In This Issue Banking on a New Pick While Staying the Course V · er of elevators, escalators and...

Banking on a New Pick While Staying the CourseVolatile stock market swings bring to mind Mark Twain’s famous line from the

novel “Pudd’nhead Wilson”: “October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.”

While many people focus on the mention of October as being a peculiarly dangerous month for the stock market, the real message is that speculation in stocks is always dangerous. But we must distinguish stock speculation from the act of investing in stocks. Speculation generally refers to the act of forming opinions about something without having all the necessary facts. In other words, you are making a guess about something that is unknown without great thought or reflection. We should treat investing as the process of making informed deci-sions using a sound and consistent framework or strategy.

Your investment strategy should guide your day-to-day tactics and actions. AAII’s Dividend Investing (DI) seeks 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 at-tractively priced. The strategy and tactics are based on robust studies of market factors that have contributed to strong long-term market returns.

In a noisy world of daily economic reports, quarterly earnings releases, deal-or-no-deal proclamations regarding trade treaties, parsing of words from Federal Reserve meeting notes and wildly shifting sentiment of market participants, a sound strategy helps you filter information and take appropriate actions. There are many sound approaches to investing; it’s important that you find one that matches your time horizon and your ability to absorb short-term market swings, considers your need for portfolio income, is cognizant of any tax constraints and fits with your time commitment and abilities. A good strategy helps to slow the world down, enabling you to make sound decisions using relevant information. Successful investment strategies do not need to be complex, but they only work well if followed consistently.

Portfolio AlertsThere is one portfolio deletion and one portfolio addition for December.

United Technologies (UTX) is being removed from the portfolio, and Comerica Inc. (CMA) is being added.

Portfolio Deletion: United Technologies (UTX)United Technologies has strong aerospace, climate control and elevator

divisions and just completed the acquisition of Rockwell Collins Inc. (COL). Management has been under growing pressure to split up the company into three separate companies. Some feel that the splitting will unlock value and provide greater flexibility for each segment, as each group has different capital needs, profitability and growth opportunities.

We have seen this cycle of growth through acquisition that helps to realize synergies of the combined companies, only to be followed by spin-offs and sales

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 fills prescription with attractive dividend coupled with double-digit dividend growth.

Comerica Inc. (CMA) 10Banking company is benefiting from the rising interest rate cycle.

CVS Health (CVS) 12With Aetna acquisition closed, the company looks to shore up its balance sheet before resuming dividend increases.

Medtronic PLC (MDT) 14Global medical technology firm offers attractive valuation relative to industry peers.

DI Article It’s Time to Check Your Tax Liability and Portfolio Allocation 16

A year-end review can alert you to changes that impact your investments due to the new tax law and allocation shifts.

Next Publication Date: January 11, 2019

December 2018Volume VII Issue 12

www.AAIIDividendInvesting.com

TM

2 December 2018

segment serves small businesses, middle-market businesses, multinational corpora-tions and governmental entities. The Retail Bank provides personal bank-ing services. It accounts for 42% of deposits and 12% 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 cus-tomers gives it a different composition than most regional banks. Noninterest deposits—deposit accounts that don’t earn interest—account for 52% of total deposits.

The majority of Comerica’s loans are floating rate. Approximately 65% are tied to the 30-day LIBOR (London Interbank Offered Rate) and an addi-tional 10% are tied to 60-day or longer LIBOR rates. Just 10% of all loans are fixed rate, meaning the interest rate does not change.

The company’s significant exposure to noninterest deposit accounts and vari-able rate loans should help it to contin-ue benefiting from a rising rate environ-ment. As interest rates rise, the interest charged on loans resets, while the non-interest savings accounts incur no direct offsetting change. Comerica estimates the combination of the six recent rate hikes announced by the Federal Reserve have boosted net interest income by a cumulative $285 million.

Financial Strength: Comerica is financially sound. Its Tier 1 capital ratio was 11.66% last quarter, well above the minimum established by the Basel III

Published monthly by the American Association of Individual Investors 625 N. Michigan Ave., Chicago, IL 60611 312-280-0170, www.aaii.com. Annual DI subscription, $199.

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

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

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

© American Association of Individual Investors, 2018. AAII Dividend Investing is a trademark and service mark of the American Association of Individual Investors—All rights reserved. This publication may not be reproduced in whole or in part by any means without prior written consent.

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

Printed in the U.S.A.

Portfolio Alerts This MonthDecember Portfolio Deletion:

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price* Alert Date Purchase* Purchase*United Technologies (UTX) 12/7/2018 $120.87 10/7/2016 28.4% 29.5%

December Portfolio Addition:Latest Dividend

Company (Ticker) Price* Yield* Sector: IndustryComerica Inc. (CMA) $76.40 2.6%*Data as of 12/4/2018.

Portfolio Deletion AlertCompany (Ticker)

Financial: Banks

The decision to break up United Technologies into three separate com-panies changes the underlying story behind the inclusion of the company in the DI portfolio. While the stewardship of the company and the strengths of its business units are admired, the near-term uncertainty regarding any business disruptions, financial structural changes and potential changes to long-term dividend policies dictates that the stock be removed from the DI portfolio.

Portfolio Addition: Comerica Inc. (CMA)The search for candidates with a

record of dividend consistency, financial strength, growth and attractive valua-tion led to Comerica Inc.

Founded 169 years ago, Comerica is one of the 25 largest commercial finan-cial holding companies in the U.S. As of the third quarter of 2018, Comerica’s deposits totaled $56.1 billion and its loans totaled $48.6 billion. The com-pany primarily operates in California, Michigan and Texas. It also operates in Arizona and Florida, while providing some services in other states as well as in Mexico and Canada.

Comerica divides its operations into three major segments. The Business Bank is the largest segment, account-ing for 54% of deposits and nearly 86% of loans. As the name suggests, this

that help to unlock value. In either case, it is the investment bankers who profit.

So it was not a great surprise when United Technologies announced, that with the regulatory approval of its ac-quisition of Rockwell Collins complete, it was going to split into three separate companies:• United Technologies, comprising

Collins Aerospace Systems and Pratt & Whitney;

• Otis, the world’s leading manufactur-er of elevators, escalators and moving walkways; and

• Carrier, a global provider of HVAC, refrigeration, building automation, fire safety and security products.The separation is expected to be

completed in 2020, with separation activities occurring within the next 18 to 24 months. One-time transaction costs are expected to include non-U.S. tax expense, debt financing, operational separation activities and other custom-ary items. The Wall Street Journal notes that the breakup could cost as much as $3 billion.

United Technologies is looking to spin-off Otis and Carrier in tax-free transac-tions. The feeling is that each indepen-dent company will be able to maintain an investment-grade credit rating, and there is no intention to reduce the dividend payout during the separation process.

December 2018 3

AAII DIvIDeND INveSTINg

regulations. Allowances for credit losses are declining, accounting for 1.35% of total loans last quarter versus 1.45% in the third quarter of 2017. The com-pany’s return on equity (ROE) of 13.0% is well above the banks industry average of 8.6%. Operating cash flow is positive and has been improving for the firm. Its earnings-based payout ratio is 30.3%, while its free cash flow-based payout ratio is 27.4%. Times interest earned is strong at 8.0 over the last four quarters. Operating margins are typically high for banks, yet Comerica’s ratio of 91.6% is well above the 79.8% median for the industry.

Growth: Earnings per share have grown at a 12.1% annualized rate over the past five years, despite declining in 2015 (higher reserves for energy-related loan losses) and 2016 (expenses associated with a cost-savings initiative). Analysts currently expect Comerica to earn $7.17 per share this year, versus $4.75 last year. Earnings should rise to $8.02 per share in 2019. Overall reve-nue growth has been slower, increasing 3.2% annually over the last five years; however, the rate of growth has acceler-ated over the last few years.

Dividend Consistency: The company

has increased its dividend every year since 2012. This year, the company raised its dividend twice. First, it an-nounced a 13.3% increase in April. Then in July, Comerica announced a new capital plan after it became no longer subject to stress testing nor required to have its capital plans reviewed by the Federal Reserve. The new capital plan raised the dividend by an addi-tional 76.5% to $0.60 per share. It also allocated $500 million for additional share repurchases. Comerica has paid a cash dividend each year since 1936. The dividend was cut twice during last decade’s financial crisis. After an initial 50% reduction to $0.33 in November 2008, the company slashed the quarter-ly payment to a token $0.05 per share in January 2009.

Valuation: The stock’s trailing price-earnings ratio is 11.7. This ranks in the cheapest 30% of all stocks. It is also be-low the banks industry median of 14.0. Shares of Comerica yield 3.1%. This is well above the stock’s five-year average of 1.6% and its five-year high-low range of 2.1% to 1.3%.

For additional analysis of Comerica, including risk considerations, please see pages 10 and 11.

November Portfolio Performance

The DI tracking portfolio had a total return of 5.7% during November, com-posed of a 5.4% capital gain and 0.3% in income return (dividend payments). In contrast, the overall domestic stock market as measured by the Dow Jones U.S. Index ETF (IYY), gained 1.9% in November, composed of a 1.9% capital gain and no income return for the month. The exchange-traded fund will distribute its next dividend in December.

The strong gain for the month was not enough to push the portfolio into positive territory for the year. Through December 4, 2018, the DI tracking port-folio has lost 4.8%, its 2.5% income gain reducing the impact of the 7.3% loss of capital year to date. The overall stock market as measured by IYY is up 2.1% for the year, composed of 1.1% income return and 1.0% of capital gains.

Over the life of the portfolio, it has provided a total return of 114.3%, with dividend income contributing 40.0% to the total return. The Dow Jones U.S. Index ETF has a total return of 138.5%, with income contributing 27.4% to the total return.

DI Pur- Latest Nov Marketchase Price Gain/ Div Cap

Ticker Company Date Price Price (12/4/18) (Loss) Stock Index Yield (Mil) IndustryAMGN Amgen, Inc. 10/27/17 $175.28 $174.93 $197.76 8.0% 17.2% 9.7% 2.7% $129,311 PharmaceuticalsBLK BlackRock, Inc. 10/5/18 $470.86 $463.47 $408.75 4.0% (11.8%) (6.0%) 3.1% $68,584 Investment Mgmt & Fund OperatorsCMA Comerica Inc. 12/7/18 na na $76.40 (2.9%) na na 3.1% $12,900 BanksCBRL Cracker Barrel 2/3/17 $158.50 $158.80 $177.49 13.9% 20.7% 22.1% 2.8% $4,317 Restaurants & BarsCMI Cummins Inc. 10/3/14 $135.10 $136.18 $146.37 10.5% 21.7% 47.0% 3.1% $24,481 Auto, Truck & Motorcycle PartsCVS CVS Health 4/7/17 $77.08 $77.56 $78.91 10.8% 6.7% 17.2% 2.5% $81,015 Healthcare Facilities & ServicesEMN Eastman Chemical Co. 2/6/15 $73.20 $74.67 $77.67 0.6% 13.9% 39.8% 2.9% $11,336 Chemicals - CommodityETN Eaton Corporation 12/31/11 $43.53 $45.52 $74.99 7.4% 107.4% 124.9% 3.5% $33,810 Electrical Components & EquipHD Home Depot Inc. 9/1/17 $150.78 $152.88 $175.30 2.5% 17.8% 11.8% 2.4% $205,280 Retailers - Home Improve Prods & ServsHBAN Huntington Bancshares Inc. 1/12/18 $15.85 $15.86 $13.68 1.8% (11.7%) (1.5%) 4.1% $15,371 BanksIBM IBM Corp. 10/2/15 $144.58 $149.54 $121.60 7.7% (7.5%) 41.9% 5.2% $113,881 IT Services & ConsultingIP International Paper Co. 4/4/14 $45.81 $45.69 $45.94 1.8% 19.4% 56.7% 4.4% $19,162 Paper PackagingIVZ Invesco Ltd. 6/6/14 $38.18 $37.82 $19.53 (6.3%) (39.3%) 48.2% 6.1% $8,494 Investment Mgmt & Fund OperatorsMDT Medtronic PLC 1/6/17 $72.87 $75.05 $96.49 8.6% 34.4% 22.1% 2.1% $132,626 Medical Equip, Supplies & DistributionOXY Occidental Petroleum 1/9/15 $77.54 $75.96 $69.67 4.8% 7.7% 41.4% 4.5% $53,849 Oil & Gas - Exploration and ProductionPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $117.80 8.5% 115.2% 124.9% 3.1% $167,948 Non-Alcoholic BeveragesPII Polaris Industries Inc. 12/9/16 $85.84 $86.34 $91.63 9.0% 11.2% 22.1% 2.6% $6,278 Recreational ProductsPFG Principal Financial Group 12/9/16 $60.30 $59.55 $45.87 4.8% (17.7%) 22.1% 4.7% $13,674 Insurance - Life & HealthPG Procter & Gamble Co. 12/7/12 $70.29 $70.89 $93.31 6.6% 59.5% 108.9% 3.1% $232,498 Personal ProductsSNA Snap-on Incorporated 9/7/18 $180.60 $183.36 $156.49 8.0% (14.2%) (6.6%) 2.4% $9,229 Industrial Machinery & EquipmentTXN Texas Instruments 4/5/13 $34.20 $34.80 $96.11 7.6% 218.6% 89.1% 3.2% $97,178 SemiconductorsUNP Union Pacific Corp. 7/2/15 $96.66 $97.23 $153.03 5.2% 70.8% 36.9% 2.1% $115,772 Freight & Logistics - GroundWEC WEC Energy Group 12/31/11 $34.96 $34.68 $73.28 6.0% 196.2% 124.9% 3.0% $23,030 Utilities - ElectricWSM Williams-Sonoma, Inc. 6/3/16 $53.25 $54.00 $55.10 (4.6%) 10.1% 33.3% 3.1% $4,733 Retailers - Home FurnishingsData as of 12/4/2018. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

4 December 2018

Dividend NewsSnap-on Incorporated (SNA) declared

a dividend of $0.95, a 15.9% increase over the previous dividend of $0.82, on November 9, 2018. The dividend is payable December 10 to shareholders who owned the stock before November 19, 2018. Snap-on is now trading with dividend yield of 2.4%, well above its 1.6% yield one year ago.

Amgen Inc. (AMGN), CVS Health

(CVS), Eastman Chemical Co. (EMN), Medtronic PLC (MDT) and Williams-Sonoma Inc. (WSM) should declare dividends during the month if past patterns hold true. Amgen and Eastman Chemical are expected to increase their dividend payouts to preserve their re-cord of consistent dividend increases.

So far this year, eight DI holdings have announced double-digit increases in their quarterly dividends: Comerica, Eaton

Corp. (ETN), Home Depot Inc. (HD), Huntington Bancshares Inc. (HBAN), PepsiCo Inc. (PEP), Snap-on, Texas Instruments (TXN) and Williams-Sonoma.

December is an active month for dividend payments to be made by holdings in the DI portfolio. Twelve of the 24 current holdings pay dividends during December along with United Technologies, which will pay a divi-dend of $0.735 per share on Monday, December 10, 2018.

Portfolio News

Strongest Stocks During November

Cracker Barrel (CBRL) was the strongest-performing stock in the DI portfolio during November, gaining 13.9%. Shares rallied following the com-pany’s first-quarter earnings release. Earnings per diluted share were $1.96, a 2.1% increase compared to $1.92 in the prior-year first quarter. Analysts polled by I/B/E/S were expecting earnings of $1.91 per share. The company reported total revenue of $733.5 million for the first quarter of fiscal 2019, represent-ing an increase of 3.3% over the first quarter of the prior year. Cracker Barrel comparable-store restaurant sales increased 1.4%, as a 3.0% increase in average check offset a 1.6% decrease in comparable-store restaurant traffic. The average menu price increase for the quarter was approximately 2.0%. Comparable-store retail sales increased 4.3% from the prior-year quarter. The relatively strong price performance is pushing down the dividend yield. The current dividend yield is 2.8%, below the five-year average of 3.2%, but still above the five-year average low of 2.7%. Cracker Barrel has boosted its div-idend for 16 consecutive years, normally announcing increases during May.

After rising 10.8% in November, CVS Health (CVS) was the second-strongest DI holding for the month. The company announced operating results for the three months ended September 30, 2018. Net revenues for the quarter increased 2.4% from the same period a

$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

2012 2013 2014 2015 2016 2017 2018

AAII Dividend Investing Portfolio

Growth of $100,000

AAII Dividend Investing Portfolio

Performance

Dividend Yield 3.2% 1.7%

Total Return

Income Return

Capital Gain/(Loss)

Total Return

Income Return

Capital Gain/(Loss)

November 5.7% 0.3% 5.4% 1.9% 0.0% 1.9%2018 YTD (4.8%) 2.5% (7.3%) 2.1% 1.1% 1.0%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 114.3% 40.0% 74.3% 138.5% 27.4% 111.1%Performance as of 12/4/2018.

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

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

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

Performance of DI Portfolio

December 2018 5


year ago to approximately $47.3 billion. Net income for the quarter increased 8.2%, to $1.4 billion. Adjusted earnings per share for the quarter was $1.73, up 15.3% from a year ago. Analysts polled by I/B/E/S were expecting earnings of $1.71 per share for the third quarter.

In addition, the long-awaited merger between CVS Health and Aetna Inc. (AET) formally closed. The final value of the transaction was $78 billion, includ-ing the assumption of Aetna debt. Specifically, CVS paid $145 per share in cash plus 0.8378 of a CVS share for ev-ery AET share. The combined company will trade on the NYSE under the ticker CVS. The Aetna name, due to its brand value, will continue to be used with health insurance products.

CVS has a current yield of 2.5%, down from 2.7% one year ago, but still well above its five-year average yield of 1.8%.

Cummins Inc. (CMI) gained 10.5% in the month of November, primarily driven by positive third-quarter earnings and positive sector performance, while the S&P 500 industrials sector gained 3.8%. The company reported that third-quarter revenues grew 12% year over year. Sales were driven geographi-cally by North America, improving 17%, while international revenues improved 6% in Asia, Europe and South America. Net income per share attributable to Cummins was $4.05 per share, beating the I/B/E/S estimate of $3.76 per share by 7.8%. The company maintained its prior guidance of a 15% to 17% increase in year-over-year revenues for 2018 and EBITDA (earnings before interest, taxes, depreciation and amortization) to remain at 14.8% to 15.2% of sales.

Sector performance was driven by easing of trade tensions between the U.S. and China as well as a positive outlook on future interest rate changes guided by the Federal Reserve.

The company’s current dividend yield holds at 3.1%, above the five-year aver-age of 2.6%.

Polaris Industries Inc. (PII) saw a gain of 9.0% in the month of November, driven by consumer cyclical sector performance, which gained 5.5% for the

month. On the last week of November, Federal Reserve chair Jerome Powell provided guidance that the Federal Funds rate—the benchmark rate that depository institutions lend to each other overnight—is “just below” the neutral level. Investors believe that this indicates a slowing of rate increases. As Polaris operates in the consumer cycli-cal sector, manufacturing and selling powersports vehicles, this could indicate that the individual consumer would be more willing to pay, or take a loan out to pay, for a vehicle that the company manufactures. Otherwise, there was no company-specific news that warranted the positive performance.

The company’s current yield is 2.6%, above the five-year average of 1.9%. If past patterns hold true, the company is expected to increase their dividend in February of 2019.

Weakest Stocks During November

Invesco Ltd. (IVZ) was the DI track-ing portfolio’s worst performer during November, losing 6.3% of its value last month. Shares of Invesco largely followed the direction of many other financial sector stocks. There was not a significant difference in returns between Invesco and a market-cap-weighted index of its sector peers.

The company did report a 5.6% decrease in assets under management (AUM) for October. Preliminary AUM declined to $926.1 billion because of the downturn in stock prices, foreign exchange and non-management-fee-earning AUM outflows. Partially offset-ting the drop was higher money market AUM and reinvested distributions.

The stock remains cheap with a

price-earnings ratio of 7.7. Its dividend yield of 6.1% is now the highest in the DI portfolio and is well above its five-year average high of 3.7%. There is nothing to suggest the dividend is in trouble. The company announced a $1.2 billion share repurchase program in October. and MassMutual recently acquired a 15.5% stake in Invesco. Analysts do expect earnings growth to be minimal next year, however.

Williams-Sonoma Inc. (WSM) was the second-weakest DI holding in November, losing 4.6%. For its fiscal third quarter, net revenues increased 4.4% from the same period a year ago, to $1.357 billion. Excluding certain discrete items, non-GAAP net revenues were $1.356 billion, a 4.4% increase from a year ago. Comparable-brand revenue increased 3.1% compared to the third quarter of 2017. Third-quarter comparable-brand revenue growth by concept: Pottery Barn 1.4%, West Elm 8.3%, Williams Sonoma 2.1% and Pottery Barn Kids and Teen 0.0%.

Earnings per share for the quarter were $1.00, an increase of 19.0% from a year ago. Excluding certain discrete items, non-GAAP earnings per share was $0.95. Analysts polled by I/B/E/S were expecting pro forma earnings for the quarter of $0.94 per share.

For the fourth quarter, the company is expecting non-GAAP total revenues of $1.733 billion to $1.833 billion on comparable-brand revenue growth of 0.0% to 5.0%. Non-GAAP diluted earn-ings per share is expected to be in the range of $1.89 to $1.99 for the quarter. Analysts had been expecting fourth-quarter earnings of $1.98 per share.

Williams-Sonoma is trading with a dividend yield of 3.1%, above its yield

Recent earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %CBRL Cracker Barrel Nov 27 $1.960 $1.906 2.8%CVS CVS Health Nov 6 $1.730 $1.713 1.0%HD Home Depot Inc. Nov 13 $2.510 $2.261 11.0%MDT Medtronic PLC Nov 20 $1.220 $1.147 6.4%OXY Occidental Petroleum Nov 5 $1.770 $1.535 15.3%WSM Williams-Sonoma, Inc. Nov 15 $0.950 $0.943 0.7%Data as of 12/4/2018. Sources: I/B/E/S and company releases.

6 December 2018

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

Ticker Company Paid Date Payable Div Yield Invest PlanAMGN Amgen, Inc. 3, 6, 9, 12 Thu Nov 15, 2018 Fri Dec 7, 2018 $1.3200 $5.28 2.7% -- YesBLK BlackRock, Inc. 3, 6, 9, 12 Thu Dec 6, 2018 Wed Dec 26, 2018 $3.1300 $12.52 3.1% -- --CMA Comerica Inc. 1, 4, 7, 10 Thu Dec 13, 2018 Tue Jan 1, 2019 $0.6000 $2.40 3.1% Yes YesCBRL Cracker Barrel 2, 5, 8, 11 Thu Jan 17, 2019 Tue Feb 5, 2019 $1.2500 $5.00 2.8% Yes YesCMI Cummins Inc. 3, 6, 9, 12 Wed Nov 14, 2018 Mon Dec 3, 2018 $1.1400 $4.56 3.1% Yes YesCVS CVS Health 2, 5, 8, 11 Tue Oct 23, 2018 Thu Nov 1, 2018 $0.5000 $2.00 2.5% Yes YesEMN Eastman Chemical Co. 1, 4, 7, 10 Thu Sep 13, 2018 Fri Oct 5, 2018 $0.5600 $2.24 2.9% Yes YesETN Eaton Corporation 3, 5, 8, 11 Thu Nov 1, 2018 Fri Nov 16, 2018 $0.6600 $2.64 3.5% Yes YesHD Home Depot Inc. 3, 6, 9, 12 Wed Nov 28, 2018 Thu Dec 13, 2018 $1.0300 $4.12 2.4% Yes YesHBAN Huntington Bancshares Inc. 1, 4, 7, 10 Mon Dec 17, 2018 Wed Jan 2, 2019 $0.1400 $0.56 4.1% Yes YesIBM IBM Corp. 3, 6, 9, 12 Thu Nov 8, 2018 Mon Dec 10, 2018 $1.5700 $6.28 5.2% Yes YesIP International Paper Co. 3, 6, 9, 12 Wed Nov 14, 2018 Fri Dec 14, 2018 $0.5000 � $2.00 4.4% Yes YesIVZ Invesco Ltd. 3, 6, 9, 12 Fri Nov 9, 2018 Mon Dec 3, 2018 $0.3000 $1.20 6.1% Yes YesMDT Medtronic PLC 1, 4, 7, 10 Thu Sep 27, 2018 Fri Oct 19, 2018 $0.5000 $2.00 2.1% Yes YesOXY Occidental Petroleum 1, 4, 7, 10 Fri Dec 7, 2018 Tue Jan 15, 2019 $0.7800 $3.12 4.5% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Thu Dec 6, 2018 Mon Jan 7, 2019 $0.9275 $3.71 3.1% Yes YesPII Polaris Industries Inc. 3, 6, 9, 12 Fri Nov 30, 2018 Mon Dec 17, 2018 $0.6000 $2.40 2.6% -- YesPFG Principal Financial Group 3, 6, 9, 12 Fri Nov 30, 2018 Fri Dec 28, 2018 $0.5400 � $2.16 4.7% Yes YesPG Procter & Gamble Co. 2, 5, 8, 11 Thu Oct 18, 2018 Thu Nov 15, 2018 $0.7172 $2.87 3.1% Yes YesSNA Snap-on Incorporated 3, 6, 9, 12 Mon Nov 19, 2018 Mon Dec 10, 2018 $0.9500 � $3.80 2.4% Yes YesTXN Texas Instruments 2, 5, 8, 11 Tue Oct 30, 2018 Mon Nov 19, 2018 $0.7700 � $3.08 3.2% Yes YesUNP Union Pacific Corp. 3, 6, 9, 12 Thu Nov 29, 2018 Fri Dec 28, 2018 $0.8000 $3.20 2.1% Yes YesWEC WEC Energy Group 3, 6, 9, 12 Tue Nov 13, 2018 Sat Dec 1, 2018 $0.5525 $2.21 3.0% Yes YesWSM Williams-Sonoma, Inc. 2, 5, 8, 11 Thu Oct 25, 2018 Wed Nov 21, 2018 $0.4300 $1.72 3.1% -- --

� 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 12/4/2018.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

of 2.9% one year ago and also above the five-year average yield of 2.4%. The company has increased its annual divi-dend payments for each of the last nine years, with the latest increase of 10.3% this past March.

United Technologies (UTX) was the third-worst-performing stock in November, down 1.9% for the month. In the last week of the month, United Technologies announced the comple-tion of its acquisition of Rockwell Collins as well as the company’s intention to split into three separate companies. [See page 1 for announcement of UTX’s removal from the DI portfolio.]

United Technologies will emerge separately as: United Technologies,

combining Rockwell Collins and Pratt & Whitney aerospace units; Otis, which manufactures elevators, escalators and moving walkways; and Carrier, which makes a variety of products including refrigerators and HVACs.

The announcement did not find fond sentiment from investors, as UTX ended that week down 5.6% and addition-ally reported that the Rockwell Collins acquisition will not generate as much free cash flow as expected, $750 million instead of $1.3 billion. UTX also said that the tax-free separations of Otis and Carrier will take longer than anticipated, 18 to 24 months.

Until the planned transactions are completed, UTX expects to continue

to pay a quarterly dividend of no less than $0.735 cents per share.

Eastman Chemical Co.’s (EMN) 0.6% gain during November accounted for the fourth-weakest performance within the DI holdings for the month. Eastman re-ported third-quarter results on October 25. EBIT totaled $517 million, up from $464 million over the same period a year ago. Adjusted earnings per share of $2.34 surpassed the I/B/E/S consensus estimate $2.291 by 2.1%. Sales revenue totaled $2.5 billion, up 3.3% compared to the third quarter of 2017.

Eastman is trading with a current yield of 2.9%, well above its five-year average of 2.1%. ▪

December 2018 7


Est Consec- PayoutEPS Div First utive Ratio:

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

Ticker (TTM) Current Ago Avg High Low (3-5 Yr) (5 Yr) Paid Raised Month Avg Month) AssetsAMGN 16.3 2.7% 2.6% 2.2% 2.6% 1.9% 4.7% 26.1% 2011 7 136% 61% 32% 79%BLK 14.8 3.1% 2.9% 2.5% 3.0% 2.1% 11.1% 10.8% 2003 9 32% 40% 50% 82%CMA 11.7 3.1% 1.1% 1.6% 2.1% 1.3% 20.1% 15.3% 1936 7 30% 26% 27% 89%CBRL 19.6 2.8% 2.9% 3.2% 4.0% 2.7% 0.4% 20.4% 1982 16 47% 54% 60% 62%CMI 11.0 3.1% 2.4% 2.6% 3.3% 2.1% 12.2% 18.5% 1948 9 55% 45% 33% 62%CVS 50.5 2.5% 2.7% 1.8% 2.1% 1.5% 11.8% 25.2% 1916 0 66% 29% 48% 72%EMN 9.3 2.9% 2.1% 2.1% 2.5% 1.9% 10.2% 14.4% 1994 8 20% 25% 36% 64%ETN 15.8 3.5% 5.3% 3.2% 3.9% 2.8% 10.6% 9.6% 1923 9 52% 47% 52% 47%HD 18.6 2.4% 1.8% 2.1% 2.6% 1.9% 14.2% 25.1% 1987 9 43% 43% 45% 97%HBAN 12.0 4.1% 2.1% 2.3% 2.8% 2.0% 19.3% 14.9% 1971 8 31% 30% 24% 90%IBM 9.9 5.2% 3.8% 3.0% 3.5% 2.6% na 12.3% 1915 23 98% 47% 34% 84%IP 12.0 4.4% 3.2% 3.3% 4.0% 2.9% 12.8% 11.4% 1946 7 na 68% 0% 79%IVZ 7.7 6.1% 3.1% 3.1% 3.7% 2.7% 5.6% 12.4% 1994 14 41% 45% 62% 72%MDT 27.9 2.1% 2.2% 2.2% 2.6% 1.9% 8.6% 12.1% 1977 41 na 57% 0% 44%OXY 13.7 4.5% 4.1% 3.9% 4.5% 3.4% 74.1% 7.2% 1975 16 61% na 40% 52%PEP 20.3 3.1% 2.6% 2.9% 3.3% 2.6% 7.0% 8.3% 1952 46 99% 69% 88% 86%PII 17.9 2.6% 1.8% 1.9% 2.5% 1.5% na 9.4% 1995 23 54% 48% 67% 78%PFG 8.6 4.7% 2.6% 2.9% 3.6% 2.4% 7.5% 19.1% 2002 10 27% 33% 14% 96%PG 23.0 3.1% 3.0% 3.2% 3.6% 2.9% 6.5% 4.0% 1890 62 72% 71% 63% 56%SNA 13.9 2.4% 1.6% 1.6% 1.9% 1.4% na 16.1% 1939 9 29% 27% 28% 41%TXN 20.6 3.2% 1.9% 2.6% 3.2% 2.2% 13.1% 24.1% 1962 16 52% 51% 40% 43%UNP 20.1 2.1% 1.8% 2.1% 2.6% 1.7% 18.3% 15.1% 1899 8 18% 32% 41% 65%WEC 21.5 3.0% 3.1% 3.2% 3.7% 2.8% 4.7% 11.6% 1939 15 53% 60% 343% 70%WSM 14.4 3.1% 2.9% 2.4% 2.9% 2.0% 7.7% 11.8% 2006 9 50% 43% 35% 59%Data as of 12/4/2018.

Payout Ratio:Dividend Yield EPS

5 Yr Avg

Dividend Analysis

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

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

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

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

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

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

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

Dividend Yield—1 Year Ago: The stock’s

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

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

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

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

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

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

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

Months Dividends Paid: The calendar months the company has typically paid dividends to shareholders (1 = January, 2 = February, 3 =

March, etc.).Payment Amount: The dollar amount of the

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

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

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

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

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

Definitions of Terms Used in Tables

8 December 2018

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 (22% of third-quarter 2018 revenue); Neulasta, which helps to reduce the chance of infection due to a low white blood cell count in people with certain types of cancer who receive chemotherapy (18%); Aranesp, which treats anemia caused by specific disorders (8%); Prolia, which treats postmenopausal women with osteoporosis at high risk for fracture (9%); Sensipar/Mimpara, which treats secondary hyperparathyroidism in adult patients with chronic kidney disease (CKD) who are on dialysis (7%); XGEVA, which aides in the prevention of skeletal-related events in patients with bone metastases from solid tumors (7%); and Epogen, which treats anemia caused by chronic kidney disease in patients on dialysis (4%).

Why Own AMGN?Amgen is a 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 companies that strategically fit its portfolio.

In 2014, Amgen announced its intention to undergo a “transformation” through process improvement initiatives in order to have a more agile and efficient operating model. Compared to some other biotechnology companies, Amgen is well-diversified in terms of its available products and their respective percentage of revenue.

The company’s “growth brands” are Prolia, Repatha, Kyprolis and XGEVA, all of which delivered solid unit volume growth in the third quarter of 2018. While Amgen is facing headwinds due to biosimilars, the company is also in the process of developing its own biosimilars.

The company recently announced third-quarter 2018 adjusted earnings of $3.69 per share, 6.9% above the I/B/E/S consensus estimate. While some new/growth products did well in the quarter, the strong unit demand growth for the company’s new products was offset by declines in Amgen’s

mature brands. Amgen’s worldwide revenue was up 2% year over year. Adjusted earnings grew 13% year over year. The company slightly increased earnings and revenue expecta-tions for the full year.

Amgen is trading with a trailing price-earnings ratio of 16.3, below the five-year average of 16.8, and also below the 20.9 price-earnings ratio for the pharmaceuticals industry. The 2018 forward price-earnings ratio is only 13.9, while the 2019 forward price-earnings ratio is just 13.6.

Dividend AnalysisAmgen shares currently yield 2.7%, based on an indicated

dividend of $5.28 per share, above the five-year average yield of 2.2%. Amgen has been paying a dividend since 2011 and has increased its annual dividend in each of the last seven years. In December 2017, the company announced a 14.8% increase in its quarterly dividend. Over the last five years, the dividend has increased at an annualized rate of 26.1%.

Amgen’s current earnings payout ratio is high, at 135.6%, but its free-cash-flow payout ratio is low, at 31.5%.

Amgen’s strong operating and free cash flows should allow it to continue returning capital to investors. Amgen generated free cash flow of $11.1 billion over the last four quarters and has seen a positive trend in operating cash flow and free cash flow per share over the last five years.

In the third quarter of 2018, Amgen returned $1.7 billion to shareholders through stock repurchases and $0.9 billion in dividends paid. Amgen ended the quarter with $29.9 billion in cash on its balance sheet. Long-term debt was reduced to $29.3 billion. Times interest earned is very strong at 8.0 over the last four quarters.

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.

Should products in the pipeline not materialize, the compa-ny’s revenue may decline. As patents expire on current drug products, 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.

Amgen’s two largest products as a large percentage of rev-enue (Enbrel and Neulasta) have seen declining demand and subsequently declining sales. Sales growth has declined as the company works on launching new products to mitigate the loss of revenue from legacy products. This is demonstrated by Amgen’s third-quarter revenue results: All the company’s newer products delivered double-digit growth year over year, but total portfolio revenue grew a mere 1%. ▪

Amgen, Inc. (AMgN)

Bullish Factors• Dividend yield is above historical average high, and

price-earnings ratio is below the industry average• Many products in pipeline• Strong dividend growth

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

December 2018 9


AMgN $197.76 ($210.19 - $163.31)

Addition Alert Date: 10/27/2017Price at Alert: $175.28 Risk Index: 2.22Market Cap (Million): $129,310.9Avg Daily Dollar Volume (Million): $611.1Primary Sector: HealthcarePrimary Industry: Pharmaceuticals

Indicated Annual Dividend: $5.28 Multiples Current 12/2017 12/2016 12/2015 12/2014 12/2013Latest Dividend Increase: Date Dividend Yield (%): Avg 2.7% 2.7 2.6 2.0 1.7 1.9Latest Dividend Increase: % 14.8% Dividend Yield (%): High 3.1 3.0 2.4 2.3 2.3Dividend Yield: Current 2.7% Dividend Yield (%): Low 2.4 2.3 1.7 1.4 1.6Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 16.3 15.4 15.2 17.2 21.0 15.2Dividend Paid Since: 2011 Price/Earnings (Industry) 20.9 22.5 25.0 28.2 26.4 20.3Number of Years of Div Increases: 7 Price/Book Value 8.9 4.9 3.9 4.2 4.1 3.4Direct Invest Option: No Price/Sales 5.5 5.4 5.1 5.5 5.3 4.1DRIP Plan: Yes Ratios Current 12/2017 12/2016 12/2015 12/2014 12/2013Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 135.6 169.9 38.7 34.5 35.9 27.9

$1.3200 Payout Ratio: FCFPS (%) 31.5 32.0 31.4 26.4 24.5 25.3$1.3200 Gross Margin (%) 82.6 82.2 81.9 80.5 78.0 82.1$1.3200 Operating Margin (%) 43.4 43.6 42.6 39.1 30.9 31.4$1.3200 Operating Margin (%) (Ind) (5.0) (3.4) (3.0) 3.8 1.0 3.0$1.1500 Net Margin (%) 9.4 8.7 33.6 32.0 25.7 27.2$1.1500 ROE (%) 12.6 7.2 26.6 25.8 21.5 24.7

Rel Strgth ROE (%) (Industry) (9.1) (3.0) (0.6) 4.7 8.0 11.6Rank ROA (%) 3.1 2.5 10.4 9.9 7.6 8.4

4 Week 82% Current Ratio 3.1 5.5 4.1 4.4 5.0 3.413 Week 76% Liabilities to Assets (%) 78.7 68.4 61.5 60.7 62.6 66.626 Week 82% Liab to Assets (%) (Ind) 44.1 42.9 49.2 43.6 46.3 48.152 Week 75% Asset Turnover 0.3 0.3 0.3 0.3 0.3 0.3

Financial Statements TTM 12/2017 12/2016 12/2015 12/2014 12/2013Growth 5 Year Sales ($M) 23,319 22,849 22,991 21,662 20,063 18,676Dividends 26.1% Gross Income ($M) 19,255 18,780 18,829 17,435 15,641 15,330Sales 5.8% Depreciation & Amort. ($M) 1,905 1,955 2,105 2,108 2,092 1,286Net Income (14.6%) Unusual/Extra ($M) -- 367 105 171 377 298EPS Basic (13.5%) Operating Income ($M) 10,126 9,973 9,794 8,470 6,191 5,867EPS Dil Cont 14.4% Interest Expense ($M) 1,372 1,304 1,260 1,079 1,061 1,022

Pretax Income ($M) 9,574 9,597 9,163 7,978 5,585 5,265SUE Score Net Income ($M) 2,202 1,979 7,722 6,939 5,158 5,081

1.70 Operating Cash Flow ($M) 11,114 11,177 10,354 9,731 8,555 6,2912.30 Investing Cash Flow ($M) 18,898 (4,024) (8,658) (5,547) (5,752) (8,469)

Annual Financing Cash Flow ($M) (21,056) (6,594) (2,599) (3,771) (2,877) 2,72612/2019 Capital Expenditures ($M) 666 664 837 649 1,003 693

20 Net Cash Flow ($M) 8,956 559 (903) 413 (74) 548$14.52 EPS Basic ($) 3.77 2.71 10.32 9.15 6.80 6.75$14.43 EPS Diluted Cont ($) 12.13 10.99 10.24 9.06 6.70 6.64

# Rev Up 3 EPS DC Year/Year Chg (%) 9.5 7.3 13.0 35.2 0.9 18.5 # Rev Down 1 Dividends/Share ($) 5.11 4.60 4.00 3.16 2.44 1.88Three Mos. Ago $14.52 Dividend Year/Year Chg (%) 14.8 15.0 26.6 29.5 29.8 30.6Year/Year Chg 2.0% Free Cash Flow/Share ($) 16.20 14.38 12.72 11.98 9.95 7.43

9/2018 6/2018 3/2018 12/2017 Total Cash ($M) 29,921 41,678 38,085 31,382 27,026 19,401$2.86 $3.48 $3.25 $2.53 $12.13 Goodwill/Intangibles ($M) 22,466 23,370 25,030 26,428 27,481 28,230$2.76 $2.92 $2.80 $2.61 $11.08 Total Assets ($M) 67,333 79,954 77,626 71,449 69,009 66,125

Long-Term Debt ($M) 29,350 34,190 30,193 29,182 30,215 29,6239/2018 6/2018 3/2018 12/2017 Total Total Liabilities ($M) 52,984 54,713 47,751 43,366 43,231 44,029$9.15 $9.24 $7.86 $8.00 $34.25 Book Value/Share ($) 22.25 34.53 39.94 37.05 33.96 29.34$7.93 $7.92 $7.41 $8.10 $31.36 Avg Shares Outst'g (M) 645.00 731.00 748.00 758.00 759.00 753.00

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 12/4/2018.

Nov 16, 2017

(73.1%)

2.2% (2.6% - 1.9%)

14.8%3 Year

Dec 7, 2018Sep 7, 2018Jun 8, 2018

1.05

1.08

1.071.10

TTM

Gain

Nov 15, 2018

Index

Amgen Inc. is a biotechnology company that discovers, develops, manufactures and delivers various human therapeutics. Amgen's products portfolio includes Neulasta; erythropoiesis-stimulating agents (ESAs), such as Aranesp and Epogen; Sensipar/Mimpara; XGEVA; Prolia; Neupogen. Other products include Kyprolis, Vectibix, Nplate, Repatha, Blincyto, Imlygic and Corlanor. The company focuses on human therapeutics for the treatment of serious illness in the areas of oncology/hematology, cardiovascular disease and neuroscience.

Dec 12, 2017

Oct 30, 2018

Oct 23, 2018Jul 31, 2018Mar 7, 2018 May 16, 2018

Aug 16, 2018

Oct 24, 2017

23.5%

Feb 14, 2018

4%0%8%

11%

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Quarterly

# of EstimatesCurrent

Jul 28, 2017 Aug 15, 2017Stock

12/2018

EPS$3.69$3.83

1.3%

Est Surprise

Jul 26, 2018

9.5%

EPS Estimates

4.4%(27.3%)(26.4%)

$14.24

29.6%EPS (Qtr)

$3.27

18

$14.19$3.28

29.4%

21

$3.28

Month Ago

(66.2%)

Dec 12, 2017

1$13.98

3

Annual

2012/2018

% Surp6.9%8.1%

17.9%

Mar 8, 2018

Rel Strgth

Dec 8, 2017Sep 8, 2017

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$50

$100

$150

$200

$250

Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018

Div

iden

d Yi

eld Share Price

10 December 2018

Founded 169 years ago, Comerica Inc. (CMA) is one of the 25 largest commercial financial holding companies in the U.S. As of the third quarter of 2018, Comerica’s deposits totaled $56.1 billion and its loans totaled $48.6 billion. The company primarily operates in California (30% of deposits and 37% of loans), Michigan (37% of deposits and 26% of loans) and Texas (16% of deposits and 20% of loans). It also operates in Arizona and Florida while providing some services in other states as well as in Mexico and Canada.

Comerica divides its operations into three major segments. The Business Bank accounts for 54% of deposits and nearly 86% of loans. This segment serves small businesses, middle market businesses, multinational corporations and govern-mental entities. The Retail Bank provides personal banking services. It accounts for 42% of deposits and 12% 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 52% of total deposits. None of its self-described regional peers have such high exposure to these types of accounts.

The majority of Comerica’s loans are floating rate. Approximately 65% are tied to the 30-day LIBOR (London Interbank Offered Rate) and an additional 10% are tied to 60-day or longer LIBOR rates. Just 10% of all loans are fixed rate, meaning the interest rate does not change.

Why Own CMA?The company’s significant exposure to noninterest deposit

accounts and variable rate loans should help it to continue benefiting from a rising rate environment. As interest rates rise, the interest charged on loans resets while the nonin-terest savings accounts incur no direct offsetting change. Comerica estimates that the combination of the six rate hikes

announced by the Federal Reserve last year and so far this year have boosted net interest income by a cumulative $285 million. Net interest income margin was 3.60% in the third quarter, up from 3.28% in the same quarter a year prior.

Comerica is financially sound. Its Tier 1 capital ratio was 11.66% last quarter, well above the minimum established by the Basel III regulations. Allowances for credit losses are de-clining, accounting for 1.35% of total loans last quarter versus 1.45% in the third quarter of 2017. The company’s return on equity (ROE) of 13.0% is well above the banks industry aver-age of 8.6%.

Earnings per share have grown at 12.1% annualized rate over the past five years, despite declining in 2015 (higher reserves for energy-related loan losses) and 2016 (expenses associated with a cost-savings initiative). Analysts currently ex-pect Comerica to earn $7.17 per share this year, versus $4.75 last year. Earnings should rise to $8.02 per share in 2019.

The stock’s price-earnings ratio is 11.7. This ranks near the cheapest 25% of all stocks. It is also below the banks industry median of 14.0.

Dividend AnalysisShares of Comerica yield 3.1%. This is well above the stock’s

five-year average of 1.6% and its five-year high-low range of 2.1% to 1.3%.

The company has increased its dividend every year since 2012. This year, the company raised its dividend twice. First, it announced a 13.3% increase in April. Then in July, Comerica announced a new capital plan after it became no longer subject to stress testing nor required to have its capital plans reviewed by the Federal Reserve. The new capital plan raised the dividend by an additional 76.5% to $0.60 per share. It also allocated $500 million for additional share repurchases. The company intends to buy back $500 million worth of shares this quarter through an accelerated share repurchase program.

The earnings payout ratio is 30.3%. This within the com-pany’s five-year range and leaves plenty of room to raise the dividend further.

RisksThe heavy reliance on variable rate loans and noninterest

deposit accounts is a double-edged sword. Though the com-pany benefits from rising interest rate environments, when rates fall loans reset at lower interest rates while the costs on deposit accounts stay unchanged.

Comerica lacks geographic diversity. Weakness in any of its three key markets will negatively impact earnings. An ex-ample occurred in 2015, when higher bad debt reserves were recorded to reflect anticipated energy-related losses in Texas.

The dividend was cut twice during last decade’s financial cri-sis. 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• Focused more on business than individual consumers,

which allows it to have more noninterest deposit accounts and adjustable rate loans

• Inexpensively valued, with a price-earnings ratio of 11.7 and a dividend yield of 3.1%

• Has raised its dividend twice this year, including a 76.5% hike announced in July

Bearish Factors• Dependency on adjustable rate loans will hurt margins

in a falling interest rate environment• Geographically concentrated, with a majority of business

coming from California, Michigan and Texas• The dividend was cut twice during the financial crisis

and was not consistently raised again until 2012

December 2018 11


Addition Alert Date: 12/7/2018Price at Alert: NA Risk Index: 2.9Market Cap (Million): $12,900.3Avg Daily Dollar Volume (Million): $156.3Primary Sector: FinancialsPrimary Industry: Banks

Indicated Annual Dividend: $2.40 Multiples Current 12/2017 12/2016 12/2015 12/2014 12/2013Latest Dividend Increase: Date Dividend Yield (%): Avg 3.1 1.3 1.7 1.8 1.6 1.7Latest Dividend Increase: % 76.5% Dividend Yield (%): High 1.6 2.9 2.1 1.8 2.1Dividend Yield: Current 3.1% Dividend Yield (%): Low 1.2 1.2 1.5 1.4 1.4Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 11.7 16.0 18.9 16.3 15.2 13.9Dividend Paid Since: 1936 Price/Earnings (Industry) 14.0 17.2 15.7 14.6 15.0 14.2Number of Years of Div Increases: 7 Price/Book Value 1.6 1.7 1.1 1.1 1.2 1.0Direct Invest Option: Yes Price/Sales 5.1 6.1 4.6 4.6 4.9 4.1DRIP Plan: Yes Ratios Current 12/2017 12/2016 12/2015 12/2014 12/2013Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 30.3 24.0 31.6 28.0 23.2 22.7

$0.600 Payout Ratio: FCFPS (%) 27.4 16.5 35.7 18.4 22.3 15.0$0.600 Gross Margin (%) -- -- -- -- -- --$0.340 Operating Margin (%) 91.6 91.1 81.1 86.4 93.0 91.1$0.300 Operating Margin (%) (Ind) 79.8 81.8 83.1 84.4 83.9 80.4$0.300 Net Margin (%) 41.4 33.8 24.8 28.9 33.5 29.9$0.300 ROE (%) 13.0 9.4 6.2 6.9 8.1 7.6

Rel Strgth ROE (%) (Industry) 8.6 7.6 8.4 8.2 8.1 8.1Rank ROA (%) 1.4 1.0 0.7 0.7 0.9 0.8

4 Week 34% Current Ratio -- -- -- -- -- --13 Week 30% Liabilities to Assets (%) 89.1 88.9 89.3 89.5 89.3 89.026 Week 37% Liab to Assets (%) (Ind) 89.1 89.4 89.7 89.6 89.4 89.652 Week 50% Asset Turnover 0.0 0.0 0.0 0.0 0.0 0.0

Financial Statements TTM 12/2017 12/2016 12/2015 12/2014 12/2013Growth 5 Year Sales ($M) 2,493 2,182 1,909 1,784 1,750 1,784Dividends 15.3% Gross Income ($M) -- -- -- -- -- --Sales 3.2% Depreciation ($M) 0 0 0 0 0 0Net Income 7.5% Unusual/Extra ($M) 0 0 0 0 0 0EPS Basic 9.5% Operating Income ($M) 2,283 1,987 1,549 1,542 1,628 1,626EPS Dil Cont 12.1% Interest Expense ($M) 210 121 112 95 95 112

Pretax Income ($M) 1,465 1,234 670 750 870 786SUE Score Net Income ($M) 1,031 738 473 515 586 533

2.60 Operating Cash Flow ($M) 1,212 1,103 502 862 639 8364.10 Investing Cash Flow ($M) 75 (138) (270) (3,255) (3,743) 1,174

Annual Financing Cash Flow ($M) (1,660) (2,338) 839 2,469 2,724 (93)12/2019 Capital Expenditures ($M) 91 69 95 119 70 102

28 Net Cash Flow ($M) (365) (1,373) 1,071 76 (380) 1,917$8.02 EPS Basic ($) 6.06 4.24 2.75 2.93 3.27 2.91$8.01 EPS Diluted Cont ($) 6.52 4.75 2.67 2.85 3.17 2.85

# Rev Up 3 EPS DC Year/Year Chg (%) 47.8 77.7 (6.1) (10.2) 11.2 6.3 # Rev Down 2 Dividends/Share ($) 1.84 1.02 0.87 0.82 0.76 0.66Three Mos. Ago $7.92 Dividend Year/Year Chg (%) 93.7 17.2 6.1 7.9 15.2 32.0Year/Year Chg 11.9% Free Cash Flow/Share ($) 6.71 6.19 2.44 4.45 3.41 4.40

9/2018 6/2018 3/2018 12/2017 Total Cash ($M) 5,975 5,941 7,310 6,260 6,170 6,563$1.83 $1.86 $1.58 $1.25 $6.52 Goodwill/Intangibles ($M) 0 641 643 645 648 651$1.27 $1.13 $1.11 $0.91 $4.41 Total Assets ($M) 71,448 71,567 72,978 71,877 69,186 65,224

Long-Term Debt ($M) 6,418 4,622 5,160 3,058 2,675 3,5439/2018 6/2018 3/2018 12/2017 Total Total Liabilities ($M) 63,662 63,604 65,182 64,317 61,784 58,074$4.04 $3.80 $3.43 $3.38 $14.65 Book Value/Share ($) 46.62 45.76 45.33 42.95 41.35 39.07$3.33 $0.66 $2.83 $2.86 $9.69 Avg Shares Outst'g (M) 167.00 167.00 167.00 167.00 167.00 167.00


51.0%

23

32

$1.85

4

$7.062

Annual12/2018

$1.85 $7.16$1.85 $7.17

Year Ago

TTM

TTMSales/Sh (Qtr)

Quarterly

EPS (Qtr)

Year Ago

CurrentMonth Ago

12/201826

48.0%

$1.87

Est Surprise

EPS Estimates# of Estimates

Jul 17, 2018Oct 16, 2018

% Surp5.6%

14.0%

Index

Dec 14, 2017

47.8%

10.3%7.6%8.0%9.0%

14.4%

93.7%19.4%

TTM

Gain

30.7%33.3%

EPS$1.86

Nov 7, 2017Jul 25, 2017 Sep 13, 2017

(9%)(22%)(22%)(10%)

Stock

1.6% (2.1% - 1.3%)

0.83

Comerica Inc. is among the 25 largest commercial U.S. financial holding companies, with $71.2 billion in assets as of September 30, 2018. 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 the Business Bank, the Retail Bank and Wealth Management. Noninterest deposits—deposit accounts that don’t earn interest—account for 52% of total deposits, while 65% of loans are tied to interest rates that reset on a 30-day basis.

Jan 23, 2018

Nov 6, 2018Jul 24, 2018Apr 24, 2018 Jun 14, 2018

Sep 13, 2018Dec 13, 2018

Jan 1, 2018Oct 1, 2017

Jul 24, 2018

Mar 14, 2018

0.88

3 Year

Jan 1, 2019Oct 1, 2018Jul 1, 2018

0.93

Apr 1, 2018

Rel Strgth

0.80

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018$0

$20

$40

$60

$80

$100

$120

Div

iden

d Yi

eld Share Price

CMA $76.40 ($102.66 - $75.97)

12 December 2018

CVS Health is one of the largest drug store chains and pharmacy benefit managers (PBMs) in the U.S., based on revenues, net income and store count. The company operates more than 9,800 retail locations and over 1,100 walk-in medical clinics and has 93 million PBM plan members.

The company’s drugstores offer prescription drugs and an assortment of general merchandise, including over-the-coun-ter drugs, beauty products and cosmetics, film and photo-finishing services, seasonal merchandise, greeting cards and convenience foods. CVS’ pharmacy services segment provides a range of PBM services, including the operation of mail-order pharmacies and specialty pharmacies, Medicare Part D ser-vices, formulary management and discounted drug purchase agreements. CVS is also the largest operator of retail health clinics in the U.S. under the MinuteClinic name.

On November 28, CVS announced that it had completed its acquisition of health insurer Aetna Inc. (AET). The total value of the transaction was $78 billion, including the assumption of Aetna’s debt. CVS funded the cash portion of the acquisition through existing cash on hand and debt financing. In March 2018, CVS issued an aggregate of $40 billion of unsecured senior notes with maturities ranging from two to 30 years.

Why Own CVS?As a result of the Aetna acquisition, CVS expects enhanced

competitive positioning to deliver more than $750 million in synergies in 2020 and a platform from which to acceler-ate growth. The combined company is expected to generate annual revenue of over $220 billion. The transaction provides CVS with a greater ability to incentivize Aetna’s more than 20 million plan participants to utilize CVS’ Caremark mail order system or CVS retail stores. This deal also locks in Aetna’s busi-ness, which accounts for about 12% of CVS’ revenues.

The company’s substantial scale includes a nearly 24% mar-ket share in the retail pharmacy prescription market in 2017, more than 30% of the PBM prescription market, nearly 20% of the specialty pharmacy market and more than 20% of the

long-term care (LTC) prescription market. The company also estimates that roughly 75% of the U.S. population lives within five miles of a CVS pharmacy location.

The current price-earnings ratio is 50.5 times trailing GAAP earnings per share of $1.56. However, based on the consensus adjusted earnings estimate of $7.62 for the fiscal year ending December 31, 2019, the forward price-earnings ratio is 10.4 and is 9.4 times fiscal-2020 projected adjusted earnings. These forward ratios are attractive relative to the industry, which has averaged 21.6 over the last five years, and relative to the company’s five-year average price-earnings ratio of 18.2.

Over the last five years, fully diluted earnings from continu-ing operations have grown, on average, by 10.6% per year, while sales have risen an average of 8.5% over the same period. One analyst polled by I/B/E/S is forecasting earnings growth of 11.8% per year for the next three to five years. On November 6, the company reported quarterly adjusted earn-ings of $1.73 per share, which beat the consensus estimate of $1.713 by 1.0%. This also represented 15.3% growth in earn-ings year over year.

Dividend AnalysisCVS shares currently yield 2.5%, based on an indicated

annual dividend of $2.00 per share. This yield is above the five-year average of 1.8% as well as the five-year average high yield of 2.1%. CVS has been paying a dividend since 1916.

CVS has taken on an additional $45 billion in debt and issued roughly 280 million shares to fund its Aetna acquisi-tion and has publicly announced that it plans to halt dividend increases and cease share repurchases until its leverage ratio comes down to 3x. Given CVS’ attractive yield relative to the market, industry norms and historical levels, CVS continues to be held in the DI portfolio.

RisksThe risk of a poorly executed merger integration with Aetna

is material. Both firms have highly complex operations that control significant portions of their respective market seg-ments. Some analysts believe CVS overpaid for Aetna, which places a great deal of pressure on CVS management.

There has been heightened scrutiny on the role PBMs play in the pricing of drugs in recent years. There has been a concerted push to create more pricing transparency and the government could enact price caps. If PBM acquisition costs increase as a result, this will pressure CVS’ margins and returns.

The significant increase in debt to help fund the Aetna acquisition puts a strain on the company’s balance sheet. In addition, the new equity that CVS will use simultaneously dilutes continuing shareholders.

Margins have been contracting in the wake of the com-pany’s shift in business mix due to the inclusion of Omnicare, the company’s ending sales of wider-margin tobacco products and the loss of the associated non-pharmacy products often purchased on the same shopping trip. ▪

CvS Health (CvS)

Bullish Factors • Large scale allows the company to generate some of the

highest margins per adjusted claim in the industry• Demographic shifts should lead to strong

pharmaceutical spending in the coming years• PBMs should benefit from the increase in specialty drug

spending as payers look to control costs

Bearish Factors• Dividend increases and share buybacks suspended to

lower debt taken on for Aetna acquisition• Consolidation among drug suppliers could erode CVS’

pricing power• Significant integration risks associated with Aetna

acquisition

December 2018 13


Addition Alert Date: 4/7/2017Price at Alert: $77.08 Risk Index: 2.60Market Cap (Million): $81,014.9Avg Daily Dollar Volume (Million): $684.9Primary Sector: HealthcarePrimary Industry: Healthcare Facilities & Services

Indicated Annual Dividend: $2.00 Multiples Current 12/2017 12/2016 12/2015 12/2014 12/2013Latest Dividend Increase: (Date) Dividend Yield (%): Avg 2.5 2.6 1.9 1.4 1.3 1.5Latest Dividend Increase: (%) 17.6% Dividend Yield (%): High 3.0 2.5 1.7 1.7 1.8Dividend Yield: Current 2.5% Dividend Yield (%): Low 2.4 1.6 1.2 1.1 1.3Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 50.5 15.1 17.9 21.0 20.6 16.1Dividend Paid Since: 1916 Price/Earnings (Industry) 22.2 21.4 19.0 21.8 22.5 19.2Number of Years of Div Increases: 0 Price/Book Value 2.2 2.1 2.6 2.9 2.5 1.9Direct Invest Option: Yes Price/Sales 0.4 0.4 0.5 0.7 0.7 0.6DRIP Plan: Yes Ratios Current 12/2017 12/2016 12/2015 12/2014 12/2013Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 65.5 30.9 34.5 29.9 27.5 23.9

$0.5000 Payout Ratio: FCFPS (%) 47.5 33.5 23.0 25.9 21.3 28.8$0.5000 Gross Margin (%) 15.6 15.4 16.3 17.3 18.2 18.8$0.5000 Operating Margin (%) 3.1 5.2 5.5 6.2 5.9 6.3$0.5000 Operating Margin (%) (Ind) 5.4 5.1 4.4 6.2 6.1 6.4$0.5000 Net Margin (%) 1.6 3.6 3.0 3.4 3.3 3.6$0.5000 ROE (%) 8.3 17.7 14.3 13.9 12.2 12.1

Rel Strgth ROE (%) (Industry) 9.8 11.2 11.3 10.6 12.0 9.3Rank ROA (%) 2.5 7.0 5.7 6.3 6.4 6.7


Financial Statements TTM 12/2017 12/2016 12/2015 12/2014 12/2013Growth 5 Year Sales ($M) 188,055 184,765 177,526 153,290 139,367 126,761

Dividends 25.2% Gross Income ($M) 29,292 28,545 28,857 26,528 25,367 23,783Sales 8.5% Depreciation & Amort. ($M) 2,533 2,479 2,475 2,092 1,931 1,870Net Income 11.3% Unusual/Extra ($M) -- 0 643 0 521 0EPS Basic 16.3% Operating Income ($M) 5,820 9,517 9,695 9,454 8,278 8,037EPS Dil Cont 10.6% Interest Expense ($M) 2,189 1,062 1,078 859 615 517


0.80 Operating Cash Flow ($M) 6,250 8,007 10,141 8,412 8,137 5,7833.80 Investing Cash Flow ($M) (2,751) (2,932) (2,470) (13,420) (4,045) (1,835)

Annual Financing Cash Flow ($M) 35,597 (6,751) (6,761) 5,006 (5,694) (1,237)12/2019 Capital Expenditures ($M) 1,958 1,918 2,224 2,367 2,136 1,984

12 Net Cash Flow ($M) 39,097 (1,675) 912 (22) (1,608) 2,714$7.62 EPS Basic ($) 3.05 6.48 4.93 4.68 4.00 3.77$7.41 EPS Diluted Cont ($) 1.56 4.99 4.91 4.64 3.97 3.75

# Rev Up 4 EPS DC Year/Year Chg (%) (67.7) 1.8 5.6 16.9 5.9 24.1 # Rev Down 1 Dividends/Share ($) 2.00 2.00 1.70 1.40 1.10 0.90Three Mos. Ago $7.35 Dividend Year/Year Chg (%) 3.9 17.6 21.4 27.3 22.2 38.5Year/Year Chg 9.6% Free Cash Flow/Share ($) 4.21 5.97 7.38 5.41 5.17 3.12

9/2018 6/2018 3/2018 12/2017 Total Cash ($M) 41,692 1,807 3,458 2,547 2,515 4,177$1.36 ($2.52) $0.98 $1.74 $1.56 Goodwill/Intangibles ($M) 47,382 52,081 51,760 65,862 47,690 36,071$1.26 $0.14 $0.93 $1.59 $3.91 Total Assets ($M) 131,506 95,131 94,462 92,437 74,187 71,526

Long-Term Debt ($M) 60,747 22,181 25,615 26,267 11,630 12,8419/2018 6/2018 3/2018 12/2017 Total Total Liabilities ($M) 94,888 57,440 57,632 55,241 36,229 33,588

$46.34 $45.88 $44.97 $47.72 $184.91 Book Value/Share ($) 35.90 36.95 34.32 33.27 32.69 31.17$45.45 $1.15 $43.22 $43.21 $133.03 Avg Shares Outst'g (M) 1,020 1,020 1,073 1,118 1,161 1,217


1.8% (2.1% - 1.5%)

Nov 1, 2018Aug 1, 2018May 3, 2018

Est Surprise

Aug 3, 2017Oct 23, 2017Sep 19, 2017

21%

CVS Health, together with its subsidiaries, is an integrated pharmacy health care company. It operates through three segments: pharmacy services, retail/LTC and corporate. The pharmacy services segment provides a range of pharmacy benefit management (PBM) solutions to its clients. The retail/LTC segment includes over 9,700 retail locations (of which nearly 8,000 were its stores that operated a pharmacy and almost 1,700 were its pharmacies located within Target stores); its online retail pharmacy websites, CVS.com, Navarro.com and Onofre.com.br; 38 onsite pharmacy stores; its long-term care pharmacy operations; and its retail health care clinics.

Dec 29, 2017 Jan 23, 2018

Rel StrgthJul 6, 2017 Jul 20, 2017

Oct 4, 2018Jul 11, 2018Mar 14, 2018 Apr 20, 2018

Jul 24, 2018Oct 23, 2018

Nov 3, 2017

Aug 8, 2018

% Surp

Gain

22.1%9.9%

TTM3.9%3.1%

(37.2%)

Index

$1.73$1.69

Nov 6, 2018

7.9%17.4%

1.07

12/2018Quarterly

Stock

1.131.24

1.031%5%

12/2018

3 Year

10%

(38.4%)

(67.7%)

EPS

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Current

EPS (Qtr)

4$7.04

16.9%

35

$2.17

4

39.2%

EPS Estimates# of Estimates

Month Ago

Dec 14, 2016

1.0%5.0%

Annual

12.5%

Feb 2, 2018

8

$7.05$2.04

8$6.95

$2.16

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$20

$40

$60

$80

$100

$120


Div

iden

d Yi

eld Share Price

CvS $78.91 ($83.88 - $60.14)

14 December 2018

Medtronic PLC (MDT)Medtronic PLC is one of the world’s leading and larg-

est medical technology companies. Founded in 1949, the company develops, manufactures and markets its medical devices and technologies to hospitals, physicians, clinicians and patients in approximately 160 countries. The company operates in four segments: cardiac and vascular group (38% of revenues; includes cardiac rhythm and heart failure, coronary and structural heart and aortic and peripheral vascular), mini-mally invasive technologies group (27% of revenues; includes surgical solutions, patient monitoring and recovery & renal care solutions), restorative therapies group (27% of revenues; includes spine, brain therapies, specialty therapies & pain therapies) and diabetes group (8% of revenues; includes in-tensive insulin management, non-intensive diabetes therapies and diabetes services and solutions). Medtronic merged with Covidien plc in 2015, shifting its headquarters to Ireland.

Roughly 46% of the company’s revenues come from outside the U.S., with 15% of revenue from emerging markets.

Why Own MDT?Medtronic 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.

Medtronic’s strong and consistent growth protected by dif-ficult barriers to entry from competitors coupled with 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 27.9, above its 23.5 average over the last five years. The forward price-earnings ratio is 18.8 times projected 2019 earnings for the fiscal year ending in April and 17.4 times projected 2020 earnings. These ratios are attractive relative to the industry median price-earn-ings ratio, which has averaged 31.6 over the last five years.

Earnings are expected to grow at an annual rate of 8.6% over the next three to five years. Three analysts provided long-term earnings estimates that range from a low of 8.0% to a high of 8.9%.

Non-GAAP operating margin from the last quarter is 27.9% above the 26.6% figure one year ago and well above the com-pany five-year average of 20.2% and the negative margin for most firms in the medical equipment and supplies industry. Revenues have expanded at an annual growth rate of 12.5% over the last five years. Overall, operating cash flow has been strong over the years, and the company is committed to returning cash to shareholders through its dividend and share buyback programs.

Dividend AnalysisMedtronic’s relatively strong price action has helped push

down the current yield to 2.1%, based on an indicated annual dividend of $2.00 per common share. The dividend yield is below the 2.2% average yield over the last five years, but still above the five-year average low of 1.9%. 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 12.1% annually. The company announced an 8.7% dividend increase in June 2018.

For the latest fiscal year, Medtronic is paying out 80.4% of earnings as dividends and 69.0% of free cash flow (cash from operations less capital expenditures). In recent years, the company has targeted returning 50% of free cash flow to investors.

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.

RisksAs a medical device manufacturer, Medtronic faces liti-

gation and regulatory risk. Occasional voluntary recalls of products have impacted short-term performance and hurt the reputation of the firm with doctors and patients. On June 1, 2018, Medtronic announced that the FDA classified a recent voluntary urgent field action related to the HeartWare System unexpected power source switching as a Class I recall. Class I recalls describe situations where there is reasonable risk of serious adverse health consequences or death.

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. ▪

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• Political climate uncertain in domestic health care

industry for a range of issues, such as level of insured individuals as well as reimbursement rates

• Life-sustaining products carry risks of recalls and demand precise level of testing and manufacturing

• Foreign profits subject to currency risk

December 2018 15


MDT $96.49 ($100.15 - $76.41)Addition Alert Date: 1/6/2017Price at Alert: $72.87 Risk Index: 1.76Market Cap (Million): $132,625.7Avg Daily Dollar Volume (Million): $523.5Primary Sector: HealthcarePrimary Industry: Medical Equip, Supplies & Distribution

Indicated Annual Dividend: $2.00 Multiples Current 4/2018 4/2017 4/2016 4/2015 4/2014Latest Dividend Increase: (Date) Dividend Yield (%): Avg 2.1% 2.3 2.1 2.3 1.9 2.2Latest Dividend Increase: (%) 8.7% Dividend Yield (%): High 2.7 2.4 2.7 2.3 2.7Dividend Yield: Current 2.1% Dividend Yield (%): Low 2.1 1.9 1.9 1.6 1.9Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 27.9 19.6 27.7 27.2 26.7 16.5Dividend Paid Since: 1977 Price/Earnings (Industry) 45.3 38.6 33.3 31.6 30.6 24.0Number of Years of Div Increases: 41 Price/Book Value 2.6 2.1 2.2 1.8 1.3 2.6Direct Invest Option: Yes Price/Sales 4.3 3.6 3.7 3.3 3.5 3.0DRIP Plan: Yes Ratios Current 4/2018 4/2017 4/2016 4/2015 4/2014Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 114.8 80.4 58.9 60.6 50.0 36.6

$0.5000 Payout Ratio: FCFPS (%) 53.4 69.0 42.2 51.4 30.9 24.6$0.5000 Gross Margin (%) 70.5 69.8 68.7 68.3 68.9 74.5$0.4600 Operating Margin (%) -- 22.2 17.9 18.6 19.6 22.5$0.4600 Operating Margin (%) (Ind) (1.1) (4.0) (3.2) (4.8) 0.4 (2.2)$0.4600 Net Margin (%) -- 10.4 13.6 12.3 13.2 18.0$0.4600 ROE (%) -- 6.2 7.9 6.7 7.4 16.1

Rel Strgth ROE (%) (Industry) -- 1.9 3.6 6.7 5.3 10.1Rank ROA (%) -- 3.2 4.0 3.4 3.7 8.4


Financial Statements TTM 4/2018 4/2017 4/2016 4/2015 4/2014Growth 5 Year Sales ($M) 30,378 29,953 29,710 28,833 20,261 17,005Dividends 12.1% Gross Income ($M) 21,422 20,898 20,419 19,691 13,952 12,672Sales 12.5% Depreciation & Amort. ($M) 2,647 2,644 2,917 2,820 1,306 850Net Income (2.2%) Unusual/Extra ($M) 461 (308) 983 599 791 1,005EPS Basic (7.6%) Operating Income ($M) 6,141 6,651 5,330 5,361 3,976 3,828EPS Dil Cont 3.8% Interest Expense ($M) -- 1,146 1,094 1,386 666 379


10.40 Operating Cash Flow ($M) 5,905 4,684 6,880 5,218 4,902 4,9598.30 Investing Cash Flow ($M) 497 5,858 (1,571) 2,245 (17,058) (3,594)

Annual Financing Cash Flow ($M) (7,980) (11,954) (3,283) (9,543) 15,949 (918)4/2020 Capital Expenditures ($M) 1,041 1,068 1,254 1,046 571 396

24 Net Cash Flow ($M) (1,618) (1,298) 2,091 (1,967) 3,440 484$5.54 EPS Basic ($) 1.67 2.29 2.92 2.51 2.44 3.06$5.55 EPS Diluted Cont ($) 3.45 4.06 2.90 2.48 2.41 3.02

# Rev Up 9 EPS DC Year/Year Chg (%) (5.4) 40.4 16.7 2.9 (20.2) (10.4) # Rev Down 8 Dividends/Share ($) 1.92 1.84 1.72 1.52 1.22 1.12Three Mos. Ago $5.55 Dividend Year/Year Chg (%) 7.9 7.0 13.2 24.6 8.9 7.7Year/Year Chg 8.0% Free Cash Flow/Share ($) 3.61 2.67 4.08 2.96 3.95 4.55

10/2018 7/2018 4/2018 1/2018 Total Cash ($M) 10,133 11,227 13,708 12,634 19,480 28,482$0.85 $0.75 $1.22 $0.63 $3.45 Goodwill/Intangibles ($M) 59,424 61,266 61,922 68,399 68,631 25,758$1.48 $0.74 $0.84 $0.59 $3.65 Total Assets ($M) 88,150 91,393 99,857 99,644 106,685 37,943

Long-Term Debt ($M) 23,673 23,699 25,921 30,109 33,752 10,31510/2018 7/2018 4/2018 1/2018 Total Total Liabilities ($M) 38,543 40,673 49,649 47,581 53,455 18,500

$5.54 $5.46 $6.01 $5.44 $22.46 Book Value/Share ($) 36.77 37.38 36.41 36.93 48.59 19.40$5.20 $5.43 $5.78 $5.31 $21.71 Avg Shares Outst'g (M) 1,349.20 1,356.70 1,378.90 1,409.60 1,095.50 1,002.10


Sep 28, 2017

(54.9%)

2.2% (2.6% - 1.9%)

Oct 20, 2017Jul 26, 2017

Sep 27, 2018

Index1.06

1.18

Jan 19, 2018

Rel Strgth

Apr 13, 2018

1.071.13

TTM

4%0%

11%21%

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.

Dec 8, 2017

Nov 20, 2018

Aug 24, 2018Jun 22, 2018Mar 9, 2018 Mar 22, 2018

Jul 5, 2018

Aug 28, 2017

14.7%13.9%5.1%(2.1%)

(5.4%)

7.9%3 Year

26.3%

$5.12$1.24

$1.17

$1.2615 2

$5.12

16

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

EPS (Qtr)

Jun 23, 2017 Jul 5, 2017

1/2019

EPS$1.22

96.7%

$1.26

22

Aug 21, 2018

(5.4%)

2.5%

EPS Estimates

Est Surprise

1Month Ago

Quarterly

# of EstimatesCurrent

Jun 22, 2018

Annual4/2019

% Surp

24

6.4%5.2%

$5.13

19.0%

Oct 19, 2018Jul 25, 2018

Dec 28, 2017

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$20

$40

$60

$80

$100

$120


Div

iden

d Yi

eld Share Price

16 December 2018

It’s Time to Check Your Tax Liability and Portfolio Allocation

now. In taxable accounts, short-term losses offset short-term gains first and long-term losses offset long-term gains first, but net short-term losses can be used to offset any net long-term gains, and vice versa. You can further apply up to $3,000 in net losses to ordinary income and carry forward any additional net losses to apply against future years’ income. (Obviously, the goal with Dividend Investing is to produce net capital gains.) Capital gains realized and dividends received in IRAs and similar retirement accounts are not taxable.

Brokerage firms are required to report both the cost basis of and the proceeds from the sale of stocks bought and sold after January 1, 2011. (The cost basis is also required to be re-ported for stocks purchased through a dividend reinvestment plan after January 1, 2012.) They are not required to report the cost basis for stocks purchased prior to this date.

If you sell a security for a loss, be aware of the wash-sale rules. Losses are disallowed if you buy a “substantially identi-cal stock or securities” within 30 days of the sale.

Dividend Holding PeriodsA minimum 61-day holding period is required to be eligible

for the reduced tax on qualified dividends. The window for determining this period begins 60 days before the ex-dividend date and continues for 60 days after the ex-dividend date. Within this 121-day window, you must hold the stock for 61 continuous days. When counting the number of dates, the IRS says: “include the day you disposed of the stock, but not the day you acquired it.”

Don’t Forget to Take Your RMDs If you are 70½ or older and have a traditional IRA, you must

take out your required minimum distribution (RMD) by the end of this month. If you turned 70½ in 2018, you have until April 15, 2019, to take your first RMD, with the second due by December 31, 2018. RMDs are required to be taken from Roth 401(k) plan accounts, but not Roth IRAs.

Review Allocation & Investment DecisionsIf you haven’t looked at your portfolio’s allocation in quite

some time, do so. The lengthy bull market, increase in bond yields and this year’s volatility may have caused it to veer from target. If it has, consider adjusting your allocations to re-flect your long-term portfolio strategy—which may have also changed given your age and other life cycle events.

Also, review the investment decisions you made over the past year. Did you follow a plan, such as DI portfolio alerts, or did you make buy and sell decisions based on how you felt about the market’s volatility? You should always strive to make rational investment decisions based on a long-term plan. It’s okay to be scared by volatile markets; it’s not okay to let emotions dictate your portfolio decisions. ▪

Two years ago, we wrote about December being a good time to review your portfolio. At the time, we brought up the importance of calculating tax liabilities and reviewing your overall portfolio allocation. Given that this will be the first year the Tax Cuts and Jobs Act (TCJA) is in effect (which is discussed in greater detail in our 2018 Tax Guide), we thought now is a good time to update the discussion.

The New Tax Law’s Impact on Investments Prior to the passage of the new legislation, capital gains

and dividend tax rates were tied to tax brackets. Those in the former 12% or 15% marginal tax brackets paid no taxes on long-term capital gains or qualified dividends meeting the 61-day holding period. Those in the then top 39.6% bracket paid a 20% tax. Everyone else paid a 15% levy. The TCJA broke this relationship, tying the capital gains and qualified dividend rate to specific income levels.

In 2018, married couples filing joint returns with taxable income of $77,200 or lower ($38,600 for single filers) will pay 0% on long-term capital gains and qualified dividends. The tax rate is 15% for joint filers with taxable income up to $479,000 ($425,800 for singles) and 20% above those levels. In 2019, the upper limit for the 0% rate will rise to $78,750/$39,375 for married and single filers, respectively; while the upper limit for the 15% rate will be $488,850/$434,550 for mar-ried and single filers; and 20% for those with taxable income above those levels.

The TCJA also reduced the marginal tax rates. This means those of you who incur short-term capital gains, fail to meet the 61-day holding rule for qualified dividends or receive non-qualified distributions in the 2018 tax year will likely pay a lower tax rate than you would have for the same taxable events occurring in 2017. The extent to which your rates changed depend on the bracket you fall into, but they range between zero (for the bottom and second highest bracket) to a reduction of up to four percentage points. The brackets were also widened, so you may find yourself in a different marginal bracket this year compared to last year.

The 3.8% net investment income (NII) tax was kept un-changed by the TCJA. It is also not indexed to inflation, so it remains in effect for joint filers with incomes above $250,000 and single filers with incomes above $200,000 in both 2018 and 2019.

The rules regarding whether a capital gain or loss is con-sidered short-term or long-term have not changed. Realized gains on stocks, bonds and funds held for longer than a year qualify for the cheaper, long-term rates. Realized gains on stocks, bonds and funds held for less than a year are taxed at your marginal income rate.

It’s a good idea to tabulate the gains and losses you have realized from selling securities over the course of this year

In This Issue Banking on a New Pick While Staying the Course V · er of elevators, escalators and...

Documents

Transcript of In This Issue Banking on a New Pick While Staying the Course V · er of elevators, escalators and...