groesbeck investment management corporation our growth of income investment management process...

Groesbeck Investment Management Corporation

Our Growth of Income Investment Management Process

Kovack Securities, Inc. 2009 National Conference

Robert P. Dainesi, Portfolio Manager

Al Dudley, Marketing Representative

October 21, 2009

Groesbeck Investment Management 2

Corporate Profile

Professional Experience

Robert P. Groesbeck, CFA, has over 35 years of experience managing assets for taxable and tax-exempt clients. Bob started the firm in 1993.

Robert P. Dainesi has 23 years of portfolio management and security analysis experience. Bob joined the firm in 1993. Theodore M. Groesbeck, CFA, has 16 years investment experience. Ted joined the

firm in 1999. John D. Mattesich, CFA, has 14 years research experience. John joined the firm

in 2006.

Consistency of Approach and Results

Research driven stock selection disciplines Philosophy implemented over the long term Above-market risk-adjusted results Minimal dependence on market and street forecasts Fundamentally driven stock selection and sell methodologies Continuity of philosophy and strategy over many market cycles

Corporate Structure

An employee owned corporation managing approximately $400 million A client base including pension plans, endowments, foundations, Taft Hartley, and high net

worth individuals.


Empirical evidence supports the case for a dividend-based stock selection strategy. As illustrated below, dividends consistently accounted for a significant portion – and sometimes the majority - of total returns in the S&P 500 index. On average, since 1940, dividends contributed approximately 43% of the total return provided by the S&P 500.

Dividend Portion of Total Return of the S&P 500

Annual Annual Dividend % Decade % Change Dividend Total Return Total Return

1940s 3.0% 6.5% 9.5% 68.3% 1950s 13.6% 5.8% 19.3% 29.8% 1960s 4.4% 3.4% 7.8% 43.7% 1970s 1.6% 4.4% 5.9% 72.7% 1980s 12.6% 5.0% 17.5% 28.2% 1990s 15.3% 2.9% 18.2% 15.8% 2000s* -3.9% 1.6% -2.3% ?????

Source: Bloomberg* Through 7/31/2009

After three of the last four recession-driven bear markets, high yield stocks posted accelerating excess total returns over the S&P 500. Importantly, excess returns from dividend payers were nearly flat or negative in the first year following the market bottom, but investors that stuck with the strategy would have been handsomely rewarded over the longer-term in three out of the four scenarios.

The Importance of Dividends


0%

2%

4%

6%

8%

10%

- 5 10 15 20 25 30

Risk*

Re

turn

**

Dividend Grow ers and Initiators (16.3, 8.9%)

All Dividend-Paying Stocks (16.6, 7.9%)

Dividend Payers w ith No Change in Dividends (18.0, 6.3%)

Non-Dividend-Paying Stocks (26.0, 0.3%)

Dividend Cutters or Eliminators (24.3, 0.6%)

Source: Ned Davis Research

Very Favorable Risk/Return Profile of Dividend Payers versus Non-Payers (1/31/72-12/31/08)


Growth of Income Returns

Return vs. Risk

Groesbeck Mgmt. Wrap Growth-Inc. Standard & Poor’s 500


Growth of Income Returns as of 6/30/09

5-YEAR ROLLING DOWN-MARKET CAPTURE

Universe: PSN Large Cap Core



5-YEAR ROLLING RETURNS

Universe: PSN Large Cap Core


Benefits of a Dividend-Paying Stock Selection Strategy

•Dividend paying stocks are typically less volatile than the overall stock market, thereby reducing risk.

(Our Growth of Income composite has a ten year standard deviation and beta of 14.8 and 0.62, versus 17.0 and 1.0, respectively, for the S&P 500)

•Consistent dividend payout policy is an indication of a well-managed, fundamentally sound company

•Regular dividend payments help align management and shareholder interests, and provide a deterrent to investing

in low-return capital projects

•A dividend increase is a positive signal of future financial strength


Superior Sustainable Earnings Growth - Growing companies, based on trailing operating earnings, producing earnings growth superior to the S&P 500. Our target is portfolio earnings growth of 10% or more.

Attractive Growth of Dividends - Compared with industry and market benchmarks. We buy companies which have increased their dividends each and every year.

Superior Dividend Yield - Dividends must be attractive relative to the S&P 500 and other alternatives.

Superior Revenue Growth - Positive growth of revenues from sustainable ongoing business operations.

Strong Financials - Ensuring companies purchased have strong balance sheets.

Low Dividend Payout Ratio - Ensuring that management is not paying out in dividends an excessive portion of earnings.

High Return on Equity - Investing in only companies having high return on equity, an important measure of overall corporate profitability.

Liquidity - We actively monitor the trading volume of all qualified stocks in an attempt to reduce market price impact.

The First Step: Quantitative Analysis

Groesbeck Investment Management’s investment process begins with the search for:


Dividend Criteria

Consistent growth of dividends in the future

Dividend growth exceeding industry and market averages

Potential for significant growth

Validate Fundamentals Underlying sales, earnings, margin trends Operating & free cash flows Balance sheet strength

Evaluate Business Market leadership and market share

Industry outlook

Factors affecting sustainability of sales and earnings

Valuation Analysis P/E multiple on trailing operating earnings, relative to the S&P, its industry,

and its history P/E relative to growth rate (PEG Ratio); the current PEG Ratio is 1.0x Attractiveness of dividend yield

The Next Step: Fundamental Analysis

For those companies possibly qualifying for our portfolio, we perform in-depth fundamental analysis:

Our process avoids deep cyclical companiessuch as the paper, auto, chemicals, metals,

and transportation companies


Portfolio Statistics as of 6/30/09

Groesbeck

Growth of Income S&P 500

Trailing 12 Month P/E 12.8x 21.4x Lower

Dividend Yield 3.5% 2.5% Higher

1 yr EPS Growth 2.0% -44% Better

5 yr EPS Growth 4.0% -7.0% Better

1 yr Dividend Growth 14% -3.5% Better

5 yr Dividend Growth 14.8% 3.4% Better

Projected 3 yr Dividend Growth 6.1% -5.0% Better

Dividend Coverage 2.5x 1.6x Better

Payout Ratio 43% 63% Better

Price to Book 3.6x 3.2x Higher

Price to Cash Flow 8.7x 10.8x Lower

Price to Sales 1.6x 1.5x In-Line

Average ROE 26.4% 24.6% Better

Portfolio Beta 0.77 1.00 Less Volatility

5 yr STD Deviation 15.3 14.3 Above

10 yr Std Deviation 14.8 17.0 Less Volatility


Construction of a Diversified Portfolio Fully Invested At All Times 30-40 companies Over 15 industries

Portfolio Construction: Growth of Income Process

Portfolio Sector Weights (6/30/09)


Representative Holdings (6/30/09)

5 Year Annualized Growth Current Yield EPS* Dividend S&P Rank

The Growth of Income portfolio holds companies with strong balance sheets that achieve above-average earnings and dividend growth and high profitability.

Becton Dickinson 1.9% 15.5% 18.4% AJohnson & Johnson 3.5 10.4 13.1 A+United Technologies 3.0 14.3 16.8 A+Praxair 2.3 17.5 23.5 APepsiCo., Inc. 3.3 8.0 19.4 A+Chevron 3.9 21.0 12.2 A-Procter & Gamble 3.4 10.5 11.9 A+Illinois Tool Works 3.3 6.9 20.6 A+McDonalds 3.5 18.9 36.2 A-AFLAC 3.6 16.1 24.8 A


Our reasons for selling:

Weakening Revenues and Earnings Trends

We want to own companies producing growing revenues and earnings.

Declining Margins

A reduction in profit margins is often a warning for not only one stock but possibly several members of a sector.

Failure to Increase the Dividend

This would cause an automatic sale of the holding.

Reduced Growth Rate of Dividend

This triggers a review and possible sale.

Positions Sold When Fully Valued

Superior Alternatives

We monitor other candidates closely, and make portfolio changes which increase the income stream.

Positions Trimmed as Prices Advance

Stocks exceeding 7% of the portfolio will be trimmed back to 5% or less.

Sell Disciplines

groesbeck investment management corporation our growth of income investment management process...

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