in this issue building your dividend investing portfolio w · 2020-06-05 · building your dividend...

Building Your Dividend Investing Portfolio We would like to welcome new subscribers to AAII’s Dividend Investing (DI)

service and thank our current subscribers for your continued interest in the Dividend Investing model portfolio.

With many new members joining us, we thought it would be a good idea to review some of the factors to consider as you start building your DI portfolio.

Dividend Investing StrategyGood strategies can seemingly falter because of the market’s downward

momentum, while bad strategies can have some success simply because a rally is broad-based. This is why it is always important to understand the philosophy of a strategy you are following and pay attention to whether the approach is disciplined. Solid strategies are replicable, are based on what has been proven to work over the long term and stay true to the spirit of their methodology. For example, rising dividends—which are at the heart of the Dividend Investing strategy—have been shown to lead to good long-term performance. The Dividend Investing portfolio is a systematic approach that was started with a few specific goals: realize above-average total returns, limit transactions and educate subscribers on how to become a better dividend investor. We’re happy with our progress on these goals and we continue to strive for improvement.

AAII’s Dividend Investing seeks a total return that consists of both dividend income and capital appreciation by being fully invested in a portfolio of stocks that exhibit financial strength; have a solid record of sales, earnings and dividend growth; maintain a consistent pattern of dividend increases; and remain attrac-tively priced. The DI approach also considers portfolio diversification as well as general market and sector trends. It’s an approach that rewards patient investors with good long-term returns.

How to Start Building Your PortfolioThe Dividend Investing model portfolio holds 24 stocks. The more stocks you

own, the greater the portfolio’s diversification and the lower the portfolio risk, provided you are selecting stocks from varying industries. The number of stocks you choose from the current DI portfolio and when you buy them, however, depends on several factors.

We suggest that you invest in all 24 stocks, but we understand that not every-one wants to hold that many stocks. At a minimum, it is strongly advised that you hold at least 12 stocks and holding more stocks will increase your portfolio’s diversification and lower its risk.

If you choose to hold less than 24 stocks, it is imperative that you divide your initial investment as equally as possible among stocks from different industries, with an equal initial investment amount in each stock. You can choose among the following options when building your initial Dividend Investing portfolio:• Select the most recent additions to the DI portfolio by date (newest to old-

est). The newest additions to the model portfolio are Allstate Corp. (ALL), Hubbell Incorporated (HUBB) and Republic Services Inc. (RSG).

• Choose DI portfolio stocks that still pass the DI Ideas quantitative screen.

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

Innovative biotech company adds equity stake in early-stage Chinese oncology firm to strengthen its cancer drugs portfolio.

Comerica Inc. (CMA) 10Remains committed to dividend despite the economic downturn and weak energy sector.

Medtronic PLC (MDT) 12Global medical technology firm offers attractive product mix and growth potential overcoming sales dip from deferred medical procedures.

Walgreen Boots Alliance Inc. (WBA) 14Pharmacy-led health and well-being company reaping benefits of cost control measures and share buybacks.

DI Article Shareholder Yield Works on Wall Street 16

The shareholder yield is a value measure that captures both dividend distributions and changes in shares outstanding.

Next Publication Date: July 2, 2020

June 2020Volume IX Issue 6

www.AAIIDividendInvesting.com

TM

2 June 2020

dividend-paying investment opportuni-ties. For these reasons, the DI Ideas quantitative screen tool was created, and the expectation is that you will find it valuable as you conduct your research.

Deciding to build your portfolio by dividend yield, dividend growth rate, dividend yield valuation, earnings payout ratio, free-cash-flow payout ratio and/or industry is only the first step. None of the metrics mentioned above are used on a standalone basis; they are often used in conjunction with one another when selecting stocks for consideration. Additionally, most of the metrics here are best compared within a stock’s sector or industry.

If You Build It, Dividend Income Will Come

Once you have identified the stocks you want to add to your initial portfolio, it’s time to buy them! Let’s assume you decide to invest $9,600 in a 12-stock portfolio. You would invest approximately $800 per stock ($9,600 ÷ 12 = $800). You would purchase 32 shares of a stock trading at a price of $25 ($800 ÷ $25 = 32), but only 16 shares of a stock trading at a price of $50 ($800 ÷ $50 = 16).

For more information on building your DI portfolio, you can check out the DI User’s Guide online. For general instructions, scroll down to Chapter 2

The current passing companies are Allstate, BlackRock Inc. (BLK), Hubbell, Snap-on Incorporated (SNA) and Walgreens Boots Alliance Inc. (WBA).

•Add DI stocks that are undervalued relative to their five-year historical dividend yield. It is ideal to buy a stock when its current dividend yield is greater than its five-year average yield. Comerica Inc. (CMA), Eastman Chemical Co. (EMN), Huntington Bancshares Inc. (HBAN) and Walgreens Boots Alliance are a few that meet this metric. The Dividend Analysis table on page 7 shows divi-dend yield metrics. This information is also provided at the DI website at the Dividend Analysis tab.

•Buy DI holdings with the strongest projected earnings growth. Tyson Foods Inc. (TSN) and UnitedHealth Group Inc. (UNH) have projected earnings growth greater than 10% over the next three to five years.

•Acquire stocks with the highest dividend yields. IBM Corp. (IBM), International Paper Co. (IP) and Principal Financial Group Inc. (PFG) are among the highest-yielding stocks in the DI portfolio.

However, not everyone wants to hold stocks in the DI model portfolio, and some may prefer to independently research different, high-quality, rising

for the Overview, and continue reading Building Your Initial Portfolio. Then, proceed to the sec-tion Holding Less Than 24 Stocks.

Finally, there is one more site area to visit: The first section of the FAQs online is

called Getting Started, and it answers many of the specific questions you may have on how to start investing using the Dividend Investing approach. These sections should be helpful as you build your initial DI portfolio.

We value your membership and encourage you to reach out to us if you have additional questions.

Potential Paths to Recovery In determining where the current

coronavirus-induced global economic slowdown is likely to end up, it helps to consider the potential paths to recovery. Economists are attempting to plot the economy’s future trajectory. They are all asking important questions. What will the recovery look like? Will the recovery be V-, L-, U-, W- or M-shaped?

Economists are trying to determine if the steep decline and recovery will resemble a V—a quick, sharp rebound. This is the best-case scenario and the shape most people are hoping for so that life can return to “normal” as quickly as possible. In this scenario, the economy’s downturn lasts only one or two quarters and the economy comes back quickly to prior levels.

Other economists point out that the coronavirus pandemic will have a lasting negative impact on the economy resem-bling the letter L—resulting in a down-ward slope in economic activity that

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

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

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

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

© American Association of Individual Investors, 2020. AAII Dividend Investing is a trademark and service mark of the American Association of Individual Investors—All rights reserved. This publication may not be reproduced in whole or in part by any means without prior written consent.

“The American Association of Individual Investors is an independent nonprofit corporation formed in 1978 for the purpose of assisting individuals in becoming effective managers of their own assets through programs of education, information and research.”

Printed in the U.S.A.

Portfolio Alerts This MonthJune Portfolio Deletions

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price Alert Date Purchase Purchaseno portfolio deletions for June

June Portfolio Additions

Company (Ticker) Latest PriceDividend

Yield Sector: Industryno portfolio additions for June

Company (Ticker)Portfolio Deletion Alert

June 2020 3

AAII DIvIDeND INvesTINg

DI Pur- Latest Maychase Price Gain/ Div

Ticker Company Date Price Price (6/2/20) (Loss) Stock Index Yield IndustryALL Allstate Corp. 5/8/20 $100.79 $93.80 $99.00 (3.8%) 6.1% 9.0% 2.2% Insurance - Property & CasualtyAMGN Amgen, Inc. 10/27/17 $175.28 $174.93 $223.72 (4.0%) 38.5% 27.4% 2.9% PharmaceuticalsBLK BlackRock, Inc. 10/5/18 $470.86 $463.47 $541.34 5.3% 22.2% 9.2% 2.7% Investment Mgmt & Fund OpersCMA Comerica Inc. 12/7/18 $74.03 $72.16 $37.74 4.3% (44.9%) 17.6% 7.2% BanksCMI Cummins Inc. 10/3/14 $135.10 $127.75 $171.47 3.7% 49.3% 70.7% 3.1% Auto, Truck & Motorcycle PartsEMN Eastman Chemical Co. 2/6/15 $73.20 $74.59 $70.93 12.5% 9.9% 62.4% 3.7% Chemicals - CommodityETN Eaton Corporation 12/31/11 $43.53 $39.80 $85.62 1.7% 149.7% 161.2% 3.4% Electrical Components & EquipHD Home Depot Inc. 9/1/17 $150.78 $152.88 $252.71 13.0% 76.8% 29.8% 2.4% Retailers-Home Improve Prod/ServHUBB Hubbell Incorporated 3/27/20 $106.97 $111.00 $128.66 (1.6%) 16.7% 24.0% 2.8% Electrical Components & EquipHBAN Huntington Bancshares 1/12/18 $15.85 $15.86 $9.20 (3.8%) (36.3%) 14.5% 6.5% BanksIBM IBM Corp. 10/2/15 $144.58 $155.86 $126.00 (0.5%) 2.8% 64.8% 5.2% IT Services & ConsultingIP International Paper Co. 4/4/14 $45.81 $45.23 $35.23 (0.6%) (1.5%) 82.0% 5.8% Paper PackagingMDT Medtronic PLC 1/6/17 $72.87 $75.05 $97.25 1.0% 39.1% 41.8% 2.4% Medical Equip, Supplies & DistribPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $132.63 (0.6%) 153.1% 161.2% 3.1% Non-Alcoholic BeveragesPII Polaris Inc. 12/9/16 $85.84 $86.34 $89.24 23.1% 12.2% 41.8% 2.8% Recreational ProductsPFG Principal Financial Group 12/9/16 $60.30 $57.72 $39.71 6.1% (23.8%) 41.8% 5.6% Insurance - Life & HealthRSG Republic Services, Inc. 3/27/20 $75.20 $74.70 $86.63 9.1% 16.0% 24.0% 1.9% Environmental Services & EquipSNA Snap-on Incorporated 9/7/18 $180.60 $182.03 $134.42 (0.5%) (23.3%) 8.5% 3.2% Industrial Machinery & EquipTXN Texas Instruments 4/5/13 $34.20 $34.80 $122.67 2.3% 328.2% 119.6% 2.9% SemiconductorsTSN Tyson Foods, Inc. 3/8/19 $62.78 $64.74 $62.50 (1.2%) (2.1%) 11.3% 2.7% Food ProcessingUNP Union Pacific Corp. 7/2/15 $96.66 $97.23 $170.94 6.3% 97.2% 59.0% 2.3% Freight & Logistics - GroundUNH UnitedHealth Group Inc 9/6/19 $229.00 $233.44 $306.31 4.2% 32.8% 3.4% 1.6% Managed Health CareWBA Walgreens Boots Alliance 6/7/19 $51.97 $53.64 $43.55 (0.8%) (13.7%) 8.1% 4.2% Retailers - DrugWSM Williams-Sonoma, Inc. 6/3/16 $53.25 $53.28 $86.02 34.6% 78.7% 54.9% 2.2% Retailers - Home FurnishingsData as of 6/2/2020. Sources: AAII Stock Investor Pro, Refinitiv, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

remains flat for some time to come.The U-shaped rebound is a downturn

that lasts a few quarters before reaching bottom, but the recovery is still sharp. In this scenario, the economy recovers after a coronavirus vaccine is developed and consumers, business spending and production go back to normal.

Economists don’t agree on much, but the following is where there is some common ground. America’s economy contracted in the first quarter and the pain is expected to be even worse for the second quarter.

There are valid reasons for concerns about the shape of the recovery, with historic unemployment, skyrocketing debt, threat of a coronavirus resur-gence and the reescalation of tensions between the U.S. and China.

There are also valid reasons for opti-mism about the shape of recovery, with the economy starting to reopen slowly and expectations that the news about the coronavirus pandemic will improve, that there’s going to be a vaccine at some point down the line and that the massive amounts of monetary and fiscal stimulus will continue.

It is too early to determine which type

of recovery we will see, but the possibil-ity of a second wave of infections—pos-sibly later this summer or in the fall—suggests that the recovery out of the current economic downturn is likely to be long and uneven. The path to recov-ery is highly dependent on monetary and fiscal stimulus, as well as consum-ers’ ability and willingness to spend. So, wages, employment and level of bankruptcies will likely determine the shape of this economic recovery.

DI Portfolio AlertsNo changes are being made to the

Dividend Investing portfolio for June. Keeping turnover low is a part of the DI approach, but a holding will be replaced if a more viable candidate comes along. This month, a relatively small number of companies met the minimum criteria for the portfolio, and none were attractive enough to warrant a portfolio change.

When considering a stock for addition, the DI approach looks for a dividend yield above benchmark yields, dividend growth, a reasonable free-cash-flow payout ratio, improving trends in sales and earnings, a strong balance sheet and an attractive valuation. The DI

approach also considers portfolio diver-sification as well as general market and sector trends.

Shareholder Yield Works on Wall Street

Our article on the back page of this issue focuses on the shareholder yield. A stock’s shareholder yield is the sum of its dividend yield and buyback yield and shows what percentage of total cash the company is paying out to shareholders, either in the form of a cash dividend or as cash used to repurchase its shares in the open market.

Research indicates that stocks with the highest shareholder yield (top 10%) outperformed stocks with the lowest shareholder yield.

Shareholder yield figures are provided for each of the stocks in the DI portfo-lio on page 16. Comerica is the recent leader in the Dividend Investing portfo-lio, with a shareholder yield of 18.0%, composed of a 7.2% dividend yield and 10.8% buyback yield.

Unlike other valuation measures, shareholder yield is inversely related to value, with higher shareholder yields implying more attractive valuations.

4 June 2020

May Portfolio PerformanceThe Dividend Investing real-dollar

tracking portfolio gained 4.5% during the month of May. This follows the portfolio’s gain of 15.3% in April, which was the strongest monthly increase over its more than eight-year history. The portfolio’s benchmark, the Dow Jones U.S. Index ETF was up 5.3% in May.

Comparing to a more dividend-growth-focused strategy, the S&P 500 Dividend Aristocrats index rose 4.9% over the same period.

Over the life of the Dividend Investing portfolio through June 3, 2020, it has provided a total return of 123.0%, with dividend income contributing 50.3% to the total return. The Dow Jones U.S.

Index ETF has a total return of 180.6% over this same period, with income con-tributing 38.6% to the total return.

The average dividend yield of the stocks in the DI portfolio is 3.2% while the Dow Jones U.S. Index fund has a dividend yield of 2.0%.

Dividend News Twelve stocks in the Dividend

Investing portfolio declared dividends during May, 10 of which were in line with the previous quarter’s payment: Allstate, BlackRock, Cummins Inc. (CMI), Eastman Chemical, Home Depot Inc. (HD), International Paper, Polaris Inc. (PII), Tyson Foods, Union Pacific Corp. (UNP) and Williams-Sonoma Inc. (WSM).

Medtronic PLC (MDT) declared a divi-dend in May, raising its quarterly cash dividend by 7.4%, from $0.54 to $0.58 per share. The company has increased its dividend for 43 consecutive years. The company’s dividends have expanded at a 12.3% average annual rate over the last five fiscal years.

PepsiCo. Inc. (PEP) declared a dividend in May, raising its quarterly cash dividend by 7.1% to $1.0225 per share. The com-pany has increased its dividend for 48 consecutive years, which is the longest streak in the Dividend Investing portfolio.

Portfolio NewsStrongest DI Stocks During May

Williams-Sonoma Inc. (WSM) was the strongest DI stock for the month, up 34.6%. Shares of upscale home-goods retailer spiked after the company reported first-quarter results that were well above expectations.

First-quarter net income of $35.4 million was down from $52.7 million in the year-ago quarter. However, net revenue of $1.24 billion was relatively flat compared to the prior-year quarter, despite dislocation from the coronavirus pandemic and the temporary closure of stores. Comparable-brand revenue growth for the quarter was up by 2.6%, with positive comparable revenue growth in almost all brands, including West Elm at 3.3%, Pottery Barn Kids and Teen at 8.5% and Williams Sonoma at

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

2012 2013 2014 2015 2016 2017 2018 2019 2020

AAII Dividend Investing Portfolio

Growth of $100,000

AAII Dividend Investing Portfolio

Performance

Dividend Yield 3.2% 2.0%

Total Return

Income Return

Capital Gain/(Loss)

Total Return

Income Return

Capital Gain/(Loss)

May 4.5% 0.1% 4.4% 5.3% 0.0% 5.3%2020 YTD (13.8%) 1.2% (15.0%) (3.1%) 0.0% (3.1%)2019 29.9% 4.1% 25.8% 30.8% 2.5% 28.3%2018 (11.5%) 2.6% (14.1%) (5.2%) 1.7% (6.9%)2017 22.3% 3.4% 18.9% 21.3% 2.0% 19.3%2016 18.2% 3.9% 14.3% 12.0% 2.1% 9.9%2015 (7.7%) 2.9% (10.6%) 0.4% 1.9% (1.5%)2014 12.2% 3.0% 9.2% 12.9% 2.0% 10.9%2013 36.5% 3.6% 32.9% 32.6% 2.3% 30.3%2012* 10.2% 3.5% 6.7% 14.4% 2.3% 12.1%From Inception 123.0% 50.3% 72.7% 180.6% 38.6% 142.0%Performance as of 6/3/2020.

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

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

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

Performance of DI Portfolio

June 2020 5


5.4%. Comparable-brand revenue growth

for the quarter was primarily driven by e-commerce growth that reached more than 30.0%. Additionally, the company’s focus on innovation and marketing and digitalization techniques helped shares rise further.

Williams-Sonoma also declared a regu-lar quarterly dividend of $0.48 per share, in line with its previous declaration.

Polaris Inc. (PII) was the second-best-performing stock in the DI portfolio for the month, up 23.1%. The company reaffirmed its delayed dividend payment and reported unexpectedly strong retail demand for its recreation products dur-ing April and May.

Polaris started the month report-ing that first-quarter sales decreased by 6% year over year to $1.41 bil-lion and reporting a loss of $0.09 per share, compared to earnings per share of $0.78 in first-quarter 2019. The decrease in year-over-year business due to the coronavirus pandemic prompted Polaris to announce that it was delaying its second-quarter dividend to better assess its financial position.

Polaris CEO Scott Wine said in an interview with CNBC that the company was internally forecasting for sales across its portfolio of recreation vehicles to be down 20% to 30% during the second quarter, covering April through June. Sales were particularly strong in the southeastern U.S., Wisconsin and Pennsylvania. However, Wine said that Polaris’ dealers were holding inventory at a level lower than the 10 preceding years and that the company was fore-casting for a shrinking gross domestic product (GDP) in 2021.

Polaris’ dividend yield of 2.8% com-pares to its five-year average of 2.3%.

Home Depot Inc. (HD) was the third-best-performing stock in the DI port-folio for May, up 13.0%. The company reported that first-quarter 2020 earn-ings per diluted share declined by 8.2% to $2.08, while sales for the quarter grew by 7.1% to $28.3 billion.

With more time spent at home, con-sumers have undertaken long-delayed home-improvement projects, benefiting

Home Depot’s sales. However, the increase in revenues was not enough to offset costs from boosting employees’ pay and benefits for the quarter. Total operating expenses for the quarter increased 17.0% year over year to $6.3 billion.

Home Depot withdrew its financial guidance for fiscal 2020, given the uncertainty surrounding the coronavi-rus pandemic and the impact on the economy. The company also suspended its share repurchase program indefi-nitely in mid-March. Before the suspen-sion, the company had repurchased approximately $600 million, or 2.5 million shares, of outstanding shares on its latest repurchase program.

Home Depot declared a regular quar-terly dividend of $1.50 per share, in line with the previous declaration.

Eastman Chemical Co. (EMN) was a top-performing stock in the DI portfo-lio for the month, up 12.5%. Eastman reported first-quarter 2020 adjusted earnings per diluted share of $2.03 that grew year over year and beat the I/B/E/S consensus estimate by 18.0%.

Revenues for the quarter declined by 5.8% to $2.24 billion over the same period. Adjusted operating profits increased by 8.5% to $382 million, primarily driven by higher sales volumes and lower raw materials costs.

Eastman withdrew its guidance for fiscal-2020 earnings and cash flow given uncertainty related to the coro-navirus pandemic and the impact on the economy. The company set priori-ties for available cash to go toward the payment of quarterly dividends, debt repayment of more than $400 million and modest share repurchases to offset dilution. Cost reduction targets were

increased to be about $150 million in net savings. Eastman expects working capital to be a source of more than $250 million of cash flow beyond its previous expectations.

In early May, the company declared a regular quarterly dividend of $0.66 per share, in line with the previous declara-tion. Eastman’s dividend yield of 3.7% compares to its five-year average of 2.6%.

Weakest DI Stocks During MayAmgen Inc. (AMGN) was the worst-

performing stock in the DI portfolio in May, falling 4.0% for the month, which brought the stock to its lowest price in the last 52 weeks.

At the beginning of May, the company maintained its previously issued guid-ance for its full-year earnings for 2020 and reported first-quarter 2020 results that beat expectations. However, these typically positive indicators were not able to offset several analyst down-grades during the month.

The company expects 2020 adjusted earnings of $14.85 to $15.60 per share on revenue of $25.0 billion to $25.6 bil-lion, which compares to the prior I/B/E/S consensus estimate of $15.78. Amgen’s current dividend yield of 2.9% compares to its five-year average of 2.6%.

Allstate Corp. (ALL) was tied as the second-worst-performing stock during May, down 3.8% for the month. Allstate reported a year-over-year increase of 54% in earnings per share to $3.54 but a year-over-year decrease of 8% in consolidated revenues to $10.1 billion. The company also declared a regular quarterly dividend of $0.54, in line with the previous declaration.

The decrease in total revenue was primarily driven by net realized capital

Recent earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %ALL Allstate Corp. May 5 $3.540 $3.496 1.3%HD Home Depot Inc. May 19 $2.080 $2.266 (8.2%)MDT Medtronic PLC May 21 $0.580 $0.677 (14.3%)RSG Republic Services, Inc. May 5 $0.770 $0.757 1.7%TSN Tyson Foods, Inc. May 4 $0.770 $1.043 (26.2%)WSM Williams-Sonoma, Inc. May 28 $0.740 $0.015 4,833.3%Data as of 6/2/2020. Sources: I/B/E/S and company releases.

6 June 2020

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

Ticker Company Paid Date Payable Div Yield Invest PlanALL Allstate Corp. 1, 4, 7, 10 Thu May 28, 2020 Wed Jul 1, 2020 $0.5400 $2.16 2.2% Yes YesAMGN Amgen, Inc. 3, 6, 9, 12 Fri May 15, 2020 Mon Jun 8, 2020 $1.6000 $6.40 2.9% -- YesBLK BlackRock, Inc. 3, 6, 9, 12 Thu Jun 4, 2020 Tue Jun 23, 2020 $3.6300 $14.52 2.7% -- --CMA Comerica Inc. 1, 4, 7, 10 Fri Jun 12, 2020 Wed Jul 1, 2020 $0.6800 $2.72 7.2% Yes YesCMI Cummins Inc. 3, 6, 9, 12 Thu May 21, 2020 Thu Jun 4, 2020 $1.3110 $5.24 3.1% No YesEMN Eastman Chemical Co. 1, 4, 7, 10 Fri Jun 12, 2020 Fri Jul 10, 2020 $0.6600 $2.64 3.7% Yes YesETN Eaton Corporation 3, 5, 8, 11 Wed May 13, 2020 Fri May 29, 2020 $0.7300 $2.92 3.4% Yes YesHD Home Depot Inc. 3, 6, 9, 12 Wed Jun 3, 2020 Thu Jun 18, 2020 $1.5000 $6.00 2.4% Yes YesHUBB Hubbell Incorporated 3, 6, 9, 12 Thu May 28, 2020 Mon Jun 15, 2020 $0.9100 $3.64 2.8% No NoHBAN Huntington Bancshares 1, 4, 7, 10 Tue Jun 16, 2020 Wed Jul 1, 2020 $0.1500 $0.60 6.5% Yes YesIBM IBM Corp. 3, 6, 9, 12 Thu May 7, 2020 Wed Jun 10, 2020 $1.6300 � $6.52 5.2% Yes YesIP International Paper Co. 3, 6, 9, 12 Tue May 26, 2020 Mon Jun 15, 2020 $0.5125 $2.05 5.8% Yes YesMDT Medtronic PLC 1, 4, 7, 10 Thu Jun 25, 2020 Fri Jul 17, 2020 $0.5800 � $2.32 2.4% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Thu Jun 4, 2020 Tue Jun 30, 2020 $1.0225 � $4.09 3.1% Yes YesPII Polaris Inc. 3, 6, 9, 12 Thu Jun 4, 2020 Mon Jun 15, 2020 $0.6200 $2.48 2.8% -- YesPFG Principal Financial Group 3, 6, 9, 12 Fri May 29, 2020 Fri Jun 26, 2020 $0.5600 $2.24 5.6% Yes YesRSG Republic Services, Inc. 1, 4, 7, 10 Tue Jun 30, 2020 Wed Jul 15, 2020 $0.4050 $1.62 1.9% -- --SNA Snap-on Incorporated 3, 6, 9, 12 Wed May 20, 2020 Wed Jun 10, 2020 $1.0800 $4.32 3.2% Yes YesTXN Texas Instruments 2, 5, 8, 11 Fri May 1, 2020 Mon May 18, 2020 $0.9000 $3.60 2.9% Yes YesTSN Tyson Foods, Inc. 3, 6, 9, 12 Mon Aug 31, 2020 Tue Sep 15, 2020 $0.4200 $1.68 2.7% Yes YesUNP Union Pacific Corp. 3, 6, 9, 12 Thu May 28, 2020 Tue Jun 30, 2020 $0.9700 $3.88 2.3% Yes YesUNH UnitedHealth Group Inc. 3, 6, 9, 12 Fri Jun 19, 2020 Tue Jun 30, 2020 $1.2500 � $5.00 1.6% -- --WBA Walgreens Boots Alliance 3, 6, 9, 12 Tue May 19, 2020 Fri Jun 12, 2020 $0.4575 $1.83 4.2% Yes YesWSM Williams-Sonoma, Inc. 2, 5, 8, 11 Thu Jul 23, 2020 Fri Aug 28, 2020 $0.4800 $1.92 2.2% -- --

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

Data as of 6/2/2020.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

losses of $462 million during the quar-ter, compared to gains of $662 million in the first quarter of 2019. Net invest-ment income decreased by 35% on lower price-based results. Adjusted net income was up year over year due to higher underwriting income.

Allstate has been returning money to customers of its personal auto insurance because they are driving less and get-ting in fewer accidents due to the coro-navirus pandemic. The payback program is expected to return about $1 billion to customers through the end of June.

Allstate’s dividend yield of 2.2% com-pares to its five-year average of 1.9%.

Huntington Bancshares Inc. (HBAN) was among the worst-performing stocks in the DI portfolio during May, down 3.8% for the month. The company’s last news item was its first-quarter earn-ings presentation at the end of April in which it withdrew its guidance for fiscal

2020 and offered a bleak forecast on the economic recovery from the corona-virus pandemic.

During the conference call with ana-lysts, Huntington CEO Stephen Steinour said that the company’s first quarter was dedicated to meeting clients’ short-term financial needs. Measures enacted by Huntington included loan defer-ral, fee waivers and the suspension of foreclosures and repossessions, as the bank worked to process almost 26,000 applications for the U.S. government’s Paycheck Protection Program.

Despite Huntington’s efforts and those of its small business and commercial clients, Steinour said the bank was fore-casting for a long, U-shaped economic recovery with the bottom of the eco-nomic decline extending later into 2020 and not recovering to pre-coronavirus levels until “well into 2022.”

Huntington’s dividend yield of 6.5%

compares to its five-year average of 3.2%.Hubbell Incorporated (HUBB) was

among the worst-performing stocks in the DI portfolio, declining 1.6% over the month as the company withdrew its fiscal- 2020 guidance. In early May, Hubbell reported first-quarter 2020 results in which adjusted diluted earnings per share of $1.64 increased by 4.5% year over year and beat the I/B/E/S consensus estimate of $1.519 by 8.0%.

Apart from Hubbell reporting quar-terly results, there were no other news items related to the stock’s contraction in May. However, the decline can be attributed to weakness in the U.S. ser-vices market for the second consecutive month, as the coronavirus pandemic triggered shutdowns in construction and layoffs around the country.

The company’s current dividend yield of 2.8% compares to its five-year aver-age of 2.5%. ▪

June 2020 7


Est Consec- PayoutEPS Div First utive Ratio:

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

Ticker (TTM) Current Ago Avg High Low (3-5 Yr) (5 Yr) Paid Raised Month Avg Month) AssetsALL 8.3 2.2% 1.9% 1.9% 2.2% 1.6% 2.4% 11.8% 1993 10 17% 22% 13% 79%AMGN 17.5 2.9% 3.2% 2.6% 3.1% 2.3% 5.9% 18.9% 2011 8 46% 66% 40% 85%BLK 20.1 2.7% 3.0% 2.6% 3.2% 2.2% 2.7% 11.3% 2003 11 50% 43% 109% 78%CMA 7.1 7.2% 3.2% 2.2% 2.9% 1.8% na 28.7% 1936 9 51% 30% 23% 90%CMI 12.6 3.1% 3.0% 3.0% 3.9% 2.5% (7.4%) 11.8% 1948 10 37% 46% 31% 65%EMN 12.1 3.7% 3.5% 2.6% 3.2% 2.3% 2.6% 12.1% 1994 10 43% 31% 27% 63%ETN 16.8 3.4% 3.6% 3.5% 4.3% 3.0% 4.7% 7.7% 1923 11 56% 50% 44% 54%HD 24.7 2.4% 2.2% 2.3% 2.7% 2.0% 4.2% 23.7% 1987 11 53% 46% 53% 106%HUBB 17.5 2.8% 2.8% 2.5% 3.0% 2.1% 10.0% 10.9% 1934 12 46% 50% 35% 61%HBAN 9.4 6.5% 5.1% 3.2% 3.8% 2.7% 4.9% 29.2% 1971 9 60% 39% 41% 90%IBM 12.3 5.2% 4.9% 4.0% 4.9% 3.4% 3.9% 8.6% 1915 25 64% 61% 48% 87%IP 21.2 5.8% 4.7% 3.9% 4.9% 3.3% na 6.8% 1946 8 121% 59% 35% 79%MDT 24.9 2.4% 2.1% 2.0% 2.3% 1.7% 9.6% 12.3% 1977 43 54% 62% 43% 44%PEP 25.6 3.1% 2.9% 3.0% 3.4% 2.7% 4.6% 8.4% 1952 48 74% 70% 107% 84%PII 20.6 2.8% 3.0% 2.3% 3.1% 1.9% na 4.9% 1995 25 56% 55% 38% 79%PFG 8.9 5.6% 4.1% 3.4% 4.4% 2.8% 4.8% 11.2% 2002 11 49% 36% 10% 95%RSG 25.6 1.9% 1.7% 2.2% 2.5% 2.0% 5.7% 7.6% 2003 10 46% 49% 45% 65%SNA 11.4 3.2% 2.3% 1.9% 2.2% 1.7% 10.0% 16.3% 1939 10 34% 29% 37% 40%TXN 23.5 2.9% 2.7% 2.6% 3.3% 2.2% 6.7% 21.0% 1962 16 63% 52% 55% 55%TSN 11.5 2.7% 1.8% 1.4% 1.8% 1.1% 13.4% 38.0% 1976 8 29% 17% 36% 57%UNP 19.9 2.3% 1.9% 2.4% 3.0% 2.0% 8.6% 15.4% 1899 9 44% 39% 49% 74%UNH 21.4 1.6% 1.5% 1.6% 1.9% 1.4% 12.7% 24.1% 1990 11 30% 29% 25% 70%WBA 11.2 4.2% 3.4% 2.1% 2.5% 1.8% 2.0% 6.9% 1933 44 46% 37% 30% 74%WSM 19.1 2.2% 2.9% 2.7% 3.3% 2.3% (3.5%) 7.5% 2006 10 41% 43% 34% 70%Data as of 6/2/2020.

5 Yr Avg

Payout Ratio:Dividend Yield EPS

Dividend Analysis

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

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

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

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

Direct Invest: Denotes companies that offer a direct investment program, which allows inves-tors to buy their initial shares directly from a company, without having to go through a broker.

Div Growth Rate (5 Yr): The compound annual percentage change in dividends per share over the past five years. Positive numbers show an increase in the dollar amount of divi-dends paid.

Div Yield (or Current Dividend Yield): Projected dividend payments for the next 12 months divided by the current stock price. This number shows, in percentage form, how much income can be expected relative to the current stock price.

Dividend Yield—1 Year Ago: The stock’s

dividend yield (dividends divided by price) from one year ago. 5 Year Averages: The stock’s average and average high and low dividend yields over the past five years.

DRIP Plan: Denotes companies that offer a dividend reinvestment plan, which allows shareholders to use cash dividends to acquire additional shares of stocks, including partial amounts.

Est EPS Growth Rate (3-5 Yr): The forecast annual growth rate in earnings per share for the next three to five years.

Ex-Dividend Date: The date used by the exchanges to determine who owns shares of a company. This is one trading day before the record date. Investors must purchase shares prior to the ex-dividend date to receive the dividend.

First Year Dividend Paid: The first year a company paid its dividend. If a dividend was suspended, the date is the first year the dividend was reinstated.

Liab to Assets: Total liabilities divided by total assets. A measure of balance sheet strength, lower percentages signal a lower proportionate amount of debt.

Market Cap (Mil): A measure of company size, this is the current share price multiplied by the number of shares outstanding, expressed in millions of dollars.

Months Dividends Paid: The calendar months the company has typically paid dividends

to shareholders (1 = January, 2 = February, 3 = March, etc.).

Payment Amount: The dollar amount of the current quarterly dividend payment. An up arrow () indicates that the dividend is higher than that paid last quarter. If no arrow is displayed, the dividend has not changed from the prior quarter.

Payout Ratio: EPS—12 Month: The percent-age of earnings paid out as dividends over the latest 12-month period. 5 Year Average: The average payout ratio for the previous five years. A payout ratio of 100% means the dollar amount of dividends paid equals the dollar amount of profits earned.

Payout Ratio: FCFPS (12 Month): The per-centage of free cash flow per share paid out as dividends over the latest 12-month period. Free cash flow is cash flow from operating activities less capital expenditures. A measure of a com-pany’s ability to both pay dividends and increase its cash balance.

P/E Ratio (TTM): The price-earnings ratio (price divided by earnings) based on reported earnings per share for the previous 12 months (trailing 12 months).

Total Return Since Purchase—Stock: The change in a stock’s price plus the value of all dividends received during the holding period divided by the commission-adjusted purchase price. Index: The total return of the benchmark index since the stock was added to the DI track-ing portfolio, expressed as a percentage.

Definitions of Terms Used in Tables

8 June 2020

Amgen Inc. is a biotechnology company that discovers, develops, manufactures and delivers various human thera-peutics for the treatment of serious illness in the areas of oncology, cardiovascular disease and neuroscience.

Some of Amgen’s main products include: Enbrel, which treats moderate-to-severe active rheumatoid arthritis and chronic plaque psoriasis (20% of first-quarter 2020 revenue); Prolia, which increases bone mass in osteoporosis patients (11%); Neulasta, which helps boost the immune system (10%); and XGEVA, which aides in the prevention of skeletal-related events in patients with bone metastases from solid tumors (8%).

In 2019, the company acquired worldwide rights to Otezla, a treatment for plaque psoriasis and psoriatic arthritis that generated sales of $1.6 billion in 2018. In January 2020, Amgen acquired a 20.5% equity stake in China’s BeiGene Ltd., a commercial-stage biopharmaceutical company, to advance its oncology drugs portfolio.

Growth TrendsAmgen has continued to grow despite steady regulatory and

competitive headwinds. The company reported that portfolio volume grew by 15% in the first-quarter 2020 compared to the same period last year. The catalyst for the company’s future growth depends on rapidly advancing its oncology portfolio.

Revenue for Amgen has increased at a 3.1% annual rate of growth over the last five years but has slowed to 0.9% over the last four quarters.

Net income and adjusted earnings per share are much stronger, with a five-year compound annual growth rate (CAGR) of 8.7% and 14.0%, respectively.

Gross profit margins currently at 79.9% 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 60.9%.

Analysts expect adjusted earnings per share growth to increase by 20.9% this fiscal year to $15.57 and expand 8.6% to $16.91 per share for 2021. The I/B/E/S consensus estimate calls for earnings per share to expand 5.9% 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 18.9%.

Financial StrengthWhile the pharmaceuticals industry is very competitive,

Amgen has managed to maintain its competitive edge by introducing new drugs and acquiring other companies that strategically fit its portfolio.

The ratio of total liabilities to total assets has worsened over the last five years from 60.7% to 84.6%, with a large spike in 2018 mainly due to its $10 billion tender offer. The company’s ability to pay interest is strong, as measured by the times interest earned ratio of 7.8.

Amgen’s current earnings payout ratio is 46.3% and its free-cash-flow payout ratio is 39.9%, which is above its five-year average of 32.7%.

Amgen’s strong operating and free cash flows should allow it to continue returning capital to investors. Amgen generated operating cash flow of $9.4 billion over the last four quarters and has seen a positive trend in free cash flow per share over the last five years from $12.05 to $14.91.

In 2019, Amgen returned $7.6 billion to shareholders through share repurchases and $3.5 billion in dividends.

ValuationAmgen shares currently yield 2.9%, based on an indicated

annual dividend of $6.40 per share; the yield is above the five-year average yield of 2.6%.

Amgen is trading with a trailing price-earnings ratio of 17.5, above the five-year average of 15.7, and below the pharma-ceuticals industry median of 18.9.

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, two of Amgen’s largest products as a percentage of revenue (Enbrel and Neulasta) had seen declining demand and subsequent declining sales. Sales growth has slowed as the company works on launch-ing new products to mitigate the loss of revenue from legacy products. Amgen’s newer brands like Prolia, Repatha, Aimovig and Parsabiv delivered double-digit growth year over year, but total portfolio revenue was relatively flat. ▪

Amgen, Inc. (AMgN)

Bullish Factors• Worldwide rights to blockbuster psoriasis drug Otezla

strengthens 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

June 2020 9


AMgN $223.72 ($244.99 - $173.09)

Addition Alert Date: 10/27/2017Price at Alert: $175.28 Risk Index: 1.28Market Cap (Million): $133,479.2Avg Daily Dollar Volume (Million): $798.6Primary Sector: HealthcarePrimary Industry: Pharmaceuticals

Indicated Annual Dividend: $6.40 Multiples Current 12/2019 12/2018 12/2017 12/2016 12/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 2.9 2.8 2.8 2.7 2.6 2.0Latest Dividend Increase: % 10.3% Dividend Yield (%): High 3.5 3.2 3.1 3.0 2.4Dividend Yield: Current 2.9% Dividend Yield (%): Low 2.4 2.5 2.4 2.3 1.7Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 17.5 16.0 14.8 15.4 15.2 17.2Dividend Paid Since: 2011 Price/Earnings (Industry) 18.9 21.4 21.7 23.4 23.9 25.9Number of Years of Div Increases: 8 Price/Book Value 13.9 12.9 9.9 4.9 3.9 4.2Direct Invest Option: No Price/Sales 5.5 5.3 5.2 5.4 5.1 5.5DRIP Plan: Yes Ratios Current 12/2019 12/2018 12/2017 12/2016 12/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 46.3 44.7 41.6 169.9 38.7 34.5

$1.6000 Payout Ratio: FCFPS (%) 39.9 41.1 33.1 32.0 31.1 26.2$1.6000 Gross Margin (%) 79.9 81.4 82.7 82.2 81.9 80.5$1.4500 Operating Margin (%) 39.9 41.4 43.6 43.6 42.6 39.1$1.4500 Operating Margin (%) (Ind) (12.0) (19.6) (8.8) (3.4) (2.7) 3.5$1.4500 Net Margin (%) 32.0 33.6 35.3 8.7 33.6 32.0$1.4500 ROE (%) 75.1 70.7 44.5 7.2 26.6 25.8

Rel Strgth ROE (%) (Industry) (25.0) (41.3) (16.9) 0.3 0.3 10.2Rank ROA (%) 12.8 12.4 11.5 2.5 10.4 9.9

4 Week 16% Current Ratio 1.6 1.4 2.8 5.5 4.1 4.413 Week 77% Liabilities to Assets (%) 84.6 83.8 81.2 68.4 61.5 60.726 Week 66% Liab to Assets (%) (Ind) 52.0 49.3 46.0 46.7 53.6 45.952 Week 84% Asset Turnover 0.4 0.4 0.3 0.3 0.3 0.3

Financial Statements TTM 12/2019 12/2018 12/2017 12/2016 12/2015Growth 5 Year Sales ($M) 23,966 23,362 23,747 22,849 22,991 21,662Dividends 18.9% Gross Income ($M) 19,152 19,006 19,646 18,780 18,829 17,435Sales 3.1% Depreciation & Amort. ($M) 2,608 2,206 1,946 1,955 2,105 2,108Net Income 8.7% Unusual/Extra ($M) -- 47 292 367 105 171EPS Basic 13.8% Operating Income ($M) 9,557 9,674 10,343 9,973 9,794 8,470EPS Dil Cont 14.0% Interest Expense ($M) 1,292 1,289 1,392 1,304 1,260 1,079

Pretax Income ($M) 8,844 9,138 9,545 9,597 9,163 7,978SUE Score Net Income ($M) 7,675 7,842 8,394 1,979 7,722 6,939

1.90 Operating Cash Flow ($M) 9,439 9,150 11,296 11,177 10,354 9,7311.10 Investing Cash Flow ($M) 1,924 5,709 14,339 (4,024) (8,658) (5,547)

Annual Financing Cash Flow ($M) (11,034) (15,767) (22,490) (6,594) (2,599) (3,771)12/2021 Capital Expenditures ($M) 644 618 738 664 738 594

28 Net Cash Flow ($M) 329 (908) 3,145 559 (903) 413$16.91 EPS Basic ($) 12.84 12.96 12.70 2.71 10.32 9.15$16.96 EPS Diluted Cont ($) 12.77 12.88 12.62 10.99 10.24 9.06

# Rev Up 1 EPS DC Year/Year Chg (%) 1.9 2.0 14.8 7.3 13.0 35.2 # Rev Down 4 Dividends/Share ($) 5.95 5.80 5.28 4.60 4.00 3.16Three Mos. Ago $17.00 Dividend Year/Year Chg (%) 10.0 9.8 14.8 15.0 26.6 29.5Year/Year Chg 8.6% Free Cash Flow/Share ($) 14.91 14.10 15.97 14.38 12.86 12.05

3/2020 12/2019 9/2019 6/2019 Total Cash ($M) 8,012 8,911 29,304 41,678 38,085 31,382$3.07 $2.85 $3.27 $3.57 $12.77 Goodwill/Intangibles ($M) 33,336 34,116 22,142 23,370 25,030 26,428$3.18 $3.01 $2.86 $3.48 $12.53 Total Assets ($M) 61,669 59,707 66,416 79,954 77,626 71,449

Long-Term Debt ($M) 30,008 26,950 29,510 34,190 30,193 29,1823/2020 12/2019 9/2019 6/2019 Total Total Liabilities ($M) 52,184 50,034 53,916 54,713 47,751 43,366

$10.44 $10.45 $9.58 $9.67 $40.14 Book Value/Share ($) 16.08 15.99 18.91 34.53 39.94 37.05$8.93 $9.78 $9.15 $9.24 $37.10 Avg Shares Outst'g (M) 590.00 605.00 661.00 731.00 748.00 758.00

Sources: AAII Stock Investor Pro, Refinitiv and I/B/E/S. Data as of 6/2/2020.

1.8%

Dec 11, 2019

3$15.78

2

Annual

2812/2020

% Surp10.8%5.1%

7.9%

Sep 6, 2019

Rel Strgth

Jun 7, 2019Mar 8, 2019

EPS (Qtr)

$3.81

22

$15.57$3.82

7.0%

33

$4.12

Month Ago

0.5%0.5%7.9%

$15.57

20.9%

Quarterly

# of EstimatesCurrent

Dec 7, 2018 Feb 14, 2019Stock

6/2020

EPS$4.17$3.64

0.9%

Est Surprise

Jan 30, 2020

1.9%

EPS Estimates

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

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. Its products portfolio includes Enbrel, Neulasta, Neupogen and Prolia. Recent drug launches include Repatha (cholesterol-lowering) and Aimovig (migraine). Amgen completed its $13.4 billion acquisition of worldwide rights to Otezla, a treatment for plaque psoriasis and psoriatic arthritis in November 2019. In January 2020, it acquired a 20.5% equity stake in China’s BeiGene Ltd., a commercial-stage biopharmaceutical company, to advance its oncology drugs portfolio.

Aug 2, 2019

Apr 30, 2020

Mar 4, 2020Dec 11, 2019Oct 22, 2019 Nov 14, 2019

Feb 13, 2020

Mar 7, 2019

13.2%

Aug 14, 2019

(5%)9%(5%)30%

May 16, 2019

(5.0%)

2.6% (3.1% - 2.3%)

10.0%3 Year

Jun 8, 2020Mar 6, 2020Dec 6, 2019

0.88

1.16

1.070.97

TTM

Gain

May 15, 2020

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$50

$100

$150

$200

$250

$300

Jul 2015 Jul 2016 Jul 2017 Jul 2018 Jul 2019

Divi

dend

Yie

ld Share Price

10 June 2020

Comerica Inc. is one of the 25 largest commercial financial holding companies in the U.S. As of the first quarter of 2020, its deposits totaled $56 billion and its loans totaled $49.6 billion. The company primarily operates in California (31% of deposits and 36% of loans), Michigan (36% of deposits and 25% of loans) and Texas (16% of deposits and 21% of loans).

Comerica divides its operations into three major segments. The business bank segment accounts for 53% of deposits and 86% of loans, serving small businesses, middle market busi-nesses, multinational corporations and governmental entities. The retail bank segment provides personal banking services and accounts for 37% of deposits and 4% of loans. Wealth management provides fiduciary, private banking, retirement services, investment management and advisory services, investment banking and brokerage services.

The company’s focus on business customers gives it a dif-ferent composition than most regional banks. Noninterest deposits—deposit accounts that don’t earn interest—account for 47% of total deposits.

The majority of Comerica’s loans are floating rate. Approximately 70% are tied to the 30-day LIBOR (London Interbank Offered Rate) and an additional 6% are tied to 60-day or longer LIBOR rates. Just 18% of all loans are fixed rate, meaning the interest rate does not change.

Growth Trends

The company’s significant exposure to noninterest deposit accounts and variable rate loans has been a headwind as the Federal Reserve has cut interest rates to 0.0% to 0.25%. As interest rates change, the interest charged on these loans resets, while the noninterest savings accounts incur no direct offsetting change. The company uses interest rate swaps—a contract exchanging one type of interest rate payment with

another—as a hedge against interest changes.Earnings per share have grown at a 20.0% annualized rate

over the past five years. Analysts currently expect Comerica’s earnings to fall to $1.06 per share this year because of the coronavirus’ economic impact, a narrowing net interest mar-gin and higher loan loss reserves.

Share buybacks have helped to boost per-share earnings. Comerica repurchased $3.2 million of shares in the first quar-ter but has since suspended further buybacks.

The company has increased its dividend every year since 2012. This past January, Comerica raised its dividend by a meager 1.5% to $0.68 per share.

Financial Strength

Comerica is financially sound. Its Tier 1 capital ratio was 9.5% last quarter, well above the minimum established by the Basel III regulations. Last quarter, the company raised its credit reserves to $916 million, or 1.71% of all loans, because of weakness in the energy sector. These numbers compare to $637 million and 1.27% in the fourth quarter, respectively. Energy loans represented 4% of total loans as of March 31.

The earnings payout ratio is at a multi-year high of 50.6%. Though still reasonable on an absolute level, it reflects the aforementioned headwinds impacting earnings. The com-pany’s executives have stated their intent to continue paying the dividend.

Valuation

Shares of Comerica currently yield 7.2%, well above the stock’s five-year average high of 2.9%. The price-earnings ratio is 7.1 and ranks in the bottom 13% of all stocks.

Comerica is very cheap on a relative basis. Value investors may view such a valuation as a potential sign of too much pessimism being priced in.

Risks

Comerica is very exposed to changes in interest rates. The cutting of interest rates to near 0% has caused the company’s net interest margin—the difference between what it charges on loans and pays out to depositors—to fall to 3.06% from 3.79% a year ago.

At the same time, Comerica has been adversely affected by this year’s economic downturn and sharp drop in oil prices—a factor intensified by the company’s lack of geographic diver-sity. The economic downturn has affected lending activity. The drop in oil prices has caused the company to increase its loan loss reserves.

The dividend was cut twice during the financial crisis. After an initial 50% reduction to $0.33 in November 2008, the company slashed the quarterly payment to a token $0.05 per share in January 2009. ▪

Comerica Inc. (CMA)

Bullish Factors• History of growth prior to the coronavirus pandemic• Cheaply valued, with a price-earnings ratio of 7.1 and a

dividend yield of 7.2%• Raised its dividend for the ninth consecutive year with a

hike of 1.5 % in January; remains committed to paying a dividend

Bearish Factors• Dependency on adjustable rate loans is hurting net

interest income as the interest rates have been cut to near 0%

• Sharp drop in oil prices has led to an increase in loan loss reserves

• Geographically concentrated, with a majority of business coming from California, Michigan and Texas

June 2020 11


Addition Alert Date: 12/7/2018Price at Alert: $74.03 Risk Index: 2.29Market Cap (Million): $5,224.9Avg Daily Dollar Volume (Million): $122.0Primary Sector: FinancialsPrimary Industry: Banks

Indicated Annual Dividend: $2.72 Multiples Current 12/2019 12/2018 12/2017 12/2016 12/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 7.2 3.6 2.2 1.7 1.7 1.8Latest Dividend Increase: % 1.5% Dividend Yield (%): High 4.6 2.9 2.1 2.9 2.1Dividend Yield: Current 7.2% Dividend Yield (%): Low 3.0 1.8 1.5 1.2 1.5Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 7.1 9.4 11.7 16.0 18.9 16.3Dividend Paid Since: 1936 Price/Earnings (Industry) 9.8 12.7 14.4 17.5 15.8 14.7Number of Years of Div Increases: 9 Price/Book Value 0.7 1.5 1.9 1.7 1.1 1.1Direct Invest Option: Yes Price/Sales 2.0 3.9 5.3 6.1 4.6 4.6DRIP Plan: Yes Ratios Current 12/2019 12/2018 12/2017 12/2016 12/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 50.6 33.8 25.2 31.1 31.6 28.0

$0.680 Payout Ratio: FCFPS (%) 22.8 37.6 17.0 18.3 31.4 15.6$0.680 Gross Margin (%) -- -- -- -- -- --$0.670 Operating Margin (%) 64.6 80.7 89.8 91.1 81.1 86.4$0.670 Operating Margin (%) (Ind) 73.5 74.6 78.6 82.5 83.3 84.3$0.670 Net Margin (%) 29.2 42.4 46.8 33.8 24.8 28.9$0.670 ROE (%) 10.8 16.1 15.9 9.4 6.2 6.9

Rel Strgth ROE (%) (Industry) 8.5 9.6 9.9 7.5 8.3 8.3Rank ROA (%) 1.1 1.7 1.7 1.0 0.7 0.7

4 Week 75% Current Ratio -- -- -- -- -- --13 Week 25% Liabilities to Assets (%) 90.3 90.0 89.4 88.9 89.3 89.526 Week 16% Liab to Assets (%) (Ind) 89.1 88.8 89.1 89.4 89.8 89.652 Week 24% Asset Turnover 0.0 0.0 0.0 0.0 0.0 0.0

Financial Statements TTM 12/2019 12/2018 12/2017 12/2016 12/2015Growth 5 Year Sales ($M) 2,706 2,807 2,619 2,182 1,909 1,784Dividends 28.7% Gross Income ($M) -- -- -- -- -- --Sales 9.9% Depreciation ($M) 0 0 0 0 0 0Net Income 15.2% Unusual/Extra ($M) 0 0 0 0 0 0EPS Basic 19.4% Operating Income ($M) 1,748 2,265 2,353 1,987 1,549 1,542EPS Dil Cont 20.0% Interest Expense ($M) 460 468 267 121 112 95

Pretax Income ($M) 1,022 1,532 1,535 1,234 670 750SUE Score Net Income ($M) 789 1,191 1,227 738 473 515

(1.20) Operating Cash Flow ($M) 1,749 1,090 1,616 1,085 486 8622.20 Investing Cash Flow ($M) (3,789) (494) (1,156) (120) (254) (3,255)

Annual Financing Cash Flow ($M) 3,414 661 (1,744) (2,338) 839 2,46912/2021 Capital Expenditures ($M) 85 86 90 69 95 119

25 Net Cash Flow ($M) 1,374 1,257 (1,284) (1,373) 1,071 76$3.56 EPS Basic ($) 5.32 7.94 7.30 4.24 2.75 2.93$3.63 EPS Diluted Cont ($) 5.29 7.89 7.13 4.75 2.67 2.85

# Rev Up 0 EPS DC Year/Year Chg (%) (30.9) 10.6 50.2 77.7 (6.1) (10.2) # Rev Down 3 Dividends/Share ($) 2.69 2.68 1.84 1.32 0.87 0.82Three Mos. Ago $7.34 Dividend Year/Year Chg (%) 21.7 45.7 39.4 51.7 6.1 7.9Year/Year Chg 235.2% Free Cash Flow/Share ($) 11.80 7.12 10.82 7.21 2.77 5.27

3/2020 12/2019 9/2019 6/2019 Total Cash ($M) 4,993 5,973 4,695 5,941 7,310 6,260($0.46) $1.85 $1.96 $1.94 $5.29 Goodwill/Intangibles ($M) 0 637 639 641 643 645$2.11 $1.87 $1.83 $1.86 $7.66 Total Assets ($M) 76,337 73,402 70,818 71,567 72,978 71,877

Long-Term Debt ($M) 3,634 3,469 2,663 1,822 2,360 3,0583/2020 12/2019 9/2019 6/2019 Total Total Liabilities ($M) 68,935 66,075 63,311 63,604 65,182 64,317$4.32 $4.58 $4.84 $4.78 $18.52 Book Value/Share ($) 52.50 48.85 44.68 45.76 45.33 42.95$4.49 $0.88 $4.04 $3.80 $13.22 Avg Shares Outst'g (M) 141.00 141.00 141.00 141.00 141.00 141.00


(86.5%)

24

02

$1.48

0

$7.064

Annual12/2020

$0.41 $1.09$0.40 $1.06

Year Ago

TTM

TTMSales/Sh (Qtr)

Quarterly

EPS (Qtr)

Year Ago

CurrentMonth Ago

6/202022

(79.6%)

$1.85

Est Surprise

EPS Estimates# of Estimates

Jan 21, 2020Apr 21, 2020

% Surp(148.2%)

6.2%

Index

Jun 13, 2019

(30.9%)

45.5%13.7%36.0%42.4%43.4%

21.7%(1.2%)

TTM

Gain

(38.6%)(32.0%)

EPS($0.46)

Apr 23, 2019Jan 22, 2019 Mar 14, 2019

20%(26%)(46%)(46%)

Stock

2.2% (2.9% - 1.8%)

0.72

Comerica Inc. is among the 25 largest commercial U.S. financial holding companies, with $73.3 billion in assets as of March 31, 2020. Comerica operates primarily in California, Michigan and Texas, though it also has a presence in Arizona and Florida. The company's primary business segments are business bank, retail bank and wealth management. Noninterest-bearing deposits—deposit accounts that don’t earn interest—account for 47% of total deposits, while 70% of loans are tied to interest rates that reset on 30-day basis.

Jul 23, 2019

Apr 28, 2020Jan 28, 2020Nov 5, 2019 Dec 12, 2019

Mar 12, 2020Jun 15, 2020

Jul 1, 2019Apr 1, 2019

Jan 28, 2020

Sep 12, 2019

0.48

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Jul 1, 2020Apr 1, 2020Jan 1, 2020

1.11

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Jul 2015 Jul 2016 Jul 2017 Jul 2018 Jul 2019$0

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ld Share PriceCMA $37.74 ($74.11 - $24.28)

12 June 2020

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 patients in more than 150 countries. The company operates in four segments: cardiac and vascular group (33% of 2020 fourth-quarter revenues includes cardiac rhythm and heart failure, coronary and structural heart and aortic and periph-eral vascular), minimally invasive technologies group (32% of revenues; includes surgical solutions, patient monitoring and recovery & renal care solutions), restorative therapies group (25% of revenues; includes spine, brain therapies, specialty therapies & pain therapies) and diabetes group (10% of rev-enues; includes intensive insulin management, non-intensive diabetes therapies and diabetes services and solutions).

Roughly 48% of the company’s revenues come from outside the U.S., with 15% 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 com-pany also has market-leading positions in spinal products, insu-lin pumps and neuromodulation for chronic pain treatment. Medtronic continues to launch new products and expand its global footprint, but the global focus on coronavirus-related treatments will interrupt introductions.

The company had a negative earnings surprise of 14.3% on May 21, 2020. Consensus fiscal-2021 earnings per share have dropped from $6.01 to $3.61 over the last three months. Earnings per share are expected to rebound to $5.59 in fiscal 2022.

Earnings are expected to grow at an annual rate of 9.6% over the next three to five years. Four analysts provided long-term earnings estimates that range from a low of 6.3% to a high of 13.5%.

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.

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 7.4% dividend increase in May 2020.

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 17.8%,

below the company’s five-year average of 19.4%. Overall, operating cash flow has been strong and has grown over the years, and the company is committed to returning cash to shareholders through its dividend and share buyback programs.

Medtronic was paying out 53.5% of its earnings as divi-dends and 42.7% of free cash flow. The company generated $7.2 billion in operating cash flow and incurred $1.2 billion in capital expenditures for the just-completed 2020 fiscal year.

Medtronic’s ratio of total liabilities to assets is 44.2%, below the industry median of 48.9%.

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

ValuationWhile much of Medtronic’s products are protected by dif-

ficult barriers to entry, global deferral of medical procedures has hurt short-term performance. Medtronic’s trailing price-earnings ratio is 24.9, below its 27.8 average over the last five years. The forward price-earnings ratio is 27.0 times projected 2021 earnings for the fiscal year ending in April and 17.4 times projected 2022 earnings. These ratios are attractive relative to the industry median price-earnings ratio, which has averaged 38.5 over the last five years.

The market downturn and dividend increase has also pushed up Medtronic’s current yield to 2.4%, based on an indicated annual dividend of $2.32 per share. The dividend yield is now above the 2.0% five-year average yield.

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’s products are subject to U.S. Food and Drug Administration (FDA) approval and oversight, 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• Many medical procedures delayed during coronavirus

pandemic• Life-sustaining products carry risks of recalls and

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

June 2020 13


Addition Alert Date: 1/6/2017Price at Alert: $72.87 Risk Index: 1.06Market Cap (Million): $130,143.5Avg Daily Dollar Volume (Million): $769.5Primary Sector: Health CarePrimary Industry: Medical Equip, Supplies & Distribution

Indicated Annual Dividend: $2.32 Multiples Current 4/2019 4/2018 4/2017 4/2016 4/2015Latest Dividend Increase: (Date) Dividend Yield (%): Avg 2.4% 2.0 2.1 2.2 1.9 1.8Latest Dividend Increase: (%) 7.4% Dividend Yield (%): High 2.4 2.4 2.5 2.1 2.2Dividend Yield: Current 2.4% Dividend Yield (%): Low 1.7 1.8 1.9 1.7 1.5Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 24.9 28.9 22.4 27.5 32.3 28.0Dividend Paid Since: 1977 Price/Earnings (Industry) 52.0 39.7 47.6 38.0 31.5 35.5Number of Years of Div Increases: 43 Price/Book Value 2.5 2.6 2.3 2.2 2.1 1.8Direct Invest Option: Yes Price/Sales 4.5 4.3 4.0 3.6 3.8 4.7DRIP Plan: Yes Ratios Current 4/2019 4/2018 4/2017 4/2016 4/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 53.5 58.1 80.4 58.9 60.6 50.0

$0.5800 Payout Ratio: FCFPS (%) 42.7 45.7 68.5 41.5 50.2 39.7$0.5400 Gross Margin (%) 68.0 70.3 69.8 68.8 68.3 68.9$0.5400 Operating Margin (%) 17.8 18.9 22.0 18.1 18.6 19.6$0.5400 Operating Margin (%) (Ind) (3.3) (1.4) (5.9) (5.9) (2.8) (1.0)$0.5400 Net Margin (%) 17.1 15.2 10.4 13.6 12.3 13.2$0.5000 ROE (%) 10.5 9.2 6.2 7.9 6.7 7.4

Rel Strgth ROE (%) (Industry) (1.1) (0.2) 4.4 4.4 4.0 5.3Rank ROA (%) 5.8 5.1 3.2 4.0 3.4 3.7


Financial Statements TTM 4/2019 4/2018 4/2017 4/2016 4/2015Growth 5 Year Sales ($M) 28,914 30,557 29,953 29,710 28,833 20,261Dividends 12.3% Gross Income ($M) 19,653 21,493 20,914 20,443 19,691 13,952Sales 12.4% Depreciation & Amort. ($M) 2,658 2,659 2,644 2,917 2,820 1,306Net Income 8.6% Unusual/Extra ($M) 1,803 1,342 (92) 950 599 791EPS Basic 2.4% Operating Income ($M) 5,523 5,783 6,602 5,383 5,361 3,976EPS Dil Cont 2.5% Interest Expense ($M) 750 959 2,254 1,094 1,386 666


(0.30) Operating Cash Flow ($M) 7,871 7,007 4,684 6,880 5,218 4,90211.20 Investing Cash Flow ($M) (4,097) (774) 5,858 (1,571) 2,245 (17,058)Annual Financing Cash Flow ($M) (3,748) (5,431) (11,954) (3,283) (9,543) 15,9494/2022 Capital Expenditures ($M) 1,212 1,134 1,068 1,254 1,046 571

24 Net Cash Flow ($M) 6 724 (1,298) 2,091 (1,967) 3,440$5.59 EPS Basic ($) 3.96 3.44 2.29 2.92 2.51 2.44$6.09 EPS Diluted Cont ($) 3.91 3.42 3.94 2.90 2.48 2.41

# Rev Up 8 EPS DC Year/Year Chg (%) 6.9 (13.1) 36.0 16.7 2.9 (20.2) # Rev Down 17 Dividends/Share ($) 2.12 2.00 1.84 1.72 1.52 1.22Three Mos. Ago $6.53 Dividend Year/Year Chg (%) 8.2 8.7 7.0 13.2 24.6 8.9Year/Year Chg 55.0% Free Cash Flow/Share ($) 4.97 4.38 2.69 4.15 3.03 3.07


Long-Term Debt ($M) 24,732 24,486 23,699 25,921 30,109 33,7521/2020 10/2019 7/2019 4/2019 Total Total Liabilities ($M) 41,014 39,603 40,673 49,649 47,581 53,455$5.76 $5.75 $5.59 $6.07 $23.17 Book Value/Share ($) 38.65 37.36 37.67 37.01 37.76 37.76$5.62 $5.54 $5.46 $6.01 $22.63 Avg Shares Outst'g (M) 1,340.50 1,340.70 1,346.40 1,356.70 1,378.90 1,409.60


Month Ago

Quarterly


May 20, 2020

Annual4/2021

% Surp

26

(14.3%)4.0%

$3.61

11.3%

Jul 17, 2020Apr 17, 2020

Sep 26, 2019

EPS (Qtr)

Mar 8, 2019 Mar 21, 2019

7/2020

EPS$0.58

(82.9%)

$0.80

21

Feb 18, 2020

8.8%

(5.4%)

EPS Estimates

Est Surprise

2

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

5.4%

$5.14$0.15

$1.44

$1.3618 26

$6.01

0

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.

Aug 23, 2019

May 21, 2020

May 20, 2020Mar 6, 2020Dec 6, 2019 Dec 26, 2019

Mar 26, 2020

Jun 21, 2019

9.6%2.0%9.4%11.1%

6.9%

8.2%3 Year

(1%)(3%)

(13%)4%

StockGain

Jul 5, 2019

8.1%

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Jul 25, 2019Apr 12, 2019

Jun 25, 2020

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0.93

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14 June 2020

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

health and well-being company with fiscal-2019 (ended 8/31/2019) sales of $136.9 billion. The company operates through three segments: retail pharmacy USA (76.7% of sales), retail pharmacy international (8.0%) and pharma-ceutical 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 more than 18,750 stores in 25 countries and is the largest retail pharmacy, health and daily living destination across the U.S. and Europe. It has also built one of the largest global phar-maceutical 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 growth rate 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 transformational acquisitions expanding 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 mar-gins have decreased over the last seven years from 29.2% to 21.2%, while the industry median is currently 23.4%. Its

net margin of 2.5% 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 2.0% over the next three to five years based on a poll of three analysts. Analysts expect earnings to increase 26.4% to $5.45 per share for the current fiscal year ending August 2020 and then increase 8.7% and 5.7% 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. 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

from 55.1% to 73.6% since 2015 but is well below the indus-try median of 91.7%. The company’s ability to pay interest is strong, as measured by the times interest earned ratio of 6.6.

Walgreens’ current earnings payout ratio is 46.1% and its free-cash-flow payout ratio is 30.1. The earnings payout ratio is above the five-year average of 36.5%, which it not surpris-ing given the recent coronavirus-related decline in earnings. The free-cash-flow payout ratio is in line with the 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. The com-pany has no plans of changing its dividend policy of annual increases. The next dividend increase is expected in July.

ValuationShares currently yield 4.2%, based on an indicated annual

dividend of $1.83 per share. This yield is above the five-year average yield of 2.1%.

The company is trading with a trailing price-earnings ratio of 11.2, below the five-year average of 18.5, and well below the industry median of 30.5. The forward price-earnings ratio is 8.0 times forecasted earnings for the fiscal year ending August 2020. The stock is trading at historically low valuation levels.

RisksThe landscape across the drug retailers industry is very

competitive, and Walgreens faces significant headwinds from mass merchants and internet retailers for consumer commod-ity products.

Regulatory and reimbursement changes will likely continue to impact gross margins, but Walgreens should be able to offset this decline through its cost structure improvements and 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. ▪

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

dividend yield above its historical average high • Walgreens is able to reach 80% of U.S. consumers,

which provides scale and cost advantages• 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

June 2020 15


WBA $43.55 ($64.50 - $36.65)Addition Alert Date: 6/7/2019Price at Alert: $51.97 Risk Index: 1.58Market Cap (Million): $37,983.6Avg Daily Dollar Volume (Million): $367.7Primary Sector: Consumer 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 4.2% 2.8 2.2 2.0 1.8 1.6Latest Dividend Increase: % 4.0% Dividend Yield (%): High 3.6 2.7 2.4 2.0 1.8Dividend Yield: Current 4.2% Dividend Yield (%): Low 2.3 1.9 1.7 1.6 1.4Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 11.2 14.4 14.8 20.1 21.8 21.4Dividend Paid Since: 1933 Price/Earnings (Industry) 30.5 15.5 18.2 20.1 17.7 22.2Number of Years of Div Increases: 44 Price/Book Value 1.6 2.4 2.8 3.0 2.9 2.9Direct Invest Option: Yes Price/Sales 0.3 0.4 0.6 0.7 0.7 0.9DRIP Plan: Yes Ratios Current 8/2019 8/2018 8/2017 8/2016 8/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 46.1 40.7 31.6 39.5 37.4 33.4

$0.4575 Payout Ratio: FCFPS (%) 30.1 41.7 23.0 27.3 23.9 31.9$0.4575 Gross Margin (%) 21.2 22.0 23.4 24.7 25.5 26.0$0.4575 Operating Margin (%) 3.1 3.7 4.6 4.6 5.3 4.5$0.4575 Operating Margin (%) (Ind) 0.5 0.7 (1.8) (3.6) 0.5 1.7$0.4400 Net Margin (%) 2.5 2.9 3.8 3.4 3.6 4.1$0.4400 ROE (%) 14.7 16.1 18.8 14.2 13.7 16.4

Rel Strgth ROE (%) (Industry) 14.1 14.9 (8.2) 19.3 22.3 17.8Rank ROA (%) 4.4 5.9 7.5 5.9 5.9 8.0


Financial Statements TTM 8/2019 8/2018 8/2017 8/2016 8/2015Growth 5 Year Sales ($M) 138,704 136,866 131,537 118,214 117,351 103,444

Dividends 6.9% Gross Income ($M) 29,455 30,076 30,792 29,162 29,874 26,924Sales 12.4% Depreciation & Amort. ($M) 2,017 2,038 1,770 1,654 1,718 1,742Net Income 15.6% Unusual/Extra ($M) 1,077 1,007 976 1,298 335 386EPS Basic 16.3% Operating Income ($M) 4,327 4,998 6,111 5,484 6,269 4,668EPS Dil Cont 14.5% Interest Expense ($M) 690 704 616 693 596 606


1.10 Operating Cash Flow ($M) 6,885 5,595 8,263 7,255 7,847 5,664(1.20) Investing Cash Flow ($M) (1,878) (2,307) (5,501) (843) (3,517) (4,276)

Annual Financing Cash Flow ($M) (5,017) (3,047) (5,295) (12,934) 2,606 (915)8/2021 Capital Expenditures ($M) 1,614 1,702 1,367 1,351 1,325 1,251

21 Net Cash Flow ($M) (20) 232 (2,522) (6,496) 6,807 354$5.92 EPS Basic ($) 3.90 4.32 5.07 3.80 3.85 4.05$5.93 EPS Diluted Cont ($) 3.89 4.31 4.92 3.78 3.66 3.98

# Rev Up 2 EPS DC Year/Year Chg (%) (22.2) (12.4) 30.2 3.4 (8.2) 81.7 # Rev Down 3 Dividends/Share ($) 1.80 1.76 1.60 1.50 1.44 1.35Three Mos. Ago $6.05 Dividend Year/Year Chg (%) 6.8 10.0 6.7 4.2 6.7 7.1Year/Year Chg 8.7% Free Cash Flow/Share ($) 5.96 4.22 6.96 5.50 6.02 4.23


Long-Term Debt ($M) 11,657 11,098 12,431 12,684 18,705 13,3152/2020 11/2019 8/2019 5/2019 Total Total Liabilities ($M) 66,284 44,087 42,117 38,543 42,808 37,921

$40.50 $38.52 $37.74 $38.02 $154.78 Book Value/Share ($) 26.82 25.51 26.24 25.59 27.59 29.58$37.19 $35.64 $34.31 $34.61 $141.74 Avg Shares Outst'g (M) 884.50 921.50 991.00 1,073.50 1,083.10 1,043.20


May 17, 2019

(32.0%)

2.1% (2.5% - 1.8%)

6.8%3 Year

Jun 12, 2020Mar 12, 2020Dec 12, 2019

0.96

0.78

0.920.75

TTM

Gain

May 19, 2020

Index

Walgreens Boots Alliance Inc. 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, care clinics and 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.

Jul 10, 2019

Apr 2, 2020

Apr 22, 2020Jan 30, 2020Oct 23, 2019 Nov 15, 2019

Feb 18, 2020

Apr 18, 2019

6.9%

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4%(6%)

(27%)(13%)

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Quarterly


Jan 25, 2019 Feb 14, 2019Stock

5/2020

EPS$1.52$1.37

1.9%

Est Surprise

Jan 8, 2020

(22.2%)

EPS Estimates

5.3%(1.5%)3.9%

$5.45

26.4%EPS (Qtr)

$1.22

17

$5.50$1.22

8.0%

12

$1.53

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(26.9%)

Jul 10, 2019

3$5.84

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Annual

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% Surp4.3%(3.0%)

5.6%

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16 June 2020

Works on Wall Street” (McGraw-Hill, 2011). O’Shaughnessy’s examination of stocks with the highest shareholder yield (top 10%) showed an average annual compound rate of return of 13.2% from December 31, 1926, to the end of 2009, com-pared to a gain of 10.5% for the overall universe. The variabil-ity of return was also lower than that of the overall average, pushing the risk-adjusted return even higher for this group.

In contrast, portfolios made up of stocks with the lowest shareholder yield had a compound annual return of just 6.1%, coupled with higher risk as well.

The dividend yield measures the dividend level over time and across a range of companies. The dividend yield is calcu-lated by dividing the indicated annual dividend by the current stock price. The indicated annual dividend is the anticipated cash dividend payment over the next year. It is the percentage rate of return paid on a stock in dividends.

Comerica Inc.’s (CMA) board of directors declared a $0.68 per share dividend on April 28, 2020, payable July 1, 2020. Comerica’s indicated annual dividend is currently $2.72 ($0.68 × 4). Comerica’s closing price on June 2, was $37.74, resulting in a dividend yield of 7.2% ($2.72 ÷ $37.74 = 0.072, or 7.2%).

Companies with meaningful dividend yields and growing dividends often represent undervalued investment opportu-nities, with the added benefit that the dividend yield often serves as some protection against price declines. Companies can also repurchase outstanding shares. The theory is that a share buyback is a signal to the market that management thinks the stock is undervalued, and the company is repur-chasing shares at a discount. According to academic studies, stocks with high buyback yields outperform stocks with low buyback yields.

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

Comerica had 158 million shares outstanding during its 2019 first quarter, but it reduced the number of outstanding shares to 141 million by the end of the 2020 first quarter. The 10.8% reduction in the number of shares is the buyback yield. Note that the buyback yield can be negative if the number of outstanding shares has increased.

The dividend yield and the buyback yield can be combined to calculate the shareholder yield, showing what the com-pany is paying out to shareholders. When you add Comerica’s 7.2% dividend yield to its 10.8% buyback yield, you get a shareholder yield of 18.0%. Unlike other valuation measures, shareholder yield is inversely related with value, with higher shareholder yields implying more attractive valuations. The table here lists the dividend, buyback and shareholder yields for all of the Dividend Investing stocks. The table also lists the average shareholder yield over the last five years. ▪

There are essentially five choices companies have for deploying capital: invest in existing operations, mergers & acquisitions, debt pay-down, share repurchases and, impor-tantly, dividend payments can be made or increased.

In a research paper by Michael Mauboussin, “Share Repurchase from All Angles,” he states: “The purpose of a company is to maximize long-term value. As such, the prime responsibility of a management team is to invest financial, physical and human capital at a rate in excess of the opportu-nity cost of capital. Operationally, this means identifying and executing strategies that deliver excess returns. Outstanding executives assess the attractiveness of various alternatives and deploy capital to where its value is highest.” To beat the street, investors could do worse than using shareholder yield as a value measure.

A stock’s shareholder yield is the sum of its dividend yield and buyback yield and shows what percentage of total cash the company is paying out to shareholders, either in the form of a cash dividend or as cash used to repurchase its shares in the open market. Thus, if a company is paying a 5% dividend yield and has a buyback yield of 10%, its shareholder yield would be 15%. The theory is that stocks with higher share-holder yields might be more attractive that those with lower ones.

James P. O’Shaughnessy provided a detailed analysis of investment strategies in the fourth edition of his book “What

shareholder Yield Works on Wall street

Dividend Inves�ng: Buyback and Shareholder YieldsDividend Buyback

Yield Yield Yield Yield(Current) (TTM) (TTM) (5 Yr Avg)

Allstate Corp. (ALL) 2.2% 4.6% 6.8% 7.5%Amgen, Inc. (AMGN) 2.9% 5.1% 8.0% 6.9%BlackRock, Inc. (BLK) 2.7% 1.9% 4.6% 4.1%Comerica Inc. (CMA) 7.2% 10.8% 18.0% 5.6%Cummins Inc. (CMI) 3.1% 5.0% 8.1% 6.2%Eastman Chemical Co. (EMN) 3.7% 2.2% 5.9% 4.3%Eaton Corpora�on (ETN) 3.4% 3.5% 6.9% 6.0%Home Depot Inc. (HD) 2.4% 2.5% 4.9% 6.2%Hubbell Incorporated (HUBB) 2.8% 0.2% 3.0% 4.0%Hun�ngton Bancshares (HBAN) 6.5% 2.8% 9.3% (2.1%)IBM Corp. (IBM) 5.2% 0.2% 5.4% 6.5%Interna�onal Paper Co. (IP) 5.8% 2.0% 7.8% 5.4%Medtronic PLC (MDT) 2.4% 0.2% 2.6% (2.7%)PepsiCo, Inc. (PEP) 3.1% 1.1% 4.2% 4.5%Polaris Inc. (PII) 2.8% (1.0%) 1.8% 3.8%Principal Financial Group (PFG) 5.6% 1.3% 7.0% 4.8%Republic Services, Inc. (RSG) 1.9% 0.8% 2.7% 4.3%Snap-on Incorporated (SNA) 3.2% 1.8% 5.0% 3.0%Texas Instruments (TXN) 2.9% 0.9% 3.8% 5.2%Tyson Foods, Inc. (TSN) 2.7% 0.3% 3.0% 0.6%Union Pacific Corp. (UNP) 2.3% 4.5% 6.8% 7.1%UnitedHealth Group Inc (UNH) 1.4% 0.9% 2.3% 2.3%Walgreens Boots Alliance (WBA) 4.2% 4.7% 8.9% 2.5%Williams-Sonoma, Inc. (WSM) 2.2% 2.7% 4.9% 6.3%Por�olio Average 3.4% 2.5% 5.9% 4.3%Data as of 6/2/2020. TTM=trailing 12 months.Source: AAII's Stock Investor Pro, Refini�v.

Shareholder

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