in this issue two new stocks being added (and two deleted) …two new stocks being added (and two...

Two New Stocks Being Added (and Two Deleted)We are replacing Microchip Technology (MCHP) and V.F. Corp. (VFC) with

Procter & Gamble Co. (PG) and Wells Fargo & Co. (WFC). These are the first transactions made to the DI portfolio since September and only the third change made to the portfolio since the service started.

Microchip is being deleted because of a lack of earnings growth. Earnings per share have only increased on a year-over-year basis one time over the past five quarters and the company’s guidance implies the possibility of declining profits this quarter. V.F. Corp. is being deleted because of its valuation. The stock’s cur-rent yield is below its average five-year low yield.

Procter & Gamble has a lengthy history of raising its dividend. The company is financially strong and analysts expect earnings growth to resume this quarter. Wells Fargo will be our first banking stock. It gives us exposure to the housing sector, which is finally showing signs of starting a long-anticipated rebound.

The additions of Procter & Gamble and Wells Fargo in the DI tracking portfolio will be funded both from the proceeds from the deletion of the Microchip and V.F. Corp. and from the reinvestment of dividend cash that has accumulated over the past few months. The current cash balance is proportionately small, about 0.5% of the total portfolio, but the transactions give us the opportunity to put the cash to work without incurring additional costs.

V.F. Corp. went ex-dividend on December 6, 2012. The DI tracking portfolio, and all DI subscribers who owned the stock as of market close on Wednesday, Decem-ber 5, will receive a payment of $0.87 per share on December 20, 2012.

November DI PerformanceThe DI tracking portfolio had a total return of 0.3% in November. The DI track-

ing portfolio’s performance was composed of capital gains (stock price increases) of 0.2% and income returns (dividends received) of 0.1%. Our benchmark, the Dow Jones U.S. Index fund (IYY), had a total return of 0.6% for November, com-posed entirely of capital gains. The ETF did not pay a dividend last month.

Year-to-date, the DI tracking portfolio has a total return of 8.9%. This return is composed of capital gains totaling 6.3% and income returns totaling 2.6%. The Dow Jones U.S. Index fund has a total return of 13.0% since January 3, 2012. This return is composed of capital gains totaling 11.5% and income returns totaling 1.5%. The DI tracking portfolio’s yield of 3.2% compares to a yield of 1.7% for the Dow Jones U.S. Index fund.

The broader market declined following the presidential election, as traders’ and commentators’ eyes turned toward the fiscal cliff. Stocks rebounded just enough late in the month to lock in a small gain. Against this backdrop, the DI portfolio continued to show less volatility than its benchmark. In that respect, we are pleased with the performance of the portfolio.

The 0.1% income return for November reflects the timing of dividend pay-ments. Only four DI holdings paid dividends last month: ABM Industries Inc. (ABM), AT&T Inc. (T), General Dynamics (GD) and Waddell & Reed Financial (WDR). In comparison, December will have a much higher income return figure, with 18 companies paying dividends. Included in this group are Microchip,

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 ReportsGenuine Parts Co. (GPC) 8

Auto parts distributor offers slow but steady growth.

Procter & Gamble Co. (PG) 10Household and personal-care products giant focuses on key markets, productivity and innovation to enhance shareholder returns.

Vectren Corporation (VVC) 12Diversified utility company pays a 4.9% dividend and targets 8% to 10% total shareholder return.

Wells Fargo & Co. (WFC) 14Strong, large bank that should be returning more capital to shareholders in coming years.

DI ArticleThe Unintended Consequences of Accelerated and Special Dividends 16

Adjusting dividend payments now may adversely hurt companies and shareholders.

Next Publication Date: January 11, 2013

December 2012Volume I Issue 10

www.AAIIDividendInvesting.com

TM

2 December2012

whose payment of $0.352 per share was received on December 6, 2012; V.F. Corp., which will pay $0.87 per share on December 20, 2012; and Waddell & Reed Financial (WDR), which paid a special dividend of $1.00 per share on December 6, 2012. The Dow Jones U.S. Index fund should issue a distribution late this month.

DI Portfolio AlertsMicrochip and V.F. Corp. are being

deleted. The proceeds from the two de-letions will be combined with the divi-dend cash that has accumulated within the DI tracking portfolio to add Procter & Gamble Co. and Wells Fargo & Co.

Portfolio Deletion:Microchip Technology (MCHP)

Microchip is being deleted because of a disappointing trend in earnings. The company has not shown the growth we thought it would experience. The stock has a total return of –13.4% since it was added on January 3, 2012.

A good rule of thumb for determin-ing whether to hold or sell a stock is to ask if the reasons you bought the stock still apply. If the answer is yes, you may

want to consider holding onto the stock. If the answer is no, you may want to consider selling it. In the case of Micro-chip, one of the reasons for including it in the DI portfolio was our expectation that earnings would grow. This has not turned out to be the case.

Earnings per share have declined on a year-over-year basis during four out of the last five quarters. Though earnings per share did rise by 4.3% during Micro-chip’s second fiscal quarter, Microchip’s guidance left open the possibility for earnings to decline again during the cur-rent third fiscal quarter. Plus, the cover-ing brokerage analysts further cut their full-year earnings forecasts recently for fiscal 2013 and fiscal 2014.

We realize the 4.6% yield is attrac-tive, especially in the current interest rate environment, but the risk/reward analysis of any stock needs to also con-sider the business prospects of the firm. High yields can reflect the perception of higher risk, and we believe this is the case with Microchip.

Portfolio Deletion:V.F. Corp. (VFC)

Valuation is of prime importance

when it comes to investing, and we think shares of V.F. Corp. have become too expensive on a historical dividend yield basis. Therefore, we are deleting the stock.

V.F. Corp. has been one of the DI portfolio’s best performers, with a total return of 21.8% since January 3, 2012. Enthusiasm for the stock has exceeded the un-

derlying growth in profits and dividends, making shares of V.F. Corp. too expen-sive for this portfolio. The stock’s cur-rent yield of 2.2% is below its five-year average low yield of 2.5%. Since yields are inversely related to valuation, the current yield implies the stock is trading at a valuation above the upper range that investors have typically paid over the past five years.

We continue to think V.F. Corp. is a good company; our concern is that the stock’s valuation has become too high.

Portfolio Addition:Procter & Gamble Co. (PG)

Few companies need less of an introduction than Procter & Gamble. The company produces a wide variety of beauty, grooming, health care, fabric and home care, and baby and family care products. It owns many billion-dol-lar brands including Head & Shoulders, Gillette, Braun, Crest, Dawn, Duracell, Iams, Tide, Charmin and Pampers. Demand for the many of the product categories the company targets would be described by economists as relatively inelastic since few people are willing to go without items like toothpaste, laun-

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, 2012. AAII Dividend Investing is a trademark and service mark of the American Association of Individual Investors—All rights reserved. This publication may not be reproduced in whole or in part by any means without prior written consent.

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

Printed in the U.S.A.

Portfolio Alerts This MonthDecember Portfolio Deletions:

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price* Alert Date Purchase* Purchase*Microchip Technology (MCHP) 12/7/2012 $29.82 12/31/2011 -13.4% 12.4%V.F. Corporation (VFC) 12/7/2012 $156.19 12/31/2011 21.8% 12.4%

December Portfolio Additions:LatestPrice Dividend

Company (Ticker) (12/4/2012) Yield* Sector: IndustryNew Portfolio Additions:Procter & Gamble Co. (PG) $69.31 3.2%Wells Fargo & Co. (WFC) $32.74 2.7%*Data as of 12/4/2012.

Financial: Regional Banks

Portfolio Deletion AlertCompany (Ticker)

Consumer Non-Cyclical: Personal/Household Products

December2012 3

AAII DIvIDeND INveSTINg

dry detergent or toilet paper. Demand for Procter & Gamble’s specific brands, however, ebbs and flows on competitive options, particularly whether consumers feel frugal enough to buy lower-price alternatives.

Brokerage analysts anticipate earn-ings to begin rebounding. The I/B/E/S consensus estimate calls for earnings to reach $4.30 in fiscal 2014, up from $3.96 in fiscal 2013 (ending in June). Should the forecasts prove to be ac-curate, Procter & Gamble could achieve high-single-digit profit growth during each of the next two years.

Shares yield 3.2%. The current yield is slightly above the five-year average of 3.1%. Procter & Gamble has paid a dividend for 122 consecutive years and raised it for 56 consecutive years. Dur-ing the past five years, dividends have grown at a 10.8% annualized rate.

We also like Procter & Gamble’s stabil-ity. The company generates in excess of $3 per share in pre-dividend free cash flow. Procter & Gamble’s debt levels are at very manageable levels and the company consistently earns a profit. Plus, the stock has historically traded with less volatility than the broader

market, as is evidenced by its risk index score of 0.75.

See pages 10 and 11 for more analysis and data on P&G.

Portfolio Addition:Wells Fargo & Co. (WFC)

Wells Fargo gives the DI portfolio two things. First, it gives the portfolio ad-ditional diversification with the inclusion of a bank. Second, it gives the portfolio exposure to the budding recovery in the housing market. The Case-Shiller housing price index has been trending upward, and the pending home sales index is showing signs of improvement. Existing home and new home sales data, though choppy, are signaling that the market is starting to shift from sta-bilization to recovery. We acknowledge that the housing recovery has been marked by false starts and some areas remained depressed, but we think the potential rewards of adding Wells Fargo at this point outweigh the risks.

Wells Fargo is more than just a hous-ing play. The company is the largest middle-market and small business lender. It ranks number two in the U.S. for deposits and number four for wealth

management. Commercial lending ac-counts for 40% of its loan portfolio.

Wells Fargo was considered to be one of the strongest banks in terms of weathering the financial crisis. The com-pany has returned to a growth mode, increasing earnings for 11 consecutive quarters. Analysts expect the growth to continue, with profits projected to rise at a high-single-digit percentage pace over the next two years.

The stock’s valuation has yet to reflect the potential positives. Wells Fargo trades with a price-earnings ratio of just 10.3. This is far below the stock’s five-year average of 18.9. The current yield of 2.7% is above the stock’s five-year average of 2.5%. Both of these suggest that concerns about the outlook for the stock are priced in.

The company resumed dividend increases in 2011. Like other major banks, Wells Fargo has been required to seek approval by regulators to declare and raise dividends, despite having passed two stress tests. This has led to fragmented dividends being paid during the first quarters of 2011 and 2012. (The company paid partial dividends in January and March of both years.) Even

DI Pur- Latest Novchase Price Gain/ Div

Ticker Company Date Price Price (11/30/12) (Loss) Stock Index Yield IndustryABM ABM Industries, Inc. 12/31/11 $20.48 $20.89 $19.08 0.4% (6.7%) 13.0% 3.0% Business ServicesAFL AFLAC Incorporated 12/31/11 $43.26 $45.04 $52.99 6.4% 21.1% 13.0% 2.6% Insurance (Accident & Health)T AT&T Inc. 12/31/11 $30.24 $30.48 $34.13 (1.3%) 18.2% 13.0% 5.3% Communications ServicesCVX Chevron Corporation 12/31/11 $106.40 $110.91 $105.69 (4.1%) (1.5%) 13.0% 3.4% Oil & Gas - IntegratedETN Eaton Corporation 12/31/11 $43.53 $45.52 $52.16 10.5% 18.3% 13.0% 2.9% Electronic Instruments & ControlsEMR Emerson Electric Co. 12/31/11 $46.59 $48.13 $50.23 3.7% 7.7% 13.0% 3.3% Scientific & Technical InstrumentsGD General Dynamics 12/31/11 $66.41 $68.28 $66.50 (2.3%) 0.3% 13.0% 3.1% Aerospace and DefenseGPC Genuine Parts Co. 12/31/11 $61.20 $61.63 $65.09 4.0% 8.2% 13.0% 3.0% Auto & Truck PartsITW Illinois Tool Works 12/31/11 $46.71 $48.18 $61.57 0.4% 30.3% 13.0% 2.5% Auto & Truck PartsINTC Intel Corporation 12/31/11 $24.25 $24.70 $19.57 (9.5%) (18.1%) 13.0% 4.6% SemiconductorsLEG Leggett & Platt, Inc. 5/4/12 $21.49 $21.48 $27.85 5.0% 33.0% 4.5% 4.2% Furniture & FixturesMCD McDonald's Corp. 12/31/11 $100.33 $99.19 $87.04 0.3% (9.4%) 13.0% 3.5% RestaurantsMDT Medtronic, Inc. 12/31/11 $38.25 $38.89 $42.11 1.3% 11.0% 13.0% 2.5% Medical Equipment & SuppliesMSFT Microsoft Corp. 12/31/11 $25.96 $26.94 $26.62 (6.7%) 1.6% 13.0% 3.5% Software & ProgrammingNSC Norfolk Southern Corp. 12/31/11 $72.86 $74.18 $60.38 (1.6%) (16.3%) 13.0% 3.3% RailroadsPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $70.21 1.4% 7.8% 13.0% 3.1% Beverages (Non-Alcoholic)PG Procter & Gamble Co. 12/7/12 na na $69.83 0.9% na na 3.2% Personal & Household ProductsTGT Target Corporation 12/31/11 $51.22 $51.28 $63.13 (1.0%) 25.9% 13.0% 2.3% Retail (Specialty Non-Apparel)TRV Travelers Companies 9/7/12 $65.21 $65.60 $70.82 (0.2%) 8.0% (0.5%) 2.6% Insurance (Property & Casualty)UTX United Technologies 12/31/11 $73.09 $74.97 $80.11 2.5% 9.7% 13.0% 2.7% Aerospace and DefenseVVC Vectren Corporation 2/7/12 $29.55 $29.36 $29.25 (1.1%) 4.6% 6.1% 4.9% Natural Gas UtilitiesWDR Waddell & Reed Fin'l 12/31/11 $24.77 $25.36 $32.49 (2.5%) 35.3% 13.0% 3.4% Investment ServicesWFC Wells Fargo & Co. 12/7/12 na na $33.01 (2.0%) na na 2.7% Regional BanksWEC Wisconsin Energy Corp. 12/31/11 $34.96 $34.68 $37.53 (2.4%) 11.8% 13.0% 3.2% Electric UtilitiesData as of 11/30/2012. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

4 December2012

Performance

Dividend Yield %7.1%2.3

TotalReturn

IncomeReturn

CapitalGain/(Loss)

TotalReturn

IncomeReturn

CapitalGain/(Loss)

November 0.3% 0.1% 0.2% 0.6% 0.0% 0.6%2012 YTD 8.9% 2.6% 6.3% 13.0% 1.5% 11.5%From Inception 8.9% 2.6% 6.3% 13.0% 1.5% 11.5%Performance as of 11/30/2012.

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

*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)

AAII Dividend Inves�ng Por�olio

Performance of DI Portfolio

with the increases, this year’s dividend payment of $0.88 per share is below the $1.30 per share paid in 2008. Should regulators feel comfortable loosening their strict oversight and earnings con-tinue to grow, we expect Wells Fargo to continue raising its dividend.

See pages 14 and 15 for further analy-sis and data on Wells Fargo.

DI Portfolio News

Strongest Stocks in NovemberEaton Corp. (ETN) has seen its stock

price rise 40% after dipping below $37 per share during July. Eaton gained

10.5% during November and has seen its dividend yield drop from 4.1% dur-ing its lows in July to 2.9% at the end of November. Eaton’s price strength during November came after its last earnings report. While Eaton missed its third-quarter earnings estimates and lowered 2012 guidance, investors reacted positively to the strength of Eaton’s domestic electrical and automo-tive business as well as its merger with Cooper Industries and transformation into an Ireland-based corporation. Eaton is expected to see increased sales from the aftermath of Superstorm Sandy, as companies and consumers replace and

upgrade electrical units damaged during the storm.

The Eaton merger cleared all legal and regulatory hurdles during November, and the firm converted its shares on November 30, 2012. Your brokerage statement should already reflect the delivery of old Eaton shares and the receipt of new Eaton shares. The ticker remains the same and Eaton Corpora-tion plc is listed on the New York Stock Exchange. While this change resulted in a taxable exchange of shares, Eaton anticipates that the transition will allow it to maintain lower corporate tax rates going forward.

Shares of AFLAC Inc. (AFL) continued their upward climb in November, with a total return of 6.4%. There was no news event driving the stock higher. Rather, the rising price was an extension of the stock’s second-half upward trend.

Since hitting a 52-week closing low of $37.90 on June 4, 2012, the stock’s price has rebounded by almost 40%. (It is up 26% since the end of June.) As we stated in the November Monthly Report, reduced concern about the company’s exposure to risky European debt, a valuation that had become very cheap (the price-earnings ratio was 8.0 at the end of May), two positive earn-ings surprises and the likely attention of momentum trades have all contributed to AFLAC’s rising price. Enticing share-holders even more was a 6.1% increase in the quarterly dividend, announced in October. The higher $0.35 dividend was paid to shareholders a few days before press time, on December 3, 2012.

Though the rebound has been signifi-cant, AFLAC remains attractively priced. Thanks to rising earnings, the trailing 12-month (TTM) price-earnings ratio is just 8.8. The current price-earnings ratio is below the accident & health insur-ance industry median of 10.4 and below the stock’s five-year average of 13.1. Additionally, the 2.6% yield is above AFLAC’s five-year average of 2.3%.

Leggett & Platt Inc. (LEG) was the third-best performing DI stock in No-vember, gaining 5.0%. The company’s report of better-than-expected quarterly earnings of $0.45 per share (actual

December2012 5


results topped the I/B/E/S consensus es-timate by 17.8%) was released on a day when the markets were closed due to Superstorm Sandy (October 29, 2012). When markets re-opened on October 31, 2012, shares gained nearly 4.5%.

Further bolstering Leggett & Platt’s share price were reports from various news outlets that construction and home improvement companies will likely benefit from the rebuilding effort in the aftermath of Sandy. IHS Global Insight forecast potential infrastructure insured damages of about $10 billion and total damages of about $20 billion. Howard Altschule of Forensic Weather Consultants told FOX Business shortly after Sandy struck that he believes total damages will be “much higher than $20 billion,” with $40 billion “certainly possible.” Analysts at J.P. Morgan Chase initially estimated that housing and construction could receive a $36 billion boost from Sandy.

Genuine Parts Co. (GPC) was the fourth-best-performing stock in the DI portfolio, with a 4.0% gain in November. While the company declared its usual quarterly dividend and announced the retirement of its chief financial officer, the company’s price strength is more likely related to the general consistency of its sales and earnings during all eco-nomic conditions. The majority of GPC sales and earnings come from its auto parts business, and if your car’s alterna-tor goes out, you will need to replace it, fiscal cliff or not.

Genuine Parts was one of the corpora-tions that decided not move its normal dividend date. In November, its board of directors declared a regular quarterly cash dividend of $0.495 per share. The dividend is payable January 2, 2013, to shareholders of record December 7, 2012. The stock traded ex-dividend on Wednesday December 5, 2012. The divi-dend is unchanged from the prior quar-ter and follows Genuine Parts normal pattern of dividend payments. We antici-pate its next dividend increase will be in February 2013. Last year, Genuine Parts increased its dividend by 10% and its cash position and free cash flow should support a dividend increase. For more on

Genuine Parts see pages 8 and 9.

Weakest Stocks in NovemberIntel Corp. (INTC) was the worst-

performing stock in the DI portfolio, losing 9.5% during the month of November. Investors continue to worry about the prospects of the company with consumers increasingly relying on mobile devices such as tablets and smartphones. During the month, market researcher Gartner Inc. reported that PC shipments tumbled 8.3% in the third calendar quarter from a year earlier. The firm now anticipates total shipments will decline this year for the first time since 2001. This weakness has weighed on many tech companies, including Intel and Microsoft Corp. (MSFT).

Intel announced that the company’s president and CEO, Paul Otellini, will retire as an officer and director at the company’s annual stockholders’ meet-ing in May. Otellini has been with the firm for almost 40 years. His retirement at age 62 is considered a shock by most, as Intel CEOs are usually on board until age 65.

Shares of Intel now yield 4.6%. This yield is above the stock’s five-year aver-age high of 3.9%. With the deletion of Microchip, Intel is now the third-highest yielding stock in the DI portfolio. Though concerns about demand for the compa-ny’s products loom, Intel has a large cash balance and remains highly profitable.

Microsoft Corp. (MSFT) was the second-worst performing stock in the DI portfolio, losing 6.7% during November. Microsoft was hit with the same worries as Intel. Investors are simply unsure as to how well the company will perform in a changing technological landscape. In addition, Microsoft’s Windows 8 operating system, which went on sale

at the end of October, has received a lukewarm reception. This is disappoint-ing because the cross-platform operat-ing system was intended to be a step in the right direction. A common theme of Windows 8 complaints by analysts is that the user interface change is too radical to catch on quickly with PC consumers. The current level of criticism could make it easier for sales to exceed expectations, however.

In very preliminary readings, Re-uters reported that consumer sales of Windows-powered personal computers fell 21% overall last month. The data is based on a report released by NPD Group, which tracks computer sales weekly using data supplied by retail-ers. The figures are a slight cause for concern, but it should be noted that Windows 8 has been out for too short a period of time to truly ascertain its demand. In addition, these figures cover the period right before the holiday sea-son. Figures going forward through the holiday season should provide a better gauge.

Like Intel, Microsoft’s current yield is at a historically high level. Shares cur-rently yield 3.5%, significantly above the stock’s five-year average high of 2.9%.

Chevron Corp. (CVX) lost 4.1% last month. In early November, the com-pany reported earnings that were much lower than anticipated. Volatile crude prices, a decrease in output and unex-pected maintenance costs pushed down profits. Chevron earned $5.3 billion, or $2.69 per share, for the third quarter of 2012, compared with $7.8 billion, or $3.92 per share, in third-quarter 2011. The I/B/E/S consensus estimate had called for earnings of $2.83 per share.

Increasing output has been difficult for most major oil companies. Chevron

Recent earnings AnnouncementsRecent Earnings Announcements

Date Reported Expected SurpriseTicker Company Reported Earnings Earnings %EMR Emerson Electric Co. Nov 6 $1.110 $1.051 5.6%MDT Medtronic, Inc. Nov 20 $0.880 $0.883 (0.3%)TGT Target Corporation Nov 15 $0.810 $0.775 4.5%VVC Vectren Corporation Nov 5 $0.480 $0.330 45.5%Data as of 11/30/2012. Sources: I/B/E/S and company releases.

6 December2012

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viDelbayaPetaDdiaPynapmoCrekciT Yield Invest PlanABM ABM Industries, Inc. 2, 5, 8, 11 Tue Oct 2, 2012 Mon Nov 5, 2012 $0.1450 $0.58 3.0% -- --AFL AFLAC Incorporated 3, 6, 9, 12 Mon Nov 12, 2012 Mon Dec 3, 2012 $0.3500 � $1.40 2.6% Yes YesT AT&T Inc. 2, 5, 8, 11 Tue Jan 8, 2013 Fri Feb 1, 2013 $0.4500 � $1.80 5.3% Yes YesCVX Chevron Corporation 3, 6, 9, 12 Wed Nov 14, 2012 Mon Dec 10, 2012 $0.9000 $3.60 3.4% Yes YesETN Eaton Corporation 2, 5, 8, 11 Fri Oct 5, 2012 Fri Oct 19, 2012 $0.3800 $1.52 2.9% Yes YesEMR Emerson Electric Co. 3, 6, 9, 12 Wed Nov 14, 2012 Mon Dec 10, 2012 $0.4100 � $1.64 3.3% Yes YesGD General Dynamics 2, 5, 8, 11 Fri Dec 14, 2012 Wed Dec 26, 2012 $0.5100 $2.04 3.1% -- --GPC Genuine Parts Co. 1, 4, 7, 10 Wed Dec 5, 2012 Wed Jan 2, 2013 $0.4950 $1.98 3.0% -- YesITW Illinois Tool Works 1, 4, 7, 10 Thu Dec 27, 2012 Tue Jan 8, 2013 $0.3800 $1.52 2.5% -- YesINTC Intel Corporation 3, 6, 9, 12 Mon Nov 5, 2012 Sat Dec 1, 2012 $0.2250 $0.90 4.6% Yes YesLEG Leggett & Platt, Inc. 1, 4, 7, 10 Thu Dec 6, 2012 Thu Dec 27, 2012 $0.2900 $1.16 4.2% -- YesMCD McDonald's Corp. 3, 6, 9, 12 Thu Nov 29, 2012 Fri Dec 14, 2012 $0.7700 � $3.08 3.5% Yes YesMDT Medtronic, Inc. 1, 4, 7, 10 Thu Dec 13, 2012 Fri Dec 28, 2012 $0.2600 $1.04 2.5% Yes YesMSFT Microsoft Corp. 3, 6, 9, 12 Tue Feb 19, 2013 Thu Mar 14, 2013 $0.2300 $0.92 3.5% Yes YesNSC Norfolk Southern Corp. 3, 6, 9, 12 Wed Oct 31, 2012 Mon Dec 10, 2012 $0.5000 $2.00 3.3% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Wed Dec 5, 2012 Wed Jan 2, 2013 $0.5375 $2.15 3.1% Yes YesPG Procter & Gamble Co. 2, 5, 8, 11 Wed Oct 17, 2012 Thu Nov 15, 2012 $0.5620 $2.25 3.2% Yes YesTGT Target Corporation 3, 6, 9, 12 Mon Nov 19, 2012 Mon Dec 10, 2012 $0.3600 $1.44 2.3% Yes YesTRV Travelers Companies 3, 6, 9, 12 Thu Dec 6, 2012 Mon Dec 31, 2012 $0.4600 $1.84 2.6% -- YesUTX United Technologies 3, 6, 9, 12 Wed Nov 14, 2012 Mon Dec 10, 2012 $0.5350 $2.14 2.7% Yes YesVVC Vectren Corporation 3, 6, 9, 12 Tue Nov 13, 2012 Mon Dec 3, 2012 $0.3550 � $1.42 4.9% Yes YesWDR Waddell & Reed Fin'l 2, 5, 8, 11 Wed Jan 9, 2013 Fri Feb 1, 2013 $0.2800 � $1.12 3.4% -- --WFC Wells Fargo & Co. 3, 6, 9, 12 Wed Nov 7, 2012 Sat Dec 1, 2012 $0.2200 $0.88 2.7% Yes YesWEC Wisconsin Energy Corp. 3, 6, 9, 12 Mon Nov 12, 2012 Sat Dec 1, 2012 $0.3000 $1.20 3.2% 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 12/6/2012.

AmountPayment

Quarterly Dividend Payment

Dividend Payments

reported that worldwide net oil-equiva-lent production was 2.52 million barrels per day in the third quarter of 2012, down from 2.60 million barrels in third-quarter 2011. Production increases from project ramp-ups in Thailand, Nigeria and the U.S. were more than offset by the effects of planned maintenance-related downtime, normal field declines, continued shut-in of the Frade field in Brazil, dispositions and storm-related shut-ins in the Gulf of Mexico.

Chevron expects increased production in the fourth quarter of 2012, reflecting the completion of planned turnarounds and restoration of shut-in production in the Gulf of Mexico. As production stabi-lizes, earnings should rebound.

Legal issues also continue to trouble Chevron. Ecuadorian prosecutors are

now trying to persuade the courts in Ar-gentina to freeze $2 billion in company assets, citing a treaty Argentina signed that allows for the automatic freezing of assets of defendants who refuse to pay final court judgments.

Domestically, the company’s Rich-mond, California, refinery is expected to be back on line early next year, follow-ing an August fire at the facility. The facility shutdown has contributed to lower production for Chevron.

The announcement of a special dividend contributed to a 2.5% decline in shares of Waddell & Reed Financial (WDR), making it the DI portfolio’s fourth-worst-performing stock. In mid-November, the board of directors declared a special dividend of $1.00 per share payable to shareholders of record

as of November 26, 2012. Traders dis-counted the stock for this dividend on the ex-dividend date of November 21, 2012. The dividend was paid on Decem-ber 6, 2012.

The decline represented normal trad-ing activity. Stocks are discounted on their ex-dividend dates to account for the outflow of cash from the company to shareholders. Buyers of the stock on the ex-dividend date are no longer eli-gible to receive the dividend and there-fore demand a proportionate reduction in the share price.

Prior to the ex-dividend date, the stock was performing roughly similar to other financial stocks and the S&P 500. Year-to-date, Waddell & Reed remains the DI portfolio’s top performer, with a total return of 35.3%. ▪

December2012 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 19.7 3.0% 2.6% 2.5% na 4.9% 1965 46 58% 47% 24% 56% $1,035AFL 8.8 2.6% 3.0% 2.3% 10.8% 17.5% 1973 29 22% 28% 4% 88% $24,847T 44.3 5.3% 6.1% 5.5% 6.4% 5.1% 1984 29 226% na 59% 62% $193,858CVX 8.7 3.4% 3.3% 3.3% (1.9%) 9.0% 1912 25 28% 30% 91% 41% $206,855ETN 12.6 2.9% 4.1% 2.9% 9.0% 12.9% 1923 3 45% 43% 63% 56% $17,625EMR 18.7 3.3% 3.1% 3.0% 9.6% 8.8% 1947 56 60% 49% 49% 57% $36,374GD 9.9 3.1% 3.0% 2.3% 5.1% 15.4% 1979 15 30% 24% 20% 60% $23,479GPC 16.4 3.0% 3.3% 3.8% 8.2% 5.9% 1948 56 48% 54% 38% 53% $10,098ITW 15.0 2.5% 3.2% 2.7% 9.0% 13.3% 1933 41 30% 42% 37% 46% $28,535INTC 8.5 4.6% 3.4% 2.9% 11.8% 14.4% 1992 9 36% 46% 57% 34% $97,355LEG 22.5 4.2% 5.0% 5.1% 15.0% 10.4% 1939 41 88% na 55% 57% $3,935MCD 16.4 3.5% 2.9% 3.1% 8.4% 20.4% 1976 36 52% 52% 72% 59% $87,386MDT 13.5 2.5% 2.8% 2.0% 5.2% 17.1% 1977 35 30% 31% 26% 49% $42,958MSFT 14.4 3.5% 3.2% 2.2% 9.0% 14.9% 2003 3 44% 29% 24% 44% $224,004NSC 11.0 3.3% 2.5% 2.4% 12.6% 19.5% 1901 10 34% 33% 86% 67% $19,083PEP 18.7 3.1% 3.3% 2.8% 4.3% 11.8% 1952 40 56% 47% 60% 71% $108,605PG 22.8 3.2% 3.4% 3.1% 8.0% 10.8% 1890 56 58% 44% 60% 53% $190,931TGT 14.0 2.3% 2.4% 1.6% 11.8% 20.1% 1967 42 28% 21% 29% 67% $41,085TRV 10.1 2.6% 3.2% 2.7% 14.0% 9.5% 2003 7 25% 26% 22% 75% $27,014UTX 13.9 2.7% 2.6% 2.3% 11.5% 12.8% 1936 18 40% 32% 43% 73% $73,424VVC 14.7 4.9% 4.8% 5.3% na 2.4% 1946 53 70% 78% 226% 70% $2,402WDR 15.5 3.4% 3.7% 2.8% 12.7% 7.2% 1998 3 63% 52% 48% 53% $2,777WFC 10.3 2.7% 3.0% 2.5% 7.4% (15.0%) 1939 2 24% 58% 16% 89% $173,774WEC 15.6 3.2% 3.5% 2.8% 5.5% 17.7% 1939 9 47% 40% 58% 70% $8,635Data as of 11/30/2012. 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 December2012

Genuine Parts Co. is a wholesale distributor that operates in four primary markets: automotive parts, industrial parts, of-fice products and electrical/electronics materials. GPC started as an automotive parts distributor in 1928, but has used its strong cash flow to diversify its product lines over the last 30 years. The stock yields 3.1%, and Genuine Parts has shown a long-term commitment to rewarding shareholders, having raised the dividend for 56 consecutive years.

Why Own Genuine Parts Co.?Genuine Parts is a well-run, financially stable firm that dis-

tributes a mix of nondiscretionary and discretionary products. The U.S. accounted for 86% of revenue, while Canada ac-counted for 13% and Mexico was less than 1% of revenue.

GPC’s largest segment is its automotive parts group (49% of revenue, 48% of profits), which distributes over 380,000 prod-ucts through its 58 NAPA distribution centers. GPC operates a heavy vehicle parts distribution business under the name TW Distribution and Traction.

The industrial parts group (33% of revenue, 34% of profits), which operates under the name Motion Industries, distributes over three million industrial replacement parts such as bear-ings, belts and hydraulic components.

The office products group (14% of revenue, 14% of profits) operates 45 distribution centers under the name S.P. Richards. Its customers include thousands of office product resellers.

The electrical/electronic materials group (4% of revenue, 4% of profits) distributes over 100,000 items from 36 locations to the electrical original equipment manufacturer, apparatus repair and assembly markets.

Sales have grown at a 3.6% annual growth rate over the last five years, but have picked up some momentum since 2009. Sales have expanded at a 5.4% year-over-year rate over the last four quarters. Earnings per share from continuing opera-tions have grown a 5.3% annual growth rate over the last five

years, and a 14.7% growth rate over the last four quarters. Earnings for 2012 are projected to be around 13% higher than 2011, but the year-over-year growth has been decelerating recently. The industrial and electrical/electronic parts seg-ments have shown the strongest growth recently, while the office products group has struggled.

Dividend AnalysisGenuine Parts yields 3.1%, below its five-year average of

3.8%. GPC’s yield shot above 5% during the bear market, increasing the average. Nevertheless, GPC’s stock price has increased faster than its dividend, pushing down the yield. Investors have been attracted to the counter-cyclical nature of the auto parts business.

Genuine Parts has paid a dividend every year since going public in 1948, and they have raised their dividend for 56 con-secutive years. In February, the board of directors approved a 10% increase in the annual dividend from $1.80 per share paid in 2011 to $1.98 per share for 2012.

The company’s 12-month earnings per share payout ratio of 48.4% is secure and below the 54.0% five-year average. The payout ratio based on pre-dividend free cash flow is even stronger at 38.4% over the trailing 12 months.

Genuine Parts generates strong and consistent operating cash flow that has been used to fund expansion in the four business lines, strategic acquisitions, share repurchases and dividend payouts. GPC repurchased 2.4 million shares of com-mon stock in 2011 and has repurchased 0.98 million shares during 2012. The company is authorized to repurchase an additional 12.6 million shares.

RisksGenuine Parts’ strong balance sheet, consistent cash flow

and record of increasing dividend payments have attracted investor attention over last few years, pushing up the stock price relative to dividends and earnings. Its 3.1% dividend yield is below the five-year average, even with 10% annual dividend increases over the last two years. The 16.2 trailing price-earnings ratio is below the 14.5 five-year average. The forward price-earnings ratio is 15.9 times 2012 consensus earnings and 14.9 times the 2013 consensus earnings esti-mate. While we wouldn’t call the valuation expensive, it is not inexpensive either.

Genuine Parts has benefited from the aging of the typi-cal car—the average car is now nearly 11 years old—as well as the increasing complexity of cars that push consumers to maintain cars at independent car care centers. This is an attractive marketplace that has seen firms such as Autozone expand beyond the retail do-it-yourself customer and go after the commercial market as well. Extreme weather is tough on cars. A warmer-than-average winter can hurt sales.

Sales of the office segment have stagnated during the weak economy. Also troubling is the growth of mega office supply stores that can bypass middleman distributors such as GPC. ▪

genuine Parts Co. (gPC)

Bullish Factors• Extensive distribution network, diverse inventory and

quick delivery gives company a competitive edge• Strong balance sheet and consistent cash flow have

given company freedom to raise dividend annually for over 50 straight years and fund internal growth and acquisitions

• Recent expansion in profit margins, return on assets and return on equity

Bearish Factors• Priced fairly relative to earnings and dividend growth;

not deeply discounted• Sales growth of office products segment remains weak• Decline in economic activity will pressure growth

and possibly margins if costs cannot be passed on to customer

December2012 9


gPC $64.64 ($66.90 - $55.58)Addition Alert Date: 12/31/2011Price at Alert: $61.20 Risk Index: 0.96Market Cap (Million): $10,097.5Avg Daily Dollar Volume (Million): $50.9Primary Sector: Consumer CyclicalPrimary Industry: Auto & Truck Parts

Indicated Annual Dividend: $1.98 7002/218002/219002/210102/211102/21tnerruCselpitluMLatest Dividend Increase: (Date) Dividend Yield (%): Avg 3.1% 3.3 3.7 4.9 4.1 3.0Latest Dividend Increase: (%) 2.32.54.64.49.3hgiH :)%( dleiY dnediviD %0.01Dividend Yield: Current 3.1% 8.24.30.42.39.2woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 6.2 6.6 6.8 7.7 7.7 6.1Dividend Paid Since: 4.610.310.318.411.512.61sgninraE/ecirP8491Number of Years of Div Increases: 56 Price/Earnings (Industry) 9.8 12.6 15.9 16.0 17.4 18.0Direct Invest Option: No Price/Book Value 3.3 3.1 2.5 2.0 2.7 3.0DRIP Plan: Yes 8.06.05.06.07.08.0selaS/ecirP

7002/218002/219002/210102/211102/21tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.4950 Payout Ratio: EPS (%) 48.4 49.9 54.5 63.7 53.2 48.8$0.4950 Payout Ratio: FCFPS (%) 38.4 54.1 43.7 36.3 59.6 47.0$0.4950 Gross Margin (%) 29.1 28.9 29.0 29.9 29.7 29.7$0.4950 Operating Margin (%) 7.7 7.3 7.0 6.7 7.3 7.7$0.4500 Operating Margin (%) (Ind) 4.7 4.4 4.8 1.5 1.5 4.6

7.43.40.42.45.48.4)%( nigraM teN0054.0$Rel Strgth 2.919.812.616.713.024.12)%( EOR

Rank ROE (%) (Industry) 18.3 17.8 13.9 12.1 7.4 13.79.019.92.81.90.011.01)%( AOR%57keeW 46.20.39.22.25.22.2oitaR tnerruC%56keeW 311.344.156.749.847.256.25)%( stessA ot seitilibaiL%85keeW 62

%36keeW 25 Liab to Assets (%) (Ind) 66.8 67.6 65.2 66.5 71.5 64.73.23.21.21.22.21.2revonruT tessA

7002/218002/219002/210102/211102/21MTTstnemetatS laicnaniFraeY 5 htworG348,01510,11850,01802,11954,21909,21)M$( selaS%9.5sdnediviD712,3372,3010,3352,3606,3067,3)M$( emocnI ssorG%6.3selaS889809989859)M$( noitaicerpeD%5.3emocnI teN000000)M$( artxE/lausunU%4.5cisaB SPE838008176687019699)M$( emocnI gnitarepO%3.5tnoC liD SPE

Interest Expense ($M) 27 27 28 28 32 31SUE Score Pretax Income ($M) 977 891 762 644 769 817

(0.60) Net Income ($M) 623 565 476 400 475 5060.10 Operating Cash Flow ($M) 892 625 679 845 530 642

Annual Investing Cash Flow ($M) (679) (232) (172) (264) (214) (88)12/2013 Financing Cash Flow ($M) (356) (394) (321) (330) (473) (470)

12 Capital Expenditures ($M) 111 104 85 142 105 116$4.33 Net Cash Flow ($M) (137) (5) 193 269 (164) 96

99.239.215.210.316.300.4)$( cisaB SPE33.4$89.229.205.200.385.389.3)$( tnoC detuliD SPE0pU veR # 64.165.106.146.108.149.1)$( erahS/sdnediviD0nwoD veR # 11.326.214.457.333.330.5)$( erahS/wolF hsaC eerF83.4$ogA .soM eerhT

9/2012 6/2012 3/2012 12/2011 Total 23286733035525893)M$( hsaC$1.11 $1.08 $0.93 $0.86 $3.98 Goodwill/Intangibles ($M) 504 280 210 172 159 83$0.97 $0.96 $0.80 $0.75 $3.48 Total Assets ($M) 6,446 5,880 5,465 5,005 4,786 4,774

Long-Term Debt ($M) 500 500 250 500 500 2509/2012 6/2012 3/2012 12/2011 Total Total Liabilities ($M) 3,390 3,096 2,671 2,383 2,462 2,057

$21.76 $21.43 $20.42 $19.37 $82.98 Book Value/Share ($) 19.70 17.77 17.68 16.44 14.32 16.06$21.03 $20.25 $18.87 $17.82 $77.98 Avg Shares Outst'g (M) 155.15 156.66 158.03 159.41 162.35 169.13

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 12/4/2012.

Feb 21, 2012

0$4.07

01

$0.95

1

Quarterly12/2012

9

2102 ,3 naJ1102 ,12 voNAug 15, 2012 Sep 7, 2012 Oct 3, 2011

EPS (Qtr)

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

Est Surprise

EPS Estimates# of EstimatesCurrentMonth Ago $0.93 $4.05

$0.93

Annual12/2012

12$4.05

EPS$1.11$1.08

% Surp(0.5%)0.1%

14.6%14.7%

4.9%4.2%5.9%7.2%7.0%

TTM7.5%5.4%13.5%

Gain

Apr 2, 2012

Rel StrgthIndex

Dec 7, 2011

Genuine Parts Co. is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials. GPC sells goods and services through a network of over 2,000 operations, geographically located across the United States, Canada and Mexico. The company has four segments: automotive parts group (NAPA, Auto Todo, TW Distribution and Traction); industrial parts group (Motion Industries); office products group (S.P. Richards Company), and the electrical/electronic materials group.

Feb 21, 2012

Oct 18, 2012Jul 19, 2012

Mar 7, 2012

4%3%7%

10%

Stock

Nov 19, 2012Aug 20, 2012Apr 23, 2012 Jun 6, 2012

Sep 5, 2012Dec 5, 2012

0.97

3 Year

Jan 2, 2013Oct 1, 2012Jul 2, 2012

1.03

3.8% (4.6 - 3.3)

1.020.96

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011

Div

iden

d Yi

eld

$0

$10

$20

$30

$40

$50

$60

$70

$80

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10 December2012

Procter & gamble Co. (Pg)Procter & Gamble Co. is the largest personal-care product

manufacturer in the world. Its portfolio of products include 25 billion-dollar brands (products with at least $1 billion in annual global sales). These include Crest toothpaste, Iams pet food, Duracell batteries, Pampers diapers, Charmin toilet pa-per, Olay skin care products, Tide laundry detergent and Gil-lette razors. In May 2012, P&G reclassified its businesses into five segments: beauty (24% of fiscal-2012 sales); grooming (10%); health care (15%); fabric care and home care (32%); and baby care and family care (19%).

Why Own Procter & Gamble?With more than $80 billion in annual sales, P&G products

are sold in over 180 countries. Its diverse product portfolio, scale and brand recognition give it an advantage over its com-petitors. P&G implemented a restructuring and cost-cutting plan earlier this year that the company hopes will save it $10 billion over the next five years. The company now plans to cut its non-manufacturing workforce by an additional 2% to 4% annually through fiscal-years 2014 to 2016. This is on top of the 10% reduction it had previously announced.

The company has been aggressively buying back its shares as part of its commitment to enhance shareholder returns. P&G repurchased $7 billion of shares in fiscal 2011 and an-other $4 billion in fiscal 2012. In November, P&G said it was boosting its share buyback program for the current fiscal year by 50% to $6 billion.

P&G outlined its “40/20/10” strategy in June, an effort to prioritize resources on its biggest, most profitable businesses and on the innovations and emerging markets that offer the greatest opportunity for growth. This includes focusing on its 40 largest country/category combinations, its 20 most impor-tant innovations and the 10 emerging markets that potentially offer the greatest growth opportunities.

Procter & Gamble spends nearly $2 billion a year on R&D,

or almost 2.4% of fiscal-2012 sales, which is top among its competitors.

Sales have been growing, on average, by 2.9% a year over the last five years, while fully diluted earnings from continu-ing operations have been rising by 1.9% a year over the same period. The long-term estimated earnings growth rate over the next three to five years is 8.04%. Management currently expects organic sales growth of 2% to 4% for the current fiscal year with fiscal-2013 core earnings to come in between $3.80 and $4.00 per share.

P&G is currently trading at a price-earnings ratio of 22.7, which is higher than its industry median of 19.1. However, based on fiscal-2013 forecasted earnings of $3.96, P&G’s for-ward price-earnings ratio is a more attractive 17.5.

Dividend AnalysisPG shares currently yield 3.2% based on an indicated divi-

dend of $2.25 per share. However, with a five-year average range of 1.9% to 5.0%, the stock can’t be considered “cheap.” Founded in 1837, P&G has been paying a dividend since 1890 and has increased its dividend for each of the last 56 years. Over the last five years, P&G’s cash dividend has risen by 10.8% a year on average. On April 13, 2012, the company an-nounced that it was raising the quarterly dividend by $0.037 per share, or 7.0%, to $0.562 per share.

Currently, the company is paying out just over 58% of earnings as dividends. Based on the latest quarterly dividend increase and the forecasted earnings for 2012, this year P&G will pay out roughly 57% of earnings as dividends.

Looking at free cash flow, the company is currently generat-ing $3.62 per share of pre-dividend free cash and is paying out 60% of that as dividends. Given the company’s tremen-dous free cash generation and reasonably conservative bal-ance sheet, there is little doubt that the company should be able to continue to boost its dividend.

RisksSome analysts believe P&G’s 40/20/10 strategy is an

acknowledgement by management that the company had overextended itself as it tried to play catch-up in developing markets at the expense of developed markets.

P&G seems to have misjudged the pricing power of its port-folio, which is skewed toward higher-end products. The com-pany had been passing on higher commodity costs to consum-ers during a period when many shoppers have become more cost-conscious and its competitors have been lowering costs. This has contributed to lower volumes and reduced profitabil-ity. The company is now lowering prices and rolling out lower-level products to compete with private-label products.

Also, with roughly 60% of sales coming from outside North America, P&G is subject to the impact of currency transla-tions. This negatively impacted sales by 4% for fiscal 2012, and the company expects it be another 4% negative impact in 2013. ▪

Bullish Factors• Cost-cutting initiative underway to reduce cost structure

by $10 billion over the next several years• Company is looking to emerging markets to power

growth as developed markets stagnate• The company has generated roughly $36 billion in free

cash over the last three years

Bearish Factors• Growth in developed markets, which account for

roughly 60% of sales, has been sluggish• Company is having to roll back prices to try to recapture

market share it lost after raising prices to offset rising commodity costs

• Negative foreign exchange impact, which is expected to hurt fiscal 2012 revenues by 4%

December2012 11


Pg $69.31 ($70.83 - $59.07) Addition Alert Date: 12/7/2012

57.0 :xednI ksiRAN :trelA ta ecirPMarket Cap (Million): $190,931.3Avg Daily Dollar Volume (Million): $645.1Primary Sector: Consumer Non-CyclicalPrimary Industry: Personal & Household Products

Indicated Annual Dividend: $2.25 8002/69002/60102/61102/62102/6tnerruCselpitluMLatest Dividend Increase: Date Dividend Yield (%): Avg 3.2 3.4 3.8 3.4 2.6 2.1Latest Dividend Increase: % 4.21.31.40.57.3hgiH :)%( dleiY dnediviD %2.7Dividend Yield: Current 3.2% 9.12.28.20.32.3woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 4.4 5.0 7.4 6.5 5.3 5.0Dividend Paid Since: 9.918.815.516.311.027.22sgninraE/ecirP0981Number of Years of Div Increases: 56 Price/Earnings (Industry) 19.1 18.1 15.9 13.0 16.9 20.2Direct Invest Option: Yes Price/Book Value 3.0 2.8 2.2 2.6 3.1 3.1DRIP Plan: 6.25.20.28.11.23.2selaS/ecirPseY

8002/69002/60102/61102/62102/6tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.5620 Payout Ratio: EPS (%) 58.1 56.0 47.8 41.7 36.5 37.6$0.5620 Payout Ratio: FCFPS (%) 60.0 63.2 55.1 40.0 41.4 37.3$0.5620 Gross Margin (%) 49.4 49.7 50.9 52.2 49.6 50.5$0.5250 Operating Margin (%) 15.7 15.9 19.1 20.3 20.0 20.2$0.5250 Operating Margin (%) (Ind) 4.2 4.2 6.1 4.8 4.3 5.5




8002/69002/60102/61102/62102/6MTTstnemetatS laicnaniFraeY 5 htworG752,97496,67765,77401,18086,38988,28)M$( selaS%8.01sdnediviD699,93400,83525,04542,14595,14459,04)M$( emocnI ssorG%9.2selaSANANANANANAN)M$( noitaicerpeD%6.0emocnI teN0000826,2675,1)M$( artxE/lausunU%5.3cisaB SPE979,51473,51237,51594,51292,31399,21)M$( emocnI gnitarepO%9.1tnoC liD SPE

Interest Expense ($M) 734 769 831 946 1,358 1,467SUE Score Pretax Income ($M) 12,567 12,785 14,997 14,868 14,413 14,885

10.10 Net Income ($M) 10,271 10,500 11,564 12,517 13,244 11,8995.00 Operating Cash Flow ($M) 13,887 13,284 13,330 16,131 14,919 15,008

Annual Investing Cash Flow ($M) (973) (1,093) (3,482) (597) (2,353) (2,549)6/2014 Financing Cash Flow ($M) (11,222) (10,410) (10,122) (17,314) (10,814) (14,844)

22 Capital Expenditures ($M) 3,936 3,964 3,306 3,067 3,238 3,046$4.30 Net Cash Flow ($M) 1,720 1,668 (111) (1,902) 1,468 (2,041)

68.394.423.421.428.347.3)$( cisaB SPE03.4$04.393.374.358.321.360.3)$( tnoC detuliD SPE0pU veR # 54.146.108.179.141.271.2)$( erahS/sdnediviD2nwoD veR # 88.369.305.475.393.326.3)$( erahS/wolF hsaC eerF22.4$ogA .soM eerhT

9/2012 6/2012 3/2012 12/2011 Total 145,3187,4978,2867,2634,4203,5)M$( hsaC$0.96 $0.74 $0.81 $0.55 $3.06 Goodwill/Intangibles ($M) 85,495 84,761 90,182 85,648 89,118 94,000$1.01 $0.82 $0.94 $1.33 $4.10 Total Assets ($M) 135,888 132,244 138,354 128,172 134,833 143,992

Long-Term Debt ($M) 23,563 21,080 22,033 21,360 20,652 23,5819/2012 6/2012 3/2012 12/2011 Total Total Liabilities ($M) 71,589 68,805 70,714 67,057 71,734 74,498$7.55 $7.35 $7.35 $7.89 $30.13 Book Value/Share ($) 22.97 22.62 23.68 20.63 20.93 22.11$7.81 $7.32 $7.10 $13.14 $35.37 Avg Shares Outst'g (M) 2,748.60 2,751.30 2,804.00 2,900.80 2,952.20 3,080.80


3.1% (3.7% - 2.6%)

1.03

Apr 13, 2012

Rel Strgth

Nov 15, 2011Aug 15, 2011

Oct 17, 2012

0.96

3 Year

Nov 15, 2012Aug 15, 2012May 15, 2012

1.00

1.02

Gain

Feb 15, 2012

TTM

Oct 19, 2011

Oct 9, 2012Jul 10, 2012Apr 13, 2012 Apr 25, 2012

Jul 18, 2012

Oct 11, 2011Jul 12, 2011 Jul 20, 2011

The Procter & Gamble Co. (P&G) is focused on providing consumer packaged goods. The company’s products are sold in more than 180 countries, primarily through mass merchandisers, grocery stores, membership club stores, drug stores and high-frequency stores. P&G is organized into two global business units: beauty and grooming and household care. The units contain a total of five segments: beauty (24% of sales), grooming (10%), health care (15%), fabric care/home care (32%) and baby care/family care (19%). Developed markets accounted for 62% of sales and developing markets accounted for 38% of sales.

Jan 10, 2012

Oct 25, 2012

Jan 18, 2012

1%4%

13%9%

StockIndex

(9.4%)

9.3%2.9%(7.4%)(5.2%)(2.7%)

7.7%(1.2%)5.0%6.4%

Month Ago

# of Estimates

Aug 3, 2012

EPS$1.06$0.82

Est Surprise

Quarterly

20EPS Estimates 12/2012

Year Ago

TTM

TTMSales/Sh (Qtr)

EPS (Qtr)

Year Ago

Current

% Surp10.5%6.5%

23

Annual6/2013

$1.11 $3.95$1.11 $3.96

1$1.09

1

$3.901

0

$0

$10

$20

$30

$40

$50

$60

$70

$80

Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012

Share Price

0%

1%

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12 December2012

Vectren is not your typical utility. Though the majority of earnings come from electric and natural gas power, the company is also engaged in coal mining and energy infrastruc-ture. This gives a diversification option to what is otherwise a traditional utility. The mix is potentially good for investors as it enables the company to target annual utility earnings growth of 3%, but target a total shareholder return of 8% to 10% an-nually.

A significant part of this return is dependent on the stock’s dividend. Earnings are projected to grow by 6.4% in 2013 and 7.2% in 2014, while shares of Vectren currently yield 4.9%. In addition, Vectren has shown a long-term commitment to rewarding shareholders, with 53 consecutive annual dividend increases.

Why Own Vectren?The first thing that attracts dividend investors to Vectren is

the yield. The stock’s indicated yield of 4.9% is the second-highest in the DI portfolio. Though higher yields can be a sign of more risk, we view the dividend as safe. The company has been profitable for many years and generates positive cash flow from operations. Vectren expects its utility capital expenditures to increase by 6% next year, an indication that the company’s cash needs are not sharply rising. The balance sheet is in good shape, with debt at a manageable level.

As indicated above, Vectren’s business model is a utility company with a diversification option. The company provides electric and natural gas power to 1.1 million customers in In-diana and Ohio. These utility operations account for between 80% and 90% of the company’s core earnings. The remainder of earnings comes from a combination of coal mining, whole-sale gas marketing and utility infrastructure businesses. This gives shareholders stability with an option for growth. Vectren is paying particular attention to the utility infrastructure busi-

ness and views the aging energy grid of the U.S. as a source of future growth. The company has made acquisitions in this area, including the 2011 purchase of Minnesota Limited, and CEO Carl Chapman has indicated a willingness to make more.

Vectren is primarily a utility company, however. Current regulations allow the company to achieve an approximate 10.2% return on equity on gas and an approximate 10.4% return on equity on electrical transmission. Gas and electrical industrial volumes, measures of demand, are above pre-re-cession levels. Through September, the year-to-date increases are more than 9% for industrial gas volumes and 2.5% for industrial electric volumes.

Dividend AnalysisVectren yields 4.9%, 1.3 percentage points higher than the

utilities sector median of 3.6%. The company’s 12-month earnings per share (EPS) payout ratio of 70.4% is above the sector median of 62.2%. The company has raised its dividend for 53 consecutive years. The latest increase boosted the cumulative annual dividend distribution by two cents to $1.42 per share.

Like many utilities, Vectren does not generate enough free cash from operating activities to cover both capital expendi-tures and the dividend. Pre-dividend, however, the company is cash flow positive. Because state regulators allow utilities to recapture investments in their infrastructure through rate increases, we view the dividend as safe.

RisksThough Vectren has a long history of raising its dividend,

on a percentage basis, the size of the recent increases has been small. During the past five years, the dividend has risen at a 2.4% annualized rate. The latest increase represents year-over-year growth of just 1.4%. We think future dividend growth could remain at modest levels. Again, the dividend is safe; we just don’t expect it to rise sharply.

Vectren, like many utilities, is dependent on the economic health of a small geographic area. Any downturn in Indiana’s or Ohio’s economy would have an adverse impact on profits. Pushback by regulators could impact Vectren’s ability to raise rates. Though the non-utility segment does provide some di-versification, the company’s earnings are primarily dependent on the performance of the utility segment.

Weather is an ongoing concern for any electric or gas utility. Unseasonably warm or cool temperatures will impact the results, increasing or decreasing demand for power. Weather also impacts the infrastructure business, as rainstorms during the third quarter delayed products and adversely impacted revenues.

Coal prices are another volatile factor. Changes in coal pric-es not only affect energy costs for electric utility operations, but also how the coal mining unit performs. Weak prices this year have been a drag on the coal mining unit. ▪

vectren Corporation (vvC)

Bullish Factors• Combines a traditional utility business with exposure to

coal mining and energy infrastructure• Pays a high yield and has raised its dividend for 53

consecutive years.• Gas and electrical industrial volumes, a measure of

demand, are above pre-recession levels

Bearish Factors• Annual dividend growth is slow• The EPS payout ratio is high and the dividend is not

covered by free cash flow, though capital expenditures can be recouped

• Operates in a relatively small geographic area; weather patterns and changes in the regulatory environment could adversely impact earnings

December2012 13


vvC $29.23 ($30.75 - $27.46)Addition Alert Date: 2/7/2012Price at Alert: $29.55 Risk Index: 0.84Market Cap (Million): $2,402.4Avg Daily Dollar Volume (Million): $10.5Primary Sector: UtilitiesPrimary Industry: Natural Gas Utilities

Indicated Annual Dividend: $1.42 7002/218002/219002/210102/211102/21tnerruCselpitluMLatest Dividend Increase: Date Dividend Yield (%): Avg 4.9 5.1 5.5 6.0 5.1 4.6Latest Dividend Increase: % 1.57.64.73.69.5hgiH :)%( dleiY dnediviD %4.1Dividend Yield: Current 4.9% 2.41.40.59.45.4woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 6.8 6.4 6.6 7.3 6.3 6.8Dividend Paid Since: 8.418.517.311.517.517.41sgninraE/ecirP6491Number of Years of Div Increases: 53 Price/Earnings (Industry) 19.4 18.5 15.6 13.4 14.1 16.8Direct Invest Option: Yes Price/Book Value 1.6 1.5 1.4 1.3 1.5 1.7DRIP Plan: 9.08.09.09.00.11.1selaS/ecirPseY

7002/218002/219002/210102/211102/21tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.3550 Payout Ratio: EPS (%) 70.4 80.1 82.7 81.5 79.4 67.2$0.3500 Payout Ratio: FCFPS (%) 226.3 118.5 103.0 616.7 318.5 (264.8)$0.3500 Gross Margin (%) 72.3 28.9 28.6 26.6 21.3 22.6$0.3500 Operating Margin (%) 16.8 16.3 14.7 13.4 10.4 11.4$0.3500 Operating Margin (%) (Ind) 17.4 16.5 15.2 14.6 11.9 13.6




7002/218002/219002/210102/211102/21MTTstnemetatS laicnaniFraeY 5 htworG282,2584,2980,2031,2523,2612,2)M$( selaS%4.2sdnediviD515035555806276106,1)M$( emocnI ssorG%6.2selaS581291212922442152)M$( noitaicerpeD%4.5emocnI teN

0)M$( artxE/lausunU%7.3cisaB SPE (10) 5 0 5 0162852082213083373)M$( emocnI gnitarepO%9.3tnoC liD SPE

Interest Expense ($M) 98 107 105 100 98 101SUE Score Pretax Income ($M) 258 228 208 197 205 219

3.00 Net Income ($M) 163 142 134 133 129 1434.00 Operating Cash Flow ($M) 419 417 385 450 423 298

Annual Investing Cash Flow ($M) (275) (320) (269) (431) (402) (303)12/2013 Financing Cash Flow ($M) (143) (99) (117) (100) 52 (7)

7 Capital Expenditures ($M) 368 321 277 432 391 335$1.93 Net Cash Flow ($M) 1 (2) (2) (81) 73 (12)

98.156.156.156.137.199.1)$( cisaB SPE98.1$78.146.146.146.137.199.1)$( tnoC detuliD SPE3pU veR # 72.113.153.173.193.104.1)$( erahS/sdnediviD0nwoD veR #

14.022.033.171.126.0)$( erahS/wolF hsaC eerF98.1$ogA .soM eerhT (0.48)9/2012 6/2012 3/2012 12/2011 Total 1239210197)M$( hsaC$0.48 $0.31 $0.63 $0.57 $1.99 Goodwill/Intangibles ($M) 262 294 260 242 240 238$0.43 $0.18 $0.55 $0.56 $1.72 Total Assets ($M) 4,936 4,879 4,764 4,672 4,633 4,296

Long-Term Debt ($M) 1,454 1,560 1,435 1,541 1,248 1,2459/2012 6/2012 3/2012 12/2011 Total Total Liabilities ($M) 3,430 3,413 3,325 3,275 3,281 3,063$6.25 $5.74 $7.37 $7.66 $27.03 Book Value/Share ($) 18.35 17.92 17.72 17.31 17.26 16.25$6.59 $5.82 $8.35 $6.92 $27.69 Avg Shares Outst'g (M) 82.10 81.80 81.20 80.70 78.30 75.90


3 Year

Dec 3, 2012Sep 4, 2012Jun 1, 2012

0.99

0.89

5.3% (6.3% - 4.5%)

1.030.91

Nov 2, 2012Aug 1, 2012Apr 4, 2012 May 11, 2012

Aug 13, 2012Nov 13, 2012

Vectren Corporation is an energy holding company providing gas and/or electricity to over 1.1 million customers in adjoining service territories that cover nearly two-thirds of Indiana and west central Ohio. Vectren holds three public utilities: Indiana Gas, or Vectren North (564,000 natural gas customers); SIGECO-Electric and SIGECO-Gas, or Vectren South (252,000 combined customers); and Vectren Delivery of Ohio, or Vectren Ohio (310,000 customersVectren provides utility infrastructure services, energy contracting services, and energy marketing services, and the company operatea coal mining business.

Jan 31, 2012

Nov 5, 2012Aug 1, 2012

Feb 13, 2012

(1%)4%1%1%

Stock

TTM1.4%(2.0%)16.0%

Gain

Mar 1, 2012

Rel StrgthIndex

Nov 10, 2011

15.7%15.7%

1.9%(2.2%)3.2%1.6%1.8%

Annual12/2012

6$1.82

EPS$0.48$0.31

% Surp45.5%34.2%

Sep 1, 2011

# of Estimates

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

Current

EPS (Qtr)

Month Ago

Est Surprise

EPS Estimates

Nov 2, 2011Aug 3, 2011

$0.48 $1.74

Nov 2, 2012

0

Quarterly12/2012

5$0.47

Dec 1, 2011Aug 11, 2011

$1.75

12

$0.52

4

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14 December2012

Wells Fargo & Co. (WFC)Wells Fargo & Co. is a diversified financial services company

providing banking, insurance, investments, mortgage, and consumer and commercial finance in the U.S. and abroad.

The company operates as a bank holding company and has three operating segments: community banking; wholesale banking; and wealth, brokerage and retirement. It provides retail, commercial and corporate banking services to individu-als, businesses and institutions. It provides other financial ser-vices through subsidiaries, principally engaged in wholesale banking, mortgage banking, insurance agency and brokerage services, mortgage-backed securities servicing and venture capital investment. The company has $1.4 trillion in assets and employs 273,000 people in 35 countries.

Why Own WFC?Wells Fargo is one of the four largest banks in the U.S. with

dominant market positions in a number of major metropoli-tan areas. The company offers convenience and focuses on building strong relationships with customers by catering to a variety of customer needs.

As of the end of 2011, Wells Fargo had about $940 billion in deposits on its balance sheet, representing about 83% of total liabilities. The current low interest rate environment means that Wells Fargo has access to an abundance of cheap capital, but the bank is only able to deploy the capital at thin mar-gins. Separately, Wells Fargo is the top mortgage originator in the U.S. and economic indicators are pointing to a housing rebound. A stronger recovery in housing would greatly benefit Wells Fargo’s earnings.

Wells Fargo is known for its strong management. The cur-rent CEO, John Stumpf, has been with the company for over 30 years. Under the leadership of Stumpf, and former CEO Richard Kovacevich, the company has developed a low cost base of deposits and very strong customer relationships. Ad-ditionally, Wells Fargo provides diversification benefits to the DI portfolio as a “big bank.”

The company’s fundamentals are very strong. It currently trades at a price-earnings ratio of 10.3, which is well below its five-year average of 18.9. The current price-earnings ratio is also lower than the 12.5 median for the financial sector and the 12.6 median for the regional banks industry. The firm’s forward PEG ratio (price-earnings ratio divided by earnings growth) is 1.3.

Sales have increased at a 12.3% annual rate over the last three years, while net income has expanded at an 85.1% annual growth rate. Fully diluted earnings from continuing operations have grown at a 59.1% annual rate over the same period. Analysts are expecting earnings to be $3.35 per share for fiscal 2012, $3.63 per share for fiscal 2013 and $3.94 for fiscal 2014.

Cash flow from operations is $26.1 billion for the trailing 12 months, while dividends paid amount to $4.1 billion. Free cash flow per share has grown by 40.6% over the last three years.

Dividend AnalysisWells Fargo has a history of returning excess cash to its

shareholders. Its dividend yield is currently 2.7%, which is above its five-year average yield of 2.5%.

The company has paid a dividend every year since 1939, but during the financial crisis, the company cut its dividend substantially, as did all big banks. Since the annual payment dropped to $0.20 per share in 2010, Wells Fargo has been raising its dividend aggressively, with annual payments of $0.48 per share in 2011 and $0.88 per share in 2012, but the payments are still far from pre-recession levels.

Wells Fargo should be capable of raising its dividend further (pending government approval), given its strong results on stress tests. Plus, WFC’s current earnings payout ratio is at 24.2%. We see the cash dividend as very safe.

RisksAs a systemically important bank, Wells Fargo is likely to

face additional government oversight. It will be forced to hold more capital than the amount that was required pre-reces-sion, which may lead to lower returns. In addition, being the largest originator of mortgages means that past missteps may continue to cost Wells Fargo, as regulations target the bank. The total liability owed is near-impossible to predict.

Macroeconomic headwinds also remain. The U.S. recovery continues to be slugglish, consumers are spending less and lending standards remain strict. The low interest rate environ-ment hurts margins. Going forward, the U.S. may experience a period of deleveraging, from consumers and government entities, which can reduce bank profitability.

Wells Fargo has also begun to expand its offerings and now offers investment banking services. Although investment banking can offer additional revenue streams, it is consider-ably more risky than Wells Fargo’s core businesses. ▪

Bullish Factors• Large base of low-cost deposits• Fosters strong relationships with customers by offering

comprehensive financial services• One of the strongest big banks and should be able to

raise dividends in the near future given its high marks on stress tests

Bearish Factors• Low interest rate environment and deleveraging can

depress margins• Past housing missteps can lead to additional expenses• Faces increased government regulation and oversight

December2012 15


WFC $32.74 ($36.60 - $25.18) Addition Alert Date: 12/31/2011Price at Alert: NA Risk Index: 1.52Market Cap (Million): $173,773.7Avg Daily Dollar Volume (Million): $868.9Primary Sector: FinancialPrimary Industry: Regional Banks

Indicated Annual Dividend: $0.88 7002/218002/219002/210102/211102/21tnerruCselpitluMLatest Dividend Increase: (Date) Dividend Yield (%): Avg 2.7% 1.7 0.7 2.5 4.0 3.5Latest Dividend Increase: (%) 0.45.63.69.01.2hgiH :)%( dleiY dnediviD %3.38Dividend Yield: Current 2.7% 1.39.26.16.04.1woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 9.7 9.9 7.7 8.9 2.2 7.1Dividend Paid Since: 1.411.642.110.311.013.01sgninraE/ecirP9391Number of Years of Div Increases: 2 Price/Earnings (Industry) 12.6 12.5 14.3 14.3 16.8 16.1Direct Invest Option: Yes 4.26.19.03.12.12.1eulaV kooB/ecirPDRIP Plan: Yes 2.31.36.18.20.36.3selaS/ecirP

7002/218002/219002/210102/211102/21tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.2200 Payout Ratio: EPS (%) 24.2 16.8 9.0 27.8 185.7 49.0$0.2200 Payout Ratio: FCFPS (%) 15.8 18.5 5.6 7.8 (91.7) 42.6

ANANANANANAN)%( nigraM ssorG0022.0$$0.1000 Operating Margin (%) 63.2 70.6 54.9 43.8 26.3 45.6$0.1200 Operating Margin (%) (Ind) 26.8 62.9 53.2 46.8 47.0 49.0


Rank ROE (%) (Industry) 6.4 4.9 3.9 2.9 6.0 10.05.13.06.09.02.13.1)%( AOR%83keeW 4ANANANANANANoitaR tnerruC%24keeW 317.194.290.190.093.987.88)%( stessA ot seitilibaiL%36keeW 62

%08keeW 25 Liab to Assets (%) (Ind) 90.3 90.5 90.7 90.8 91.0 90.71.00.00.00.00.00.0revonruT tessA7002/218002/219002/210102/211102/21MTTstnemetatS laicnaniFraeY 5 htworG

Dividends (15.0%) 771,53898,43472,65697,25214,94219,84)M$( selaSANANANANANAN)M$( emocnI ssorG%9.8selaS

)M$( noitaicerpeD%3.21emocnI teN (1,723) (1,880) (2,199) (2,577) (186) (158)ANANANANANAN)M$( artxE/lausunU%7.2cisaB SPE530,61461,9656,42400,92468,43509,03)M$( emocnI gnitarepO%7.2tnoC liD SPE

Interest Expense ($M) 5,433 6,649 8,039 9,950 9,755 14,203SUE Score Pretax Income ($M) 27,307 23,656 19,001 17,998 3,300 11,835

0.30 Net Income ($M) 17,030 15,025 11,632 7,990 2,369 8,0570.30 Operating Cash Flow ($M) 26,065 13,665 18,772 28,613 (4,788) 9,286

Annual Investing Cash Flow ($M) (69,051) (35,044) (3,675) 71,785 (18,161) (77,347)12/2013 Financing Cash Flow ($M) 41,658 24,775 (26,133) (97,081) 31,955 67,790

35 Capital Expenditures ($M) 0 0 0 0 0 0$3.63 Net Cash Flow ($M) (1,328) 3,396 (11,036) 3,317 9,006 (271)

14.207.067.132.258.222.3)$( cisaB SPE36.3$83.207.057.112.228.291.3)$( tnoC detuliD SPE3pU veR # 81.103.194.002.084.087.0)$( erahS/sdnediviD2nwoD veR #

03.695.395.239.4)$( erahS/wolF hsaC eerF66.3$ogA .soM eerhT (1.42) 2.779/2012 6/2012 3/2012 12/2011 Total 861,23268,441853,721815,461924,851825,591)M$( hsaC$0.88 $0.82 $0.75 $0.73 $3.18 Goodwill/Intangibles ($M) 46,595 44,437 47,705 51,801 55,103 14,761$0.72 $0.70 $0.67 $0.61 $2.70 Total Assets ($M) 1,374,715 1,313,867 1,258,128 1,243,646 1,309,639 575,442

Long-Term Debt ($M) 130,801 125,354 156,983 203,861 267,158 97,9409/2012 6/2012 3/2012 12/2011 Total Total Liabilities ($M) 1,220,036 1,173,626 1,131,720 1,131,860 1,210,555 527,814$2.26 $2.33 $2.32 $2.35 $9.25 Book Value/Share ($) 26.93 24.40 22.52 22.73 20.06 14.09$2.31 $2.34 $2.36 $2.47 $9.48 Avg Shares Outst'g (M) 5,288.10 5,278.10 5,226.80 4,545.20 3,378.10 3,348.50


2.5% (4.0% - 1.9%)

0.960.991.13

3 Year

Dec 1, 2012Sep 1, 2012Jun 1, 2012

0.97

Oct 23, 2012Jul 24, 2012Apr 24, 2012 May 2, 2012

Aug 8, 2012Nov 7, 2012

Wells Fargo & Co. is the nation's fourth-largest bank holding company with three operating segments: community banking; wholesale banking; and wealth, brokerage and retirement. It provides retail, commercial and corporate banking services through banking stores and offices, the Internet and other distribution channels to individuals, businesses and institutions in 50 states, the District of Columbia and in other countries. It provides other financial services through subsidiaries engaged in wholesale banking, mortgage banking, insurance agency and brokerage services, mortgage-backed securities servicing and venture capital investment.

Mar 13, 2012

Oct 12, 2012Jul 13, 2012

Mar 22, 2012

(2%)(3%)9%29%

StockGain

Mar 30, 2012

Rel StrgthIndex

Feb 1, 2012

TTM90.2%(2.2%)18.5%17.9%18.1%

(28.3%)12.3%85.1%59.7%59.1%

EPS$0.88$0.82

% Surp1.1%1.0%

Annual12/2012

31$3.35Current

Month Ago $0.89 $3.34$0.90

Est Surprise

EPS Estimates# of Estimates

EPS (Qtr)

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

2102 ,1 raM2102 ,42 naJOct 25, 2011 Nov 3, 2012 Dec 1, 2012

Mar 13, 2012

1$3.31

10

$0.88

4

Quarterly12/2012

32

0%

2%

4%

6%

8%

10%


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Share Price

16 December2012

The ongoing uncertainty about the rate dividends will be taxed at next year is having three unintended consequences. The first is that an extraordinarily large number of companies are issuing special dividends. The second is that some compa-nies are paying their typical first-quarter dividends early. The third is that dividend growth rates for certain companies will be adversely affected in the future.

Large Number of Special DividendsHoward Silverblatt, the senior index analyst at S&P Dow

Jones, counted special dividend declarations from 228 com-panies occurring last month. To put this number in perspec-tive, total annual (not monthly, but annual) special dividend declarations have averaged 181 over the past eight years. Only 2007 saw more declarations than November 2012 (233 for all of 2007 versus 228 for just November 2012).

Some companies, including DI portfolio holding Waddell & Reed Financial (WDR), are opting to pay a one-time dividend in 2012 when maximum tax rates on qualified dividends are still 15%. Such payments give shareholders more income now, but won’t be repeated in the future. Hence, they are called “special” dividends.

Whether paying a special dividend is a good thing is debat-able. If a company truly has excess cash on its balance sheet that is not needed to fund future profitable projects, then distributing it to shareholders is the right thing to do. This distribution can take the form of a series of higher dividend payments in the future, share repurchases or a special divi-dend.

Paying a special dividend immediately puts the cash back in the hands of shareholders. It reduces the book value of the company by lowering the cash balance and retained earnings, but can help boost net profit margins by depleting an asset earning a low rate of return. To replenish the cash balance, the company can either rely on free cash flow generation, is-sue debt or issue more shares. For shareholders receiving the special dividend in a taxable account, the payment increases the amount of taxes due. If the 61-day holding period for qualified dividends is not met, the dividend payment is tax-able at ordinary income rates.

Waddell & Reed is paying its dividend from its cash bal-ance. Conversely, Costco (COST), a stock we do not hold, issued $3.5 billion in new debt to pay a special dividend of $7.00 per share. As we commented in the November 30, 2012, DI Weekly Update, selling bonds to pay for a dividend is akin to cashing one of those credit card checks sent in the mail so you can have an expensive night out on the town. Well after the joy of the night is gone, the repayment obliga-tion lingers.

Even if a company has the ability to handle the debt, it doesn’t mean they should issue debt to pay a dividend. A key test any CEO should ask before issuing new bonds is: Will shareholders benefit by having the level of debt increase? If the debt offering will not help the company prosper in the

future, then the answer is no.

Early Dividend Payments Now, Headaches LaterSome companies, including DI holding Medtronic Inc.

(MDT), are reacting to the possibility of higher tax rates on dividends by paying their typical first-quarter dividend before December 31, 2012. The rationale is that a known tax rate will be locked in. The negatives, however, are being over-looked.

The first is the potential tax implications on individual investors receiving extra dividends this year. Individual inves-tors holding a dividend-yielding stock in their portfolio are liable for taxes in the year the dividends are received. Though qualified dividends are taxed at a preferential maximum rate of 15%, they do increase reported gross income. Consult a tax professional if you have questions about the implications on your taxes.

The second negative is the impact on future dividend growth rates. By shifting a 2013 dividend payment into 2012, a company will have five dividend payments this year and three next year. Unless dividends are raised significantly enough next year, the calculated annual dividend growth rate will show a decline.

For example, let’s say a company paid a quarterly divi-dend payment of $0.20 per share in 2012. In November, the company raised its 2013 quarterly dividend payment to $0.22 per share (a 10% increase), but shifted its typical January payment to the end of December 2012. The calculations will show $1.02 in dividends paid in 2012 (four payments of $0.20 per share and one payment of $0.22 per share) and $0.66 in dividends paid in 2013 (three payments of $0.22 cents per share), a 35% decline in the annual dividend growth rate.

This statistical event, caused by the timing of when the divi-dends are paid, will have ramifications for years to come. The figures displayed on many websites and used in stock screens will be calculated using the larger cumulative dividend pay-ments in 2012 and the smaller cumulative dividend payments in 2013. This is because the databases aren’t programmed to consider temporary, tax-related actions. Expect to see the annualized dividend growth rates for those companies that are paying their typical first-quarter 2013 dividend before the end of 2012 reduced, or even negative, for years to come. Also expect them to be excluded from stock screens that require either consecutive annual dividend increases or a minimum dividend growth rate.

The number of companies paying their first-quarter divi-dend early is small relative to the universe of all dividend-paying stocks. Plus, our internal database does not factor in special dividends, which are different from a regular dividend that is paid early, into the growth rate. Nonetheless, compa-nies focused on short-term tax issues are running the risk of having their stocks overlooked by potential shareholders over the next several years because of the impact on the calcu-lated dividend growth rates. ▪

The Unintended Consequences of Accelerated and Special Dividends

in this issue two new stocks being added (and two deleted) …two new stocks being added (and two...

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