016 and has been inconsistent since. Revenues this year are on track to decline for the second time in four years.

Earnings per share could decline by 4.3% this year. Eastman lowered its full-year adjusted earnings forecast in October from a range of $7.50 and $8.00 per share to $7.00 to $7.20 per share. Global trade issues were cited as the key reason for

the change. If the company’s guidance proves to be correct, it would be the first annual decrease since 2014.

Growth is expected to resume next year, with earnings per share expected to rebound to $7.86 per share. This forecast is down from the $8.57 per share analysts were expecting three months ago.

Eastman raised its dividend near the start of the month by 6.5%. The 10th consecutive annual increase raised the quar-terly dividend to $0.66 per share. On an absolute basis, the $0.04 hike was the smallest since 2012.

Financial Strength

Eastman has both the financial ability and the stated intent to keep growing its dividend. Its payout is reasonable at 43.5% of earnings and 29.6% of free cash flow. The company has routinely been free-cash-flow positive. Eastman continues to expect positive free cash flow to approach $1.1 billion this year.

The priorities for cash flow include paying down debt and supporting the dividend. Remaining free cash will be used for acquisitions and repurchasing stocks. Retiring CFO Curtis Espeland recently told attendees at an investor confer-ence to expect the company to continue looking for bolt-on acquisitions.

Eastman’s debt has been decreasing relative to its assets. The company’s liabilities-to-assets ratio of 62.7% is below the basic materials industry average of 71.1%.

Valuation

Shares of Eastman yield 3.5%. This is well above the five-year average range of 2.0% to 2.8%. The yield also ranks Eastman among the 20% highest-yielding members of the S&P 500 and the 15% highest-yielding stocks overall.

Eastman’s price-earnings ratio of 14.3 also implies that the stock is cheap. It ranks in the approximate bottom third of all exchange-traded stocks. The current price-earnings ratio compares to a five-year average of 13.0.

Risks

Eastman’s global reach exposes it to variations in global growth as well as trade issues. Slowing growth in China and tough economic conditions in other countries have adversely impacted revenues. At the same time trade disputes have affected end-market demand for the products that Eastman’s products are used in, such as tires.

Because Eastman’s revenues are realized in foreign coun-tries, the company is exposed to currency risk. The combina-tion of weaker international economies and a stronger dollar have been headwinds for Eastman’s attempt to grow.

High multiples have prevented the company from making an acquisition of significant size in recent years.

Because the company’s products are often used in the production and manufacture of other products, Eastman lacks control over the end products and end-market demand. ▪

eastman Chemical Co. (eMN)

Bullish Factors• Yield ranks among the highest 20% of all S&P 500

members• Has grown its dividend for 10 consecutive years and has

the cash flow to continue raising it• Sells to a variety of markets, and is a leader in many of

the product categories it targets

Bearish Factors• Earnings are projected to decline this year, the second

such decline in four years• Economic headwinds in foreign markets and trade issues

have adversely impacted revenues• High valuations have kept acquisitions from being large

enough to drive revenue and earnings growth

December 2019 11


Addition Alert Date: 2/06/2015Price at Alert: $73.20 Risk Index: 2.08Market Cap (Million): $10,538.4Avg Daily Dollar Volume (Million): $86.5Primary Sector: Basic MaterialsPrimary Industry: Chemicals - Commodity

Indicated Annual Dividend: $2.64 Multiples Current 12/2018 12/2017 12/2016 12/2015 12/2014Latest Dividend Increase: Date Dividend Yield (%): Avg 3.5 2.5 2.4 2.7 2.2 1.7Latest Dividend Increase: % 6.5% Dividend Yield (%): High 3.3 2.7 3.3 2.5 2.0Dividend Yield: Current 3.5% Dividend Yield (%): Low 2.0 2.1 2.3 1.9 1.5Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 14.3 12.1 11.9 11.7 13.0 16.2Dividend Paid Since: 1994 Price/Earnings (Industry) 20.9 18.5 19.5 19.7 21.0 22.8Number of Years of Div Increases: 10 Price/Book Value 1.8 2.2 2.3 2.2 2.8 3.4Direct Invest Option: Yes Price/Sales 1.1 1.3 1.3 1.1 1.1 1.3DRIP Plan: Yes Ratios Current 12/2018 12/2017 12/2016 12/2015 12/2014Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 43.5 29.3 21.3 31.7 28.0 27.9

$0.6600 Payout Ratio: FCFPS (%) 29.6 31.2 29.3 35.7 24.5 24.9$0.6200 Gross Margin (%) 23.3 24.4 24.7 26.2 26.7 23.3$0.6200 Operating Margin (%) 12.6 15.2 16.0 14.5 14.3 12.2$0.6200 Operating Margin (%) (Ind) 9.8 10.0 9.4 10.5 11.5 9.1$0.6200 Net Margin (%) 8.1 10.6 14.5 9.5 8.8 7.9$0.5600 ROE (%) 13.0 19.3 27.9 20.2 22.8 20.6

Rel Strgth ROE (%) (Industry) 15.3 18.9 21.8 12.7 14.0 17.4Rank ROA (%) 4.7 6.8 8.8 5.5 5.4 5.4



Dividends 13.3% Gross Income ($M) 2,203 2,479 2,363 2,357 2,580 2,221Sales 1.7% Depreciation & Amort. ($M) 615 604 587 580 571 450Net Income (1.5%) Unusual/Extra ($M) 98 0 13 120 162 77EPS Basic 0.2% Operating Income ($M) 1,186 1,545 1,530 1,304 1,384 1,162EPS Dil Cont (0.1%) Interest Expense ($M) 224 238 244 258 266 203

Pretax Income ($M) 964 1,310 1,289 1,049 1,129 990SUE Score Net Income ($M) 767 1,080 1,384 854 848 751

(0.80) Operating Cash Flow ($M) 1,573 1,543 1,657 1,385 1,624 1,433(1.60) Investing Cash Flow ($M) (508) (463) (643) (655) (693) (4,091)

Annual Financing Cash Flow ($M) (1,045) (1,040) (1,006) (838) (844) 2,63912/2020 Capital Expenditures ($M) 455 528 649 626 652 593

18 Net Cash Flow ($M) 14 35 10 (112) 79 (23)$7.86 EPS Basic ($) 5.56 7.65 9.56 5.80 5.71 5.02$7.89 EPS Diluted Cont ($) 5.35 7.42 7.15 5.76 5.66 4.96

# Rev Up 0 EPS DC Year/Year Chg (%) (36.0) 3.7 24.3 1.7 14.2 (33.4) # Rev Down 4 Dividends/Share ($) 2.42 2.24 2.04 1.84 1.60 1.40Three Mos. Ago $8.57 Dividend Year/Year Chg (%) 10.5 9.8 10.9 15.0 14.3 16.7Year/Year Chg 10.7% Free Cash Flow/Share ($) 8.17 7.19 6.96 5.15 6.54 5.62

9/2019 6/2019 3/2019 12/2018 Total Cash ($M) 207 226 191 181 293 214$1.93 $1.86 $1.49 $0.07 $5.35 Goodwill/Intangibles ($M) 6,498 6,652 6,900 6,930 14,336 7,391$2.99 $2.32 $2.00 $1.05 $8.36 Total Assets ($M) 16,137 15,995 15,999 15,457 15,580 16,072

Long-Term Debt ($M) 5,567 5,925 6,147 6,311 6,577 7,2489/2019 6/2019 3/2019 12/2018 Total Total Liabilities ($M) 10,117 10,192 10,596 10,925 11,639 12,562

$17.00 $17.15 $17.12 $17.01 $68.27 Book Value/Share ($) 44.01 41.10 37.31 30.77 26.52 23.48$18.12 $18.47 $18.26 $16.45 $71.29 Avg Shares Outst'g (M) 136.8 141.2 144.8 147.3 148.6 149.5


Eastman Chemical Co. is a global specialty chemical company that produces a broad range of advanced materials, chemicals and fibers. Eastman Chemical's businesses are divided into four reporting segments: additives & functional products (coatings, resin, tire industry, animal nutrition and crop protection), advanced materials (specialty plastics, interlayers and films), chemical intermediates (chemical intermediates, amines, specialty fluids and platicizers) and fibers (actetate products). The company operates globally, selling to customers in more than 100 countries. Eastman Chemical's stated objective is to be an outperforming specialty chemical company with consistent earnings growth and strong cash flow.

Feb 14, 2019

Oct 24, 2019Jul 25, 2019

Mar 14, 2019

(6%)4%6%6%

Stock

Dec 5, 2019Aug 1, 2019May 2, 2019 Jun 14, 2019

Oct 4, 2019Dec 16, 2019

Dec 7, 2018Aug 3, 2018

2.3% (2.8% - 2%)

0.990.980.89

Jan 3, 2020Sep 16, 2019

Est Surprise

Dec 14, 2018

10.3%9.4%

(6.8%)

3 Year

1.7%8.4%

(48.5%)(36.0%)

Oct 5, 2018

% Surp

IndexGain

TTM10.5%

Jan 4, 2019

0.92

Rel Strgth

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

EPS (Qtr)

EPS Estimates

Dec 5, 2019

3

CurrentMonth Ago

# of Estimates

$7.11$1.39 $7.10

18

Sep 13, 2018

12/2019

11.9%

Quarterly12/2019

(50.1%)

EPS

1862.0% (4.3%)

03

$1.94$1.99

$1.91

0

$7.68

17

$1.41

Annual

(2.1%)(4.6%)

Jul 5, 2019Apr 5, 2019

0%

1%

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eMN $76.25 ($86.18 - $61.22)

12 December 2019

Medtronic PLC is one of the world’s leading and largest medical technology companies. Founded in 1949, the com-pany develops, manufactures and markets its medical devices and technologies to hospitals, physicians, clinicians and pa-tients in more than 150 countries. The company operates in four segments: cardiac and vascular group (37% of revenues; includes cardiac rhythm and heart failure, coronary and struc-tural heart and aortic and peripheral vascular), minimally in-vasive technologies group (28% of revenues; includes surgical solutions, patient monitoring and recovery & renal care solu-tions), restorative therapies group (27% of revenues; includes spine, brain therapies, specialty therapies & pain therapies) and diabetes group (8% of revenues; includes intensive insulin management, non-intensive diabetes therapies and diabetes services and solutions).

Roughly 46% of the company’s revenues come from outside the U.S., with 16% of revenue from emerging markets.

Growth TrendsMedtronic offers an attractive portfolio of medical prod-

ucts. Medtronic is the largest medical equipment maker, with roughly 50% market share in its core heart devices. The company also has market-leading positions in spinal prod-ucts, insulin pumps and neuromodulation for chronic pain treatment. Medtronic continues to launch new products and expand its global footprint.

Sales have grown at an annual rate of 12.4% over the last five fiscal years, while bottom line net income has increased at an 8.6% annual rate.

Fully diluted continuing earnings per share have increased at a 2.5% annual rate over the last five fiscal years. The lower long-term growth rate in earnings per share reflects the in-creased share count from the Covidien merger.

Earnings are expected to grow at an annual rate of 7.6% over the next three to five years. Six analysts provided long-term earnings estimates that range from a low of 6.6% to a high of 8.8%.

Medtronic has been paying a dividend since 1977 and its annual dividend payment has increased each year. Over the

last five years, the company has been increasing dividends 12.3% annually. The company announced an 8.0% dividend increase in June 2019.

Medtronic has established tax residence in Ireland. As such, dividends are considered Irish source income, and Irish divi-dend withholding tax (DWT) rules apply. Residents of the U.S. are entitled to an exemption from DWT.

Financial StrengthOperating margin over the last four quarters is 17.6%, be-

low the company’s five-year average of 19.4%. However, net margin has been expanding and was 15.1% over the last four quarters, above its 12.9% five-year average. Overall, operating cash flow has been strong and growing over the years, and the company is committed to returning cash to shareholders through its dividend and share buyback programs.

Medtronic is paying out 59.8% of its earnings as dividends and 44.3% of free cash flow.

Medtronic’s ratio of total liabilities to assets is 44.5%, below the industry median of 46.1%.

Medtronic’s interest coverage ratio was 6.9 over the last four quarters.

ValuationMedtronic’s strong and consistent growth—protected by

difficult barriers to entry—and merger-related expenses have elevated the firm’s price-earnings level, but the firm still trades at a discount to its industry. Medtronic’s trailing price-earnings ratio is 32.5, above its 25.5 average over the last five years. The forward price-earnings ratio is 19.8 times projected 2020 earnings for the fiscal year ending in April and 18.4 times pro-jected 2021 earnings. These ratios are attractive relative to the industry median price-earnings ratio, which has averaged 36.6 over the last five years.

Medtronic’s relatively strong price action has also pushed down the current yield to 1.9%, based on an indicated annual dividend of $2.16 per common share. The dividend yield is below the 2.2% average yield over the last five years.

RisksAs a medical device manufacturer, Medtronic faces litigation

and regulatory risk. Occasional voluntary recalls of products have impacted short-term performance and hurt the reputa-tion of the firm with doctors and patients. Medtronic recalled an insulin pump this year due to cybersecurity problems that can’t be updated or patched.

Medtronic’s products are subject to FDA approval and over-sight, and delays in the approval of new products can impact sales. Even early FDA approval of a product can negatively impact short-term sales, as doctors hold off using an older product line until the new and improved product is widely available.

Lastly, the company operates in a highly competitive mar-ketplace and faces pricing pressures from its competitors. ▪

Medtronic PLC (MDT)

Bullish Factors• Consistent record of dividend growth• Market leader in heart devices, spinal products, insulin

pumps and neuromodulators, with high barriers to entry• Pipeline of products to fuel future growth

Bearish Factors• Relatively strong price increases have stretched earnings

and dividend valuations• Life-sustaining products carry risks of recalls and

demand precise level of testing and manufacturing• Foreign profits subject to currency risk

December 2019 13


Addition Alert Date: 1/6/2017Price at Alert: $72.87 Risk Index: 1.25Market Cap (Million): $148,956.2Avg Daily Dollar Volume (Million): $482.9Primary Sector: HealthcarePrimary Industry: Medical Equipment, Supplies & Distribution

Indicated Annual Dividend: $2.16 Multiples Current 4/2019 4/2018 4/2017 4/2016 4/2015Latest Dividend Increase: (Date) Dividend Yield (%): Avg 1.9% 2.3 2.3 2.1 2.3 1.9Latest Dividend Increase: (%) 8.0% Dividend Yield (%): High 2.6 2.7 2.4 2.7 2.3Dividend Yield: Current 1.9% Dividend Yield (%): Low 2.0 2.1 1.9 1.9 1.6Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 32.5 25.8 20.2 27.7 27.2 26.7Dividend Paid Since: 1977 Price/Earnings (Industry) 48.1 48.3 38.0 34.0 31.9 30.6Number of Years of Div Increases: 42 Price/Book Value 2.9 2.4 2.1 2.2 1.8 1.3Direct Invest Option: Yes Price/Sales 4.8 3.9 3.6 3.7 3.3 3.5DRIP Plan: Yes Ratios Current 4/2019 4/2018 4/2017 4/2016 4/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 59.8 58.1 80.4 58.9 60.6 50.0

$0.5400 Payout Ratio: FCFPS (%) 44.3 45.9 69.0 42.2 51.4 30.9$0.5400 Gross Margin (%) 69.6 70.3 69.8 68.8 68.3 68.9$0.5400 Operating Margin (%) 17.6 18.9 22.0 18.1 18.6 19.6$0.5000 Operating Margin (%) (Ind) (3.0) (4.0) (7.5) (4.8) (0.6) 0.0$0.5000 Net Margin (%) 15.1 15.2 10.4 13.6 12.3 13.2$0.5000 ROE (%) 9.3 9.2 6.2 7.9 6.7 7.4

Rel Strgth ROE (%) (Industry) (1.4) 3.5 3.1 2.8 5.3 5.5Rank ROA (%) 5.2 5.1 3.2 4.0 3.4 3.7



Dividends 12.3% Gross Income ($M) 21,510 21,493 20,914 20,443 19,691 13,952Sales 12.4% Depreciation & Amort. ($M) 2,670 2,659 2,644 2,917 2,820 1,306Net Income 8.6% Unusual/Extra ($M) 1,776 1,342 (92) 950 599 791EPS Basic 2.4% Operating Income ($M) 5,426 5,783 6,602 5,383 5,361 3,976EPS Dil Cont 2.5% Interest Expense ($M) 837 959 2,254 1,094 1,386 666


4.50 Operating Cash Flow ($M) 7,519 7,007 4,684 6,880 5,218 4,90211.10 Investing Cash Flow ($M) (3,305) (774) 5,858 (1,571) 2,245 (17,058)Annual Financing Cash Flow ($M) (4,143) (5,431) (11,954) (3,283) (9,543) 15,9494/2021 Capital Expenditures ($M) 1,221 1,134 1,068 1,254 1,046 571

25 Net Cash Flow ($M) 51 724 (1,298) 2,091 (1,967) 3,440$6.03 EPS Basic ($) 3.48 3.44 2.29 2.92 2.51 2.44$6.01 EPS Diluted Cont ($) 3.42 3.42 3.94 2.90 2.48 2.41

# Rev Up 18 EPS DC Year/Year Chg (%) 1.8 (13.1) 36.0 16.7 2.9 (20.2) # Rev Down 2 Dividends/Share ($) 2.08 2.00 1.84 1.72 1.52 1.22Three Mos. Ago $6.01 Dividend Year/Year Chg (%) 8.3 8.7 7.0 13.2 24.6 8.9Year/Year Chg 7.6% Free Cash Flow/Share ($) 4.70 4.36 2.67 4.08 2.96 3.95

10/2019 7/2019 4/2019 1/2019 Total Cash ($M) 10,398 9,848 11,227 13,708 12,634 19,480$1.01 $0.62 $0.86 $0.93 $3.42 Goodwill/Intangibles ($M) 59,727 60,519 61,266 61,922 68,399 68,631$0.86 $0.77 $1.10 $0.63 $3.36 Total Assets ($M) 91,053 89,694 91,393 99,857 99,644 106,685


$5.75 $5.59 $6.07 $5.62 $23.03 Book Value/Share ($) 37.72 37.20 37.38 36.41 36.93 48.59$5.54 $5.46 $6.01 $5.44 $22.46 Avg Shares Outst'g (M) 1,340.80 1,346.40 1,356.70 1,378.90 1,409.60 1,095.50


Dec 27, 2018

106.5%

2.2% (2.5% - 1.9%)

Jan 18, 2019Oct 19, 2018

Dec 26, 2019

Index1.01

0.98

Apr 12, 2019

Rel Strgth

Jul 25, 2019

0.981.05

TTM

2%2%14%16%

StockGain

Medtronic PLC is a medical technology and services company. The company develops, manufactures and markets its medical devices and technologies to hospitals, physicians, clinicians and patients in approximately 160 countries and operates in four segments: Cardiac and vascular group, minimally invasive technologies group, restorative therapies group and diabetes group.

Mar 8, 2019

Nov 19, 2019

Dec 6, 2019Aug 23, 2019Jun 21, 2019 Jul 5, 2019

Sep 26, 2019

Dec 7, 2018

9.6%2.0%9.4%

11.1%1.8%

8.3%3 Year

63.8%

$5.56$1.39

$1.26

$1.3914 0

$5.56

25

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

EPS (Qtr)

Aug 24, 2018 Sep 27, 2018

1/2020

EPS$1.31

49.1%

$1.39

22

Aug 20, 2019

108.1%

1.7%

EPS Estimates

Est Surprise

3Month Ago

Quarterly


Jun 21, 2019

Annual4/2020

% Surp

25

2.1%6.6%

$5.60

11.3%

Jan 17, 2020Oct 18, 2019

Mar 21, 2019

0%

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Div

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MDT $111.04 ($114.46 - $81.66)

14 December 2019

Walgreens Boots Alliance (WBA)Walgreens Boots Alliance is a global pharmacy-led health

and well-being company with fiscal-2019 sales of $136.9 bil-lion. The company operates through three segments: retail pharmacy USA (76.7% of sales), retail pharmacy international (8.0%) and pharmaceutical wholesale (16.9%). Its operations consist of retail drugstores, care clinics, specialty pharmacy services, optical practices and related contract manufacturing.

Its portfolio of retail and business brands includes Walgreens, Duane Reade, Boots and Alliance HealthCare.

From the first store on the South Side of Chicago in 1909, the company now operates or has an equity interest in 18,750 stores in 25 countries and is the largest retail phar-macy, health and daily living destination across the U.S. and Europe. It has also built one of the largest global pharmaceu-tical wholesale and distribution networks, with more than 390 distribution centers delivering to more than 230,000 pharmacies, doctors, health centers and hospitals each year in more than 20 countries. In addition, Walgreens is one of the world’s largest purchasers of prescription drugs and many other health and well-being products.

Growth TrendsDespite reimbursement pricing pressure and increasing

competition from mass merchants and internet retailers for consumer commodity products, Walgreens has demonstrated solid growth due to its scale, transformational acquisitions and strategic partnerships focused on increasing store utiliza-tion with clinical partners.

Revenue for Walgreens has increased at a 12.4% annual rate of growth over the last five years but has slowed to 5.3% over the last three years. While the industry is hyper-competitive, Walgreens has maintained an edge through two transforma-tional acquisitions that expanded its global footprint: U.K.’s Boots Alliance in 2014 and 1,932 Rite Aid stores in 2018.

Due to reimbursement pricing pressure and the increased competition mentioned above, Walgreens’ gross profit margins have decreased over the seven years from 29.2% to 22.0%, basically in line with the industry at 22.7%. Its net margin of 2.9% is below the five-year average of 3.6%.

However, the typical company in the drug retailers industry is not profitable.

The I/B/E/S consensus estimate calls for earnings per share to grow 2.3% over the next three to five years, based on a poll of four analysts. Analysts expect earnings to decline 1.1% to $5.94 per share for the current fiscal year ending August 2020 and then increase 3.9% and 3.6% over the following two years.

Walgreens has been paying a dividend since 1933 and has increased its annual dividend in each of the last 44 years. In July 2019, the company announced a 4.0% increase in its quarterly dividend, down from the 10% increase the year before. Over the last five years, the dividend has increased at an annualized rate of 6.9%.

Financial StrengthThe ratio of total liabilities to total assets has increased over

the last five years from 55.1% to 65.2% but is well below the industry median of 89.0%. The company’s ability to pay inter-est is strong, as measured by the times interest earned ratio of 7.4.

Walgreens’ current earnings payout ratio is 40.8% and its free-cash-flow payout ratio is 40.7%, which is above its five-year average of 29.6%.

The company’s long-term capital policy is to maintain a strong balance sheet and financial flexibility, including return-ing surplus cash flow to stockholders in the form of dividends and share repurchases over the long term. For fiscal 2019, Walgreens returned $4.2 billion to shareholders through stock repurchases and $1.64 billion in dividends paid.

ValuationShares currently yield 3.1%, based on an indicated dividend

of $1.83 per share. This yield is above the five-year average yield of 2.0%.

The company is trading with a trailing price-earnings ratio of 13.6, well below the five-year average of 18.7, and below the industry median of 15.7. The forward price-earnings ratio is 9.9 times forecasted earnings for 2020. The stock is trading at historically low valuation levels.

RisksThe landscape across retail (drugs) is very competitive, and

Walgreens faces significant headwinds from mass merchants and internet retailers for consumer commodity products.

Regulatory and reimbursement changes will likely continue to impact gross margins, but Walgreens should be able to offset this decline as the company improves its cost structure and accelerates cost savings initiatives. The company is in the midst of a multi-faceted cost management program that is expected to deliver in excess of $1.8 billion of annual cost savings by fiscal 2022.

Weak U.K. market conditions and continued uncertainty surrounding Brexit are playing a role limiting near-term earn-ings per share growth. ▪

Bullish Factors• Stock trading at historically low valuation levels, with

dividend yield above its historical average high • Acquisition of Rite Aid stores driving sales growth • Emphasis on strategic partnerships and joint ventures

Bearish Factors• Increasing competition, particularly with consumer

commodity products• Reimbursement pressures and pricing transparency will

likely lead to stock volatility• Weak U.K. market and continued Brexit confusion

December 2019 15


WBA $58.41 ($83.33 - $49.03)Addition Alert Date: 6/7/2019Price at Alert: $51.97 Risk Index: 2.16Market Cap (Million): $52,401.1Avg Daily Dollar Volume (Million): $350.3Primary Sector: Non-CyclicalsPrimary Industry: Retailers - Drug

Indicated Annual Dividend: $1.83 Multiples Current 8/2019 8/2018 8/2017 8/2016 8/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 3.1% 2.4 2.1 1.9 1.7 2.0Latest Dividend Increase: % 4.0% Dividend Yield (%): High 3.0 2.5 2.1 2.0 2.4Dividend Yield: Current 3.1% Dividend Yield (%): Low 2.0 1.8 1.7 1.5 1.7Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 13.6 16.9 15.4 21.1 23.3 16.7Dividend Paid Since: 1933 Price/Earnings (Industry) 15.7 16.9 15.4 17.9 21.9 18.5Number of Years of Div Increases: 44 Price/Book Value 2.2 2.9 2.9 3.1 3.1 2.3Direct Invest Option: Yes Price/Sales 0.4 0.5 0.6 0.7 0.8 0.7DRIP Plan: Yes Ratios Current 8/2019 8/2018 8/2017 8/2016 8/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 40.8 40.7 31.6 39.5 37.4 33.4

$0.4575 Payout Ratio: FCFPS (%) 40.7 41.7 23.0 27.3 23.9 31.9$0.4575 Gross Margin (%) 22.0 22.0 23.4 24.7 25.5 26.0$0.4400 Operating Margin (%) 3.7 3.7 4.6 4.6 5.3 4.5$0.4400 Operating Margin (%) (Ind) (1.4) (0.8) (0.4) 0.0 0.8 1.9$0.4400 Net Margin (%) 2.9 2.9 3.8 3.4 3.6 4.1$0.4400 ROE (%) 16.2 16.1 18.8 14.2 13.7 16.4

Rel Strgth ROE (%) (Industry) 4.1 8.2 4.0 16.8 25.9 17.1Rank ROA (%) 5.8 5.9 7.5 5.9 5.9 8.0



Dividends 6.9% Gross Income ($M) 30,076 30,076 30,792 29,162 29,874 26,924Sales 12.4% Depreciation & Amort. ($M) 2,038 2,038 1,770 1,654 1,718 1,742Net Income 15.6% Unusual/Extra ($M) 1,206 1,203 976 1,298 335 386EPS Basic 16.3% Operating Income ($M) 4,998 4,998 6,111 5,484 6,269 4,668EPS Dil Cont 14.5% Interest Expense ($M) 704 704 616 693 596 606


0.80 Operating Cash Flow ($M) 5,595 5,595 8,263 7,255 7,847 5,6641.10 Investing Cash Flow ($M) (2,307) (2,307) (5,501) (843) (3,517) (4,276)

Annual Financing Cash Flow ($M) (3,047) (3,047) (5,295) (12,934) 2,606 (915)8/2021 Capital Expenditures ($M) 1,702 1,702 1,367 1,351 1,325 1,251

21 Net Cash Flow ($M) 232 232 (2,522) (6,496) 6,807 354$6.15 EPS Basic ($) 4.31 4.32 5.07 3.80 3.85 4.05$6.18 EPS Diluted Cont ($) 4.30 4.31 4.92 3.78 3.66 3.98

# Rev Up 0 EPS DC Year/Year Chg (%) (9.5) (12.4) 30.2 3.4 (8.2) 81.7 # Rev Down 1 Dividends/Share ($) 1.76 1.76 1.60 1.50 1.44 1.35Three Mos. Ago $6.39 Dividend Year/Year Chg (%) 10.0 10.0 6.7 4.2 6.7 7.1Year/Year Chg 3.9% Free Cash Flow/Share ($) 4.33 4.22 6.96 5.50 6.02 4.23

8/2019 5/2019 2/2019 11/2018 Total Cash ($M) 1,023 1,023 785 3,301 9,807 3,000$0.75 $1.13 $1.24 $1.18 $4.30 Goodwill/Intangibles ($M) 27,436 27,436 28,697 25,788 25,829 28,723$1.37 $1.21 $1.36 $0.81 $4.75 Total Assets ($M) 67,598 67,598 68,124 66,009 72,688 68,782


$37.74 $38.02 $37.19 $35.64 $148.59 Book Value/Share ($) 26.13 25.51 26.24 25.59 27.59 29.58$34.31 $34.61 $33.32 $30.55 $132.79 Avg Shares Outst'g (M) 899.60 921.50 991.00 1,073.50 1,083.10 1,043.20


Nov 8, 2018

(17.7%)

2% (2.4% - 1.8%)

10.0%3 Year

Dec 12, 2019Sep 12, 2019Jun 12, 2019

0.92

0.61

0.961.03

TTM

Gain

Nov 15, 2019

Index

Walgreens Boots Alliance is a pharmacy-led health and well-being company. The company operates through three segments: retail pharmacy USA, retail pharmacy international and pharmaceutical wholesale. The retail pharmacy USA segment consists of the Walgreen Co. (Walgreens) business, which includes the operation of retail drugstores and care clinics providing specialty pharmacy services. The retail pharmacy international segment consists primarily of the Alliance Boots pharmacy-led health and beauty stores, optical practices and related contract manufacturing operations. The pharmaceutical wholesale segment consists of the Alliance Boots pharmaceutical wholesaling and distribution businesses.

Jan 25, 2019

Oct 28, 2019

Oct 23, 2019Jul 10, 2019Apr 18, 2019 May 17, 2019

Aug 19, 2019

Oct 24, 2018

6.9%

Feb 14, 2019

(7%)1%12%(28%)

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Quarterly


Jun 28, 2018 Aug 17, 2018Stock

11/2019

EPS$1.43$1.47

4.1%

Est Surprise

Jun 27, 2019

(9.5%)

EPS Estimates

5.3%(1.5%)3.9%

$5.93

37.4%EPS (Qtr)

$1.41

20

$5.94$1.41

19.4%

00

$1.42

Month Ago

(15.2%)

Jul 10, 2019

2$6.00

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248/2020

% Surp1.3%2.5%

5.6%

Mar 12, 2019

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16 December 2019

Why DI Holdings May Not Pass the DI Ideas Quant screen Today

holdings do not currently meet the sales growth requirement. Although some DI holdings do not pass the quantitative filters, it does not mean that they aren’t attractive rising-dividend payers.

The portfolio addition alert date for Texas Instruments (TXN) was April 5, 2013. On that date, Texas Instruments passed the quantitative filters for inclusion in the DI portfolio. Texas Instruments was added to the portfolio, and it has been one of the strongest performers since the DI portfolio’s inception. However, the company does not currently pass the DI Ideas screen.

Texas Instruments meets all the characteristics looked for in a company to add to the DI portfolio, except one. As of December 10, the company does not meet the payout ratio characteristic. The DI approach looks for companies with a 12-month payout ratio that is less than or equal to 50%. Texas Instruments’ payout ratio is 56.2%, so it does not pass the filter. However, it has continued to be held in the portfolio because all its other fundamentals are strong.

Home Depot Inc. (HD) is another good example of a fun-damentally strong company that does not currently pass the screen because its payout and long-term-debt-to-capital ratios are too high. The DI portfolio seeks companies with long-term-debt-to-capital ratios for the most recent quarter that are less than or equal to 50%. Home Depot’s ratio is 104.2%. Heavy debt spending on buybacks has skewed total liabilities high relative to assets, resulting in negative shareholder equity.

The Home Depot example reminds us that screening is only the first stage in the process to identify the best dividend opportunities, and it involves scanning a group of securities to find those that merit further in-depth analysis. Home Depot’s financial leverage ratio is extremely high, but with further research an investor understands that it borrowed money at attractive rates to buy back shares while simultaneously its interest coverage ratio continued to improve.

IBM Corp. (IBM) and International Paper Co. (IP) are hold-ings that do not pass the DI Ideas screen due to the same four characteristics: payout ratios greater than 50%, long-term-debt-to-capital ratios for the most recent quarter greater than or equal to 50%, five-year sales growth less than 3% and five-year adjusted earnings per share growth less than 3%.

One of the reasons why Eastman Chemical Co. (EMN), Medtronic PLC (MDT), PepsiCo Inc. (PEP) and UnitedHealth Group Inc. (UNH) do not pass the DI Ideas screen is that their current dividend yields are less than their five-year average yields.

Huntington Bancshares Inc. (HBAN) does not meet two of the filter requirements. The DI portfolio seeks companies with operating margins for the last 12 months and the previous year greater than or equal to its industry operating margins. Huntington’s operating margins are above 70% but are below the comparable banking industry figures. ▪

DI Ideas is a list of Dividend Investing stock ideas that pass our initial quantitative filters for consideration for the model DI portfolio. To get to the DI Ideas screening strategy, login to the DI website (www.aaiidividendinvesting.com) and click the “DI Ideas” tab. AAII introduced the DI Ideas tool to enhance the DI subscriber experience and to deliver more meaningful content. We believe this tool will help you find additional stock candidates to meet your income investing needs.

The DI Ideas area is updated daily with stocks that currently meet the initial screening criteria used for inclusion in the actual DI portfolio. Note that these top DI Ideas may not be in the actual DI tracking portfolio and may never be added to it, but they meet the criteria used when making additions to the DI portfolio.

Of the 34 companies that passed the DI Ideas screen using data as of December 10, the actual DI portfolio held six of them: BlackRock Inc. (BLK), Comerica Inc. (CMA), Cummins Inc. (CMI), Royal Caribbean Cruises Ltd. (RCL), Snap-on Incorporated (SNA) and Walgreens Boots Alliance (WBA). There may be some DI subscribers wondering why only six companies in the DI portfolio currently pass the DI Ideas quantitative filters. We will address this concern in a moment but, rest assured, the other 18 companies in the DI portfolio all passed the quantitative filters when they were added to the portfolio.

Quantitative Filters Behind DI IdeasThe quantitative filters behind DI Ideas seeks to identify

the best dividend investment opportunities by focusing on a select universe of well-financed companies that have a long history of earnings and dividend growth, positive free cash flow, reasonable valuations and a solid outlook for both price appreciation and higher dividends in the future. There are over 40 characteristics that are used to create the DI Ideas screen. Three of them are: 1) current dividend yield greater than its five-year average yield, which seeks out companies whose dividends have increased faster than increases in share price, or whose current share price has declined recently; 2) five-year dividend growth rate greater than 3%; and 3) paid a dividend for each of the last seven years and has never reduced it during this period.

Still Solid Rising-Dividend Payers

Some of the DI holdings do not currently pass the filter because they simply do not meet one or two of its qualifying requirements. The characteristics that eliminate the most DI holdings from passing the DI Ideas screen are the require-ments that the ratio of long-term debt to capital be less than or equal to 50% and five-year sales growth be greater than 3%; eight DI portfolio companies do not currently meet the long-term-debt-to-capital requirement and nine DI

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