in this issue green acres is the place to be tmanufacturers of agricultural and turf equipment. its...

Green Acres Is the Place to BeThe market’s January malaise helped to bring a well-known name onto our

radar screen: Deere & Co. (DE). Deere is the world’s largest manufacturer of trac-tors, in addition to producing a full line of agriculture, turf, forestry and construc-tion equipment. Deere also operates a financial services arm to finance sales, leases and dealer inventory.

There are several things we like about Deere. The last time we checked, de-mand for food is not projected to go away. The company’s ties to farming add to the DI portfolio’s diversification. Deere has a global reach, but not too much exposure to emerging markets. (South America accounted for 11% of fiscal-2013 sales.) The company is on very sound financial ground and generates consider-able pre-dividend free cash flow: $5.44 per share in fiscal 2013. Deere’s current yield of 2.4% and price-earnings (P/E) ratio of 9.4 represent discounts to the average valuation investors have paid in the past. The company is also a dividend grower, with 11 dividend hikes since 2004. We expect another increase to be an-nounced near the end of this month.

Intel Corp. (INTC) is being removed to make room for Deere. The DI portfolio follows a total return strategy of price appreciation and dividend growth. Intel violates our strategy by failing to raise its dividend in six quarters. Concerns about the company’s strategy for future growth, given the slump in PC sales and lack of significant market share in mobile devices, limit the stock’s potential for future capital gains.

Since Intel is one of our smallest positions, the proceeds from the stock’s deletion will be combined with the dividend cash that has accumulated in the DI portfolio to fund the addition of Deere.

Margin of SafetyOne concept value investors consider is margin of safety. Attributed to Ben-

jamin Graham—Warren Buffett’s mentor—margin of safety refers to buying stocks at valuations low enough to ensure most of the downside risk is priced in. A strict Graham approach means buying stocks with market capitalizations below the value of their current assets. It is extraordinarily difficult to apply such a strict version of the strategy to a dividend growth portfolio during normal market conditions.

We can, however, incorporate the spirit of the strategy. This is accomplished by targeting quality stocks trading with valuations below what investors have historically been willing to pay over the past five years. The idea is that the cur-rent price already reflects potential downside risks. Our newest addition, Deere, has this characteristic.

We’ve discussed relative valuation before, but Deere offers an interesting take on what to consider when looking at valuations. The stock’s trailing 12-month (TTM) price-earnings ratio is 9.4. This puts Deere’s valuation in the bottom 14% of all stocks in AAII’s Stock Investor Pro universe. This is a positive because stocks with low price-earnings ratios (value stocks) have historically outperformed stocks with high price-earnings ratios (growth stocks).

Deere’s trailing 12-month price-earnings ratio is driven down by the record

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 ReportsAT&T Inc. (T) 8

Telecom giant has one of the lowest price-earnings ratios and highest yields in the S&P 500.

Deere & Company (DE) 10World’s largest farm equipment manufacturer trading at an attractive valuation.

United Technologies (UTX) 12Aerospace and elevators providing a lift for this industrial conglomerate.

Walgreen Co. (WAG) 14Pharmacy chain enjoying positive impact of strategic partnerships & resolution of Express Scripts dispute.

DI ArticleGraham Earnings Multiplier 16

Graham’s earnings multiplier sheds light on the impact of current earnings, earnings growth and interest rates on stock valuations.

Next Publication Date: March 7, 2014

February 2014Volume III Issue 2

www.AAIIDividendInvesting.com

TM

2 February2014

earnings earned in fiscal 2013. (The bigger the denominator, earnings, the lower the ratio will be if the numera-tor, price, does not rise accordingly.) High farm cash receipts boosted sales of farm equipment and led to good profits. Deere expects a decline in 2014 commodity prices to weaken demand for large farm equipment and lead to an approximate 6% decline in agriculture and turf equipment sales.

I/B/E/S shows analysts projecting fis-cal-2014 earnings per share of $8.34 per share and fiscal-2015 earnings per share of $7.65. In comparison, Deere earned $9.09 per share in fiscal 2013. If we use the lower 2015 earnings estimate, Deere trades at a price-earnings ratio of 11.1. Though above the current trailing 12-month price-earnings ratio, it is still well below the stock’s five-year aver-age price-earnings ratio of 13.4 and its seven-year average of 13.9.

Deere’s yield tells a similar story. The stock yields 2.4%, versus a five-year av-erage of 2.2% and a seven-year average of 2.0%. Deere is trading at a discount relative to what investors have histori-cally been willing to pay for it, implying the risks of lower farm cash receipts are being priced in.

The challenge in value investing is

being able to separate the cheap stocks from the bargain stocks, but quantita-tive and qualitative analysis can help. On a quantitative basis, Deere has consistently raised its dividends, has a manageable debt level and generates much cash flow. On a qualitative basis, Deere is not only a leader in its industry, but we can tell you what the company will be doing 10 years from now and that a market for its products will con-tinue to exist.

If Deere lacked the aforementioned traits, we would have a different opin-ion. We don’t pretend to have the abil-ity to forecast future farm cash receipts, but valuations are a pendulum which, at times, swings too far to the low side. When it does, it creates the opportunity for patient investors to pick up shares of good companies at attractive prices. Value strategies ultimately come down to a willingness to play the odds. If the fundamentals and the business model are strong, and the negative factors are cyclical or otherwise temporary, then a stock’s potential upside will outweigh its potential downside. We think this is the case with Deere.

DI Portfolio AlertsWe are making our first changes to

the DI portfolio since November 2013. Intel Corp. (INTC) is being removed from the port-folio, and the proceeds from the deletion are being combined with the approximate $1,000 in dividend cash that has accumulated in the portfolio to add Deere & Co. (DE).

Portfolio Deletion: Intel Corp. (INTC)Intel is primarily being removed for

a lack of dividend growth. The com-pany has not raised its dividend since announcing a 7% hike, to $0.225 per share, on May 7, 2012. Prior to 2011, Intel had announced dividend increases in November. When the company failed to announce an increase last July, we thought it might revert back to its historical trend of November an-nouncements. The January 23, 2014, announcement kept the dividend at $0.225 per share.

Intel has $20 billion in cash and short-term investments, so we are not certain as to why the company is keeping its dividend unchanged. We have ideas—a greater emphasis on share buybacks, satisfaction with the current yield, a future acquisition—but they are all just speculation on our part. Intel executives have not given any rationale for keeping the dividend steady.

Secondarily, we have concerns about the stock’s ability to appreciate in price over the foreseeable future. PC sales have been slumping and, though they may be close to stabilizing, we don’t anticipate a significant rebound over the short term. Intel’s footprint in the wire-less arena remains comparatively small.

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, 2014. 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 MonthFebruary Portfolio Deletions:

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price* Alert Date Purchase* Purchase*Intel Corp. (INTC) 2/7/2014 $29.60 12/31/2011 3.4% 44.3%

February Portfolio Additions:LatestPrice Dividend

Company (Ticker) (2/5/2014) Yield* Sector: IndustryNew Portfolio Additions:Deere & Company (DE) $84.70 2.4%*Data as of 2/5/2014.

Portfolio Deletion AlertCompany (Ticker)

Capital Goods: Construction & Agricultural Machinery

February2014 3

AAII DIvIDeND INvesTING

Server sales, while strong, are not large enough to be a key upward catalyst for the stock.

Since being added at the start of 2012, Intel has a total return of 3.4% versus 44.3% for the benchmark Dow Jones U.S. Index fund (IYY).

We did consider the relative valu-ations of Gentex Corp. (GNTX) and Waddell & Reed Financial (WDR) when deciding which stock to delete. Gentex has the lowest yield of any DI stock at 1.8%, though a dividend hike should be forthcoming. Waddell & Reed has the highest price-earnings ratio at 24.4, though the recently reported fourth-quarter profits will lower this to about 22. We are monitoring the changing competitive environment for AT&T Inc. (T), even though we know many of you like the high dividend. As far as Target Corp. (TGT) is concerned, we are hope-ful that the credit and debit card breach will only be a short-term issue, but we are monitoring the situation.

Portfolio Addition: Deere & Co. (DE)Deere is one of the world’s largest

manufacturers of agricultural and turf equipment. Its products include trac-

tors, loaders, combines, harvesters, balers and mowers. The company’s construction and forestry segment makes loaders, excavators, dump trucks and harvesters. Deere also provides financing for both dealers and con-sumers. Approximately 62% of the company’s revenues are realized in the U.S.; western Europe and Central and South America are the next two largest markets, accounting for about 12.5% of total revenues each.

Deere has earned a profit during each of the past seven years and has gener-ated positive free cash flow during six of those seven years. Though earnings are projected to decline this fiscal year and in fiscal 2015, three analysts project the company to grow earnings at an 8% annualized rate over the long term. Deere is committed to maintaining its “A” credit rating.

The stock yields 2.4% and has a five-year dividend growth rate of 12.8%. Management lists “consistently and moderately” raising the dividend as one of the priorities for its cash. Deere exec-utives are targeting a mid-cycle earnings payout ratio of 25% to 35%. They also prioritize dividend increases above stock

buybacks. As previously noted, the stock is trading below its five-year average valuation on both a yield and a price-earnings ratio basis. More about Deere can be found on pages 10 and 11.

January DI Portfolio Performance

The DI tracking portfolio lost 3.6% on a total return basis in January 2014. This return consisted of a capital loss (stock price decrease) of 3.7% and 0.1% gain in income return (dividends received). The portfolio’s benchmark, the Dow Jones U.S. Index fund (IYY), lost 3.2% on a to-tal return basis, due to a fall in its share price. The exchange-traded fund did not pay a dividend last month.

This was the first time in five months that the DI tracking portfolio has in-curred a loss. It is also just the fifth time the portfolio has experienced a monthly drop since its inception.

A few events have combined to cause our portfolio’s rough start to the new year. The broad market endured a pullback, and our holdings did not escape the broader market’s volatility. Tupperware Brands (TUP) was hurt by its emerging markets exposure. The

DI Pur- Latest Janchase viD/niaGecirP

Ticker Company Date Price Price (2/4/14) (Loss) Stock Index Yield IndustryABM ABM Industries, Inc. 12/31/11 $20.48 $20.89 $26.30 (6.8%) 32.7% 44.5% 2.4% Business ServicesAFL AFLAC Incorporated 12/31/11 $43.26 $45.04 $61.47 (6.0%) 44.0% 44.5% 2.4% Insurance (Accident & Health)T AT&T Inc. 12/31/11 $30.24 $30.48 $32.45 (4.0%) 19.8% 44.5% 5.7% Communications ServicesBAX Baxter International 9/6/13 $70.01 $71.34 $66.95 (1.8%) (5.5%) 5.1% 2.9% Medical Equipment & SuppliesCVX Chevron Corporation 12/31/11 $106.40 $110.91 $110.83 (10.6%) 6.7% 44.5% 3.6% Oil & Gas - IntegratedDE Deere & Company 2/7/14 na na $85.11 (5.9%) na na 2.4% Construction & Agricul MachineryETN Eaton Corporation 12/31/11 $43.53 $45.52 $68.65 (4.0%) 59.7% 44.5% 2.4% Electronic Instruments & ControlsGNTX Gentex Corporation 3/8/13 $19.58 $19.83 $30.65 (1.4%) 58.1% 15.1% 1.8% Auto & Truck PartsMCD McDonald's Corp. 12/31/11 $100.33 $99.19 $93.09 (2.9%) 0.0% 44.5% 3.5% RestaurantsMDT Medtronic, Inc. 12/31/11 $38.25 $38.89 $53.60 (1.4%) 45.2% 44.5% 2.1% Medical Equipment & SuppliesMSFT Microsoft Corp. 12/31/11 $25.96 $26.94 $36.35 1.1% 42.9% 44.5% 3.1% Software & ProgrammingNSC Norfolk Southern Corp. 12/31/11 $72.86 $74.18 $91.79 (0.3%) 31.4% 44.5% 2.4% RailroadsOMC Omnicom Group Inc. 6/7/13 $63.93 $63.33 $72.16 (2.4%) 16.0% 8.7% 2.2% AdvertisingPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $78.82 (3.1%) 25.4% 44.5% 2.9% Beverages (Non-Alcoholic)PG Procter & Gamble Co. 12/7/12 $70.29 $70.89 $76.09 (5.2%) 11.5% 26.5% 3.2% Personal & Household ProductsTGT Target Corporation 12/31/11 $51.22 $51.28 $55.12 (10.5%) 12.6% 44.5% 3.1% Retail (Department & Discount)TXN Texas Instruments 4/5/13 $34.20 $34.80 $40.89 (3.4%) 21.0% 14.5% 2.9% SemiconductorsTRV Travelers Companies 9/7/12 $65.21 $65.60 $80.35 (10.2%) 25.6% 27.2% 2.5% Insurance (Property & Casualty)TUP Tupperware Brands 11/8/13 $86.51 $86.94 $76.79 (17.1%) (11.1%) (0.3%) 3.5% Personal & Household ProductsUTX United Technologies 12/31/11 $73.09 $74.97 $109.10 0.2% 52.7% 44.5% 2.2% Aerospace and DefenseWDR Waddell & Reed Fin'l 12/31/11 $24.77 $25.36 $64.72 (0.5%) 177.9% 44.5% 2.1% Investment ServicesWAG Walgreen Company 2/8/13 $41.40 $41.57 $55.95 (0.2%) 37.8% 18.2% 2.3% Retail (Drugs)WFC Wells Fargo & Co. 12/7/12 $33.23 $33.40 $44.77 (0.1%) 38.9% 26.5% 2.7% Regional BanksWEC Wisconsin Energy Corp. 12/31/11 $34.96 $34.68 $42.16 3.2% 30.0% 44.5% 3.7% Electric UtilitiesData as of 2/4/2014. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

4 February2014

AAII Dividend Inves�ng Por�olio

Performance

Dividend Yield %7.1%8.2

TotalReturn

IncomeReturn

CapitalGain/(Loss)

TotalReturn

IncomeReturn

CapitalGain/(Loss)

January (3.6%) 0.1% (3.7%) (3.2%) 0.0% (3.2%)2014 YTD (5.8%) 0.2% (6.0%) (4.9%) 0.0% (4.9%)2013 36.5% 3.6% 32.9% 32.6% 2.3% 30.3%2012* 10.2% 3.5% 6.7% 14.3% 2.2% 12.1%From Inception 41.7% 8.5% 33.2% 44.2% 5.3% 38.9%Performance as of 2/5/2014

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

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

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

Performance of DI Portfolio

company cited increasing headwinds in those countries as a reason for issu-ing guidance that was below analysts’ expectations. Target also was a drag on performance, with shares falling in reaction to the aftermath of their credit and debit card breach. We address both stocks in the Portfolio News section below.

We cautioned last year that the mar-ket’s performance was unusually good. Stocks do not move in one direction for an extended period of time. Rather, they fluctuate up and down. Unfortu-nately, so far this year, they’ve fluctu-ated more to the downside than to the

upside. On Monday, February 3, 2013, the

S&P 500’s downward fluctuation put the index into official pullback territory with a year-to-date decline of 5.76%. The move has been quick, which is nor-mal. Market pullbacks and corrections (a decline of at least 10%) tend to be short and painful. Even bear markets (a decline of at least 20%) are significantly shorter than bull markets. Though pessi-mism runs high during a market decline, those who don’t panic fare best.

Year-to-date, through February 5, 2014, the DI tracking portfolio is down 5.8%. The portfolio has incurred 6.0%

in capital losses, partially offset by 0.2% income return. The Dow Jones U.S. in-dex fund is down 4.9%, with the decline composed entirely of capital losses.

Portfolio News

Strongest Stocks in JanuaryWisconsin Energy Corp. (WEC) was a

notable standout among DI stocks last month, gaining 3.2%. The pullback in Treasury yields was the primary cata-lyst, though the polar vortex probably helped. Yields on the benchmark 10-year note fell like the mercury in Wis-consin thermometers, ending January at 2.67%. This was an approximate 10% drop from the 3.03% yield at the end of 2013. The decline in bond yields made the utility comparatively more attractive to income-seeking investors.

The company announced a 1.9% dividend increase mid-month. Though seemingly small, it followed a 13% increase on January 17, 2013, and a 12.5% increase on July 18, 2013. The July increase was an acceleration of the planned 2014 increase, making last month’s hike a welcome surprise.

Microsoft Corp. (MSFT) was the sec-ond-best-performing stock, gaining 1.1% during a weak January. Rumors have been swirling that the company will unveil plans for its Windows 9 release at its Build developer conference in April.

The main catalyst for the upward move, however, was the release of a surprisingly strong earnings report. Revenues totaled $24.52 billion for the quarter ended December 31, 2013, up 14.3% from a year prior. Adjusted earnings were $0.81 per share, well above the I/B/E/S consensus earnings estimate of $0.68 per share. Devices and consumer segment revenue grew 13%, to $11.91 billion. Windows rev-enue declined 3%, however, reflecting continued softness in the consumer PC market. Surface tablet revenue more than doubled sequentially to $893 million. Microsoft sold 7.4 million Xbox console units, including 3.9 million Xbox One consoles.

United Technologies (UTX) managed a small price gain during January after an-

February2014 5


nouncing adjusted earnings of $1.67 per share for the fourth quarter that sur-passed the consensus earnings estimate of $1.53 per share. Results were tem-pered, however, as revenues fell short of the consensus estimate by around $330 million. Adjusted for restructuring costs and net one-time items, earn-ings per share grew 29%, with segment operating margins of 15.3%. Sales increased 2% for the quarter, to $16.8 billion, reflecting the organic growth of four percentage points partially offset by net divestitures of two points.

New equipment orders at Otis in-creased 8% over the year-ago quarter. UTC Climate, Controls & Security equip-ment orders increased 5% organically. Large commercial engine spares orders were up 20% at Pratt & Whitney, and commercial spares orders increased 19% at UTC Aerospace Systems.

Looking forward, chairman and CEO Louis Chenevert said, “We are confident in our ability to deliver 2014 earnings per share of $6.55 to $6.85 on sales of approximately $64 billion.” I/B/E/S was reporting a consensus earnings estimate of $6.82 per share ($6.68 to $6.90 per share range) for 2014 before the latest earnings release. The company expects share repurchase and acquisition spend-ing of $1 billion each in 2014. For more on UTX see pages 12 and 13.

A near breakeven performance was enough to make Wells Fargo & Co. (WFC) the DI portfolio’s fourth-best-performing stock. Shares of Wells Fargo slipped 0.1% as a slumping market off-set enthusiasm for the stock following the company’s earnings report.

The banking company earned $1.00 per share in the fourth quarter, up 10% from a year prior and above the I/B/E/S consensus estimate of $0.956 per share. A credit loss reserve release of $600 million inflated net income to $5.61 bil-lion, up from $5.09 billion a year prior. Mortgage originations declined to $50 billion, down from $80 billion in the third quarter of 2013 and $125 billion in the fourth quarter of 2012. The compa-ny had previously warned that origina-tions would be lower, and expects them to continue declining this quarter. On

a positive note, the net charge off rate improved, bank deposits increased and the wealth management business saw more inflows.

Wells Fargo could announce a divi-dend hike in March. The company’s ex-ecutives want to achieve a total payout ratio of at least 50% to 65%, but will need approval by the Federal Reserve.

Weakest Stocks in JanuaryTupperware Brands (TUP) was the

worst-performing stock in the DI portfo-lio for January, dropping 17.1%. While the company said its fourth-quarter earnings rose 20% as sales improved in emerging markets, it offered an outlook below the consensus estimates because of growing headwinds in emerging mar-kets. Tupperware forecast earnings per share for fiscal 2014 of $5.51 to $5.66 and sales of between flat and growing 2%. Analysts polled by I/B/E/S had been expecting a profit of $6.024 per share.

Tupperware’s fourth-quarter profits were $1.81 per share, excluding items, versus the consensus estimate of $1.836 per share. Quarterly revenues increased 0.9% to $717 million, or 5% excluding currency impacts. The company had projected a profit of $1.83 to $1.88 per share and sales growth of 2% to 4%.

Even with the downwardly revised fiscal-2014 forecast, analysts polled by I/B/E/S are still projecting earnings per

share growth of 11.1% in fiscal 2014 and 9.3% growth in fiscal 2015. Based on fiscal-2014 earnings, Tupperware shares are currently trading with a price-earnings ratio of 13.1. Compared to the five-year average price-earnings ratio of 14.7, the downside risk due to slower growth seems limited.

Chevron Corp. (CVX) was the DI’s portfolio’s second-worst-performing stock, losing 10.6%. Last month, Chev-ron announced that much of its added production would not be accretive to earnings until 2015. A poor earnings report sent shares down even further.

Chevron earned $2.57 per share in the fourth quarter of 2013, compared with $3.70 per share a year prior. The I/B/E/S consensus estimate was $2.60 per share. Revenues were also slightly below analysts’ expectations. Upstream production increases from project ramp-ups in the United States and Nigeria were more than offset by normal field declines and lower cost recovery vol-umes. In downstream operations, U.S. repair and maintenance activity nega-tively affected earnings.

We are taking Chevron at its word in estimating production to bounce back. The company still generates very strong cash flows, consistently pays and increases its dividends and buys back a lot of its shares. During 2013, Chevron repurchased $5 billion of its common

Recent earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %AFL AFLAC Incorporated Feb 4 $1.400 $1.390 0.7%T AT&T Inc. Jan 28 $0.530 $0.502 5.6%BAX Baxter International Jan 23 $1.260 $1.252 0.6%CVX Chevron Corporation Jan 31 $2.570 $2.600 (1.2%)GNTX Gentex Corporation Jan 29 $0.480 $0.426 12.7%MCD McDonald's Corp. Jan 23 $1.400 $1.393 0.5%MSFT Microsoft Corp. Jan 23 $0.780 $0.679 14.9%NSC Norfolk Southern Corp. Jan 22 $1.640 $1.502 9.2%PG Procter & Gamble Co. Jan 24 $1.210 $1.198 1.0%TXN Texas Instruments Jan 21 $0.460 $0.464 (0.9%)TRV Travelers Companies Jan 21 $2.680 $2.165 23.8%TUP Tupperware Brands Jan 29 $1.810 $1.836 (1.4%)UTX United Technologies Jan 22 $1.580 $1.527 3.5%WDR Waddell & Reed Fin'l Feb 4 $0.920 $0.830 10.8%WFC Wells Fargo & Co. Jan 14 $1.000 $0.984 1.6%WEC Wisconsin Energy Corp. Feb 6 $0.630 $0.590 6.8%Data as of 2/6/2014. Sources: I/B/E/S and company releases.

6 February2014

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Ticker Company Paid Date Payable Div Yield Invest PlanABM ABM Industries, Inc. 2, 5, 8, 11 Mon Dec 30, 2013 Mon Feb 3, 2014 $0.1550 � $0.62 2.4% -- --AFL AFLAC Incorporated 3, 6, 9, 12 Wed Feb 12, 2014 Mon Mar 3, 2014 $0.3700 $1.48 2.4% Yes YesT AT&T Inc. 2, 5, 8, 11 Wed Jan 8, 2014 Mon Feb 3, 2014 $0.4600 � $1.84 5.7% Yes YesBAX Baxter International 1,4,7,10 Wed Dec 4, 2013 Fri Jan 3, 2014 $0.4900 $1.96 2.9% Yes YesCVX Chevron Corporation 3, 6, 9, 12 Wed Feb 12, 2014 Mon Mar 10, 2014 $1.0000 $4.00 3.6% Yes YesDE Deere & Company 2,5,8,11 Fri Dec 27, 2013 Mon Feb 3, 2014 $0.5100 $2.04 2.4% Yes YesETN Eaton Corporation 3, 5, 8, 11 Thu Oct 31, 2013 Fri Nov 22, 2013 $0.4200 $1.68 2.4% Yes YesGNTX Gentex Corporation 1, 4, 7, 10 Thu Jan 2, 2014 Fri Jan 17, 2014 $0.1400 $0.56 1.8% -- --MCD McDonald's Corp. 3, 6, 9, 12 Thu Feb 27, 2014 Mon Mar 17, 2014 $0.8100 $3.24 3.5% Yes YesMDT Medtronic, Inc. 1, 4, 7, 10 Tue Dec 31, 2013 Fri Jan 24, 2014 $0.2800 $1.12 2.1% Yes YesMSFT Microsoft Corp. 3, 6, 9, 12 Tue Feb 18, 2014 Thu Mar 13, 2014 $0.2800 $1.12 3.1% Yes YesNSC Norfolk Southern Corp. 3, 6, 9, 12 Wed Feb 5, 2014 Mon Mar 10, 2014 $0.5400 � $2.16 2.4% Yes YesOMC Omnicom Group Inc. 1, 4, 7, 10 Wed Dec 18, 2013 Thu Jan 16, 2014 $0.4000 $1.60 2.2% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Wed Dec 4, 2013 Thu Jan 2, 2014 $0.5675 $2.27 2.9% Yes YesPG Procter & Gamble Co. 2, 5, 8, 11 Wed Jan 22, 2014 Tue Feb 18, 2014 $0.6015 $2.41 3.2% Yes YesTGT Target Corporation 3, 6, 9, 12 Fri Feb 14, 2014 Mon Mar 10, 2014 $0.4300 $1.72 3.1% Yes YesTXN Texas Instruments 2, 5, 8, 11 Wed Jan 29, 2014 Mon Feb 10, 2014 $0.3000 $1.20 2.9% Yes YesTRV Travelers Companies 3, 6, 9, 12 Thu Mar 6, 2014 Mon Mar 31, 2014 $0.5000 $2.00 2.5% -- YesTUP Tupperware Brands 1, 4, 7, 10 Mon Mar 17, 2014 Fri Apr 4, 2014 $0.6800 � $2.72 3.5% -- --UTX United Technologies 3, 6, 9, 12 Wed Feb 12, 2014 Mon Mar 10, 2014 $0.5900 � $2.36 2.2% Yes YesWDR Waddell & Reed Fin'l 2, 5, 8, 11 Thu Jan 9, 2014 Mon Feb 3, 2014 $0.3400 � $1.36 2.1% -- --WAG Walgreen Company 3, 6, 9, 12 Thu Feb 13, 2014 Wed Mar 12, 2014 $0.3150 $1.26 2.3% Yes YesWFC Wells Fargo & Co. 3, 6, 9, 12 Wed Feb 5, 2014 Sat Mar 1, 2014 $0.3000 $1.20 2.7% Yes YesWEC Wisconsin Energy Corp. 3, 6, 9, 12 Wed Feb 12, 2014 Sat Mar 1, 2014 $0.3900 � $1.56 3.7% Yes Yes

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

Data as of 2/4/2014.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

stock. Additionally, Chevron is currently trading with a 3.6% yield.

Target Corp. (TGT) lost 10.5% in Janu-ary. The stock is down approximately 13% since the credit and debit card breach was announced on December 19, 2013. The company confirmed that the hackers appear to have used electronic credentials stolen from a ven-dor to conduct the breach. Target has limited access to some of its computer systems while an investigation proceeds.

As a result of the breach, Target cut its fourth-quarter outlook by $0.30 per share to a range of $1.20 to $1.30 per share and said it expects comparable-store sales during the holiday quarter to fall 2.5%, compared with prior guidance of about flat sales. Target forecast com-parable-store sales to drop 2% to 6% for the rest of the quarter. Target said it has seen “meaningfully weaker-than-expected sales” following its announce-

ment and that its REDcard business has been hurt. Meanwhile, the 2013 entry to Canada was expected to cut profit by $0.45 per share, versus the prior projec-tion of up to $0.32 per share, because of disappointing sales.

Brokerage analysts are speculating about the size of Target’s legal bill. News reports suggest the company has $100 million in cyber insurance and $65 million in directors and officers liability coverage. A Cowen analyst and a Jef-fries analyst further speculate that the retailer is forgoing share buybacks to conserve cash.

We continue to monitor the situation, but feel that to sell at this point would be a knee-jerk reaction. There is no doubt that Target will face some near-term negative overhang from the secu-rity breach, but we are still confident in the company’s long-term prospects.

Travelers Companies (TRV) handily

beat the I/B/E/S consensus earnings estimate, but traders were unimpressed with the personal insurance segment and the stock fell 10.2% in January. Net premiums in this segment fell 4% last quarter, reflecting weakness in automo-tive and agency homeowners and other lines. Business insurance net written premiums rose 3%, however. Fourth-quarter earnings per share reached a record of $2.68, versus the consensus estimate of $2.165 per share. The stock’s yield of 2.5% is near its five-year low of 2.4%. Though the price-earnings ratio has pulled back to 8.2, traders were questioning if the higher valua-tion Travelers had been trading at in early January was warranted given the weakness in its personal segment. The company has been proactive in being more competitive in its automotive seg-ment, and while we wait to see if those efforts pay off, we are watching the stock’s relative valuation. ▪

February2014 7


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

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

tuoyaP-cesnoCtsE:oitaRevitutsriFviDSPE

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

Ticker (TTM) Current Ago Avg (3-5 Yr) (5 Yr) Paid Raised Month Avg Month) Assets (Mil)ABM 20.2 2.4% 2.7% 2.6% na 3.5% 1965 48 45% 46% 32% 57% $1,480AFL 9.4 2.4% 2.6% 2.6% 0.0% 10.9% 1973 30 21% 29% 6% 88% $29,261T 9.5 5.7% 5.2% 5.8% 6.1% 2.3% 1984 31 53% 118% 68% 67% $174,130BAX 18.2 2.9% 3.6% 2.4% 7.4% 16.0% 1934 7 42% 40% 67% 69% $37,066CVX 10.0 3.6% 3.4% 3.4% 4.7% 9.0% 1912 26 35% 33% 94% 42% $214,684DE 9.4 2.4% 2.1% 2.2% 8.0% 12.8% 1971 10 22% 30% 36% 83% $31,923ETN 20.4 2.4% 2.2% 2.8% 13.0% 12.1% 1923 4 37% 47% 40% 55% $34,681GNTX 19.9 1.8% 2.9% 2.3% 11.6% 5.0% 2003 3 36% 52% 58% 25% $4,688MCD 16.8 3.5% 3.3% 3.2% 8.1% 13.9% 1976 37 56% 51% 80% 57% $93,702MDT 14.3 2.1% 2.3% 2.2% 6.6% 15.8% 1977 36 29% 32% 25% 49% $56,467MSFT 13.4 3.1% 3.5% 2.4% 7.5% 15.9% 2003 3 36% 31% 36% 45% $314,072NSC 15.2 2.4% 3.0% 2.7% 10.1% 10.8% 1901 12 33% 37% 57% 65% $28,599OMC 19.4 2.2% 2.8% 1.8% 9.1% 15.9% 1998 4 24% 26% 22% 84% $18,679PEP 18.5 2.9% 3.0% 2.9% 7.9% 8.3% 1952 41 51% 50% 47% 71% $123,240PG 20.6 3.2% 3.1% 3.2% 8.6% 9.6% 1890 57 61% 48% 69% 52% $207,748TGT 14.8 3.1% 2.5% 1.7% 10.8% 20.6% 1967 43 40% 24% 32% 65% $35,802TXN 21.3 2.9% 3.2% 2.2% 10.8% 21.1% 1962 10 55% 38% 39% 43% $46,410TRV 8.2 2.5% 2.4% 2.8% 8.7% 15.3% 2003 8 20% 28% 18% 76% $28,733TUP 14.7 3.5% 2.9% 2.5% 12.0% 20.3% 1996 5 25% 36% 32% 86% $3,970UTX 17.6 2.2% 2.5% 2.5% 11.3% 10.2% 1936 20 35% 35% 44% 65% $104,623WDR 24.4 2.1% 2.7% 2.6% 19.5% 8.0% 1998 4 41% 54% 37% 50% $5,537WAG 19.6 2.3% 3.0% 2.1% 13.6% 23.5% 1932 38 41% 32% 43% 45% $54,492WFC 11.5 2.7% 3.3% 2.1% 9.6% (2.4%) 1939 3 29% 22% 10% 89% $238,362WEC 18.3 3.7% 3.5% 2.7% 5.6% 19.1% 1939 11 59% 43% 61% 71% $9,666Data as of 2/4/2014. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Payout Ratio:SPEdleiY dnediviD

Dividend Analysis

Definitions of Terms Used in Tables

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

8 February2014

AT&T is one of the country’s largest providers of telecommunications services. Though the company remains dependent on the traditional telephone (wireline) business, wireless service accounts for more than half of total revenues, a sign of how the industry and the company are evolving. The traditional wireline business is undergoing a transformation, with AT&T offering U-verse (television, high-speed Internet access and digital voice service) and a variety of digital and networking business services. The pending acquisition of Leap Wireless International (LEAP) is expected to close this quarter and will give AT&T ownership of Cricket and increased market share in the prepaid market.

Why Own T?Though many individuals now rely solely on their mobile

phones for telephone service, AT&T still boasted 12.4 million consumer access lines as of December 31, 2013. The company’s U-verse service is growing, and now totals 10.7 million subscribers. Plus, average revenue per user (ARPU) is higher for U-verse subscribers.

The wireless division is the primary growth driver for the company and accounted for 55.6% of fourth-quarter 2013 revenues, up from 54.2% in 2012. Wireless revenues grew 4.5% last quarter, aided by the net addition of 566,000 postpaid subscribers (customers with a mobile service contract) and a 2.1% increase in ARPU. The pending acquisition of Leap Wireless gives AT&T the Cricket prepaid brand, as well as spectrum covering 137 million people that is largely complementary to AT&T’s existing licenses.

The stock’s price-earnings ratio has fallen to 9.5, as the one-time expenses related to the 2011 failed acquisition of T-Mobile (TMUS) and the 2012 pension charges are no

longer factored into profits. This ratio is well below the communication services industry median of 16.8. It also ranks among the lowest in the Dow Jones industrial average and the S&P 500 index.

Dividend AnalysisAT&T’s yield of 5.7% is the highest of any Dow Jones

industrial average component and ranks among the 10 highest for the S&P 500. Funding the dividend is a free-cash-flow payout ratio of 68.4%, which means about two-thirds of free cash flow is spent on dividends.

The company has a long history of returning excess cash back to shareholders. AT&T has both paid and raised its dividend every year since it was first spun off as regional bell operating company SBC Communications in 1984. (SBC acquired its former parent, AT&T, in 2005 and subsequently changed its name.) The dividend has grown at a 2.3% annualized pace per year over the past five years.

RisksCompetition for postpaid wireless customers has intensified

significantly in recent months. Fourth-quarter results indicate T-Mobile added 869,000 subscribers, versus 566,000 additions for AT&T. Verizon Wireless (VZ) fared even better with 1.6 million additions. AT&T recently responded by cutting prices on its family plans, creating concerns about profit margins and a potential price war.

The current regulatory environment restricts the company’s ability to expand domestically via acquisition. Rumors about an imminent takeover offer for Vodafone (VOD) were denied by AT&T, but the company can bid for Vodafone in six months. Fallout from the NSA surveillance revelations has not been “inconsequential” to European business, according to CEO Randall Stephenson.

AT&T is in the midst of a massive network upgrade. Capital expenditures totaled $20.9 billion last year, an increase of $1.5 billion from 2012. The company expects to spend $21 billion this year. This heavy spending is reducing the amount of free cash flow. Also affecting cash flows are the new Next plans, which allow consumers to finance their smartphone purchases instead of paying the subsidized price up front. If AT&T’s guidance proves to be correct, post-dividend free cash flow will total $1.28 billion in 2014. This compares to an average of $6 billion over the past four years.

Annual dividend increases have been limited to four cents per share since 2008. This has effectively slowed the rate of dividend growth from the 2.5% increase announced in 2008 to the 2.2% increase announced last December. This puts the dividend at risk of growing slower than the rate of inflation.

Though U-verse revenues and subscriber counts are rising, overall revenues for the wireline unit continue to be hurt by traditional home and business analog phone service, a legacy business that is being replaced by newer technologies. ▪

AT&T Inc. (T)

Bullish Factors• Highest yield in the Dow Jones industrial average and

one of the 10 highest yields in the S&P 500• The wireless division now accounts for 55.6% revenues,

and the ongoing shift toward smartphones is raising average revenue per user (ARPU)

• U-verse continues to grow and its higher ARPU is helping to offset the declining demand for traditional wireline service

Bearish Factors• Wireless industry competition is intensifying and

concerns about a price war are starting to surface• The massive network upgrade is leaving little free cash

to fund stock buybacks or increase the dividend growth rate

• Dividend increases have been held at $0.04 a year since 2008, slowing the rate of growth to just 2.2%

February2014 9


T $32.45 ($39.00 - $31.74)Addition Alert Date: 12/31/2011Price at Alert: $30.24 Risk Index: 0.98Market Cap (Million): $174,130.3Avg Daily Dollar Volume (Million): $783.4Primary Sector: ServicesPrimary Industry: Communications Services

Indicated Annual Dividend: $1.84 9002/210102/211102/212102/213102/21tnerruCselpitluMLatest Dividend Increase: Date Dividend Yield (%): Avg 5.7 5.0 5.2 5.9 6.3 6.5Latest Dividend Increase: % 7.71.74.61.65.5hgiH :)%( dleiY dnediviD %2.2Dividend Yield: Current 5.7% 6.57.54.56.46.4woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) 4.218.98.440.726.015.9sgninraE/ecirPDividend Paid Since: 1984 Price/Earnings (Industry) 16.8 16.9 15.2 15.2 14.5 13.2Number of Years of Div Increases: 28 Price/Book Value 1.9 2.1 2.1 1.7 1.4 1.5Direct Invest Option: 2.13.14.15.15.14.1selaS/ecirPseYDRIP Plan: Yes 9002/210102/211102/212102/213102/21tnerruCsoitaRDeclared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 52.8 52.9 140.8 258.2 59.1 80.1

$0.4500 Payout Ratio: FCFPS (%) 68.4 69.8 51.8 70.1 63.7 54.5$0.4500 Gross Margin (%) 60.0 60.0 56.7 56.7 59.6 58.7$0.4500 Operating Margin (%) 24.1 23.7 10.2 7.3 13.3 17.1$0.4500 Operating Margin (%) (Ind) 11.5 11.0 11.5 10.7 11.1 11.3

9.96.311.37.52.412.41)%( nigraM teN0044.0$3.218.516.33.79.918.02)%( EOR0044.0$

Rel Strgth ROE (%) (Industry) 10.4 11.1 8.5 13.7 12.7 12.6Rank 5.43.65.17.26.67.6)%( AOR

7.06.07.07.07.07.0oitaR tnerruC%63keeW 41.266.850.161.662.762.76)%( stessA ot seitilibaiL%72keeW 31

%23keeW 62 Liab to Assets (%) (Ind) 67.7 67.7 69.5 67.9 69.4 67.25.05.05.05.05.05.0revonruT tessA%03keeW 25

Financial Statements TTM 12/2013 12/2012 12/2011 12/2010 12/2009raeY 5 htworG 315,221082,421327,621434,721257,821257,821)M$( selaS

478,17320,47788,17602,27882,77882,77)M$( emocnI ssorG%3.2sdnediviD515,91973,91773,81341,81593,81593,81)M$( noitaicerpeD%8.0selaS201381019,2000)M$( artxE/lausunU%0.55emocnI teN898,02394,61812,9799,21974,03089,03)M$( emocnI gnitarepO%6.75cisaB SPE801,4667,3796,3444,3049,3049,3)M$( esnepxE tseretnI%5.75tnoC liD SPE

Pretax Income ($M) 27,777 27,777 10,439 6,716 15,256 18,518SUE Score Net Income ($M) 18,249 18,249 7,264 3,944 16,882 12,138

1.40 Operating Cash Flow ($M) 34,796 34,796 39,176 34,743 35,222 34,4050.40 Investing Cash Flow ($M) (23,124) (23,124) (19,680) (21,250) (21,449) (17,883)

Annual Financing Cash Flow ($M) (13,201) (13,201) (17,673) (11,649) (15,849) (14,508)12/2015 Capital Expenditures ($M) 20,944 20,944 19,465 20,110 19,530 16,554

24 Net Cash Flow ($M) (1,529) (1,529) 1,823 1,844 (2,076) 2,01460.268.276.052.104.314.3)$( cisaB SPE18.2$

$2.85 EPS Diluted Cont ($) 3.40 3.39 1.25 0.66 2.71 2.054.982.1710.181)%( ghC raeY/raeY CD SPE4pU veR # (75.6) 32.2 (565.9)

56.196.137.167.108.108.1)$( erahS/sdnediviD31nwoD veR # 5.24.24.27.13.23.2)%( ghC raeY/raeY dnediviD68.2$ogA .soM eerhT30.356.274.204.385.236.2)$( erahS/wolF hsaC eerF%6.5ghC raeY/raeY

12/2013 9/2013 6/2013 3/2013 Total 147,3734,1540,3868,4933,3933,3)M$( hsaC$1.31 $0.72 $0.71 $0.67 $3.41 Goodwill/Intangibles ($M) 131,485 131,485 128,548 130,185 134,121 134,410

($0.68) $0.63 $0.66 $0.60 $1.21 Total Assets ($M) 277,787 277,787 272,315 270,442 269,391 268,312Long-Term Debt ($M) 69,290 69,290 66,358 61,300 58,971 64,720

12/2013 9/2013 6/2013 3/2013 Total Total Liabilities ($M) 186,799 186,799 179,953 164,908 157,744 166,748$6.30 $6.05 $5.96 $5.69 $24.00 Book Value/Share ($) 17.28 16.95 15.92 17.80 18.88 17.21$5.75 $5.45 $5.39 $5.38 $21.98 Avg Shares Outst'g (M) 5,267.00 5,368.00 5,801.00 5,928.00 5,913.00 5,900.00

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 2/4/2014.

5.8% (6.5% - 5.2%)

0.910.890.80

Nov 1, 2013Aug 1, 2013May 1, 2013

0.98

Sep 27, 2013Jun 28, 2013Mar 29, 2013 Apr 8, 2013

Jul 8, 2013Oct 8, 2013

3 Year

AT&T provides telecommunications services, including wireless communications, local exchange services, long-distance services, data/broadband and Internet services, video services, managed networking and wholesale services. Primary reporting segments: wireless, which provides both wireless voice and data communications services; wireline, which provides landline voice and data communication services, AT&T U-Verse TV, broadband and voice services and managed networking to business customers; and other, which includes customer information serviceand corporate and other operations.

Nov 9, 2012

Jan 28, 2014

Jan 8, 2013

(4%)(8%)(7%)(4%)

Stock

Feb 1, 2013

Rel StrgthIndex

Oct 8, 2012Jul 6, 2012

5.9%7.7%

Year Ago

EPS Estimates

Oct 23, 2013

Year Ago

TTM

TTMSales/Sh (Qtr)

EPS (Qtr)

CurrentMonth Ago

2

1.6%$0.69

9

1.2%

2.1%

177.2%181.0%

151.2%1.2%2.6%

1.0%

$0.53$0.66

Sep 28, 2012Jun 29, 2012

Est Surprise

$0.68# of Estimates

TTM

EPS

Gain

2.3%

(21.5%)

9

Quarterly3/2014

22

$0.69 $2.67$2.66

31

Dec 13, 2013

16$2.67

Nov 1, 2012Aug 1, 2012

Annual12/2014

% Surp5.6%

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Feb 2009 Feb 2010 Feb 2011 Feb 2012 Feb 2013

Share Price

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Div

iden

d Yi

eld

10 February2014

Deere & Co. is best known for its John Deere farming equipment. The company, along with its subsidiaries, operates in three segments: agriculture and turf, construction and forestry, and financial services. The agriculture and turf segment primarily manufactures and distributes a full line of agriculture and turf equipment and related service parts. The construction and forestry segment primarily manufactures and distributes a broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. The products and services produced by these two segments are marketed primarily through independent retail dealer networks and major retail outlets. The financial services segment primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment. In addition, the financial services segment provides wholesale financing to dealers of the equipment, finances retail revolving charge accounts and operating loans and offers crop risk-mitigation products and extended equipment warranties. The agriculture and turf segment accounts for approximately 77% of revenues, while construction and forestry accounts for 16% and financial services accounts for 7% (1% of which is other revenues).

Why Own DE?Deere & Co. is the largest manufacturer of farm equipment

in the world. It makes a broad range of industrial equipment, primarily used by the construction and forestry industries, and its John Deere equipment is synonymous with high-quality agricultural equipment. Morningstar estimates that it holds over a 50% share of the North American farm equipment market largely due to the machinery’s high resale value and solid support system.

The company expects worldwide sales of construction and forestry equipment to increase by about 10% in 2014, which should help Deere’s revenues and profits. Sales have expanded at a 13.3% annual rate over the last three years, while net

income has expanded at a 23.8% annualized growth rate and diluted earnings per share from continuing operations expanded at a 27.8% annualized growth rate over the same period. Analysts are expecting earnings of $8.34 per share in fiscal 2014, pulling back to $7.65 per share in 2015 before rebounding to $8.06 per share in 2016. Analysts are also expecting an 8.0% three- to five-year growth rate in earnings.

DE has an attractive valuation, with a current price-earnings ratio of 9.4 which is below its historical average of 13.4 and the 16.3 median of the construction and agricultural machinery industry. The company also generates strong cash flows, with $3.3 billion in operating cash flow, while spending $1.2 billion on capital expenditures in 2013.

Dividend AnalysisDeere & Co. has a history of returning excess cash to its

shareholders in the form of dividends and share buybacks. The company has paid a dividend every year since 1971 and increased its annual payout for 10 consecutive years. Its latest increase was announced on February 27, 2013, when the quarterly dividend payment went up 10.9%. The dividend has grown at an 18.7% annual rate over the last three years, and we expect Deere to continue increasing its dividend going forward.

DE currently trades with a 2.4% dividend yield, above its five-year average of 2.2%. The company is expected to announce another dividend increase later this month, which should help raise the dividend yield. Deere & Co. has a low current earnings dividend payout ratio of 21.7%. Its current free cash payout ratio is 35.9%.

The company has also been consistently using excess cash to repurchases shares, spending about $1.6 billion in each of the last three years to buy back its own stock. It has also just announced an additional $8 billion share repurchase program.

RisksDeere operates in a variety of highly competitive global

and regional markets. The company competes worldwide with a number of other manufacturers and distributors of similar products. Aggressive pricing, unanticipated product or manufacturing delays or Deere’s failure to price its products competitively could adversely affect its results.

Deere’s sales are strongly influenced by commodity prices and farm income. A drop in these may negatively affect the demand for large farm equipment. An extended downturn in crop prices can significantly dampen revenues and profits.

Poor or unusual weather conditions, particularly during the planting and early growing season, can significantly affect the purchasing decisions of Deere’s customers, particularly the purchasers of agriculture and turf equipment. The timing and quantity of rainfall are two of the most important factors in agricultural production. Natural disasters such as regional floods, hurricanes and droughts can all have significant nega-tive effects. ▪

Bullish Factors• Dominant position in farming equipment industry with a

wide range of products• Current price-earnings ratio below that of historical

average and industry and sector medians• Company generates strong cash flows and is aggressive

at repurchasing shares

Bearish Factors• Operates in highly competitive industry • Sales influenced by commodity prices and farming

income, neither of which Deere has influence over• Analysts predict pullback in fiscal 2014 and 2015

earnings

Deere & Company (De)

February2014 11


Addition Alert Date: 2/7/201429.1 :xednI ksiRAN :trelA ta ecirP

Market Cap (Million): $31,922.7Avg Daily Dollar Volume (Million): $284.8Primary Sector: Capital GoodsPrimary Industry: Construction & Agricultural Machinery

Indicated Annual Dividend: $2.04 9002/010102/011102/012102/013102/01tnerruCselpitluMLatest Dividend Increase: (Date) Dividend Yield (%): Avg 2.4% 2.2 2.2 1.9 1.7 2.8Latest Dividend Increase: (%) 6.44.25.26.24.2hgiH :)%( dleiY dnediviD %9.01Dividend Yield: Current 2.4% 0.24.15.10.20.2woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) 8.913.510.214.016.94.9sgninraE/ecirPDividend Paid Since: 1971 Price/Earnings (Industry) 16.3 15.2 14.8 18.4 25.1 12.3Number of Years of Div Increases: 10 Price/Book Value 3.2 3.3 4.6 4.9 4.5 3.6Direct Invest Option: Yes 7.01.10.19.09.09.0selaS/ecirPDRIP Plan: Yes 9002/010102/011102/012102/013102/01tnerruCsoitaRDeclared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 21.7 21.1 23.2 22.7 26.4 54.1

$0.5100 Payout Ratio: FCFPS (%) 35.9 35.7 (469.2) 50.0 32.3 43.9$0.5100 Gross Margin (%) 32.1 32.1 29.8 30.6 31.8 28.1$0.5100 Operating Margin (%) 16.5 16.5 15.3 15.6 14.8 10.3$0.5100 Operating Margin (%) (Ind) 9.7 11.2 10.4 9.0 5.4 7.1

8.32.77.85.84.94.9)%( nigraM teN0064.0$4.516.338.249.443.149.04)%( EOR0064.0$


ANANANANANANoitaR tnerruC%23keeW 43.885.589.588.788.288.28)%( stessA ot seitilibaiL%36keeW 31



005,6262,8587,9287,01821,21821,21)M$( emocnI ssorG%8.21sdnediviD8828826039330AN)M$( noitaicerpeD%9.5selaS000000)M$( artxE/lausunU%5.11emocnI teN283,2738,3289,4715,5522,6522,6)M$( emocnI gnitarepO%0.41cisaB SPE240,1118957387147147)M$( esnepxE tseretnI%1.41tnoC liD SPE

Pretax Income ($M) 5,483 5,483 4,734 4,223 3,025 1,339SUE Score Net Income ($M) 3,536 3,536 3,064 2,799 1,864 874

3.10 Operating Cash Flow ($M) 3,254 3,254 1,168 2,326 2,282 1,9857.80 Investing Cash Flow ($M) (4,821) (4,821) (4,004) (2,621) (2,109) (57)

Annual Financing Cash Flow ($M) 407 407 3,880 140 (1,010) 47010/2015 Capital Expenditures ($M) 1,158 1,158 1,319 1,057 762 907

23 Net Cash Flow ($M) (1,148) (1,148) 1,005 (143) (861) 2,44070.204.417.627.781.971.9)$( cisaB SPE56.7$

$7.67 EPS Diluted Cont ($) 9.08 9.09 7.63 6.63 4.35 2.062.1114.251.511.910.91)%( ghC raeY/raeY CD SPE1pU veR # (56.3)

21.161.125.197.149.199.1)$( erahS/sdnediviD2nwoD veR # 7.56.30.138.714.82.11)%( ghC raeY/raeY dnediviD28.7$ogA .soM eerhT

Year/Year Chg (8.2%) Free Cash Flow/Share ($) 5.55 5.44 (0.38) 3.04 3.59 2.5510/2013 7/2013 4/2013 1/2013 Total 256,4197,3746,3256,4405,3405,3)M$( hsaC

$2.12 $2.56 $2.76 $1.65 $9.09 Goodwill/Intangibles ($M) 922 922 1,710 1,719 1,642 1,659$1.75 $1.98 $2.61 $1.30 $7.64 Total Assets ($M) 59,521 59,521 56,266 48,207 43,267 41,133

Long-Term Debt ($M) 21,578 21,578 22,453 16,960 16,815 17,39210/2013 7/2013 4/2013 1/2013 Total Total Liabilities ($M) 49,256 49,256 49,424 41,407 36,977 36,314$25.03 $25.93 $28.04 $19.11 $98.11 Book Value/Share ($) 27.19 26.64 17.23 16.29 14.84 11.40$25.14 $24.30 $25.01 $16.75 $91.19 Avg Shares Outst'g (M) 377.60 385.30 397.10 417.40 424.00 422.80


0.77

3 Year

Feb 3, 2014Nov 1, 2013Aug 1, 2013

2.2% (2.9 - 1.8)

1.040.99

Stock

0.97

Dec 4, 2013Aug 28, 2013May 30, 2013 Jun 26, 2013

Sep 26, 2013Dec 27, 2013

Gain

May 1, 2013

Rel StrgthIndex

18.7%

Deere & Company along with its subsidiaries, operates in three segments: agriculture & turf, construction & forestry, and financial services. The John Deere agriculture and turf segment manufactures and distributes a line of agricultural and turf equipment and related service parts. John Deere construction, earthmoving, material handling and forestry equipment includes a range of backhoe loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, landscape loaders, skid-steer loaders, forestry equipment and a range of attachments. The financial services segment primarily finances sales and leases by John Deere dealers of new and used equipment.

Feb 27, 2013 Mar 26, 2013

(5%)5%3%(9%)

13.3%23.8%27.8%27.8%

TTM

Annual10/2014

11.2%4.5%15.4%18.6%

EPS$2.11

19.0%

EPS (Qtr)

Year Ago

24$8.34Current

Month Ago

(8.2%)

$2.56

% Surp11.6%18.1%

Est Surprise

EPS Estimates# of Estimates

Nov 20, 2013Aug 14, 2013

$1.53 $8.35$1.53

(7.6%)

Year Ago

TTM

TTMSales/Sh (Qtr)

3102 ,1 beF2102 ,5 ceDAug 29, 2012 Sep 26, 2012 Nov 1, 2012

Dec 27, 2012

Feb 27, 2013

1$8.00

11

$1.40

1

Quarterly1/2014

19

$0

$20

$40

$60

$80

$100

$120


Share Price

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1%

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De $85.11 ($94.09 - $79.50)

12 February2014

United Technologies is a global conglomerate with a focus on the aerospace and building industries. United Technologies was formed in 1934 from the government-forced breakup of United Aircraft and Transportation Corporation that also created the Boeing Corporation and United Airlines. Over the years, UTX acquired a number of aerospace companies. However, it also started on a diversification movement in the 1970s to lower its dependence on military business, with the acquisitions of Otis Elevator and Carrier Refrigeration. The company acquired Goodrich for $18.4 billion in 2012 to expand its commercial aerospace presence.

United Technologies has five operating segments: UTC Climate, Controls & Security (25% of fourth quarter sales, 25% of operating profit); Pratt & Whitney aircraft engines (24% of sales, 20% of operating profit); Otis elevators, escalators and moving walkways (20% of sales, 28% of operating profit); UTC Aerospace Systems (20% of sales, 21% of operating profit); and Sikorsky helicopters (11% of sales, 6% of operating profit).

Why Own UTX?United Technologies has returned around 70% of its free

cash flow to shareholders through its dividends and share repurchases. UTX has averaged around $6.3 billion per year in operating cash flow over the last five years. Capital expenditures have averaged around $1.6 billion per year, but the Goodrich acquisition bumps this average up. United Technologies has been able to consistently generate free cash flow equal to or better than net income.

Sales have expanded at a 6.2% annual rate over the last three years, while net income has expanded at a 9.4% annualized growth rate and diluted earnings per share from continuing operations expanded at a 11.0% annualized growth rate. The higher earnings per share growth highlights

the impact of share repurchases.Analysts expect earnings to expand 9.9% during 2014 and

11.1% during 2015. Pratt & Whitney engine orders and new orders at Otis Elevator continue to look strong. Helicopter sales from the offshore oil business show strength, but military sales continue to have a headwind. Rumors of a Sikorsky spin-off continue to swirl.

Dividend AnalysisUnited Technologies has a history of returning excess

cash to its shareholders in the form of dividends and share buybacks. The company has paid a dividend every year since 1936 and increased its annual payout for 20 consecutive years. UTX normally increases its dividend every fifth quarter. Its increase on October 9, 2013, amounted to a 10.1% raise in the dividend, and the company bumped the quarterly dividend by 0.1 cent on February 3, 2014, to $0.59 per share. The dividend has grown at an 8.9% annual rate over the last three years, and we expect the dividend to continue to grow at a high rate into the future.

Price increases have pushed down the dividend yield. UTX currently trades with a 2.2% dividend yield, below its five-year average of 2.5%. United Technologies has a low current earnings dividend payout ratio of 34.6%. Pre-dividend free cash flow normally exceeds net income and the current free cash payout ratio is 44.3%. UTX has been using its excess cash flow to pay down the debt raised for the Goodrich buyout, repurchase shares and pay its dividend.

RisksUnited Technologies trades at a premium to its five-year

average price-earnings ratio of 14.9. However, its current price-earnings ratio of 17.6 is below the 20.6 median for the capital goods sector and the 19.7 median for the aerospace and defense industry. Trailing earnings were depressed during the acquisition of Goodrich and are bouncing back. The forward price-earnings ratio is 16.0 times expected 2014 earnings and 14.4 times expected 2015 earnings. Nevertheless, the stock’s price appreciation has pushed up the price-earnings ratio and lowered the dividend yield.

It seems likely that defense spending will decline over the coming years. About 20% of United Technologies sales were to the U.S. government. Its primary defense projects include Sikorsky’s Black Hawk and Seahawk helicopters, the Boeing refueling tanker program and the joint strike fighter. Military aerospace sales declined 8% during 2013.

United Technologies is an international company with over half its sales abroad and 20% tied to the emerging markets. Currency fluctuations can add uncertainty to reported sales and profits. United Technologies’ profitability is also tied to the costs of a wide range of commodities. ▪

United Technologies (UTX)

Bullish Factors• Growing order backlog of fuel-efficient Pratt & Whitney

engines• Positioned for rebound in commercial building through

Carrier and Otis units• Strong free cash flow and a history of above-average

dividend growth

Bearish Factors• Trades with a dividend yield below its five-year average

and a price-earnings ratio above its five-year average• Declining military aerospace sales • Sensitive to global economy; global economic slowdown

would pressure growth

February2014 13


UTX $109.10 ($118.20 - $88.37)Addition Alert Date: 12/31/2011Price at Alert: $73.09 Risk Grade: 1.42Market Cap (Million): $104,622.7Avg Daily Dollar Volume (Million): $339.8Primary Sector: Capital GoodsPrimary Industry: Aerospace and Defense

Indicated Annual Dividend: $2.36 9002/210102/211102/212102/213102/21tnerruCselpitluMLatest Dividend Increase: (Date) Dividend Yield (%): Avg 2.2% 2.2 2.6 2.4 2.4 2.8Latest Dividend Increase: (%) 1.47.28.29.26.2hgiH :)%( dleiY dnediviD %2.0Dividend Yield: Current 2.2% 2.21.20.23.29.1woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) 1.317.519.418.419.516.71sgninraE/ecirPDividend Paid Since: 1936 Price/Earnings (Industry) 19.7 15.8 13.2 14.9 14.8 11.5Number of Years of Div Increases: 20 Price/Book Value 3.2 2.8 2.7 3.2 3.0 2.5Direct Invest Option: Yes 0.12.13.12.14.16.1selaS/ecirPDRIP Plan: Yes 9002/210102/211102/212102/213102/21tnerruCsoitaRDeclared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 34.6 34.6 35.4 33.4 35.3 36.9

$0.5900 Payout Ratio: FCFPS (%) 44.3 44.3 48.9 29.4 30.8 31.2$0.5890 Gross Margin (%) 27.6 27.6 27.0 27.6 27.4 25.9$0.5350 Operating Margin (%) 14.9 14.7 13.3 14.1 13.2 12.2$0.5350 Operating Margin (%) (Ind) 9.2 9.3 9.2 8.6 8.2 9.1

3.74.89.89.81.91.9)%( nigraM teN0535.0$4.121.120.325.128.911.02)%( EOR0535.0$


3.13.14.12.13.13.1oitaR tnerruC%16keeW 40.464.364.460.178.468.46)%( stessA ot seitilibaiL%56keeW 31



465,31123,41583,51555,51503,71503,71)M$( emocnI ssorG%2.01sdnediviDANANANANANAN)M$( noitaicerpeD%2.1selaS01400000)M$( artxE/lausunU%1.4emocnI teN773,6898,6648,7486,7902,9733,9)M$( emocnI gnitarepO%9.4cisaB SPE5071573763980577)M$( esnepxE tseretnI%9.4tnoC liD SPE

Pretax Income ($M) 8,312 8,312 6,911 7,350 6,248 5,760SUE Score Net Income ($M) 5,721 5,721 5,130 4,979 4,373 3,829

2.70 Operating Cash Flow ($M) 6,877 6,877 6,646 6,590 5,856 5,3530.40 Investing Cash Flow ($M) (1,113) (1,113) (15,821) (707) (3,150) (1,104)

Annual Financing Cash Flow ($M) (5,940) (5,940) 8,021 (4,005) (3,140) (4,191)12/2015 Capital Expenditures ($M) 2,410 2,410 2,932 929 838 826

22 Net Cash Flow ($M) (217) (217) (1,124) 1,877 (366) 12271.428.485.537.553.653.6)$( cisaB SPE85.7$

$7.62 EPS Diluted Cont ($) 6.21 6.21 5.34 5.32 4.54 4.122.012.714.03.613.61)%( ghC raeY/raeY CD SPE3pU veR # (15.9)

45.107.178.130.202.202.2)$( erahS/sdnediviD6nwoD veR # 1.414.017.98.81.81.8)%( ghC raeY/raeY dnediviD66.7$ogA .soM eerhT39.435.543.651.469.469.4)$( erahS/wolF hsaC eerF%1.11ghC raeY/raeY

12/2013 9/2013 6/2013 3/2013 Total 944,4380,4069,5918,4916,4916,4)M$( hsaC$1.58 $1.55 $1.70 $1.39 $6.22 Goodwill/Intangibles ($M) 43,689 43,689 42,990 21,861 21,781 19,836$1.03 $1.37 $1.62 $1.31 $5.33 Total Assets ($M) 90,594 90,594 89,409 61,452 58,493 55,762



3 Year

Mar 10, 2014Dec 10, 2013Sep 10, 2013

1.04

1.09

2.5% (3 - 2.1)

1.051.01

Feb 3, 2014Oct 9, 2013Jun 12, 2013 Aug 14, 2013

Nov 13, 2013Feb 12, 2014

United Technologies is a provider of technology products and services to the aerospace industries and building systems worldwide. Pratt and Whitney, UTC Aerospace Systems and Sikorsky provide integrated solutions for commercial, regional, business and military aircraft, helicopters and other platforms. The company is also a major supplier to international space programs. Otis manufactures and maintains elevators, escalators and moving walkways. UTC Climate, Controls & Security provides heating, air conditioning and refrigeration systems and fire and security solutions. UTC Power provides environmentally advanced power solutions, including fuel cells and renewable energy solutions.

Apr 29, 2013

Jan 22, 2014Oct 22, 2013

May 15, 2013

1%6%6%

30%

Stock

TTM8.1%8.5%11.5%

Gain

Jun 10, 2013

Rel StrgthIndex

Feb 13, 2013

10.8%16.3%

8.9%6.2%9.4%9.6%11.0%

24$6.82

3/2014

EPS$1.58$1.55 0.8%

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

Month Ago

3102 ,01 raM3102 ,4 beFOct 10, 2012 Nov 14, 2012 Dec 10, 2012

Est Surprise

EPS EstimatesQuarterly

EPS (Qtr)

$1.46

22

$6.82$1.39

(0.4%)

115

$1.47

# of EstimatesCurrent

9.9%

Feb 3, 2014

5$6.85

6

Annual12/2014

% Surp3.5%

$0

$20

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$100

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$140


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14 February2014

Walgreen Co. (WAG)Walgreen Co. (Walgreens) is one of the largest drugstore

chains in the U.S., based on sales and store count. The com-pany operates 8,674 stores (as of the end of December 2013) in all 50 states, the District of Columbia, Guam, Puerto Rico and the U.S Virgin Islands. Walgreens also operates worksite health and wellness centers, in-store convenient care clinics, infusion and respiratory service facilities and specialty and mail service pharmacies. Its stores also sell over-the-counter medications, general merchandise, cosmetics, toiletries, household items and food and beverages.

In fiscal-year 2013, the company generated $72.2 billion in sales while filling about 821 million prescriptions, 19.1% of the U.S. retail prescription drug market.

Why Own WAG?The company seems to have moved past the dispute

with pharmacy benefit manager (PBM) Express Scripts over reimbursement rates, which ended with a new multi-year pharmacy network agreement in September 2012. January pharmacy comparable-store sales rose 4.6%; this followed a 5.3% increase in pharmacy comparable-store sales in Decem-ber and a 1.4% increase in November.

In January, the company entered into a clinical collaboration agreement with Centura Health to provide greater access to health care services. And in September of last year Walgreen entered into a long-term partnership with Theranos Inc. to offer lab testing services at Walgreens’ pharmacies. The company also continues to expand into the high-growth, $7.4 billion immunization market, recording 34% quarter-over-quarter growth in immunizations for the first fiscal quarter of 2014.

Looking beyond organic growth, Walgreens has also been making acquisitions, including a 45% stake in U.K.-based pharmacy operator and wholesale distributor Alliance Boots GmbH in 2012. Walgreens reported that the partnership gen-

erated synergies of $154 million in fiscal 2013, ahead of initial estimates of $100 million to $150 million. Walgreens has an option to acquire the remaining interest in Alliance Boots in 2015 for $9.5 billion. In 2012 Walgreens also acquired the 144-store regional drug retail chain USA Drug for $438 million, giving the company added market share in the mid-Southern U.S.

Walgreens also signed a 10-year deal with AmerisourceBer-gen (ABC) to improve its global pharmaceutical supply chain for branded and generic drugs. The agreement gives Wal-greens the right to purchase 7% of AmerisourceBergen, which is exercisable up to 23%.

Dividend AnalysisOver the last five years, earnings have grown at 3.4% a year,

while analysts expect earnings to grow, on average, by 13.6% a year over the next three to five years.

The stock currently yields 2.3%, based on an indicated dividend of $1.26 per share. This is slightly above the five-year average yield of 2.1%, and in the middle of its five-year low-high range of 1.7% to 2.7%. Walgreens has been paying a dividend since 1932 and has increased its annual dividend in each of the last 38 years.

On July 10, 2013, the company raised its annual dividend by 14.5%. Over the last five years, the company has, on average, increased dividends by 23.5% a year.

Walgreens’ strong operating and free cash flows should allow it to continue returning capital to investors. In fiscal 2013, the company generated free cash flow of $3.1 billion and returned more than $1 billion to shareholders through dividends. Walgreens is also in the midst of a $2 billion share repurchase program that runs through 2015.

RisksWhile total comparable-store sales have been growing

an average of 4.7% quarter-over-quarter for the last three fiscal quarters, front-end (non-pharmacy) sales growth has been lackluster, averaging 1.5% increases over the last three quarters. As a result, management has made front-end sales growth a priority.

The dispute with Express Scripts highlights the increased leverage that pharmacy benefit managers have in light of consolidation in the market. It also showed that the loss of a single major PBM can have a negative impact on sales and earnings.

Walgreens also faces threat from diversified retailers such as Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), which are not afraid of taking losses from selling prescriptions to gain preferred positioning in pharmacy networks. Walgreens has also been facing increased competition from drugstore chain CVS Caremark Corp. (CVS), which believes it will be able to retain the majority of the prescription volume it gained during the Express Scripts dispute. ▪

Bullish Factors• New multiyear agreement with pharmacy benefit

manager Express Scripts• AmerisourceBergen deal should expand margins, boost

bottom line• Synergies from Alliance Boots acquisition are being

realized more quickly than initially anticipated

Bearish Factors• Dispute with Express Scripts highlights the potential

negative impact of losing a single major PBM• Increased competition from CVS Caremark and

diversified retailers such as Target and Wal-Mart• Operational challenges of international market may arise

from Alliance Boots transaction

February2014 15


WAG $55.95 ($62.24 - $39.74) Addition Alert Date: 2/8/2013Price at Alert: $41.40 Risk Index: 2.1Market Cap (Million): $54,492.3Avg Daily Dollar Volume (Million): $324.2Primary Sector: ServicesPrimary Industry: Retail (Drugs)

Indicated Annual Dividend: $1.26 9002/80102/81102/82102/83102/8tnerruCselpitluMLatest Dividend Increase: Date Dividend Yield (%): Avg 2.3 2.3 2.9 2.0 1.8 1.5Latest Dividend Increase: % 2.22.25.23.31.3hgiH :)%( dleiY dnediviD %5.41Dividend Yield: Current 2.3% 2.15.17.15.29.1woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 5.1 5.2 7.3 7.8 6.4 6.5Dividend Paid Since: 4.517.519.217.311.916.91sgninraE/ecirP2391Number of Years of Div Increases: 38 Price/Earnings (Industry) 19.5 21.1 17.3 18.8 14.0 20.6Direct Invest Option: Yes Price/Book Value 2.7 2.4 1.6 2.3 2.3 2.1DRIP Plan: 5.05.05.04.06.07.0selaS/ecirPseY

9002/80102/81102/82102/83102/8tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.315 Payout Ratio: EPS (%) 41.0 44.0 39.1 25.3 27.6 23.4$0.315 Payout Ratio: FCFPS (%) 43.2 34.9 28.8 28.2 21.1 21.5$0.315 Gross Margin (%) 28.9 29.2 28.4 28.4 28.2 28.0$0.275 Operating Margin (%) 5.1 5.5 4.8 6.0 5.1 5.1$0.275 Operating Margin (%) (Ind) 4.1 2.7 4.8 3.1 6.1 4.9

2.31.38.30.34.37.3)%( nigraM teN572.0$Rel Strgth 7.415.416.819.210.311.41)%( EOR

Rank ROE (%) (Industry) 14.1 11.6 9.7 8.9 23.9 6.54.81.81.010.71.76.7)%( AOR%16keeW 48.16.15.12.13.13.1oitaR tnerruC%23keeW 318.242.549.545.542.541.54)%( stessA ot seitilibaiL%86keeW 62

%77keeW 25 Liab to Assets (%) (Ind) 54.3 50.1 50.4 48.9 47.1 61.97.26.27.24.21.20.2revonruT tessA

9002/80102/81102/82102/83102/8MTTstnemetatS laicnaniFraeY 5 htworG533,36024,76481,27336,17712,27032,37)M$( selaS%5.32sdnediviD807,71610,91594,02243,02911,12271,12)M$( emocnI ssorG%1.4selaSANANANANANAN)M$( noitaicerpeD%6.2emocnI teN

762861371240325)M$( artxE/lausunU%5.3cisaB SPE742,3854,3563,4464,3049,3047,3)M$( emocnI gnitarepO%4.3tnoC liD SPE

Interest Expense ($M) 104 168 97 81 97 99SUE Score Pretax Income ($M) 4,335 3,895 3,376 4,294 3,373 3,164

0.10 Net Income ($M) 2,732 2,450 2,127 2,714 2,091 2,0060.20 Operating Cash Flow ($M) 3,833 4,301 4,431 3,643 3,744 4,111

Annual Investing Cash Flow ($M) (2,112) (1,996) (5,860) (1,525) (1,274) (2,776)8/2015 Financing Cash Flow ($M) (2,581) (1,496) 1,170 (2,442) (2,677) 309

25 Capital Expenditures ($M) 1,240 1,212 1,550 1,213 1,014 1,927$3.90 Net Cash Flow ($M) (860) 809 (259) (324) (207) 1,644

30.231.279.234.295.288.2)$( cisaB SPE98.3$20.221.249.224.265.258.2)$( tnoC detuliD SPE3pU veR # 84.095.057.059.041.181.1)$( erahS/sdnediviD3nwoD veR # 12.287.266.292.372.337.2)$( erahS/wolF hsaC eerF39.3$ogA .soM eerhT

11/2013 8/2013 5/2013 2/2013 Total 785,2088,1655,1792,1601,2969)M$( hsaC$0.72 $0.69 $0.65 $0.79 $2.85 Goodwill/Intangibles ($M) 3,799 3,717 3,447 3,229 3,001 2,158$0.43 $0.39 $0.62 $0.78 $2.22 Total Assets ($M) 36,481 35,481 33,462 27,454 26,275 25,142



Jul 10, 2013

4$3.53

14

$1.01

2

Quarterly2/2014

22

3102 ,21 raM3102 ,01 naJOct 10, 2012 Nov 7, 2012 Dec 12, 2012

Feb 13, 2013

EPS (Qtr)

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

Est Surprise

EPS Estimates# of EstimatesCurrentMonth Ago $0.94 $3.48

$0.93

Annual8/2014

17$3.46

EPS$0.72$0.73

% Surp0.3%0.8%

27.8%

24.7%2.3%

6.5%

5.4%6.7%

18.0%3.4%37.6%28.0%

Gain

TTM 3 Year

Index

Walgreen Co., together with its subsidiaries, operates the drugstore chain in the U.S. The company provides its customers with access to consumer goods and services, pharmacy, and health and wellness services through drugstores, as well as through mail, by telephone and online. The company sells prescription and non-prescription drugs, as well as general merchandise, including household items, convenience and fresh foods, photofinishing and candy. On August 2, 2012, it acquired 45% interest in Alliance Boots GmbH (Alliance Boots). In September 2012, the company completed the purchase of a regional drugstore chain in the mid-South region of the U.S.

Apr 10, 2013

Dec 20, 2013Oct 1, 2013

May 17, 2013

1%(5%)13%44%

Stock

Jan 9, 2014Oct 9, 2013Jul 10, 2013 Aug 16, 2013

Nov 14, 2013Feb 13, 2014

2.1% (2.7% - 1.7%)

0.941.081.21

Mar 12, 2014Dec 12, 2013Sep 12, 2013

1.04

Jun 12, 2013

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2/27/2009 2/27/2010 2/27/2011 2/27/2012 2/27/2013

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16 February2014

While few investors knowingly invest in an overvalued stock, differences of opinion establish a range of possible valuations for a given security. While it sounds good to make sure that a stock you own has a high margin of safety, you still need a benchmark to determine the value. Over 50 years ago, Benjamin Graham, the well-known and respected security analyst and author, developed a stock valuation model based upon a few basic market and company variables. By observ-ing many stocks, he determined the average relationship of a common stock price to recent earnings and expected earn-ings growth. Simply stated, the higher the current earnings and the higher the expected growth in earnings, the greater the stock value—a basic tenet of fundamental stock analysis. Graham was estimating an appropriate price-earnings ratio, or earnings multiplier.

Graham observed that the average no-growth stock sold at 8.5 times earnings and that price-earnings ratios increased by twice the rate of earnings growth. This led to the earnings multiplier of:

P/E = 8.5 + 2 × GWhere:G is the expected rate of earnings growth

Thus, a company with no growth and $1.00 in earnings has an estimated value of $8.50 [$1.00 × (8.5 + 2 × 0)]. On the other hand, a stock with a $1.00 in earnings expected to grow earnings at 10% per year has an estimated value of $28.50 ($1.00 × [8.5 + 2 × 10]). Clearly, growth is an important driver of stock value.

At the time Graham proposed this relationship, the interest rate on Aaa-rated corporate bonds averaged 4.4%, but the

rate has fluctuated greatly over time as the risk-free rate, risk premium and inflation expectation change. The bond rate shot past 15% in the early eighties and today sits not too far from the level at which Graham noted the relationship. An important adjustment was made to the Graham multiplier to adjust for changing levels of interest rates. As interest rates rise, price-earnings ratios fall because future earnings are worth less to the investor today when discount rates rise and bond alternatives become more attractive. The adjusted earn-ings multiplier is:

P/E = (8.5 + 2 × G) × 4.4 ÷ AaaWhere:G is the expected rate of earnings growth, andAaa represents the current yield on Aaa-rated corporate bonds

The Federal Reserve Bank of St. Louis (http://research.stlou-isfed.org/fred2/series/AAA) reports that seasoned Aaa cor-porate bonds currently yield 4.5%. But if interest rates go up, how might that impact a stock’s valuation? Let’s say interest rates go up to 7.0%. That same stock with current earnings of $1.00 and an expected growth rate of 10% sees its earnings multiple drop from 28.5 to 17.9 and its valuation decline to $17.91 [$1.00 × (8.5 + 2 × 10) × 4.4 ÷ 7.0]. Even a 1% increase from 4.4% to 5.4% would reduce the multiple and valuation by 18.5% for a stock expected to expand earnings a 10% an-nual rate of growth.

We have created a table based upon the Graham formula-tion for a variety of growth rates and interest rates. Multiply-ing the figures in the table by a stock’s most recent earnings per share gives an estimate of the stock’s value. The table

allows you to quickly see the impact of these key valuation variables. Keep in mind that the table does not adjust for company risk. As risk increas-es, earnings multiples should decline, assuming that all other factors remain constant. While Graham did not explic-itly adjust for risk, he recog-nized that growth companies are inherently riskier and that, without some constraints, values could very quickly become speculative. Graham was reluctant to use a growth rate above 8% in his analysis and preferred to lower his estimate to provide a margin of safety. No matter how good the model, the analysis is only as good as the input. ▪

Graham earnings Multiplier

1 2 3 4 4.4 5 6 7 8 9 100 37.4 18.7 12.5 9.4 8.5 7.5 6.2 5.3 4.7 4.2 3.71 46.2 23.1 15.4 11.6 10.5 9.2 7.7 6.6 5.8 5.1 4.62 55.0 27.5 18.3 13.8 12.5 11.0 9.2 7.9 6.9 6.1 5.53 63.8 31.9 21.3 16.0 14.5 12.8 10.6 9.1 8.0 7.1 6.44 72.6 36.3 24.2 18.2 16.5 14.5 12.1 10.4 9.1 8.1 7.35 81.4 40.7 27.1 20.4 18.5 16.3 13.6 11.6 10.2 9.0 8.16 90.2 45.1 30.1 22.6 20.5 18.0 15.0 12.9 11.3 10.0 9.07 99.0 49.5 33.0 24.8 22.5 19.8 16.5 14.1 12.4 11.0 9.98 107.8 53.9 35.9 27.0 24.5 21.6 18.0 15.4 13.5 12.0 10.89 116.6 58.3 38.9 29.2 26.5 23.3 19.4 16.7 14.6 13.0 11.7

10 125.4 62.7 41.8 31.4 28.5 25.1 20.9 17.9 15.7 13.9 12.512 143.0 71.5 47.7 35.8 32.5 28.6 23.8 20.4 17.9 15.9 14.314 160.6 80.3 53.5 40.2 36.5 32.1 26.8 22.9 20.1 17.8 16.116 178.2 89.1 59.4 44.6 40.5 35.6 29.7 25.5 22.3 19.8 17.818 195.8 97.9 65.3 49.0 44.5 39.2 32.6 28.0 24.5 21.8 19.620 213.4 106.7 71.1 53.4 48.5 42.7 35.6 30.5 26.7 23.7 21.3

Interest Rate on Aaa-Rated Corporate Bonds (%)

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The earnings Multiplier (P/e Ratio) for various Growth Rates and Interest Rates

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