in this issue new addition has potential upside baked in tnew addition has potential upside baked in...

New Addition Has Potential Upside Baked InThis month, DI parts with one of its oldest holdings, McDonald’s Corp. (MCD).

The stock was among the original 24 stocks held in the tracking portfolio. It’s made money, with a 48.9% return in the DI tracking portfolio, but now its valu-ation has the appeal of cold fries—still edible, but not nearly as enjoyable as when the fries are first placed on your tray.

Replacing the fast food chain is Williams-Sonoma Inc. (WSM). Recognizable for its eponymous upscale cookware stores, Williams-Sonoma also operates the well-known Pottery Barn chain, fellow furniture and furnishings chain West Elm and upscale home hardware chain Rejuvenation.

The dividend yield of the two stocks is almost the same—2.9% for McDonald’s and 2.8% for Williams-Sonoma—but the similarities end there. Williams-Sonoma has a cheaper valuation, both in terms of its relative yield (more on that in a second) and its absolute price-earnings ratio. Simply put, the numbers suggest greater upside for Williams-Sonoma than McDonald’s going forward.

Valuing Stocks by Relative YieldRelative valuation is the methodology of assessing an asset’s value by compar-

ing it to a benchmark. This benchmark can be similar assets, an index or even the historical valuation range for the security being analyzed.

Geraldine Weiss was a proponent of valuing stocks relative to their historical yields. A synopsis of her approach can help to explain our rationale for replac-ing McDonald’s with Williams-Sonoma. Computerized Investing Editor Jaclyn McClellan takes a more an in-depth look at Weiss’ approach in the June AAII Journal.

Known as “The Grand Dame of Dividends,” Weiss believed that the price of a stock was driven by its yield. She viewed investors as being attracted to stocks with high yields and wanting to sell stocks with low yields. This behavior resulted in a repeatable pattern, which Weiss used for to determine when to get into and out of a stock. She described her strategy in “Dividends Don’t Lie” (Longman Financial Service, 1990.)

Weiss plotted a stock’s historical yields to identify its dividend cycle. This en-abled her to identify when yields were high on a historical basis (implying a low valuation) and when yields were low on a historical basis (implying a high valu-ation). She would target stocks trading within 10% of their historical high yields and sell stocks trading within 10% of their historical low yields.

She preferred to examine at least 10 years of yield data, and 20 years if pos-sible. Weiss wasn’t just seeking out cheap stocks, but rather looking for funda-mentally sound dividend growers trading at discounted valuations.

The DI portfolio follows a similar approach. Stocks added to the portfolio have yields above the historical average (yields and valuations are inversely related). Stocks may be removed from the portfolio if their yield falls to near or below their average low yield.

Those of you who incorporate technical analysis will be familiar with this type of strategy. It is akin to using a stock’s price range, or channel. For both relative yield and technical analysis strategies, decisions about the attractiveness of the

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 ReportsCummins Inc. (CMI) 8

Industry leading engine manufacturer has a revved up dividend yield, but sees a downshift in earnings growth.

Invesco Ltd. (IVZ) 10Earnings growth projected to resume for this asset manager.

Occidental Petroleum (OXY) 12Shareholder-friendly integrated oil company focused on sustainable dividend and long-term profitably and growth.

Williams-Sonoma, Inc. (WSM) 14Specialty retailer of home products via e-commerce and brick and mortar stores yielding 2.8%.

DI Article Deconstructing the Altman Z-Score: Working Capital to Total Assets 16

The second in a series discussing Altman’s Z-Score to assess a company’s potential likelihood of going bankrupt.

Next Publication Date: July 1, 2016

June 2016Volume V Issue 6

www.AAIIDividendInvesting.com

TM

http://www.aaii.com/journal/article/the-weiss-approach-to-value-in-blue-chip-stocks

2 June 2016

stock are based on how investors in the stock have historically reacted in the past. Could a stock cease to follow its historical patterns? Absolutely, but long-term history tends to be a pretty good guide for making buy and sell decisions.

DI Portfolio AlertsWe are making just the second

change to DI portfolio this year. As previously stated, McDonald’s Corp. is being removed and Williams-Sonoma is being added. The intention is to invest an amount approximately equal to the average position size of all 24 stocks in held in the DI tracking portfolio. For those who are new to DI, the aver-age position size is calculated by the dividing the total value of the portfo-lio by 24 stocks. Though holding 24 stocks provides greater diversification, subscribers wishing to own a smaller number should consider holding at least 10 stocks. The DI User’s Guide (available on the DI website) provides guidance on how to create your own portfolio.

Some readers may wonder: Why not remove Stage Stores Inc. (SSI) instead? There are legitimate near-term concerns about economic weakness in oil-produc-ing areas and the weak peso. However, we are not seeing any signs that the dividend is in danger of being cut or suspended. In fact, Stage Stores is not

only continuing to pay its dividends, it is also investing in remodeling stores. This suggests to us that the price decline, and resulting 10.8% yield, represents an overreaction on the part of the market. This said, we are continuing to monitor the stock.

Portfolio Deletion:McDonald’s Corp. (MCD)

McDonald’s has returned 48.9% since being added to the portfolio in January 2012. The return figure includes the purchase of additional shares in September 2012 and November 2014. Though realizing a profit in the DI track-ing portfolio, the stock has underper-formed the Dow Jones U.S. Index ETF’s (IYY) 77.6% gain over the same period.

McDonald’s yield of 2.9% is at the bottom of its average five-year high-low range of 3.6% to 2.9%. The stock’s price-earnings ratio of 23.5 compares to its average five-year range of 16.3 to 20.7. Both sets of numbers imply that McDonald’s is trading well above the valuations that have attracted investors to it in the past.

A dividend increase may help to reduce the yield, but we do not expect the increase to be large enough to have a significant impact. The company’s last dividend increase was limited to 4.7%. Plus, the next increase is not expected

until September.McDonald’s went ex-

dividend on Thursday, June 2, 2016. Those who owned McDonald’s prior to Thursday will receive the next dividend pay-ment of $0.89 on June 20, regardless of when the stock is sold.

Portfolio Addition:Williams-Sonoma Inc. (WSM)

Williams-Sonoma describes itself as a specialty retailer of high-quality prod-ucts for the home. The company oper-ates the chains Williams-Sonoma (cook-ing and related products); Pottery Barn, Pottery Barn Kids, West Elm and PBteen (furniture and furnishings); Rejuvenation (high-quality home hardware, light-ing and décor); and Mark and Graham (personalized gift items). Pottery Barn accounted for 42% of revenues in fiscal 2015, followed by Williams-Sonoma and West Elm at 20% and 17% of revenues, respectively.

Pottery Barn was previously known for its catalogs in addition to its furniture and home furnishings. This history has carried over to the modern era, with the entire company taking advantage of the shift toward online shopping. Last year, e-commerce revenues exceed in-store sales by a margin of 50.7% to 49.3%.

Sales have grown at a 7.3% annual-ized pace over the past five years, and earnings from continuing operations have grown at a 12.8% rate. Williams-Sonoma recently reiterated its fis-cal-2016 guidance for revenues of $5.15 billion to $5.25 billion (an increase of approximately 4.5%) and adjusted earnings guidance of $3.50 to $3.65 per

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, 2016. AAII Dividend Investing is a trademark and service mark of the American Association of Individual Investors—All rights reserved. This publication may not be reproduced in whole or in part by any means without prior written consent.

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

Printed in the U.S.A.

Portfolio Alerts This MonthJune Portfolio Deletions

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price* Alert Date Purchase* Purchase*McDonald's Corporation (MCD) 6/3/2016 $122.06 12/31/2011 48.9% 77.6%

June Portfolio Additions

Company (Ticker)Latest Price (5/31/2016)

Dividend Yield* Sector: Industry

Williams-Sonoma, Inc. (WSM) $53.04 2.8%*Data as of 5/31/2016.

Company (Ticker)Portfolio Deletion Alert

Consumer Cyclical: Furniture & Fixtures

June 2016 3

AAII DIvIDeND INvesTINg

share (an approximate 6.2% increase).The company has rewarded share-

holders with higher dividends. During the past five years, the dividend has increased at a 19.3% pace. In March, the company raised its dividend by 5.7% and announced a new $500 mil-lion share buyback program. Williams-Sonoma has realized free cash during each of the past seven years, and its payout is a very reasonable 31.0% of earnings. As such, the company has the ability to increase its dividend further.

Shares of Williams-Sonoma trade at a price-earnings ratio of 15.9. Not only is this well below the valuation investors have historically been willing to pay, it ranks approximately in the bottom 40% of all stocks within our Stock Investor Pro database. The stock’s yield of 2.8% compares to a five-year average high-low range of 2.6% to 1.7%. This yield is within the top 20% of all stocks within the Stock Investor Pro database.

See pages 14 and 15 of this is-sue for more data and analysis on Williams-Sonoma.

June, the Fed and DividendsIf historical trends hold up, June could

be a calm month. Since 1945, the S&P 500 index has experienced its second-lowest amount of volatility in June, according to Sam Stovall at S&P Capital IQ. Only December is less volatile. Furthermore, during presidential elec-tion years where the incumbent is not running, June had the fewest days with the S&P 500 declining by 1% or more.

One event with the potential to create some volatility is the forthcom-ing Federal Open Market Committee (FOMC) meeting on June 15. Scuttlebutt about a second rate hike occurring this summer had been intensifying prior to the release of the May jobs data. We have never claimed to possess any soothsaying abilities and do not intend to start making such claims now.

Those who are looking for some type of insight may want to keep an eye on the CME Group’s FedWatch Tool (www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html). This tool tracks what rate hike expectations the futures markets are pricing in. As we went to press, the FedWatch Tool showed a 4% chance of a rate hike occurring at the June 15 meeting and a 36% chance at the July 27 meeting.

These expectations are subject to change.

We can tell you with absolute confi-dence that five DI companies declared dividends last June. As such, we expect dividend announcements from all five this month. Target Corp. (TGT) raised its dividend by 7.7% on June 9, 2015, and Caterpillar Inc. (CAT) raised its dividend by 10% on June 10, 2015. AT&T Inc. (T) and Microsoft Corp. (MSFT) declared, but did not increase, their dividends last year. WEC Energy Group (WEC) announced an increase in its dividend last year pending the completion of its merger with Intergrys, but is back to its typical cycle of annual increases being announced in January.

May DI Portfolio PerformanceThe DI tracking portfolio declined by

0.7% in May, trailing the 1.8% gain for the Dow Jones U.S. ETF (IYY). The DI tracking portfolio incurred a 1.0% capital loss, partially offset by 0.3% in income return. All five DI tech holdings—Apple Inc. (AAPL), IBM Corp. (IBM), Microsoft, Qualcomm Inc. (QCOM), and Texas Instruments (TXN)—realized gains of 5.3% or higher. On the other hand,

DI Pur- Latest Maychase Price Gain/ Div

Ticker Company Date Price Price (5/31/16) (Loss) Stock Index Yield IndustryAAPL Apple Inc. 4/4/14 $75.97 $75.26 $99.86 6.5% 38.5% 16.7% 2.3% Communications EquipmentT AT&T Inc. 12/31/11 $30.24 $30.48 $39.15 0.9% 63.1% 77.6% 4.9% Communications ServicesCAT Caterpillar Inc. 11/7/14 $101.76 $102.36 $72.51 (6.7%) (24.8%) 5.2% 4.2% Construction & Agricultural MachineryCMI Cummins Inc. 10/3/14 $135.10 $136.18 $114.47 (2.2%) (11.4%) 9.4% 3.4% Misc. Capital GoodsDE Deere & Company 2/7/14 $86.56 $87.59 $82.29 (2.2%) 0.0% 18.1% 2.9% Construction & Agricul MachineryEMN Eastman Chemical Co. 2/6/15 $73.20 $74.67 $73.36 (4.0%) 1.2% 4.1% 2.5% Chemical ManufacturingETN Eaton Corporation 12/31/11 $43.53 $45.52 $61.63 (2.6%) 54.1% 77.6% 3.7% Electronic Instruments & ControlsEMR Emerson Electric Co. 8/7/15 $49.19 $50.05 $52.02 (4.8%) 8.0% 0.4% 3.7% Scientific & Technical InstrumentsIBM IBM Corp. 10/2/15 $144.58 $149.54 $153.74 5.3% 21.7% 5.7% 3.6% Computer ServicesIP International Paper Co. 4/4/14 $45.81 $45.69 $42.16 (2.6%) (0.1%) 16.7% 4.2% Paper & Paper ProductsIVZ Invesco Ltd. 6/6/14 $38.18 $37.82 $31.40 1.3% (11.6%) 10.4% 3.6% Investment ServicesMSFT Microsoft Corp. 12/31/11 $25.96 $26.94 $53.00 6.3% 123.0% 77.6% 2.7% Software & ProgrammingOXY Occidental Petroleum 1/9/15 $77.54 $75.96 $75.44 (1.6%) 4.5% 5.3% 4.0% Oil & Gas - IntegratedPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $101.17 (1.7%) 71.6% 77.6% 3.0% Beverages (Non-Alcoholic)PG Procter & Gamble Co. 12/7/12 $70.29 $70.89 $81.04 1.1% 27.7% 55.6% 3.3% Personal & Household ProductsQCOM Qualcomm, Inc. 3/6/15 $71.51 $72.60 $54.92 8.7% (20.9%) 2.6% 3.9% Communications EquipmentSSI Stage Stores Inc. 8/7/15 $16.67 $16.58 $5.53 (24.9%) (63.9%) 1.3% 10.8% Retail (Apparel)TGT Target Corporation 12/31/11 $51.22 $51.28 $68.78 (13.5%) 51.5% 77.6% 3.3% Retail (Department & Discount)TXN Texas Instruments 4/5/13 $34.20 $34.80 $60.60 6.2% 90.3% 40.8% 2.5% SemiconductorsUNP Union Pacific Corp. 7/2/15 $96.66 $97.23 $84.19 (3.5%) (11.1%) 2.0% 2.6% RailroadsWEC WEC Energy Group 12/31/11 $34.96 $34.68 $60.14 3.3% 123.7% 77.6% 3.3% Electric UtilitiesWFC Wells Fargo & Co. 12/7/12 $33.23 $33.40 $50.72 1.5% 67.5% 55.6% 3.0% Regional BanksWSM Williams-Sonoma, Inc. 6/3/16 na na $53.04 (9.8%) na na 2.8% Furniture & FixturesWYN Wyndham Worldwide Corp. 3/4/16 $76.04 $75.36 $67.39 (5.0%) (9.3%) 6.7% 3.0% Hotels & MotelsData as of 5/31/2016. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

4 June 2016

$80,0001/3/2012 7/3/2012 1/3/2013 7/3/2013 1/3/2014 7/3/2014 1/3/2015 7/3/2015 1/3/2016

$90,000

$100,000

$110,000

$120,000

$130,000

$140,000

$150,000

$160,000

$170,000

$180,000Growth of $100,000

AAII Dividend Investing Portfolio

Performance

Dividend Yield 3.3% 2.0%

Total Return

Income Return

Capital Gain/(Loss)

Total Return

Income Return

Capital Gain/(Loss)

May (0.7%) 0.3% (1.0%) 1.8% 0.0% 1.8%2016 YTD 5.5% 1.4% 4.1% 3.5% 0.5% 3.0%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% 14.3% 2.2% 12.1%From Inception 64.3% 20.2% 44.1% 77.9% 13.6% 64.3%Performance as of 6/1/2016.

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.

AAII Dividend Investing Portfolio

Performance of DI Portfolio

the DI portfolio’s two retailers were its worst performers: Stage Stores and Target. Wyndham Worldwide Corp. (WYN), which also relies on discre-tionary spending, was the portfolio’s fourth-worst performer. In total, 10 DI holdings enjoyed positive returns, while 14 declined.

The Dow Jones U.S. ETF will pay its next distribution at the end of June.

May favored growth. The S&P Value and S&P Dividend Aristocrats indexes both underperformed the S&P 500

growth index. This was a reversal of the trends earlier this year, which favored value and dividend growth strategies. The DI portfolio follows a value-oriented dividend-growth approach.

Year-to-date, the DI portfolio contin-ues to outpace its benchmark with a 5.5% gain (composed of a 1.4% capital gain and 4.1% in income return). The Dow Jones U.S. ETF has risen 3.5% (3.0% capital gain and 0.5% income return). The weighted yield of the DI portfolio is 3.3%, well above the Dow

Jones U.S. ETF’s yield of 2.0%.

Portfolio NewsStrongest Stocks in May

Qualcomm Inc. (QCOM) gained 8.7% during May, helped by the resolution of technology licensing deals with Chinese and Korean manufacturers.

Qualcomm announced that it has signed a new 3G and 4G Chinese Patent License Agreement with Hisense Group Co., Ltd. The royalties payable by Hisense are consistent with the terms of the rectification plan submit-ted by Qualcomm to China’s National Development and Reform Commission.

Qualcomm also disclosed that it has resolved its dispute with Korean manu-facturer LG Electronics over certain terms in their license agreement under Qualcomm’s portfolio of patents cover-ing 3G WCDMA and CDMA2000 and 4G LTE wireless technologies as well as numerous other technologies imple-mented in wireless devices.

Qualcomm announced plans to begin making customized chips for the Chinese market through a Chinese government-owned venture, hope-fully starting in the second half of next year. These chips will run servers, a key departure from the smartphone chips Qualcomm usually produces. As the smartphone market has slowed, Qualcomm has sought alternative areas for growth. Qualcomm owns 45% of the joint venture, the Chinese government the remainder.

Qualcomm finished the month with a 3.9% dividend yield, above its 2.8% yield one year ago and well above its five-year average of 2.0%.

Apple Inc.’s (AAPL) stock price over-came concerns over the iPhone’s slump-ing sales though an announcement of a strategic investment in Didi coupled with news of Berkshire Hathaway’s investment in Apple. Shares rose 6.5% during May.

Apple confirmed its interest in autonomous vehicle technology this month with a $1 billion investment in Didi Chuxing Technology Co., China’s dominant ride-sharing service. Didi has

June 2016 5


long been competing against Uber for control of the ride-sharing service mar-ket in the country.

This move from Apple also signals a shift in mentality toward investing its cash reserves. Previously, Apple was known for its preference to buy small startups outright and absorb their tech-nology, and the company normally does not participate in a fundraising round for a startup.

Berkshire Hathaway Inc. (BRK.B) disclosed that it invested $1 billion in Apple stock during the last quarter. Even with this move, the overall character-ization of Apple as a growth or value stock is still up in the air. Some growth-based investors point out that Apple’s fast-paced growth has only slowed, not come to a halt, while value-based inves-tors see Apple trading with low price multiples. Apple certainly straddles the gap between growth and value, due to its low price-earnings ratio, around 11.1, coupled with high historical earn-ings growth of 33.6% that is projected to slow to a 9.2% growth rate over the next three to five years.

Shares of Microsoft Corp. (MSFT) gained 6.3% during May as the compa-ny announced that it is selling its phone business to FIH Mobile Ltd., a subsidiary of Hon Hai/Foxconn Technology Group, for $350 million. As part of the deal, FIH Mobile will also acquire Microsoft Mobile Vietnam, a manufacturing facil-ity based in Hanoi. Microsoft will con-tinue to develop Windows 10 Mobile.

Microsoft noted that it will lay off 1,850 workers, taking an impairment and restructuring charge of approxi-mately $950 million. CEO Satya Nadella said the company intends to focus its mobile phone efforts in areas where the company has differentiation, which includes businesses that want to use Microsoft’s technology to manage and secure devices on their corporate networks.

Separately, Microsoft released plans to shut its MSN China portal in June, but says it remains committed to China with its other available products and efforts, ranging from Windows 10 to cloud ser-vices. The company had previously shut

down its internet messaging service in China in 2014. Both of these shutdowns indicated the transition of Microsoft’s business focus in China from providing online content to solely focusing on of-fering software and services related to Windows 10.

Texas Instruments (TXN) gained 6.2% after exceeding first-quarter revenue and earnings expectations. The com-pany reported first-quarter revenue of $3.01 billion and earnings per share of $0.65. Revenue was down 4.8% year over year, but ahead of the consensus estimate by $20 million. Earnings sur-passed the consensus estimate by $0.03 per share.

Texas Instruments’ core businesses of analog and embedded process-ing accounted for 87% of first-quarter revenue. Compared to last year, analog revenue declined 8%, while embedded processing revenue grew 8%. Operating margin increased in both businesses.

CEO Rich Templeton observed, “Free cash flow for the trailing 12 months was up 1% from a year ago, to $3.7 billion. This represents 28.4% of revenue, up from 27.3% a year ago, and is consistent with our targeted range of 20% to 30% of revenue.”

Texas Instruments finished the month with a dividend yield of 2.5%, which matches its five-year average yield.

Weakest Stocks in MayAfter losing 24.9% in May, Stage

Stores, Inc. (SSI) was the poorest per-former for the month in the DI portfolio. Shares fell after the company reported an 8.5% drop in comparable sales and a 9.9% decrease in total sales. On an adjusted basis, the company incurred a

loss of $0.56 per share, versus a loss of $0.26 per diluted share in the prior year. Analysts polled by I/B/E/S were fore-casting a loss of $0.47 per share.

“Our first-quarter results were hurt by our Texas, Louisiana, Oklahoma and New Mexico stores, due to the impact of depressed oil prices and the weak peso, as well as a challenging retail envi-ronment. Excluding stores in these four states, our comparable sales declined 3.8%,” said CEO Michael Glazer. “We expect these macro factors will weigh on our sales performance in the near term and we are reducing our expenses, inventories and capital spending. We continue to plan the business for the long term, investing in our stores, grow-ing our omnichannel business, and im-proving our merchandising and market-ing. While reinvesting in our business, we are focused on generating positive cash flows and delivering value to our shareholders through our dividend.”

Looking forward, comparable sales for the year are expected to be down 4% to 6%. Adjusted earnings per share are expected to be in the range of $0.20 to $0.40, compared to the current consen-sus estimate of $0.45 per share.

Target Corp. (TGT) fell 13.5% in May, the second-worst performance in the DI portfolio. The company reported a decline in sales in the first quarter and warned that sales at existing stores could fall in the second quarter. CEO Brian Cornell cited “an increasingly volatile consumer environment” and said he expects “excess inventory” at other retailers to “extend the very in-tense promotional environment into the months ahead.”

Sales at existing stores rose 1.2% in

Recent earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %CMI Cummins Inc. May 3 $1.870 $1.784 4.8%DE Deere & Company May 20 $1.560 $1.475 5.8%EMR Emerson Electric Co. May 3 $0.660 $0.632 4.4%OXY Occidental Petroleum May 5 ($0.560) ($0.403) (39.0%)SSI Stage Stores Inc. May 19 ($0.560) ($0.471) (18.9%)TGT Target Corporation May 18 $1.290 $1.194 8.0%WEC WEC Energy Group May 3 $1.090 $1.011 7.8%WSM Williams-Sonoma, Inc. May 25 $0.530 $0.497 6.6%Data as of 5/31/2016. Sources: I/B/E/S and company releases.

6 June 2016

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

Ticker Company Paid Date Payable Div Yield Invest PlanAAPL Apple Inc. 2, 5, 8, 11 Thu May 5, 2016 Thu May 12, 2016 $0.5700 � $2.28 2.3% -- --T AT&T Inc. 2, 5, 8, 11 Wed Apr 6, 2016 Mon May 2, 2016 $0.4800 $1.92 4.9% Yes YesCAT Caterpillar Inc. 2, 5, 8, 11 Thu Apr 21, 2016 Fri May 20, 2016 $0.7700 $3.08 4.2% Yes YesCMI Cummins Inc. 3, 6, 9, 12 Wed May 18, 2016 Wed Jun 1, 2016 $0.9750 $3.90 3.4% Yes YesDE Deere & Company 2, 5, 8, 11 Tue Jun 28, 2016 Mon Aug 1, 2016 $0.6000 $2.40 2.9% Yes YesEMN Eastman Chemical Co. 1, 4, 7, 10 Mon Jun 13, 2016 Fri Jul 1, 2016 $0.4600 $1.84 2.5% Yes YesETN Eaton Corporation 3, 5, 8, 11 Wed May 4, 2016 Fri May 20, 2016 $0.5700 $2.28 3.7% Yes YesEMR Emerson Electric Co. 3, 6, 9, 12 Wed May 11, 2016 Fri Jun 10, 2016 $0.4750 $1.90 3.7% Yes YesIBM IBM Corp. 3, 6, 9, 12 Fri May 6, 2016 Fri Jun 10, 2016 $1.4000 � $5.60 3.6% Yes YesIP International Paper Co. 3, 6, 9, 12 Wed May 25, 2016 Wed Jun 15, 2016 $0.4400 $1.76 4.2% Yes YesIVZ Invesco Ltd. 3, 6, 9, 12 Wed May 11, 2016 Fri Jun 3, 2016 $0.2800 � $1.12 3.6% Yes YesMCD McDonald's Corp.* 3, 6, 9, 12 Thu Jun 2, 2016 Mon Jun 20, 2016 $0.8900 $3.56 2.9% Yes YesMSFT Microsoft Corp. 3, 6, 9, 12 Tue May 17, 2016 Thu Jun 9, 2016 $0.3600 $1.44 2.7% Yes YesOXY Occidental Petroleum 1, 4, 7, 10 Wed Jun 8, 2016 Fri Jul 15, 2016 $0.7500 $3.00 4.0% -- YesPEP PepsiCo, Inc. 1, 3, 6, 9 Wed Jun 1, 2016 Thu Jun 30, 2016 $0.7525 � $3.01 3.0% Yes YesPG Procter & Gamble Co. 2, 5, 8, 11 Thu Apr 14, 2016 Mon May 16, 2016 $0.6695 � $2.68 3.3% Yes YesQCOM Qualcomm, Inc. 3, 6, 9, 12 Fri May 27, 2016 Wed Jun 22, 2016 $0.5300 � $2.12 3.9% Yes YesSSI Stage Stores Inc. 3, 6, 9, 12 Thu May 26, 2016 Wed Jun 15, 2016 $0.1500 $0.60 10.8% -- --TGT Target Corporation 3, 6, 9, 12 Mon May 16, 2016 Fri Jun 10, 2016 $0.5600 $2.24 3.3% Yes YesTXN Texas Instruments 2, 5, 8, 11 Thu Apr 28, 2016 Mon May 16, 2016 $0.3800 $1.52 2.5% Yes YesUNP Union Pacific Corp. 3, 6, 9, 12 Thu May 26, 2016 Thu Jun 30, 2016 $0.5500 $2.20 2.6% Yes YesWEC WEC Energy Group 3, 6, 9, 12 Wed May 11, 2016 Wed Jun 1, 2016 $0.4950 $1.98 3.3% Yes YesWFC Wells Fargo & Co. 3, 6, 9, 12 Wed May 4, 2016 Wed Jun 1, 2016 $0.3800 � $1.52 3.0% Yes YesWSM Williams-Sonoma, Inc. 3, 6, 9, 12 Wed Apr 27, 2016 Fri May 27, 2016 $0.3700 � $1.48 2.8% -- --WYN Wyndham Worldwide Corp. 3, 6, 9, 12 Wed May 25, 2016 Fri Jun 10, 2016 $0.5000 $2.00 3.0% -- --

� 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 5/31/2016. *Portfolio deletion alert issued 6/3/2016

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

the quarter ended April 30, short of Target’s 1.5% to 2.5% annual target. The company warned the metric would be flat to down 2% in the current quarter. Despite weakness in the first half of the year, Target said it still sees its full-year earnings forecast as “achievable.” Cornell said the spending slowdown at the start of the year was the result of consumer caution and unusually cold and wet weather in certain regions.

Overall for the quarter, Target report-ed a revenue decline of 5.4%, largely due to the sale of its pharmacy and clinic businesses to CVS Health Corp. (CVS). Excluding restructuring charges and gains from the CVS deal, earnings were $1.29 per share, better than ana-lyst expectations of $1.19 per share.

For the current quarter, Target expects to post $1.00 to $1.20 in adjusted

earnings per share, below the $1.36 per share analysts have projected.

Caterpillar Inc. (CAT) was the DI port-folio’s third-worst performer, declining 6.7%. The company reported a decrease in its April three-month rolling-period retail sales. Total machinery sales were down 12% worldwide. Resource industries sales fell 28% worldwide. Caterpillar’s construction industries re-ported that three-month rolling-period sales declined 7% worldwide. Energy and transportation retail sales fell 34%.

The stock currently yields 4.2%, which is well above its five-year average low yield of 3.2%. As previously noted, the company raised its dividend during the second week of June last year, and we are currently waiting to see if Caterpillar extends its streak of annual increases.

Shares of Wyndham Worldwide Corp.

(WYN) slipped 5.0% in May. There was no company-specific news last month to explain the decrease. Rather, it may have represented a continuation of selling pressure that began in late April following the company’s first-quarter earnings release.

Wyndham earned $1.12 per share in the first quarter, topping the I/B/E/S consensus estimate of $1.10 per share. The company also raised its full-year guidance to a range of $5.61 to $5.75 per share, up from $5.46 to $5.60 per share. Revenues of $1.3 billion, how-ever, were slightly below the consensus estimate. Negatively impacting revenues were a decline in room rates at the company’s hotels and a projection for revenue per available room (RevPAR) “at the lower end” of company’s expec-tations for the remainder of 2016. ▪

June 2016 7


Est Consec- PayoutEPS Div First utive Ratio:

P/E Growth Growth 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)AAPL 11.1 2.3% 1.6% na 9.2% na 2012 4 23% 17% 21% 57% $549,988T 17.4 4.9% 6.9% 5.4% 8.2% 2.3% 1984 32 na 136% 0% 69% $239,117CAT 34.6 4.2% 3.5% 2.6% (1.2%) 11.6% 1933 22 142% 43% 65% 80% $42,087CMI 15.2 3.4% 2.7% 2.0% (0.4%) 32.0% 1948 6 49% 28% 46% 53% $19,336DE 16.5 2.9% 2.6% 2.4% 1.0% 15.7% 1971 11 48% 27% 159% 88% $25,311EMN 11.8 2.5% 2.2% 2.0% 7.0% 13.2% 1994 6 28% 26% 27% 73% $10,899ETN 14.9 3.7% 3.1% 3.1% 8.0% 15.3% 1923 7 54% 45% 47% 51% $28,176EMR 17.9 3.7% 3.1% 3.0% 6.0% 7.0% 1947 59 65% 53% 54% 65% $33,467IBM 11.6 3.6% 3.1% 2.2% 2.7% 14.9% 1915 21 39% 28% 34% 87% $146,337IP 18.2 4.2% 3.2% 3.2% 7.3% 32.6% 1946 4 73% 63% 79% 86% $17,204IVZ 15.3 3.6% 2.7% 2.7% 10.0% 19.6% 1994 12 53% 41% 48% 65% $12,977MSFT 40.4 2.7% 3.7% 2.6% 8.2% 19.0% 2003 4 63% 45% 43% 59% $407,880OXY na 4.0% 3.8% 3.0% 169.9% 15.1% 1975 13 na na (257%) 43% $58,128PEP 28.9 3.0% 2.9% 3.0% 6.5% 7.9% 1952 44 80% 58% 54% 84% $147,186PG 27.1 3.3% 3.4% 3.1% 6.1% 7.5% 1890 60 81% 65% 59% 54% $216,196QCOM 17.3 3.9% 2.8% 2.0% 11.3% 20.1% 2003 14 60% 35% 44% 41% $81,877SSI na 10.8% 2.7% 2.5% na 18.3% 2005 6 na 140% (26%) 55% $144TGT 13.0 3.3% 2.8% 2.6% 9.3% 19.0% 1967 44 41% na 43% 69% $40,607TXN 21.2 2.5% 2.6% 2.5% 10.0% 23.4% 1962 12 50% 46% 40% 38% $61,027UNP 15.8 2.6% 2.2% 2.1% 7.1% 27.4% 1899 5 41% 33% 58% 63% $69,251WEC 23.3 3.3% 3.8% 3.3% 6.8% 16.8% 1939 13 70% 57% 244% 70% $18,835WFC 12.5 3.0% 2.7% 2.6% 9.4% 49.1% 1939 6 36% 28% 43% 89% $256,645WSM 15.7 2.8% 1.3% 2.1% 8.8% 19.3% 2006 6 31% 38% 27% 49% $4,640WYN 13.5 3.0% 2.6% 1.9% na 28.5% 2007 7 na 31% 0% 92% $7,458Data as of 5/31/2016. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Payout Ratio:Dividend Yield EPS

Dividend Analysis

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

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

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

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

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

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

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

Dividend Yield—1 Year Ago: The stock’s

dividend yield (dividends divided by price) from one year ago. 5 Year 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 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.).

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 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.

8 June 2016

Cummins Inc. designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products. It operates in four segments: engine, distribution, components and power generation.

The engine segment, which accounted for 42% of sales and 40% of operating earnings in the first quarter, offers a range of diesel and natural gas powered engines under the Cummins name and other customer brand names. It serves the heavy- and medium-duty truck, bus, recreational vehicle, light-duty automotive, agricultural, construction, mining, ma-rine, oil and gas, rail and governmental equipment markets.

The distribution segment (27% of sales, 19% of EBIT) provides maintenance contracts, engineering services and integrated products. The components segment (22% of sales, 35% of EBIT) supplies after-treatment systems, turbocharg-ers, filtration products and fuel systems for commercial diesel applications (on and off highway). This segment serves engine and distribution markets, truck manufacturers and other origi-nal equipment manufacturers.

The power generation segment (9% of sales, 6% of EBIT) designs and manufactures components that include engines, controls, alternators, transfer switches and switchgear, as well as power generation systems and services.

Why Own CMI?Cummins is a well-run industrial company specializing

in diesel engines. While there is competition in the space, Cummins has been able to grow earnings over the long term. Additionally, with the costs and time of development, setup and establishing a distribution and servicing network, the bar-riers to entry by a competitor are high. Over the last decade several competitors have exited the market due to challenges with meeting emissions reduction targets in the U.S. and abroad.

Earnings per share have grown an 8.3% annual rate over the last five years, and net income has expanded 6.1% over the same period. Due to cyclical headwinds, earnings are project-ed to contract 0.4% annually over the next three to five years.

The stock’s current price-earnings ratio of 15.2 is below the 20.2 median for the capital goods sector and the 21.8 median for the miscellaneous capital goods industry. The price-earn-ings ratio is above the five-year average of 13.7 times trail-ing earnings. The forward price-earnings ratio is 14.4 times expected 2016 earnings of $7.94 per share and 14.5 times the 2017 consensus estimate of $7.89 per share.

While Cummins faces weak global demand, the firm is responding quickly via workforce actions, targeted capacity reduction and acquisitions.

Dividend AnalysisCummins is committed to returning cash to shareholders

through dividends and share repurchases. The company tar-gets a return of 50% of operating cash flow to shareholders in the form of dividends and share repurchases.

The stock currently trades with a 3.4% dividend yield, which is above the 2.7% yield one year ago as well as the five-year historical average of 2.0%. The current yield is even above the five-year average high yield of 2.5%.

Cummins has paid a dividend every year since 1948 and has increased its annual payout for six consecutive years. The company last increased its dividend in July of 2015 by 25.0% and it will be interesting to see what increase, if any, is planned for this year. Cummins’ current earnings payout ratio of 49.0% is above its five-year average of 27.7%. Its free cash flow payout ratio of 46.3% is also above its five-year average of 35.9%. The company’s dividend has grown at a 24.9% an-nualized rate over the last three years and at a 32.0% annual-ized rate over the last five years.

During the first quarter, Cummins had $263 in operating cash flow and distributed $170 million in dividends while spending $575 million to repurchase shares. From 2005 to October 2015, Cummins returned 459% to shareholders and increased its dividend 1,100%.

Cummings has $1,274 million in cash on hand at the end of the quarter, while total liabilities were 53.3% of total assets.

RisksAs with all industrial companies, Cummins’s results are tied

to the overall strength of the U.S. and global economies.Growth in emerging markets has slowed due to lower

investment in infrastructure along with weaker commodity prices. Cummins expects the cyclical weakness to continue throughout 2016.

Global off-highway and power-generation markets have been weak for some time and are worsening. Industry orders in key end markets in Brazil and China are at multi-year lows and are showing no signs of improvement in the near term. Only India is expected to have higher unit sales in 2016.

Domestic and international mining markets could continue to deteriorate if commodity prices weaken further. ▪

Cummins Inc. (CMI)

Bullish Factors• Trades at a discount to sector and industry peers• Stricter pollution standards are favorable for Cummins

proven diesel engines and components• Attractive dividend yield comparted to historical norm

Bearish Factors• Economic slowdown can affect bottom line and earnings

are expected to stagnate in the near term• Declining sales in certain key markets continue to hurt

bottom line• Operates in a competitive environment of larger

manufacturers and lower-cost manufacturers

June 2016 9


CMI $114.47 ($137.99 - $79.88)

Addition Alert Date: 10/3/2014Price at Alert: $135.10 Risk Index: 1.84Market Cap (Million): $19,335.8Avg Daily Dollar Volume (Million): $252.3Primary Sector: Capital GoodsPrimary Industry: Misc. Capital Goods

Indicated Annual Dividend: $3.90 Multiples Current 12/2015 12/2014 12/2013 12/2012 12/2011Latest Dividend Increase: Date Dividend Yield (%): Avg 3.4% 3.0 2.0 1.8 1.7 1.3Latest Dividend Increase: % 25.0% Dividend Yield (%): High 4.1 2.3 2.2 2.2 1.7Dividend Yield: Current 3.4% Dividend Yield (%): Low 2.4 1.7 1.6 1.4 1.1Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 15.2 14.9 15.7 15.5 12.2 10.4Dividend Paid Since: 1948 Price/Earnings (Industry) 21.8 18.3 20.0 19.7 17.4 16.7Number of Years of Div Increases: 6 Price/Book Value 2.8 2.8 3.3 3.1 3.0 3.5Direct Invest Option: No Price/Sales 1.0 1.1 1.4 1.3 1.2 1.1DRIP Plan: Yes Ratios Current 12/2015 12/2014 12/2013 12/2012 12/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 49.0 44.7 31.1 28.4 20.7 13.7

$0.9750 Payout Ratio: FCFPS (%) 46.3 49.6 35.0 31.2 45.1 18.4$0.9750 Gross Margin (%) 25.7 25.9 25.3 24.7 25.6 25.4$0.9750 Operating Margin (%) 10.6 10.8 12.3 12.1 13.0 14.9$0.9750 Operating Margin (%) (Ind) 6.2 5.0 6.3 7.1 6.5 6.1$0.7800 Net Margin (%) 7.1 7.3 8.6 8.6 9.5 10.4$0.7800 ROE (%) 17.8 18.5 21.6 21.0 27.2 36.8

Rel Strgth ROE (%) (Industry) 11.6 10.2 10.6 11.5 12.4 12.6Rank ROA (%) 8.7 9.1 10.8 10.9 13.6 16.9

4 Week 38% Current Ratio 1.9 2.1 2.3 2.6 2.3 1.913 Week 70% Liabilities to Assets (%) 53.3 51.1 50.8 49.0 47.4 52.926 Week 81% Liab to Assets (%) (Ind) 55.9 52.5 51.6 50.0 49.2 52.952 Week 45% Asset Turnover 1.2 1.2 1.3 1.3 1.4 1.6

Financial Statements TTM 12/2015 12/2014 12/2013 12/2012 12/2011Growth 5 Year Sales ($M) 18,692 19,110 19,221 17,301 17,334 18,048

Dividends 32.0% Gross Income ($M) 4,808 4,947 4,861 4,280 4,445 4,589Sales 7.6% Depreciation ($M) 15 18 16 11 8 (5)Net Income 6.1% Unusual/Extra ($M) -- 316 26 16 52 (98)EPS Basic 8.2% Operating Income ($M) 1,979 2,057 2,365 2,101 2,254 2,681EPS Dil Cont 8.3% Interest Expense ($M) 70 69 68 41 32 44

Pretax Income ($M) 1,942 2,025 2,434 2,119 2,271 2,692SUE Score Net Income ($M) 1,333 1,399 1,651 1,483 1,645 1,869

1.00 Operating Cash Flow ($M) 2,149 2,059 2,266 2,089 1,532 2,073(0.70) Investing Cash Flow ($M) (1,181) (918) (1,234) (846) (982) (552)

Annual Financing Cash Flow ($M) (1,980) (1,644) (1,343) 52 (694) (1,025)12/2017 Capital Expenditures ($M) 775 799 798 740 777 682

26 Net Cash Flow ($M) (1,082) (590) (398) 1,330 (115) 461$7.89 EPS Basic ($) 7.56 7.86 9.04 7.93 8.69 9.69$7.80 EPS Diluted Cont ($) 7.55 7.84 9.02 7.91 8.67 9.65

# Rev Up 18 EPS DC Year/Year Chg (%) (19.1) (13.0) 14.0 (8.8) (10.2) 83.0 # Rev Down 5 Dividends/Share ($) 3.71 3.51 2.81 2.25 1.80 1.33Three Mos. Ago $7.97 Dividend Year/Year Chg (%) 25.0 24.9 24.9 25.0 35.8 51.4Year/Year Chg (0.6%) Free Cash Flow/Share ($) 8.00 7.08 8.04 7.21 3.99 7.21

4/2016 12/2015 9/2015 6/2015 Total Cash ($M) 1,274 1,811 2,394 2,849 1,616 1,761$1.87 $0.92 $2.14 $2.62 $7.55 Goodwill/Intangibles ($M) 829 810 822 818 814 566$2.14 $2.44 $2.32 $2.44 $9.33 Total Assets ($M) 14,827 15,134 15,764 14,728 12,548 11,668

Long-Term Debt ($M) 1,614 1,576 1,577 1,672 698 6584/2016 12/2015 9/2015 6/2015 Total Total Liabilities ($M) 7,907 7,728 8,015 7,218 5,945 6,176

$24.98 $27.16 $26.10 $27.99 $106.23 Book Value/Share ($) 40.28 41.60 42.43 40.16 34.88 28.46$26.07 $28.08 $26.84 $26.45 $107.45 Avg Shares Outst'g (M) 171.80 178.04 182.64 186.99 189.29 192.97

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 5/31/2016.

(19.2%)

Jul 14, 2015

2$7.82

20

Annual

2612/2016

% Surp4.8%(4.1%)

(3.3%)

Sep 1, 2015

Rel Strgth

Jun 1, 2015Mar 2, 2015

EPS (Qtr)

$2.12

22

$7.77$2.14

(18.2%)

146

$2.15

Month Ago

3.3%(5.3%)(3.3%)

$7.94

1.2%

Quarterly

# of EstimatesCurrent

Feb 8, 2015 Feb 13, 2015Stock

6/2016

EPS$1.87$2.02

(4.3%)

Est Surprise

Feb 4, 2016

(19.1%)

EPS Estimates

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Index

Cummins Inc. designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, fuel systems, controls systems, air handling systems and electric power. The company sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. It serves its customers through a network of more than 600 company-owned and independent distributor locations and more than 6,500 dealer locations in more than 190 countries and territories. It has four segments: engine, power systems, components and distribution.

Jul 14, 2015

May 3, 2016

May 10, 2016Feb 9, 2016Oct 13, 2015 Nov 18, 2015

Feb 17, 2016

May 12, 2015

24.9%

Aug 19, 2015

(3%)16%14%(16%)

May 19, 2015

(21.6%)

2% (2.5% - 1.6%)

25.0%3 Year

Jun 1, 2016Mar 1, 2016Dec 1, 2015

0.96

0.84

1.071.13

TTM

Gain

May 18, 2016

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

Jun 2011 Jun 2012 Jun 2013 Jun 2014 Jun 2015

Div

iden

d Yi

eld Share Price

10 June 2016

Invesco is a global asset management company. Its products include mutual funds, exchange-traded funds, closed-end funds, separately managed accounts, variable insurance prod-ucts and unit investment trusts. The company serves clients in the U.S. (66% of assets under management, or AUM), Canada (3%), the United Kingdom (14%), Europe (10%) and Asia (8%). Invesco manages money on behalf of both individual inves-tors (66%) and institutional investors (34%).

The company’s individual (“retail”) investor products are primarily distributed through third parties, including brokers and advisers, mutual fund platforms, retirement platforms [e.g., 401(k) plans], banks and insurance and trust companies. Last year, Invesco ranked among the 10 largest non-proprie-tary fund complexes in the U.S. It also ranked among the 10 largest of Canadian fund complexes and is among the market leaders in both the U.K. and China.

Why Own IVZ?Invesco has enjoyed good growth and is forecast to con-

tinue to do so. Earnings per share have risen at a 17.5% an-nualized rate over the past five years, while revenue and net income have increased at annualized rates of 8.0% and 15.8%, respectively. A widening of the operating margin from 16.7% in 2010 to 26.0% for the most recent trailing 12 months con-tributed to the comparatively stronger levels of profit growth.

Analysts expect Invesco to continue growing on an annual basis. The I/B/E/S consensus estimate currently projects 3.5% earnings per share growth this year and 20.9% growth next year. Five analysts are forecasting a long-term earnings growth rate of 10.0%.

Invesco appears to be well-managed relative to its peers. More than 80% of its actively managed assets rank in the top half of their peer groups on a five-year basis (60% on a

one-year basis). The 26.0% operating margin compares to an industry median of 18.2%. Similarly, Invesco realizes a higher return on equity than its industry peers.

Like other financial companies, Invesco saw revenue fall during the financial crisis. It did, however, manage to stay profitable and pay dividends during 2007 and 2008. It also realized positive levels of operating income and free cash flow during those turbulent years.

Dividend AnalysisShares of Invesco currently yield 3.6%, which is above

the stock’s five-year average high of 3.3%. Invesco’s yield is also well above the investment services industry median of 2.1%. Though it is domiciled in Bermuda, Invesco said that its dividend will receive the same tax treatment as those paid by U.S. corporations.

The five-year dividend growth rate is 19.6%. The company announced a 3.7% increase in its quarterly dividend to $0.28 per share in April. This was the smallest boost in many years, but still represented the 12th consecutive annual increase.

Invesco’s free cash flow payout ratio is 48.2%, and its earn-ings payout ratio is 52.7%. Both ratios suggest the company has the financial flexibility to raise its dividend should it so choose. The company’s executives have previously listed growing the dividend as a priority for cash flow. During the company’s investor day presentation in March, CEO Martin Flanagan explained that the dividend payout ratio has been brought in line with the company’s peers and, going forward, the dividend will likely “grow at a more moderate rate.”

RisksNearly half of the company’s AUM is invested in equity

funds. This ties Invesco’s performance to the state of the stock market. Market corrections or bear markets will likely lead to lower assets under management.

This is what has occurred over the past few quarters. Last year’s correction led to declines in assets under management and, correspondingly, lower revenues and profits. Invesco’s first-quarter AUM was down 6.0% on a year-over-year basis, leading not only to a decline in profitability, but also earnings per share that were below analysts’ expectations. This weak-ness has caused shares to decline in value over the past 12 months and the yield to rise.

Invesco’s mutual funds have average expenses, and more than two-thirds of them are load funds, according to Morningstar. Though large, Invesco is a second-tier fund company in terms of size relative to industry leaders such as Vanguard, BlackRock and Fidelity.

The size of dividend increases has slowed over the past few years. Though the CEO has guided for a moderate pace of increases in the future, it is unknown what the typical range of increases will be going forward. ▪

Invesco Ltd. (IvZ)

Bullish Factors• Earnings growth has historically been strong and

analysts project growth to resume• 12 consecutive years of dividend growth; executives

seem intent on continuing to raise the dividend• The yield is above the stock’s five-year average high and

significantly higher than the industry median

Bearish Factors• Dependent on the performance of the stock market,

with about half of AUM invested in the company’s equity funds

• The company’s size and the cost structure of its funds are disadvantages against larger competitors with lower-cost offerings

• Dividend growth will be slower going forward; the rate of future dividend growth is unknown

June 2016 11


Addition Alert Date: 6/6/2014Price at Alert: $38.18 Risk Index: 1.68Market Cap (Million): $13,123.0Avg Daily Dollar Volume (Million): $125.0Primary Sector: FinancialPrimary Industry: Investment Services

Indicated Annual Dividend: $1.12 Multiples Current 12/2015 12/2014 12/2013 12/2012 12/2011Latest Dividend Increase: (Date) Dividend Yield (%): Avg 3.6% 2.9 2.7 2.7 2.7 2.3Latest Dividend Increase: (%) 3.7% Dividend Yield (%): High 3.5 3.1 3.3 3.2 3.3Dividend Yield: Current 3.6% Dividend Yield (%): Low 2.5 2.3 2.3 2.4 1.7Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 15.3 16.0 16.1 15.9 16.1 13.6Dividend Paid Since: 1994 Price/Earnings (Industry) 18.5 20.0 19.3 16.8 17.0 16.9Number of Years of Div Increases: 12 Price/Book Value 1.6 2.0 1.9 1.7 1.3 1.2Direct Invest Option: Yes Price/Sales 2.6 3.0 3.1 3.0 2.6 2.4DRIP Plan: Yes Ratios Current 12/2015 12/2014 12/2013 12/2012 12/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 52.7 47.0 42.9 40.3 42.8 30.3



4 Week 73% Current Ratio -- -- -- -- -- --13 Week 66% Liabilities to Assets (%) 65.1 68.6 59.3 56.4 52.5 58.026 Week 44% Liab to Assets (%) (Ind) 70.3 70.7 68.8 68.3 68.9 64.852 Week 41% Asset Turnover 0.2 0.2 0.3 0.3 0.2 0.2


Dividends 19.6% Gross Income ($M) 3,452 3,543 3,516 3,155 2,742 2,703Sales 8.0% Depreciation ($M) 0 0 0 0 0 0Net Income 15.8% Unusual/Extra ($M) 0 16 0 3 33 (15)EPS Basic 17.4% Operating Income ($M) 1,295 1,343 1,277 1,120 818 926EPS Dil Cont 17.5% Interest Expense ($M) 87 82 73 45 52 62

Pretax Income ($M) 1,207 1,362 1,395 1,255 831 892SUE Score Net Income ($M) 870 968 988 940 677 730

(2.50) Operating Cash Flow ($M) 1,041 1,054 1,200 780 819 965(1.40) Investing Cash Flow ($M) (405) (665) (1,827) (240) (82) 348

Annual Financing Cash Flow ($M) (369) 23 863 (59) (646) (1,322)12/2017 Capital Expenditures ($M) 128 125 133 88 99 107

16 Net Cash Flow ($M) 235 337 183 496 108 (13)$2.82 EPS Basic ($) 2.05 2.26 2.27 2.10 1.50 1.58$2.87 EPS Diluted Cont ($) 2.05 2.26 2.28 1.95 1.45 1.55

# Rev Up 1 EPS DC Year/Year Chg (%) (16.2) (0.9) 16.5 34.5 (6.3) 54.1 # Rev Down 7 Dividends/Share ($) 1.08 1.06 0.98 0.85 0.64 0.48Three Mos. Ago $2.85 Dividend Year/Year Chg (%) 8.0 8.7 15.0 32.4 34.0 10.4Year/Year Chg 20.9% Free Cash Flow/Share ($) 2.24 2.17 2.45 1.55 1.59 1.85

3/2016 12/2015 9/2015 6/2015 Total Cash ($M) 1,455 1,851 1,514 1,331 836 1,110$0.40 $0.48 $0.58 $0.60 $2.05 Goodwill/Intangibles ($M) 7,654 7,530 7,826 8,131 8,336 8,231$0.60 $0.62 $0.59 $0.63 $2.44 Total Assets ($M) 22,658 25,073 20,463 19,271 17,492 19,347

Long-Term Debt ($M) 5,134 7,510 6,739 5,770 5,085 6,5833/2016 12/2015 9/2015 6/2015 Total Total Liabilities ($M) 14,754 17,188 12,137 10,878 9,176 11,228$2.82 $2.93 $2.97 $3.05 $11.77 Book Value/Share ($) 19.39 18.38 19.14 18.75 18.39 17.54$2.99 $2.95 $3.02 $2.96 $11.91 Avg Shares Outst'g (M) 407.70 428.90 435.00 447.50 452.30 462.90


May 12, 2015

2.7% (3.3% - 2.3%)

(16.2%)

8.0%3 Year

Jun 3, 2016Mar 4, 2016Dec 7, 2015

Aug 20, 2015

6%

0.80

1.050.93

TTM

Gain

(16.1%)

Invesco is a leading independent global investment manager. The company has significant presence in the institutional and individual investor markets within the investment management industry in the U.S., Canada, the United Kingdom, Europe and Asia-Pacific, serving clients in more than 100 countries. Invesco's asset classes, broadly defined, include money market, balanced, equity, fixed income and alternatives. As of March 31, 2016, the company managed $771.5 billion in assets for investors around the world, with approximately 47% of assets under management invested in equity securities and 53% invested in fixed income and other investments.

Jul 30, 2016

Apr 28, 2016

Apr 28, 2016Jan 28, 2016Oct 29, 2016 Nov 17, 2015

Feb 16, 2016

Apr 30, 2015

18.3%

(18.0%)

11%(7%)(21%)

May 13, 2016

Jan 29, 2015 Feb 17, 2015

Index

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

6/2016

EPS$0.49$0.58

(3.7%)

Jan 28, 2016

Est Surprise

8.1%12.7%14.7%

$2.34

3.5%EPS (Qtr)

$0.58

15

$2.40$0.57

# of EstimatesCurrent

(4.5%)

Stock

Apr 28, 2016

11$2.40

0

Annual

16

Sep 4, 2017

Rel Strgth

Jun 5, 2015

1.04

17

$0.57

15.8%

Mar 6, 2015

Month Ago

12/2016

% Surp(9.1%)(3.8%)

QuarterlyEPS Estimates

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45


Div

iden

d Yi

eld Share Price

IvZ $31.40 ($39.89 - $24.90)

12 June 2016

Occidental Petroleum was founded in 1920 and is one of the largest oil and gas companies in the United States. It operates in three business segments: oil and gas (55% of first quarter revenue), chemical (39% of revenue) and midstream and marketing (6% of revenue).

Occidental is the largest producer of oil in the Permian Basin (Texas and New Mexico), one of the largest and most active oil basins in the U.S. The company also produces oil in the Middle East (UAB, Oman and Qatar) and Latin America (Colombia). Chemical segment Oxychem focuses on being a low-cost producer of chlorovinyls. The midstream business transports and stores energy products.

Occidental prefers to hold large, long-lived legacy oil and gas assets, which is why it is focused on the Permian Basin. Total Permian oil production has grown at a 30% compound annual growth rate through 2015.

With declining oil prices, Occidental reduced its capital and operating costs and is optimizing its portfolio to focus on its core assets in the Permian Basin and Middle East. It reached a deal to sell its Williston basin assets as well as its Zubair field in Iraq. The company will focus its Middle East business in Abu Dhabi, Qatar and Oman.

Why Own OXY?Occidental is a financially sound company with a reason-

able dividend valuation. Debt is at a manageable level, with a liabilities-to-assets ratio of 43.4%, versus 54.1% for the integrated oil and gas industry. Efforts to lower production costs indicate that operating cash flow can cover dividend outlays and growth capital programs with oil prices around the current level.

Occidental does not have a meaningful trailing or forward price-earnings ratio due to negative earnings related to the sudden drop in oil prices. The firm is not expected to return to profitability until 2017, although it is generating positive cash flow from operations.

During fiscal-year 2015, Occidental generated cash flows from operations of approximately $3.35 billion. Over the trailing 12 months, operating cash flow has increased slightly to around $3.48 billion. The company raised its quarterly dividend by 4.2% in May 2015, but it is uncertain if it will raise it this year. During the first quarter of 2016, Occidental gener-ated more than $820 million of operating cash flows, received $550 million from its Ecuador settlement and collected $285 million in asset sales proceeds. After paying its quarterly dividend and the current debt maturity of $700 million, OXY ended the first quarter with $3.2 billion in cash.

Dividend AnalysisOccidental is the rare company that has offered both a high

relative yield and a historically high dividend growth rate. Over the past five years, the annual dividend growth rate has averaged 15.1%. Occidental currently yields 4.0%, above its five-year average yield of 3.0%. The company has raised its dividend each year for the last 13 years, but may not be in a position to increase the dividend this year as oil and natu-ral gas prices play a key role in capital expenditure and the dividend policy. Capital spending will continue to decline as more projects start up, but the company expects oil and gas production volume to increase.

Occidental ranks dividends as its second-highest priority, behind only maintenance but ahead of share repurchases and acquisitions. Occidental says it will be able to fund both its capital expenditures and its dividend out of operating cash flow with oil at around $60 per barrel. Some reports indicate that Occidental operates at breakeven with oil at $45 per barrel because of its profits from its chemical and midstream businesses.

RisksOil prices have historically been volatile, with significant

price swings that the company has no control over. The im-pact of these price swings is reflected in the changing con-sensus earnings estimates for Occidental. Revisions by many analysts have lowered the fiscal-year 2016 I/B/E/S consensus earnings forecast from a loss of $0.53 per share three months ago to a loss of $0.68 per share currently. OXY is expected to earn $1.27 per share in 2017 and $2.42 in 2018, but this is highly dependent on energy prices.

Occidental has historically spent heavily on capital invest-ment but has been slashing such costs in recent months. Though this spending is necessary to drive future earnings growth, it has resulted in years where free cash flow is low or negative.

Occidental’s reliance on the Permian Basin leaves it more concentrated than the other major integrated oil companies. Plus, its foreign assets are located in the politically unstable areas of the Middle East and North Africa. ▪

Occidental Petroleum (OXY)

Bullish Factors• Largest producer in the Permian Basin, one of the

largest and most active oil basins in the U.S.• Financially sound with a strong balance sheet• Committed to paying dividend ahead of capital growth,

share repurchases and acquisitions

Bearish Factors• Decline in oil prices has hurt near-term profitability and

cash flow• Capital expenditures required to sustain and grow oil

production results in negative free cash flow at times of low energy prices

• More geographic concentration than other large integrated oil companies

June 2016 13


OXY $75.44 ($79.75 - $58.24)

Addition Alert Date: 1/9/2015Price at Alert: $77.54 Risk Index: 1.83Market Cap (Million): $58,158.9Avg Daily Dollar Volume (Million): $327.4Primary Sector: EnergyPrimary Industry: Oil & Gas - Integrated

Indicated Annual Dividend: $3.00 Multiples Current 12/2015 12/2014 12/2013 12/2012 12/2011Latest Dividend Increase: Date Dividend Yield (%): Avg 4.0% 4.0 3.3 3.0 2.5 2.1Latest Dividend Increase: % 4.2% Dividend Yield (%): High 4.7 4.0 3.5 3.1 2.9Dividend Yield: Current 4.0% Dividend Yield (%): Low 3.5 2.8 2.7 2.1 1.6Dividend Yield: 5-Year Avg (High-Low) Price/Earnings (6.9) nmf nmf 13.8 18.2 10.8Dividend Paid Since: 1975 Price/Earnings (Industry) 17.4 19.3 23.3 20.7 17.8 15.7Number of Years of Div Increases: 13 Price/Book Value 2.4 2.3 1.9 1.6 1.7 1.9Direct Invest Option: No Price/Sales 5.0 4.5 3.5 3.4 3.5 3.0DRIP Plan: No Ratios Current 12/2015 12/2014 12/2013 12/2012 12/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) NA NA 365.2 34.9 38.1 22.1

$0.7500 Payout Ratio: FCFPS (%) (257.0) (112.0) 498.8 42.8 130.4 (1,023.5)$0.7500 Gross Margin (%) 52.4 53.9 65.0 68.0 67.6 69.4$0.7500 Operating Margin (%) (86.9) (76.5) (6.2) 33.1 31.1 43.4$0.7500 Operating Margin (%) (Ind) (28.5) (28.0) 4.8 7.1 8.7 11.3$0.7500 Net Margin (%) (64.8) (62.1) 3.2 29.0 22.7 28.0$0.7200 ROE (%) (27.1) (26.4) 1.6 14.2 11.8 19.3

Rel Strgth ROE (%) (Industry) 0.2 (5.5) 11.0 9.0 8.4 12.2Rank ROA (%) (15.9) (15.7) 1.0 8.8 7.4 12.0


Financial Statements TTM 12/2015 12/2014 12/2013 12/2012 12/2011Growth 5 Year Sales ($M) 11,621 12,598 19,442 20,277 20,180 24,119Dividend 15.1% Gross Income ($M) 6,093 6,794 12,639 13,780 13,650 16,734Sales (8.0%) Depreciation ($M) 4,617 4,544 4,261 4,203 3,585 3,591Net Income (30.1%) Unusual/Extra ($M) 9,993 10,239 7,379 621 1,710 0EPS Basic (30.9%) Operating Income ($M) (10,096) (9,638) (1,204) 6,708 6,279 10,459EPS Dil Cont (31.3%) Interest Expense ($M) 177 147 77 132 154 0

Pretax Income ($M) (10,010) (9,684) 1,224 7,751 6,125 10,459SUE Score Net Income ($M) (7,533) (7,829) 616 5,890 4,590 6,760

(2.20) Operating Cash Flow ($M) 3,479 3,351 11,068 12,778 11,299 12,281(0.60) Investing Cash Flow ($M) (3,854) (5,423) (8,470) (8,044) (12,642) (9,903)

Annual Financing Cash Flow ($M) 1,398 1,484 (2,202) (2,933) (846) (1,175)12/2017 Capital Expenditures ($M) 4,370 5,381 10,617 7,963 9,958 12,427

20 Net Cash Flow ($M) 1,023 (588) 396 1,801 (2,189) 1,203$1.27 EPS Basic ($) (9.87) (10.23) 0.79 7.33 5.67 8.32$1.42 EPS Diluted Cont ($) (10.86) (10.64) (0.18) 6.12 4.72 8.16

# Rev Up 7 EPS DC Year/Year Chg (%) (272.6) 5,682.6 (103.0) 29.6 (42.1) 45.4 # Rev Down 9 Dividends/Share ($) 3.00 2.97 2.88 2.56 2.16 1.84Three Mos. Ago $1.22 Dividend Year/Year Chg (%) 4.2 3.1 12.5 18.5 17.4 25.2Year/Year Chg (288.0%) Free Cash Flow/Share ($) (1.17) (2.65) 0.58 5.99 1.66 (0.18)

3/2016 12/2015 9/2015 6/2015 Total Cash ($M) 3,176 3,201 3,789 3,393 1,592 3,781($0.47) ($7.21) ($3.41) $0.24 ($10.86) Goodwill/Intangibles ($M) 0 0 0 0 0 0($0.28) ($5.39) $1.28 $1.48 ($2.92) Total Assets ($M) 42,018 43,409 56,259 69,443 64,210 60,044

Long-Term Debt ($M) 5,608 6,855 6,838 6,939 7,023 5,8713/2016 12/2015 9/2015 6/2015 Total Total Liabilities ($M) 18,229 19,059 21,300 26,317 24,194 22,424$2.81 $3.72 $4.12 $4.56 $15.21 Book Value/Share ($) 31.16 31.81 44.76 53.63 49.45 46.32$4.05 $1.26 $6.35 $6.62 $18.28 Avg Shares Outst'g (M) 763 766 781 804 809 812


11($0.53)

($0.20) ($0.57)($0.21)

Est Surprise

EPS Estimates

(652.5%)(272.6%)

May 5, 2016Feb 4, 2016

Jul 15, 2015Apr 15, 2015

Annual12/2016

3 Year

(39.0%)(39.3%)

% Surp

Year Ago

TTM

TTMSales/Sh (Qtr)

CurrentMonth Ago

# of Estimates

EPS (Qtr)

Year Ago

88

($0.21)

19

87.2%

Occidental Petroleum is an oil and gas exploration and production company with operations in the United States, Middle East/North Africa and Latin America. The company operates in three segments: oil and gas, chemical, and midstream. The oil and gas segment explores for, develops and produces oil and natural gas. The chemical segment manufactures and markets chlor-alkali products. The midstream segment gathers, processes, transports, stores, purchases and markets oil, natural gas and power. It also trades around its assets, including transportation and storage capacity, and trades oil, gas and other commodities.

Jul 9, 2015

Apr 29, 2016Feb 18, 2016Oct 8, 2015

May 5, 2015

Sep 8, 2015 Oct 15, 2015

3% (3.6% - 2.6%)

Jan 15, 2016

Jul 15, 2016Apr 15, 2016Mar 8, 2016

Dec 8, 2015

May 15, 2015Feb 11, 2015

Jun 8, 2015

Jun 8, 2016

Mar 6, 2015

(93.6%)

5%(0%)(5%)

11.2%(18.2%)

(660.9%)

($0.68)

EPS($0.56)($0.17)

20

Quarterly6/2016

(14.5%)

8

Stock

(62.0%)

1.000.96

1.002%

(56.1%)

TTM

IndexGainRel Strgth

0.99

(54.7%)

4.2%

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

14 June 2016

Williams-sonoma, Inc. (WsM)Founded in 1956, Williams-Sonoma is a nationwide special-

ty retailer of high-quality home products. The company mar-kets a wide selection of merchandise through its retail stores under the brands Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation. It also offers products directly to consumers through eight direct-mail catalogs: Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, PBteen, West Elm, Rejuvenation, and Mark and Graham. The main brands in both the retail and direct-to-customer channels are Pottery Barn, which sells casual home furnishings; Williams-Sonoma, which sells cooking and entertaining essentials; Pottery Barn Kids, which sells stylish children’s furnishings; and West Elm, which sells affordable home furnishing goods.

Net retail revenues accounted for 49.3% of fiscal-2015 (ended January 31) net sales, and e-commerce sales account-ed for 50.7%.

Why Own WSM?William-Sonoma has established a solid niche in the frag-

mented $104 billion U.S. home furnishing market (according to the U.S. Census Bureau). Its well-known brand has been a key factor in supporting the company’s top- and bottom-line growth due to repeat business by loyal customers. However, there is plenty of room for growth: Morningstar stated that the company has captured only 5% of the market share.

Furthermore, there are few large competitors in the kids and teen space, and analysts expect the company to maintain its leadership position in the category.

E-commerce business accounts for 51% of total revenue; the lower overhead of this business, in turn, boosts the com-pany’s overall margins. As a result, Williams-Sonoma’s operat-ing margin of 9.5% is well above the industry median of 7.5%.

WSM’s global operations continue to grow as well. There are 48 franchise stores operated by a third party in the Middle East, Mexico and the Philippines at the end of January

2016. In fiscal 2014, Williams-Sonoma entered the Australian market with five company-owned stores, e-commerce web-sites and distribution operations.

The trailing price-earnings ratio of 15.9 is below the compa-ny’s five-year average of 18.6, as well as the furniture & fixture industry’s median of 18.0. The forward price-earnings ratio is 14.8, using 2016 projected earnings of $3.58 per share (for the period ending January 2017). Analysts are projecting earnings to rise 6.3% in the current fiscal year; the projected three-to-five-year average annual earnings growth rate is 8.8%.

Sales have increased 7.3% a year over the last five years, while net income has expanded at a 9.1% annual rate and diluted earnings from continuing operations expanded at a 13.0% annual growth rate over the same period.

Dividend AnalysisWilliams-Sonoma has paid a dividend since 2006 and has

increased its payout in each of the last six years.WSM repurchased $225 million of its outstanding shares

in 2015 and returned $128 million in the form of dividends. At the end of fiscal 2015, its board of directors authorized a $500 million stock repurchase program.

The company’s latest dividend increase was 5.7%, declared on March 16, 2016. WSM has raised its dividend, on average, by 19.3% a year over the last five years. Williams-Sonoma’s current dividend yield of 2.8% is above its five-year average yield of 2.1% and the five-year average low yield of 1.7%. The company has a current earnings payout ratio of 31.0%, which is below the five-year average of 38.0%. The pre-dividend free-cash-flow payout ratio is 27.0%, which is well below the five-year average of 46.8%. The company is positioned to keep raising its dividend.

RisksThe direct-to-customer industry has grown over the last de-

cade, particularly in e-commerce. Williams-Sonoma risks com-petition from Amazon and other mass merchants that have passed their scale and other cost advantages into lower prices for consumers. However, the company’s long history and cus-tomer loyalty helps distinguish it from many competitors.

Demand for Williams-Sonoma’s products is somewhat tied to the performance of the domestic home-improvement market and consumer confidence. Sales and earnings tend to fluctuate over the economic cycle, driving significant volatility in comparable-store sales. However, international expansion will help insulate the company from these fluctuations, as global consumer confidence levels don’t necessarily move in tandem.

The recent decline in the economic environment has also generated increased competition from discount retailers.

Also, the specialty retail industry is subject to substantial seasonal variations in demand; a significant portion of the company’s revenues and earnings are generally realized dur-ing the October through December period. ▪

Bullish Factors• Diversified product line should offer some support

during economic cycle• International expansion should boost growth and

improve brand awareness• As greater percentage of revenues come from direct-to-

consumer channels, this should boost margins

Bearish Factors• Competition from e-retailers such as Amazon and mass

merchants could hurt growth and stymie margins• Sales and revenue growth are somewhat tied to the

health of the housing market• Sales and earnings are subject to substantial seasonal

variations

June 2016 15


Addition Alert Date: 6/3/2016Price at Alert: NA Risk Index: 2.08Market Cap (Million): $4,801.6Avg Daily Dollar Volume (Million): $108.4Primary Sector: Consumer CyclicalPrimary Industry: Furniture & Fixtures

Indicated Annual Dividend: $1.48 Multiples Current 1/2016 2/2015 2/2014 2/2013 1/2012Latest Dividend Increase: Date Dividend Yield (%): Avg 2.8 1.9 2.0 2.4 2.2 2.0Latest Dividend Increase: % 5.7% Dividend Yield (%): High 2.4 2.5 2.9 2.7 2.6Dividend Yield: Current 2.8% Dividend Yield (%): Low 1.6 1.7 2.0 1.8 1.6Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 15.9 21.9 20.0 18.6 15.9 16.5Dividend Paid Since: 2006 Price/Earnings (Industry) 18.0 18.0 19.4 21.5 14.1 17.9Number of Years of Div Increases: 6 Price/Book Value 4.1 5.6 5.0 4.0 3.1 3.1Direct Invest Option: No Price/Sales 0.9 1.3 1.3 1.2 1.0 1.0DRIP Plan: No Ratios Current 1/2016 2/2015 2/2014 2/2013 1/2012Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 31.0 41.0 40.0 43.0 34.0 32.2





Dividends 19.3% Gross Income ($M) 1,858 1,844 1,801 1,704 1,593 1,460Sales 7.3% Depreciation ($M) 0 0 0 0 0 0Net Income 9.1% Unusual/Extra ($M) 0 -- -- 10 13 8EPS Basic 12.8% Operating Income ($M) 480 489 502 452 409 382EPS Dil Cont 13.0% Interest Expense ($M) 0 0 0 0 0 0

Pretax Income ($M) 480 488 502 453 410 382SUE Score Net Income ($M) 305 310 309 279 257 237

1.90 Operating Cash Flow ($M) 538 544 462 454 364 291(1.00) Investing Cash Flow ($M) (190) (202) (189) (191) (207) (158)

Annual Financing Cash Flow ($M) (327) (369) (379) (355) (236) (259)1/2018 Capital Expenditures ($M) 191 203 205 194 205 130

30 Net Cash Flow ($M) 20 (29) (107) (94) (78) (126)$3.93 EPS Basic ($) 3.38 3.42 3.30 2.89 2.59 2.27$3.94 EPS Diluted Cont ($) 3.34 3.37 3.24 2.82 2.54 2.22

# Rev Up 11 EPS DC Year/Year Chg (%) 2.5 3.8 14.9 11.1 14.3 21.6 # Rev Down 6 Dividends/Share ($) 1.05 1.40 1.32 1.24 0.88 0.73Three Mos. Ago $3.99 Dividend Year/Year Chg (%) 6.0 6.1 6.5 40.9 20.5 25.9Year/Year Chg 9.8% Free Cash Flow/Share ($) 3.89 3.76 2.74 2.69 1.60 1.54

5/2016 1/2016 11/2015 8/2015 Total Cash ($M) 99 194 223 330 425 503$0.44 $1.56 $0.77 $0.58 $3.34 Goodwill/Intangibles ($M) 0 19 19 19 19 19$0.48 $1.56 $0.68 $0.53 $3.26 Total Assets ($M) 2,290 2,417 2,330 2,337 2,188 2,061

Long-Term Debt ($M) 0 0 0 2 4 65/2016 1/2016 11/2015 8/2015 Total Total Liabilities ($M) 1,128 1,219 1,106 1,081 879 806

$12.29 $17.67 $13.62 $12.35 $55.94 Book Value/Share ($) 13.02 13.20 13.08 12.99 13.19 12.03$11.24 $16.59 $12.28 $11.06 $51.17 Avg Shares Outst'g (M) 89.30 90.79 93.63 96.67 99.27 104.35


0.68

3 Year

May 27, 2016Feb 24, 2016Nov 25, 2015

0.89

Aug 26, 2015

Rel Strgth

0.84

2.1% (2.6% - 1.7%)

0.92

Williams-Sonoma Inc. is an e-commerce and multi-channel specialty retailer of home products. The company sells products through e-commerce websites, direct-mail catalogs and retail stores for Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams-Sonoma Home, Rejuvenation and Mark and Graham. The company operates retail stores in the United States, Canada, Puerto Rico, Australia and the United Kingdom, and franchises its brands to third parties in various countries in the Middle East and the Philippines. The company's products are also available to customers through its catalogs and online across the world.

Jun 19, 2015

Mar 16, 2016Dec 18, 2015Sep 18, 2015 Oct 23, 2015

Jan 22, 2016Apr 27, 2016

May 28, 2015Feb 24, 2015

Mar 16, 2016

Jul 22, 2015

2.3%

EPS$0.53

Mar 18, 2015Dec 19, 2014 Jan 22, 2015

(9%)(2%)

(16%)(33%)

Stock

% Surp6.6%(2.0%)

Index

Apr 22, 2015

2.5%

16.7%7.2%6.5%9.7%9.8%

6.0%6.1%

TTM

Gain

(0.8%)

$1.55

Est Surprise

EPS Estimates# of Estimates

Mar 16, 2016May 25, 2016

Year Ago

TTM

TTMSales/Sh (Qtr)

Quarterly

EPS (Qtr)

Year Ago

CurrentMonth Ago

7/201628

0.5%

Annual1/2017

$0.60 $3.57$0.58 $3.58

6.3%

30

317

$0.60

18

$3.622

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jun 2011 Jun 2012 Jun 2013 Jun 2014 Jun 2015$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

Div

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WsM $53.04 ($89.38 - $47.33)

16 June 2016

Last month we began a discussion of the Altman Z-Score, which is used to indicate the probability of a company going bankrupt or facing significant financial distress. The Altman Z-Score actually consists of five performance ratios that are weighted using the following formula:Z-Score = (1.2 × A) + (1.4 × B) + (3.3 × C) + (0.6 × D) + (1.0 × E)

This month, we will focus on the “A” element of the Z-Score, which is working capital divided by total assets.

Working CapitalWorking capital is a company’s current assets less its current

liabilities and is also referred to as net current assets. Current assets are liquid cash and assets convertible to cash within one year. Current liabilities, in contrast, include accounts pay-able, notes payable, current maturities of deposits taken and accrued liabilities.

Working capital measures a company’s efficiency and its short-term financial health. Positive working capital means that the company has enough short-term assets to cover its short-term debt. Negative working capital means that a com-pany’s current assets cannot meet its short-term liabilities; it could have problems paying back creditors in the short term, ultimately forcing it into bankruptcy.

Working capital also gives investors an idea of the com-pany’s underlying operational efficiency. Money that is tied up in inventory or accounts receivable cannot be used to pay off any of the company’s obligations. So, if a company is not operating in the most efficient manner, it may show up as an increase in the working capital. Declining working capital over a longer time period could indicate that the company’s sales volumes are decreas-ing and, as a result, its accounts receiv-ables number continues to decline.

Working Capital to Total AssetsThe working-capital-to-total-assets

ratio is a liquidity ratio that expresses the net current assets of a company as a percentage of its total assets. The ra-tio indicates the extent to which assets are tied up in working capital or the amount of assets required to run the day-to-day operations of a company.

A high ratio of net working capital to total assets shows the company’s ability to match its account payable obliga-tions on time. The reason for a high ratio could be the company realizing revenue from sales much quicker than it makes payments for raw materi-als and other services. However, the reason may also be that the company is

not utilizing its cash reserves optimally. A low ratio may indicate cash flow difficulties for the com-

pany, even when it makes a profit and has assets to cover its liabilities. It could be a predictor for an imminent bankruptcy or financial stress, if the reason for the low ratio is consistent operating losses from slow sales that eat into working capital reserves, causing it to decline relative to total assets. A low or negative ratio could, however, also indicate adoption of a zero working capital initiative.

CaveatsLiquidity ratios such as working capital to total assets may

offer misleading readings right when a company is facing its most dire financial straits. As a firm approaches bankruptcy, its current assets could be bloated due to the fact that they cannot collect on their receivables or they have too much inventory that they can’t sell. So net current assets sometimes actually go up rather than down as bankruptcy approaches. In addition, bankruptcy lawyers sometimes encourage com-panies to go bankrupt when they have a lot of cash. Even though the company doesn’t have enough cash to pay all their bills, it’s better to have more cash as they go into bankruptcy because they’ll need it during the restructuring period.

The table here lists the companies in the DI portfolio along with their working capital to total asset values for the last two fiscal years. Like most ratios, analyzing values over time can

offer insights into a company’s financial condition.

Microsoft Corp. (MSFT) has the highest ratio of working capital to total assets, currently at 42.5%. Microsoft has seen its working capital position increase as its current assets have grown by 16.7% over the last six years, current liabilities have risen 10.7% and total assets have grown, on average, by 14.6% a year.

On the other end of the spectrum is AT&T Inc. (T), which has a negative ratio of working capital to total assets. It would appear, however, that AT&T has adopted a zero working capital doctrine, as its working capital has been negative for each of the last seven years.

It also worth pointing out the zero values for Deere & Co. (DE), Invesco (IVZ) and Wells Fargo & Co. (WFC). Deere does not aggregate current assets and current liabilities in its financial reporting, so it is not possible to calculate its working capital position. As financial firms, Invesco and Wells Fargo do not do this either. ▪

Company (Ticker) Y1 Y2Microso� Corpora�on (MSFT) 42.5% 39.8%Stage Stores Inc. (SSI) 40.7% 36.3%QUALCOMM, Inc. (QCOM) 31.5% 33.8%Texas Instruments (TXN) 27.8% 27.4%Cummins Inc. (CMI) 27.4% 31.9%Williams-Sonoma, Inc. (WSM) 14.1% 22.1%Emerson Electric Co. (EMR) 10.2% 10.0%Caterpillar Inc. (CAT) 9.3% 13.0%Interna�onal Paper Co. (IP) 8.3% 10.6%PepsiCo, Inc. (PEP) 7.8% 3.6%IBM Corp. (IBM) 7.5% 6.6%Eaton Corpora�on (ETN) 6.4% 8.2%Occidental Petroleum (OXY) 5.9% 10.0%Eastman Chemical (EMN) 5.3% 7.2%Target Corpora�on (TGT) 3.7% 4.6%Apple Inc. (AAPL) 3.0% 2.2%Union Pacific Corp. (UNP) 1.7% 1.2%Deere & Company (DE) 0.0% 0.0%Invesco Ltd. (IVZ) 0.0% 0.0%Wells Fargo & Co (WFC) 0.0% 0.0%Procter & Gamble Co. (PG) (0.1%) (1.5%)Wyndham Worldwide (WYN) (0.9%) 0.1%WEC Energy Group Inc (WEC) (1.7%) (2.5%)AT&T Inc. (T) (2.9%) (1.2%)Source: AAII's Stock Investor Pro/Thomson Reuters. Data as of 5/31/2016.

to Total AssetsWorking Capital

Deconstructing the Altman Z-score: Working Capital to Total Assets

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