in this issue turning trash into cash t...occidental petroleum is an international oil and gas...

Turning Trash Into CashThroughout the month, numerous cities and states issued shelter-in-place

orders and the federal government has closed U.S. borders to non-essential travel in efforts to further combat the coronavirus. In response, U.S. Treasury bond yields trended down for the month as investors favored safe-haven assets, fearing an economic slowdown and an expected rise in the number of Ameri-cans filing for unemployment benefits. However, we are also starting to see a more coordinated fiscal, monetary and organizational response to the crisis that should pay off in the next few weeks or months.

Just before we went to press, Congress unanimously passed a $2 trillion economic relief package, the largest stimulus package in U.S. history, to re-spond to the coronavirus pandemic. The Senate plan includes direct payments to Americans, strengthened unemployment insurance, loans to businesses and increased health-care resources. “This is a wartime level of investment into our nation,” said Senate Majority Leader Mitch McConnell after announcing the deal.

On Wednesday, March 25, in anticipation of the massive stimulus package, the Dow Jones industrial average and the S&P 500 index posted their first back-to-back sessions of advances in more than a month.

While stocks across the board were lower in March, companies with stronger balance sheets and higher profitability outperformed their peers with higher debt levels and lower margins. Numerous companies have lowered operating and capital expenditures, suspended share buybacks and dividends and with-drawn guidance as companies close operations and furlough or lay off work-ers. Looking ahead, the spread of the coronavirus will continue to drive market moves.

DI Portfolio AlertsThis month there are two deletions and two additions to the Dividend

Investing portfolio. The strategy for the DI model portfolio is to remain fully invested. Occidental Petroleum (OXY) and Royal Caribbean Cruises Ltd. (RCL) are being removed from the portfolio to make room for Hubbell Incorporated (HUBB) and Republic Services Inc. (RSG). We are seeing tough trading conditions, with prices moving quickly and bid/ask spreads being widened. If you place a trade, use patience and limit orders and be prepared to change your order as prices move.

Portfolio Deletion: Occidental Petroleum (OXY)Occidental Petroleum is an international oil and gas exploration and produc-

tion company. It is one of the largest oil and gas companies in the U.S and the largest oil producer in the Permian Basin.

Occidental is highly dependent upon the price of oil, which has fluctuated widely over the years. In the last month, oil markets have digested both a supply shock—as Saudi Arabia’s state oil production cut prices and unleashed supply increases—and a demand shock—as global forecasts for oil have declined with lowered economic activity resulting from responses to the coronavirus pan-demic. On March 9, the energy sector experienced the largest one-day drop in

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 ReportsHome Depot Inc. (HD) 8

World’s largest home improvement store open for business during the coronavirus pandemic.

Hubbell Incorporated (HUBB) 10Smart infrastructure solutions and electrical and electronic products powering firm’s dividend since 1934.

PepsiCo, Inc. (PEP) 12Beverage and snack food giant focusing on fast-growing energy drink segment with Rockstar Energy acquisition.

Republic Services, Inc. (RSG) 14Leading waste management company turning trash into cash with strong annuity-type revenue profile.

DI Article Free Cash Flow Is King 16

The free cash flow measure highlights the effective management of overall company operations.

Next Publication Date: May 8, 2020

April 2020Volume IX Issue 4

www.AAIIDividendInvesting.com

TM

2 April 2020

growth strategy focused on certain international markets, such as China, gaining traction and the baby-boomer demo-graphic driving demand for the cruise industry as this population cohort retires and increases its allocated leisure time over the next decade.

Due to the uncer-tain nature of the near-term demand environment, Royal Caribbean with-drew its first-quarter and full-year 2020 guidance. The company entered into a $2.2 billion secured term loan facility to help enhance its liquidity position. The company is also pursuing additional ac-tions to improve its liquidity by at least a further $1.7 billion in 2020 by reduc-ing capital expenditures and operating expenses.

Royal Caribbean has lost 68.9% since being added to the Dividend Investing portfolio on November 13, 2019. The performance is well below the 18.8% drop realized by the Dow Jones U.S. Index ETF (IYY) over the same period.

One of the things looked at and monitored at Dividend Investing is a company’s cash flow from operations. This is a measure of how much cash a company is realizing or burning through with its normal business operations. While it can turn negative for a given quarter because of inventory or the timing of certain cash inflows, it should be positive overall. In times like this, re-ported financial data has its limits. The numbers tell you how a company has performed, not how it will in the future. For more information on cash flow, see page 16.

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

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

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

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

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

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

Printed in the U.S.A.

Portfolio Alerts This Month

innovation, quality of ships and service, variety of itineraries, choice of destina-tions and price.

Royal Caribbean has been among the companies and stocks most adversely affected by the coronavirus pandemic. Drops in demand, cancellations and restrictions have all taken a large toll. In response to the spread of the corona-virus, the company has extended the suspension of its sailing for its entire global fleet until May 12. The safety of Royal Caribbean’s dividend is an increas-ing concern going forward due to the deterioration of the company’s under-lying fundamentals from the damage caused by the coronavirus to the travel industry. Therefore, Royal Caribbean is being deleted from the Dividend Investing portfolio.

A very high level of uncertainty accompanies this decision. The out-comes range from demand for cruises rebounding faster than anticipated to a sustained period of depressed business conditions. We do not possess a work-ing crystal ball and cannot place odds on any of these outcomes occurring.

The world has changed since the investment thesis for adding Royal Caribbean to the DI portfolio was written. Reasons for adding the stock included the company’s long-term

the price of oil since the Gulf War in 1991. West Texas Intermediate (WTI) oil prices fell into the high $20s per barrel. The WTI price per barrel has remained in this range ever since and is down significantly after hovering around $50 per barrel for most of the past year.

On Tuesday, March 10, citing the sharp decline in crude oil prices, Occidental slashed its quarterly dividend 86% to $0.11 per share from $0.79 per share. The company cut its dividend for the first time in nearly 30 years and ended its 17-year streak of consecutive dividend increases. A dividend cut is one of the triggers Dividend Investing uses to remove a stock from the portfolio.

Occidental has lost 81.2% since being added to the DI tracking portfolio on January 12, 2015. The performance is significantly below the 29.5% total return realized by the Dow Jones U.S. Index ETF (IYY) over the same period.

Portfolio Deletion: Royal Caribbean Cruises Ltd. (RCL)

Royal Caribbean is the world’s second-largest cruise company, operating more than 60 ships across six global and partner brands in the cruise vacation industry. The company’s diverse brands allow it to compete on the basis of

April Portfolio Deletions:Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price* Alert Date Purchase* Purchase*Occidental Petroleum (OXY) 3/27/2020 $10.72 1/9/2015 (81.2%) 29.5%Royal Caribbean Cruises Ltd. (RCL) 3/27/2020 $34.47 11/8/2019 (68.9%) (18.8%)

April Portfolio Additions:

Company (Ticker)Latest Price*

Dividend Yield* Sector: Industry

Hubbell Incorporated (HUBB) $98.62 3.7%Republic Services, Inc. (RSG) $71.49 2.3%*Data as of 3/24/2020.

Company (Ticker)Portfolio Deletion Alert

Industrials: Electrical Components & EquipmentIndustrials: Environmental Services & Equipment

April 2020 3

AAII DIvIDeND INvesTINg

DI Pur- Latest Marchase Price Gain/ Div

Ticker Company Date Price Price (3/24/20) (Loss) Stock Index Yield IndustryAMGN Amgen, Inc. 10/27/17 $175.28 $174.93 $202.34 1.3% 24.4% 0.4% 3.2% PharmaceuticalsBLK BlackRock, Inc. 10/5/18 $470.86 $463.47 $371.70 (19.7%) (16.1%) (13.9%) 3.9% Investment Mgmt & Fund OpersCMA Comerica Inc. 12/7/18 $74.03 $72.16 $30.50 (42.1%) (55.5%) (7.3%) 8.9% BanksCBRL Cracker Barrel 2/3/17 $158.50 $157.56 $94.92 (33.8%) (32.9%) 11.8% 5.5% Restaurants & BarsCMI Cummins Inc. 10/3/14 $135.10 $127.75 $124.49 (17.7%) 7.5% 34.5% 4.2% Auto, Truck & Motorcycle PartsEMN Eastman Chemical Co. 2/6/15 $73.20 $74.59 $41.58 (32.4%) (35.6%) 28.0% 6.3% Chemicals - CommodityETN Eaton Corporation 12/31/11 $43.53 $39.80 $71.21 (21.5%) 105.7% 105.9% 4.1% Electrical Components & EquipHD Home Depot Inc. 9/1/17 $150.78 $152.88 $184.72 (15.2%) 28.4% 2.3% 3.2% Retailers-Home Improve Prod/ServHUBB Hubbell Incorporated 3/27/20 na na $98.62 (26.0%) na na 3.7% Electrical Components & EquipHBAN Huntington Bancshares 1/12/18 $15.85 $15.86 $7.43 (39.4%) (48.6%) (9.8%) 8.1% BanksIBM IBM Corp. 10/2/15 $144.58 $155.86 $105.48 (19.0%) (15.1%) 29.9% 6.1% IT Services & ConsultingIP International Paper Co. 4/4/14 $45.81 $45.23 $27.91 (24.5%) (23.1%) 43.5% 7.3% Paper PackagingMDT Medtronic PLC 1/6/17 $72.87 $75.05 $80.35 (20.2%) 14.2% 11.8% 2.7% Medical Equip, Supplies & DistribPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $113.84 (13.8%) 117.3% 105.9% 3.4% Non-Alcoholic BeveragesPII Polaris Inc. 12/9/16 $85.84 $86.34 $46.93 (43.1%) (41.0%) 11.8% 5.3% Recreational ProductsPFG Principal Financial Group 12/9/16 $60.30 $57.72 $29.61 (33.3%) (44.0%) 11.8% 7.6% Insurance - Life & HealthRSG Republic Services, Inc. 3/27/20 na na $71.49 (20.8%) na na 2.3% Environmental Servs & EquipSNA Snap-on Incorporated 9/7/18 $180.60 $182.03 $106.59 (26.4%) (39.7%) (14.5%) 4.1% Industrial Machinery & EquipTXN Texas Instruments 4/5/13 $34.20 $34.80 $105.36 (7.7%) 264.9% 73.1% 3.4% SemiconductorsTSN Tyson Foods, Inc. 3/8/19 $62.78 $64.74 $59.99 (11.6%) (6.0%) (12.3%) 2.8% Food ProcessingUNP Union Pacific Corp. 7/2/15 $96.66 $97.23 $128.87 (19.4%) 47.8% 25.4% 3.0% Freight & Logistics - GroundUNH UnitedHealth Group Inc 9/6/19 $229.00 $233.44 $219.80 (13.8%) (4.7%) (18.5%) 2.0% Managed Health CareWBA Walgreens Boots Alliance 6/7/19 $51.97 $53.64 $45.25 (1.1%) (11.3%) (14.8%) 4.0% Retailers - DrugWSM Williams-Sonoma, Inc. 6/3/16 $53.25 $53.28 $42.49 (31.9%) (12.5%) 22.1% 4.5% Retailers - Home FurnishingsData as of 3/24/2020. Sources: AAII Stock Investor Pro, Refinitiv, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

Portfolio Addition: Hubbell Incorporated (HUBB)

Hubbell Incorporated is a global elec-trical equipment company that designs, manufactures and sells electrical and electronic products for non-residential and residential construction, industrial and utility applications. The company has one of the most complete offerings across the entire electrical supply chain, from power generation to products for the end user.

In February 2018, Hubbell completed its largest acquisition to date, with the purchase of Aclara Technologies LLC for $1.1 billion. The acquisition extended Hubbell’s capabilities into smart infra-structure solutions for electric, gas and water utilities, with advanced metering solutions and grid monitoring sen-sor technology. The acquisition brings Hubbell a large installed base of recur-ring revenue in a fast-growing market. Hubbell is also well positioned to meet secular transmission and distribution growth as utilities invest to upgrade and modernize an aging U.S. power grid infrastructure.

The company is exposed to general macroeconomic headwinds including

weaker-than-expected construction demand due to a weaker-than-expected economy, increased raw material costs and potential impacts from the un-certainty surrounding the coronavirus pandemic. Hubbell also faces some challenges with its lighting business, where low-cost foreign competitors have pressured its margins.

Hubbell has been paying a dividend since 1934 and has increased its annual dividend in each of the last 12 years. The company increased its dividend dur-ing the financial crisis of 2008. The com-pany’s current dividend yield of 3.7% is above its five-year average high of 3.0%. For more information on Hubbell, see pages 10 and 11.

Portfolio Addition: Republic Services, Inc. (RSG)

Republic Services Inc. provides servic-es in the domestic non-hazardous solid waste industry. The company, through its subsidiaries, provides integrated waste management services consisting of collection, transfer station, recycling and disposal of domestic non-hazardous solid waste for commercial, industrial, municipal and residential customers.

Republic Services was founded in 1996 and—through a series of successful mergers and acquisitions—has quickly expanded to become one of the largest waste, recycling and environmental service providers in the U.S.

As a fully integrated waste hauler, it leverages a vast network of collection routes and transfer stations, which gives the company significant control over the waste stream, funneling trash from commercial, industrial and residen-tial end markets into its own landfills. Intangible resources (like regulatory permits for landfills), a modern truck fleet and substantial route density have enabled Republic Services to carve out a strong competitive position that has supported healthy core-pricing gains over the past years.

Republic Services’ traditional solid waste operations have enjoyed mac-roeconomic tailwinds in recent years. However, its recycling division has en-countered painful headwinds as prices for recycled commodities the company extracts and sells—particularly old cor-rugated cardboard—have plummeted on China’s decision to suspend most import licenses in early 2018.

4 April 2020

Republic Services has paid quarterly cash dividends since 2003 without inter-ruption or reduction. The company has increased its dividend for 10 straight years. For more information on Republic Services, see pages 14 and 15.

History and Bear Market Bottoms

Market movements are often very

sudden and strong, both to the upside and downside. The biggest market up days are often clustered near the big-gest market down days.

The S&P 500 index has fallen almost 28% from its February 19, 2020, peak through March 24, marking an end to the record long bull market that nearly reached its 11th anniversary. The sud-den and sharp market decline arrives as

investors come to grips with the disrup-tion that the coronavirus pandemic will have not only on the global economy but also on everyone’s day-to-day lives.

We realize many of you would like to know where the bottom is. We’ll share the answer several well-regarded economists, mutual fund managers and hedge fund titans have given: We don’t know. The country is dealing with the coronavirus pandemic combined with an oil price war and investors are seeing early signs of an economic downturn.

Still, history can provide a guide. If this current bear market turns out to be an ordinary type, the bottom may be closer than you think. Table 1 from Howard Silverblatt of S&P 500 Dow Jones Indices shows the data for every bear market since 1929. Excluding the current bear market, six of the prior 11 post–World War II bear markets have seen the S&P 500 fall by less than 30%. The average bottom for all post-WWII bear markets is 33.8% and lasted 1.4 years.

Historically speaking, bear market durations are shorter than bull market runs. The stock market crash of 1929 resulted in a bear market that lasted 2.7 years. The bear market associated with the collapse of the dot-com bubble in 2000 lasted about two and a half years and resulted in a 49.1% drop. The bear market from the financial crisis of 2008 saw stocks lose 56.8% over the course of one year and five months.

On average, bear markets over the last 100 years, excluding the current bear market, have averaged 1.75 years in length and have resulted in an aver-age loss of 39.9%. Stock market bull runs have averaged 5.2 years with an average gain of 182.7%.

Portfolio PerformanceThe DI tracking portfolio declined

22.1% for the month to date through March 24, 2020, while the Dow Jones U.S. Index ETF (IYY) was down 18.4%. Comparing to a more dividend-growth focused strategy, the S&P 500 Dividend Aristocrats index was down 19.6% over the same period.

The DI tracking portfolio’s 22.1% loss during this period was composed of 22.5% price decline and 0.4% income

Performance

Dividend Yield 4.5% 2.4%

Total Return

Income Return

Capital Gain/(Loss)

Total Return

Income Return

Capital Gain/(Loss)

March (22.1%) 0.4% (22.5%) (18.4%) 0.0% (18.4%)2020 YTD (34.0%) 0.5% (34.5%) (25.0%) 0.0% (25.0%)2019 29.9% 4.1% 25.8% 30.8% 2.5% 28.3%2018 (11.5%) 2.6% (14.1%) (5.2%) 1.7% (6.9%)2017 22.3% 3.4% 18.9% 21.3% 2.0% 19.3%2016 18.2% 3.9% 14.3% 12.0% 2.1% 9.9%2015 (7.7%) 2.9% (10.6%) 0.4% 1.9% (1.5%)2014 12.2% 3.0% 9.2% 12.9% 2.0% 10.9%2013 36.5% 3.6% 32.9% 32.6% 2.3% 30.3%2012* 10.2% 3.5% 6.7% 14.4% 2.3% 12.1%From Inception 70.8% 37.7% 33.1% 117.3% 29.9% 87.4%Performance as of 3/24/2020.

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

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

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

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

2012 2013 2014 2015 2016 2017 2018 2019 2020

AAII Dividend Investing Portfolio

Growth of $100,000

AAII Dividend Investing Portfolio

Performance of DI Portfolio

April 2020 5


return. The Dow Jones U.S. Index fund’s 18.4% decrease during the same period was due entirely to price decline.

Over the life of the Dividend Investing portfolio through March 24, 2020, it has provided a total return of 70.8%, with dividend income contributing 37.7% to the total return. The Dow Jones U.S. Index ETF has a total return of 117.3% over this same period, with income con-tributing 29.9% to the total return.

The average dividend yield of the stocks in the DI portfolio is 4.5% while the Dow Jones U.S. Index fund has a dividend yield of 2.4%.

Dividend News Four stocks in the DI portfolio de-

clared dividends that were in line with the previous quarter’s payment for the month through March 24, 2020: Amgen Inc. (AMGN), Cracker Barrel (CBRL), Medtronic PLC (MDT) and Williams-Sonoma Inc. (WSM). A dividend increase was expected with Williams-Sonoma’s declaration, as the company has historically announced one with its fourth-quarter earnings report. We will continue to monitor the situation with Williams-Sonoma’s dividend. The company has paid a dividend since 2006 and, until this year, had increased its payment consecutively for 10 years.

As previously discussed, Occidental

Petroleum reduced its quarterly dividend 86% from $0.79 to $0.11 per share and is being deleted from the DI portfolio.

Portfolio NewsStrongest DI Stock Performers

Amgen Inc. (AMGN) was the best-performing stock in the DI portfo-lio month to date, up by 1.3% through March 24. Biotech companies like Amgen have been generally resilient during this time of global economic un-certainty, especially in comparison to the depth of declines across the rest of the market. Amgen released a statement that it does not expect any shortages of its medicines due to the coronavirus pandemic, adding that it is monitoring its raw material inventory levels and is taking “additional mea-sures” to mitigate against disruption.

Earlier this month, Amgen declared a $1.60 per share dividend for the second quarter; the dividend will be paid out to shareholders on June 8. The

stock trades ex-dividend Friday, May 15. Amgen’s dividend yield of 3.2% compares to its five-year average high of 3.1%.

Walgreens Boots Alliance (WBA) had the smallest loss in the DI portfo-lio through March 24, down by 1.1%. Walgreens will be allocating temporary spaces at select locations outside of stores where non-Walgreens personnel will administer tests for the corona-virus. Consistent with other retailers, Walgreens has cut in-store operating hours during weekdays and over week-ends until further notice, giving staff more time to clean and sanitize stores and restock shelves. Also, the company announced that it will be waiving deliv-ery fees for all eligible prescriptions to help customers and patients during the coronavirus pandemic.

Walgreens’ dividend yield of 4.0% com-pares to its five-year average high of 2.5%.

Texas Instruments (TXN) fell 7.7% through March 24, making it the third-best-performing holding in the DI portfolio month to date. Uncertainty related to the coronavirus pandemic caused the company’s stock to fall sharply along with the broader market, just as it was beginning to recover from weak semiconductor demand in 2019.

During the month, shares of Texas Instruments were able to partially offset some of the market’s weakness as investor sentiment for the technology sector grew. Texas Instruments’ dividend yield of 3.4% compares to its five-year average high of 3.3% and its five-year average low of 2.2%.

Weakest DI Stock PerformersOccidental Petroleum (OXY) was

the worst-performing stock in the DI portfolio as of March 24. The stock was down 67.3% month to date as the company was impacted, first by the coronavirus pandemic and second by

Recent earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %WSM Williams-Sonoma, Inc. Mar 18 $2.130 $2.050 3.9%Data as of 3/24/2020. Sources: I/B/E/S and company releases.

Table 1. s&P 500 Bear MarketsBeginnng

DateEnd Date

Start Price End Price

Duration (Months)

Bear Decline

Prior Bull Gain

09/07/29 06/01/32 $31.92 $4.40 32.8 (86.2%)03/06/37 04/29/42 $18.68 $7.47 61.8 (60.0%) 325%

—

05/29/46 06/14/49 $19.25 $13.55 36.5 (29.6%) 158%08/02/56 10/22/57 $49.64 $38.98 14.7 (21.5%) 266%12/12/61 06/27/62 $72.64 $52.32 6.5 (28.0%) 86%02/09/66 10/07/66 $94.06 $73.20 7.9 (22.2%) 80%11/29/68 05/26/70 $108.37 $69.29 17.8 (36.1%) 48%01/11/73 10/03/74 $120.24 $62.28 20.7 (48.2%) 74%11/28/80 08/12/82 $140.52 $102.42 20.4 (27.1%) 126%08/25/87 12/04/87 $336.77 $223.92 3.3 (33.5%) 229%07/16/90 10/11/90 $368.95 $295.46 2.9 (19.9%) 65%03/24/00 10/09/02 $1,527.46 $776.76 30.5 (49.1%) 417%10/09/07 03/09/09 $1,565.15 $676.53 17.0 (56.8%) 101%02/19/20 03/24/20 $3,386.15 $2,447.33 1.1 (27.7%) 401%Average (ex. 2020) 21.0 (39.9%) 182.7%Post WWII Average (ex. 2020) 16.2 (33.8%) 149.9%Source: S&P Dow Jones Indices.

6 April 2020

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

Ticker Company Paid Date Payable Div Yield Invest PlanAMGN Amgen, Inc. 3, 6, 9, 12 Fri May 15, 2020 Mon Jun 8, 2020 $1.6000 $6.40 3.2% -- YesBLK BlackRock, Inc. 3, 6, 9, 12 Wed Mar 4, 2020 Mon Mar 23, 2020 $3.6300 � $14.52 3.9% -- --CMA Comerica Inc. 1, 4, 7, 10 Thu Mar 12, 2020 Wed Apr 1, 2020 $0.6800 � $2.72 8.9% Yes YesCBRL Cracker Barrel 2, 5, 8, 11 Thu Apr 16, 2020 Tue May 5, 2020 $1.3000 $5.20 5.5% Yes YesCMI Cummins Inc. 3, 6, 9, 12 Thu Feb 20, 2020 Thu Mar 5, 2020 $1.3110 $5.24 4.2% No YesEMN Eastman Chemical Co. 1, 4, 7, 10 Fri Mar 13, 2020 Fri Apr 3, 2020 $0.6600 $2.64 6.3% Yes YesETN Eaton Corporation 3, 5, 8, 11 Thu Mar 12, 2020 Fri Mar 27, 2020 $0.7300 � $2.92 4.1% Yes YesHD Home Depot Inc. 3, 6, 9, 12 Wed Mar 11, 2020 Thu Mar 26, 2020 $1.5000 � $6.00 3.2% Yes YesHUBB Hubbell Incorporated 3, 6, 9, 12 Thu Feb 27, 2020 Mon Mar 16, 2020 $0.9100 $3.64 3.7% No NoHBAN Huntington Bancshares 1, 4, 7, 10 Tue Mar 17, 2020 Wed Apr 1, 2020 $0.1500 $0.60 8.1% Yes YesIBM IBM Corp. 3, 6, 9, 12 Fri Feb 7, 2020 Tue Mar 10, 2020 $1.6200 $6.48 6.1% Yes YesIP International Paper Co. 3, 6, 9, 12 Thu Feb 20, 2020 Mon Mar 16, 2020 $0.5125 $2.05 7.3% Yes YesMDT Medtronic PLC 1, 4, 7, 10 Thu Mar 26, 2020 Fri Apr 17, 2020 $0.5400 $2.16 2.7% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Thu Mar 5, 2020 Tue Mar 31, 2020 $0.9550 $3.82 3.4% Yes YesPII Polaris Inc. 3, 6, 9, 12 Fri Feb 28, 2020 Mon Mar 16, 2020 $0.6200 � $2.48 5.3% -- YesPFG Principal Financial Group 3, 6, 9, 12 Fri Feb 28, 2020 Fri Mar 27, 2020 $0.5600 � $2.24 7.6% Yes YesRSG Republic Services, Inc. 1, 4, 7, 10 Tue Mar 31, 2020 Wed Apr 15, 2020 $0.4050 $1.62 2.3% -- --SNA Snap-on Incorporated 3, 6, 9, 12 Fri Feb 21, 2020 Tue Mar 10, 2020 $1.0800 $4.32 4.1% Yes YesTXN Texas Instruments 2, 5, 8, 11 Thu Jan 30, 2020 Mon Feb 10, 2020 $0.9000 $3.60 3.4% Yes YesTSN Tyson Foods, Inc. 3, 6, 9, 12 Fri May 29, 2020 Mon Jun 15, 2020 $0.4200 $1.68 2.8% Yes YesUNP Union Pacific Corp. 3, 6, 9, 12 Thu Feb 27, 2020 Tue Mar 31, 2020 $0.9700 $3.88 3.0% Yes YesUNH UnitedHealth Group Inc 3, 6, 9, 12 Fri Mar 13, 2020 Tue Mar 24, 2020 $1.0800 $4.32 2.0% -- --WBA Walgreens Boots Alliance 3, 6, 9, 12 Tue Feb 18, 2020 Thu Mar 12, 2020 $0.4575 $1.83 4.0% Yes YesWSM Williams-Sonoma, Inc. 2, 5, 8, 11 Thu Apr 23, 2020 Fri May 29, 2020 $0.4800 $1.92 4.5% -- --

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

Data as of 3/24/2020.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

the Russia-Saudi Arabia oil price war, the latter of which proved fatal to its dividend growth.

The company reported at the end of February in its fourth-quarter earn-ings release that the integration of its business with Anadarko was pro-gressing “extremely well and faster than expected.” Despite its efforts, Occidental’s leadership was forced to cut its dividend from $0.79 to $0.11 per share and impose cuts to operational costs and capital expenditures for fiscal 2020.

Weakened by the collapse of global oil prices, Occidental’s leadership was forced to make concessions to activ-ist investor Carl Icahn, who increased his stake in the company from 2.5% to 10%. Icahn received two seats on Occidental’s board and influence on the choice of a third new board

appointee and a new board chairman, former Occidental CEO Stephen Chazen.

Royal Caribbean Cruises (RCL) was the second worst-performing stock in the DI portfolio through March 24, down by 57.1%. This decline was driven by the coronavirus pandemic, which has resulted in an industrywide shut-down for cruise companies. Royal Caribbean extended the suspension of its global cruising operations through May 11. During the month, Royal Caribbean also withdrew its first-quarter and full-year 2020 guidance and an-nounced plans to strengthen the com-pany’s liquidity.

Polaris Inc. (PII) was the third-worst performing stock in the DI portfolio month to date, down by 43.1%. This decline was primarily driven by the ongoing coronavirus pandemic, which has significantly impacted powersports

vehicle retail demand and has resulted in the company’s decision to suspend production and operations at se-lect powersports plants.

Polaris drew down additional cash under its revolving credit facility and suspended its share repurchasing program. The company currently has approximately $150 million in cash on hand and has an additional $280 million available under its revolving credit line. Polaris stated that it is reviewing all op-erating expenses and postponing capital expenditures that do not impact near-term programs. Polaris also withdrew its prior first-quarter and full-year 2020 guidance.

The company’s dividend yield of 5.3% compares to its five-year average high of 3.1% and its five-year average low of 1.9%. ▪

April 2020 7


Est Consec- PayoutEPS Div First utive Ratio:

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

Ticker (TTM) Current Ago Avg High Low (3-5 Yr) (5 Yr) Paid Raised Month Avg Month) AssetsAMGN 15.7 3.2% 2.8% 2.6% 3.1% 2.3% 6.7% 18.9% 2011 8 45% 66% 40% 84%BLK 13.1 3.9% 2.8% 2.6% 3.2% 2.2% 6.9% 11.3% 2003 11 46% 43% 78% 80%CMA 3.9 8.9% 2.5% 2.2% 2.9% 1.8% na 28.7% 1936 9 34% 30% 38% 90%CBRL 10.4 5.5% 3.0% 3.0% 3.4% 2.6% na 10.8% 1982 17 56% 54% 53% 71%CMI 8.6 4.2% 2.8% 3.0% 3.9% 2.5% 1.7% 11.8% 1948 10 34% 46% 30% 62%EMN 7.6 6.3% 3.0% 2.6% 3.2% 2.3% 7.6% 12.1% 1994 10 45% 31% 31% 63%ETN 13.6 4.1% 3.3% 3.5% 4.3% 3.0% 6.6% 7.7% 1923 11 54% 50% 41% 51%HD 18.0 3.2% 2.1% 1.8% 2.2% 1.6% 7.1% 21.4% 1987 11 47% 43% 47% 102%HUBB 13.5 3.7% 2.6% 2.5% 3.0% 2.1% 9.3% 10.9% 1934 12 46% 50% 37% 60%HBAN 5.9 8.1% 3.7% 3.0% 3.6% 2.5% 4.9% 23.3% 1971 9 44% 36% 40% 89%IBM 9.8 6.1% 4.4% 4.0% 4.9% 3.4% 7.3% 8.6% 1915 24 61% 61% 46% 86%IP 9.1 7.3% 4.2% 3.9% 4.9% 3.3% 3.3% 6.8% 1946 8 65% 59% 34% 77%MDT 20.6 2.7% 2.2% 2.0% 2.3% 1.7% 6.9% 12.3% 1977 42 54% 62% 43% 44%PEP 21.9 3.4% 2.9% 3.0% 3.4% 2.7% 5.6% 8.4% 1952 47 73% 70% 98% 81%PII 9.0 5.3% 2.8% 2.3% 3.1% 1.9% na 4.9% 1995 25 46% 55% 37% 75%PFG 6.0 7.6% 4.2% 3.4% 4.4% 2.8% 7.2% 11.2% 2002 11 44% 36% 11% 95%RSG 21.4 2.3% 1.8% 2.2% 2.5% 2.0% 7.3% 7.6% 2003 10 46% 49% 43% 64%SNA 8.6 4.1% 2.2% 1.9% 2.2% 1.7% 10.0% 16.3% 1939 10 31% 29% 37% 40%TXN 20.1 3.4% 2.5% 2.6% 3.3% 2.2% 6.7% 21.0% 1962 16 60% 52% 52% 51%TSN 10.7 2.8% 1.8% 1.4% 1.8% 1.1% 10.0% 38.0% 1976 8 28% 17% 44% 57%UNP 15.4 3.0% 1.8% 2.4% 3.0% 2.0% 11.0% 15.4% 1899 9 44% 39% 50% 71%UNH 15.3 2.0% 1.4% 1.6% 1.9% 1.4% 13.2% 24.1% 1990 10 29% 29% 24% 67%WBA 11.1 4.0% 2.6% 2.1% 2.5% 1.8% 2.8% 6.9% 1933 44 44% 37% 35% 74%WSM 9.5 4.5% 2.9% 2.5% 3.1% 2.1% (6.7%) 7.9% 2006 10 40% 43% 55% 71%Data as of 3/24/2020.

5 Yr Avg

Payout Ratio:Dividend Yield EPS

Dividend Analysis

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

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

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

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

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

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

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

Dividend Yield—1 Year Ago: The stock’s

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Definitions of Terms Used in Tables

8 April 2020

Home Depot Inc. opened its first two stores in Atlanta in 1979. Today, Home Depot is the world’s largest home im-provement retailer, with over 2,200 stores in the U.S., Canada and Mexico. Home Depot sells to three primary groups: the do-it-yourself (DIY) customer who is buying, installing and completing projects for their own home; the do-it-for-me (DIFM) customer who is purchasing items and then hiring a handyman to install or complete the project; and the pro-fessional customer who is a general contractor, remodeler, tradesman or repairman. Home Depot is considered to offer essential services and has remained open for business during the coronavirus pandemic, albeit with reduced operating hours.

Growth TrendsRevenues have grown at a 6.5% annualized rate over the

past five years. The net income growth rate has been stronger at 15.6%, reflecting general improvements in operating and net profit margins over the last five years. Aggressive share repurchasing has pushed up earnings per share growth to 20.8% annually over the last five years. Like most retailers, Home Depot’s fiscal year ends in January to better reflect the full holiday shopping cycle. Currently analysts are expecting earnings to grow 6.8% during this calendar year and 9.0% over the year ending January 2022. Estimates for next year have been reduced over the last three months, reflecting un-certainty over the current economy. Long term, the consensus among four analysts is for 7.1% earnings growth, ranging from a low of 3.6% to a high estimate of 16.0%.

Home Depot’s dividend has grown at a compound annual growth rate of 21.4% over the last five fiscal years. The divi-dend has been raised every year over the last 11 years. Home Depot increased its dividend 10.3% in February, below the five-year growth trend and last year’s 32.0% increase.

Household formation and average age of the housing stock are key drivers of the home improvement market. As homes age, they normally require additional maintenance and

updates. Homes that are 25 years old or older are most likely to need meaningful work. The percentage of older homes is growing, and the median age is listed as 35 years. However, the sudden economic slowdown may weigh down household formation and spending on homes.

Financial StrengthHome Depot’s interest coverage ratio is currently 14.3 and

has been improving over the last five years. The ratio is well above the retail (home improvement) industry median of 9.1.

Home Depot has positive operating cash flow, which has expanded over each of the last five years.

The company’s operating and net profit margins have gen-erally expanded over the last five years. The operating margin was 14.3% over the last four quarters, above its 13.8% five-year average and well above the industry median of 9.1%.

The company intends to increase its dividend every year and tie the increase to earnings growth. The current earn-ings payout ratio is 47.4%, implying that there is still room for growth. The company generates strong and growing free cash flow. Its free-cash-flow payout ratio is 47.2%.

The company had $2.19 billion in cash at the end of the quarter.

ValuationThe sudden bear market has pushed down Home Depot’s

share price and pushed up the current dividend yield to 3.2%. This is above the 1.8% five-year average and now even above the five-year average high of 2.2%.

The stock’s price-earnings ratio of 18.0 is now below the firm’s five-year average of 23.7, but matches the 18.0 me-dian of the retail home improvement industry. Price-earnings ratios can contract if the market expects a decrease in future earnings or greater uncertainty related to earnings. While the numbers have come down, analysts are still expecting earn-ings to increase over the next two years. The forward price-earnings ratio is 17.8 times current-year estimates and 16.4 times estimates for the next fiscal year.

RisksEconomic and demographic trends are a key driver of con-

sumer confidence and spending. Concern over the coronavi-rus pandemic has shifted from a supply concern over China to an economic stop in the rest of the world.

Home Depot has returned cash to shareholders via both dividends and share buybacks. While cash flow is strong, Home Depot has increased its level of long-term debt, while decreasing its equity. The firm has had the cash flow to cover its interest rate obligations, but that may change now.

Home Depot is growing its online business, but online sales only represent a small percentage of total sales. Future growth of physical stores has limited potential, given its goods. ▪

Home Depot Inc. (HD)

Bullish Factors• Attractive dividend valuation• Strong record of cash flow growth and margin expansion• Aging housing stock helps create demand for home

improvement products and services

Bearish Factors• Stores remain open during the coronavirus pandemic,

but consumers may limit shopping to emergency items• Company has increased financial leverage/risk over the

last few years• Downward revisions in earnings estimates

April 2020 9


HD $184.72 ($247.36 - $140.63)

Addition Alert Date: 9/1/2017Price at Alert: $150.78 Risk Index: 1.38Market Cap (Million): $177,140.0Avg Daily Dollar Volume (Million): $1,172.1Primary Sector: Consumer CyclicalsPrimary Industry: Retailers - Home Improve Prods & Servs

Indicated Annual Dividend: $6.00 Multiples Current 2/2019 1/2018 1/2017 1/2016 2/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 3.2 2.0 1.9 1.7 1.9 1.7Latest Dividend Increase: % 10.3% Dividend Yield (%): High 2.4 2.3 2.1 2.2 2.0Dividend Yield: Current 3.2% Dividend Yield (%): Low 1.7 1.7 1.4 1.7 1.4Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 18.0 21.1 25.3 25.2 22.8 24.1Dividend Paid Since: 1987 Price/Earnings (Industry) 18.0 27.2 36.0 35.4 35.1 33.0Number of Years of Div Increases: 11 Price/Book Value -- -- 146.0 44.1 24.2 15.6Direct Invest Option: No Price/Sales 1.8 2.1 2.1 2.0 1.7 1.8DRIP Plan: No Ratios Current 2/2019 1/2018 1/2017 1/2016 2/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 47.4 42.1 48.6 42.6 43.0 39.6

$1.5000 Payout Ratio: FCFPS (%) 47.2 42.5 39.9 39.8 36.9 35.3$1.3600 Gross Margin (%) 34.1 34.3 34.0 34.2 34.2 34.1$1.3600 Operating Margin (%) 14.3 14.4 14.5 14.2 13.3 12.6$1.3600 Operating Margin (%) (Ind) 8.3 8.3 6.7 8.5 9.6 9.2$1.3600 Net Margin (%) 10.2 10.3 8.6 8.4 7.9 7.6$1.0300 ROE (%) (715.5) -- 298.3 149.4 89.6 58.1

Rel Strgth ROE (%) (Industry) 5.2 6.3 14.9 21.6 16.9 12.0Rank ROA (%) 22.4 25.1 19.7 18.7 17.1 15.8

4 Week 66% Current Ratio 1.1 1.1 1.2 1.3 1.3 1.413 Week 76% Liabilities to Assets (%) 102.1 104.3 96.7 89.9 85.0 76.726 Week 72% Liab to Assets (%) (Ind) 70.1 70.1 66.5 60.6 70.3 56.352 Week 83% Asset Turnover 2.2 2.4 2.3 2.2 2.2 2.1

Financial Statements TTM 2/2019 1/2018 1/2017 1/2016 2/2015Growth 5 Year Sales ($M) 110,225 108,203 100,904 94,595 88,519 83,176

Dividends 21.4% Gross Income ($M) 37,572 37,160 34,356 32,313 30,265 28,389Sales 6.5% Depreciation & Amort. ($M) 2,197 2,152 2,062 1,973 1,863 1,786Net Income 15.6% Unusual/Extra ($M) -- 247 -- -- -- --EPS Basic 20.9% Operating Income ($M) 15,741 15,530 14,681 13,427 11,774 10,469EPS Dil Cont 20.8% Interest Expense ($M) 1,108 1,051 1,057 972 919 830

Pretax Income ($M) 14,715 14,556 13,698 12,491 11,021 9,976SUE Score Net Income ($M) 11,203 11,121 8,630 7,957 7,009 6,345

4.90 Operating Cash Flow ($M) 13,628 13,038 12,031 9,783 9,373 8,2420.20 Investing Cash Flow ($M) (2,590) (2,416) (2,228) (1,583) (2,982) (1,271)

Annual Financing Cash Flow ($M) (12,094) (12,420) (8,870) (7,870) (5,787) (7,071)1/2022 Capital Expenditures ($M) 2,597 2,442 1,897 1,621 1,503 1,442

32 Net Cash Flow ($M) (943) (1,817) 1,057 322 493 (206)$11.29 EPS Basic ($) 10.09 9.78 7.33 6.47 5.49 4.74$11.42 EPS Diluted Cont ($) 10.25 9.66 7.40 6.45 5.46 4.71

# Rev Up 1 EPS DC Year/Year Chg (%) 6.2 30.5 14.7 18.0 15.9 25.5 # Rev Down 7 Dividends/Share ($) 4.78 4.12 3.56 2.76 2.36 1.88Three Mos. Ago $11.94 Dividend Year/Year Chg (%) 20.1 15.7 29.0 16.9 25.5 20.5Year/Year Chg 9.0% Free Cash Flow/Share ($) 10.13 9.69 8.91 6.93 6.40 5.32

11/2019 8/2019 5/2019 2/2019 Total Cash ($M) 2,193 1,778 3,595 2,538 2,216 1,723$2.53 $3.17 $2.27 $2.12 $10.09 Goodwill/Intangibles ($M) 2,253 2,252 2,275 2,093 2,102 1,353$2.41 $3.05 $2.08 $1.64 $9.17 Total Assets ($M) 52,309 44,003 44,529 42,966 41,973 39,946

Long-Term Debt ($M) 26,597 26,807 24,267 22,349 20,789 16,86911/2019 8/2019 5/2019 2/2019 Total Total Liabilities ($M) 53,391 45,881 43,075 38,633 35,657 30,624$25.00 $28.16 $23.96 $23.74 $100.86 Book Value/Share ($) (0.99) (1.72) 1.28 3.68 5.14 7.30$23.17 $26.63 $21.66 $20.59 $92.05 Avg Shares Outst'g (M) 1,089.00 1,093.00 1,137.00 1,178.00 1,229.00 1,277.00

Sources: AAII Stock Investor Pro, Refinitiv and I/B/E/S. Data as of 3/24/2020.

1.11

3 Year

Mar 26, 2020Dec 19, 2019Sep 19, 2019

1.00

Jun 20, 2019

Rel Strgth

1.00

1.8% (2.2% - 1.6%)

1.09

Home Depot Inc. is a home improvement retailer that sells an assortment of building materials, home improvement products and lawn and garden products, and provides various services. Home Depot stores serve three primary customer groups: do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers and professional customers. Its DIY customers are homeowners purchasing products and completing their own projects and installations. Its DIFM customers are home owners purchasing materials themselves and hiring third parties to complete the project or installation. Professional customers are primarily professional remodelers, general contractors and repairmen.

May 23, 2019

Feb 25, 2020Nov 21, 2019Aug 22, 2019 Sep 4, 2019

Dec 4, 2019Mar 11, 2020

Mar 28, 2019Dec 13, 2018

Feb 25, 2020

Jun 5, 2019

9.5%

EPS$2.28

Feb 25, 2019Nov 15, 2018 Nov 28, 2018

(21%)(16%)(18%)(3%)

Stock

% Surp8.4%0.2%

Index

Mar 13, 2019

6.2%

20.4%6.9%

16.6%21.2%20.9%

20.1%1.9%

TTM

Gain

6.1%

$2.53

Est Surprise

EPS Estimates# of Estimates

Nov 19, 2019Feb 25, 2020

Year Ago

TTM

TTMSales/Sh (Qtr)

Quarterly

EPS (Qtr)

Year Ago

CurrentMonth Ago

4/202026

9.0%

Annual1/2021

$2.36 $10.53$2.31 $10.35

6.8%

34

119

$2.37

2

$10.957

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Apr 2015 Apr 2016 Apr 2017 Apr 2018 Apr 2019$0

$50

$100

$150

$200

$250

$300

Divi

dend

Yie

ld Share Price

10 April 2020

Hubbell Incorporated is a global electrical equipment company that designs, manufactures and sells electrical and electronic products for non-residential and residential con-struction, industrial and utility applications. The company has one of the most complete offerings across the entire electrical supply chain, from power generation to products for the end user.

Over 90% of Hubbell’s total consolidated sales are made in the U.S. Hubbell is a diversified conglomerate industrial company that mostly competes in the electrical components market. Its products and services serve vital portions of the U.S. electrical supply chain, including transmission and distri-bution as well as the commercial, industrial and residential end markets. The company organizes its business into two segments—electrical and power systems. The consolidated business sells about two thirds of its products via distributors like Wesco or Grainger, with the remainder sold via direct sales to utilities and contractors.

Growth TrendsHubbell differentiates itself in a competitive market with

strong brands, breadth of product offering and its ability to lower customers’ total cost. In fiscal-year 2019, Hubbell gen-erated 57% of its revenue from its electrical segment and 43% from its power business, reporting consolidated sales of $4.6 billion. For the trailing 12 months, sales have grown by 2.4%; over the last three years sales grew 9.4%, on average.

Diluted earnings from continuing operations have grown 13.7% over the past year, while dividends have grown by 9.1% over the same period. Nine analysts are forecasting earnings to grow by 12.4% in 2020 and by 9.4% in 2021.

The United States’ bulk electrical system, according to North American Electric Reliability Corp., consists of more than 360,000 miles of transmission lines, which connect to nearly 7,000 power plants and serve millions of customers. According to a 2015 U.S. Department of Energy report, 70%

of power transformers are 25 years of age or older, 60% of circuit breakers are 30 years or older and 70% of transmission lines are 25 years or older. Industry research adds that nearly a threefold increase of investment over the level of invest-ment made in the prior two decades is needed to replace, upgrade and expand utility infrastructure over the next two decades. Industry dynamics such as these make Hubbell well positioned to grow revenue and earnings in the future, espe-cially considering the company’s large suite of products and its scale efficiencies.

Hubbell has maintained its leading position in the market-place through strategic acquisitions. Notably, over the past 10 years, Hubbell has completed more than 30 acquisitions. In February 2018, Hubbell completed its largest acquisition to date, with the purchase of Aclara Technologies LLC for $1.1 billion. The acquisition extended Hubbell’s capabilities into smart infrastructure solutions for electric, gas and water utili-ties. The acquisition brings Hubbell a large installed base of recurring revenue in a fast-growing market.

Hubbell has been paying a dividend since 1934 and has increased its annual dividend in each of the last 12 years. Over the last five years, Hubbell’s cash dividend has grown by 10.9% per year on average. Its last dividend increase of 8.3% was on October 25, 2019.

Financial StrengthThe company’s ability to pay interest is strong, as measured

by the times interest earned ratio of 8.5, higher than the industry median of 5.6. Hubbell has a current earnings payout ratio of 45.7%, slightly below its five-year average of 50.1%. The company has a free-cash-flow payout ratio of 36.7%, which is below its five-year average of 44.2%. Free cash flow per share continues to improve from $4.40 per share in 2015 to $9.15 per share over the past year.

ValuationHubbell’s shares currently yield 3.7%, based on an indicated

annual dividend of $3.64 per share. This is well above both the five-year average yield of 2.5% and the five-year average high yield of 3.0%. The company is trading with a reasonable trailing price-earnings ratio of 13.5, which is below its five-year average of 19.7 and below the electrical components & equipment industry median of 15.0.

RisksThe company is exposed to general macroeconomic head-

winds including weaker-than-expected residential demand due to a weaker-than-expected economy, increased raw material costs, slowing nonresidential construction demand, higher-than-anticipated acquisition costs and potential impacts from the uncertainty surrounding the coronavirus pandemic. A key risk to Hubbell lies in dealing with competi-tive rivalry, particularly in certain markets like lighting, where low-cost foreign competitors pressure Hubbell’s margins. ▪

Hubbell Incorporated (HUBB)

Bullish Factors• Well positioned as utilities invest to upgrade and

modernize an aging U.S. power grid infrastructure• Aclara acquisition extends capabilities into smart

automation technologies valued by utility customers• Well-run, focused conglomerate with extensive track

record of returning cash to shareholders

Bearish Factors• Slowing demand and price erosion in legacy lighting

business due to rapid adoption of LED technology • Raw material pricing and competitive rivalry has

pressured margins• Execution risk as the company integrates the large

number of acquisitions it has made in previous years

April 2020 11


Addition Alert Date: 3/27/2020Price at Alert: NA Risk Index: 2.07Market Cap (Million): $4,720.0Avg Daily Dollar Volume (Million): $35.4Primary Sector: IndustrialsPrimary Industry: Electrical Components & Equipment

Indicated Annual Dividend: $3.64 Multiples Current 12/2019 12/2018 12/2017 12/2016 12/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 3.7% 2.7 2.6 2.3 2.5 2.3Latest Dividend Increase: % 8.3% Dividend Yield (%): High 3.5 3.4 2.6 3.0 2.8Dividend Yield: Current 3.7% Dividend Yield (%): Low 2.3 2.1 2.0 2.1 1.9Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 13.5 16.8 18.7 22.9 19.3 20.7Dividend Paid Since: 1934 Price/Earnings (Industry) 15.0 22.0 19.4 21.2 20.1 20.9Number of Years of Div Increases: 12 Price/Book Value 2.8 3.4 3.7 4.2 3.5 3.3Direct Invest Option: No Price/Sales 1.2 1.5 1.5 1.9 1.6 1.7DRIP Plan: No Ratios Current 12/2019 12/2018 12/2017 12/2016 12/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 45.7 45.8 46.9 63.3 47.9 46.7

$0.9100 Payout Ratio: FCFPS (%) 36.7 36.7 40.0 51.3 42.3 50.9$0.9100 Gross Margin (%) 29.9 29.9 29.9 31.9 32.3 32.9$0.8400 Operating Margin (%) 13.3 13.3 12.4 13.9 14.0 14.6$0.8400 Operating Margin (%) (Ind) 6.1 5.7 5.8 6.8 6.4 4.9$0.8400 Net Margin (%) 8.7 8.7 8.0 6.6 8.3 8.2$0.8400 ROE (%) 21.3 21.4 21.0 15.0 17.5 15.1



Financial Statements TTM 12/2019 12/2018 12/2017 12/2016 12/2015Growth 5 Year Sales ($M) 4,591 4,591 4,482 3,669 3,505 3,390Dividends 10.9% Gross Income ($M) 1,375 1,375 1,338 1,169 1,133 1,116Sales 6.4% Depreciation & Amort. ($M) 151 151 148 100 92 85Net Income 4.2% Unusual/Extra ($M) 19 19 66 41 35 19EPS Basic 5.9% Operating Income ($M) 610 610 554 508 490 494EPS Dil Cont 5.9% Interest Expense ($M) 69 69 69 89 43 31

Pretax Income ($M) 521 521 467 443 430 419SUE Score Net Income ($M) 399 399 359 242 292 277

2.40 Operating Cash Flow ($M) 592 592 517 379 398 3311.20 Investing Cash Flow ($M) (129) (129) (1,201) (246) (230) (249)

Annual Financing Cash Flow ($M) (471) (471) 507 (214) (47) (371)12/2021 Capital Expenditures ($M) 94 94 96 80 67 77

9 Net Cash Flow ($M) (7) (7) (186) (63) 94 (310)$8.98 EPS Basic ($) 7.35 7.34 6.57 4.42 5.26 4.79$9.34 EPS Diluted Cont ($) 7.31 7.30 6.43 5.42 5.24 4.77

# Rev Up 0 EPS DC Year/Year Chg (%) 13.7 13.6 18.5 3.4 10.0 (13.0) # Rev Down 3 Dividends/Share ($) 3.36 3.36 3.08 2.80 2.52 2.24Three Mos. Ago $9.27 Dividend Year/Year Chg (%) 9.1 9.1 10.0 11.1 12.5 12.0Year/Year Chg 9.4% Free Cash Flow/Share ($) 9.15 9.15 7.71 5.46 5.96 4.40

12/2019 9/2019 6/2019 3/2019 Total Cash ($M) 196 196 198 390 449 356$1.86 $2.39 $1.75 $1.32 $7.31 Goodwill/Intangibles ($M) 2,593 2,593 2,604 1,549 1,423 1,301$1.57 $1.99 $1.82 $1.05 $6.43 Total Assets ($M) 4,903 4,903 4,872 3,721 3,525 3,209

Long-Term Debt ($M) 1,506 1,506 1,737 987 991 59612/2019 9/2019 6/2019 3/2019 Total Total Liabilities ($M) 2,956 2,956 3,092 2,086 1,932 1,468$20.28 $22.17 $22.03 $19.99 $84.47 Book Value/Share ($) 35.79 35.79 32.61 29.82 28.70 30.17$21.07 $21.61 $21.33 $18.12 $82.13 Avg Shares Outst'g (M) 54.40 54.40 54.60 54.80 55.50 57.70


Feb 27, 2019

11.3%

2.5% (3.0% - 2.1%)

9.1%3 Year

Mar 16, 2020Dec 16, 2019Sep 16, 2019

0.92

0.98

0.870.91

TTM

Gain

Feb 27, 2020

Index

Hubbell Incorporated is engaged in the design, manufacture and sale of electrical and electronic products for a range of non-residential and residential construction, industrial and utility applications. The company has two segments: electrical, which comprises businesses that sell stock and custom products including application wiring device products, electrical products, connector and grounding products, lighting fixtures and controls, components and assemblies, as well as other electrical equipment; and power, which consists of operations for the design, manufacture and sale of transmission and distribution components primarily for the electrical utilities industry.

Apr 26, 2019

Feb 4, 2020

Jan 31, 2020Oct 25, 2019Jul 24, 2019 Aug 29, 2019

Nov 27, 2019

Feb 1, 2019

10.1%

May 30, 2019

(28%)(34%)(26%)(14%)

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Quarterly

# of EstimatesCurrent

Oct 19, 2018 Nov 29, 2018Stock

3/2020

EPS$1.91$2.34

2.4%

Est Surprise

Oct 29, 2019

13.7%

EPS Estimates

9.4%11.0%11.7%

$8.21

12.4%EPS (Qtr)

$1.60

7

$8.63$1.59

20.2%

02

$1.66

Month Ago

11.7%

Oct 25, 2019

4$8.59

0

Annual

912/2020

% Surp3.3%3.2%

11.7%

Jun 17, 2019

Rel Strgth

Mar 15, 2019Dec 14, 2018

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

Apr 2015 Apr 2016 Apr 2017 Apr 2018 Apr 2019

Divi

dend

Yie

ld Share PriceHUBB $98.62 ($155.00 - $85.62)

12 April 2020

PepsiCo Inc. is a global food and beverage company that makes, markets, sells and distributes a variety of foods and beverages in over 200 countries. The company’s principal businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker Oats foods. As of the end of 2019, the company had 22 billion- dollar brands (in terms of annual revenues)—14 beverage brands and eight food brands.

The company is organized into six reportable product seg-ments: Frito-Lay North America (25.4% of 2019 sales, 51.1% of division operating profit excluding corporate overhead), Quaker Foods North America (3.7% of sales, 5.3% of oper-ating profit), PepsiCo Beverages North America (32.4% of sales, 21.2% of operating profit), Latin America Foods (11.3% of sales, 1.4% of operating profit), Europe (17.5% of sales, 12.9% of operating profit), Africa, Middle East and South Asia (5.4% of sales, 6.5% of operating profit) and the Asia Pacific, Australia and New Zealand and China Region (4.3% of sales, and 4.6% of operating profit).

Growth TrendsThe carbonated soft drink business faces ongoing head-

winds from changing consumer preferences and rising health consciousness. In 2018, soda consumption in the U.S. fell for the 13th straight year in 2018 to its lowest level in more than 30 years. Partly as a result, overall sales over the last five years, on average, have grown by only 0.1% per year. Also, several municipalities have levied or are considering levying taxes on sugary beverages, affecting demand.

In February, the company announced its intent to acquire one of the largest online snack companies in China for $705 million. In March 2020, PepsiCo announced its $3.85 billion acquisition of Rockstar Energy, demonstrating its commitment to maintaining its top-line growth.

Fully diluted earnings from continuing operations have risen, on average, by 6.0% a year over the last three years. Four analysts are forecasting earnings to grow, on average, by 5.6% over the next three to five years.

The company expects organic revenue growth of 4% for fiscal 2020 and an increase in core constant currency earnings of 7%.

On February 10, 2020, the company declared a quarterly dividend of $0.955 per share in line with the previous quar-ter’s payment. Over the last five years, PepsiCo’s cash divi-dend has grown by 8.4% per year on average.

Financial StrengthWhile PepsiCo is in second place, behind Coca-Cola Co. (KO),

in the global cola market, it controls a greater share of the U.S. non-carbonated beverage market than its peers with brands such as Gatorade and Tropicana and joint ventures with Starbucks and Unilever (Lipton brand). It is also the world’s largest snack food company through its Frito-Lay division, with an estimated global market share of more than 25%.

PepsiCo generates more than 40% of its revenue outside the U.S. and continues to invest in developing and emerging markets, which have significant growth opportunities due to their relatively low per-capita consumption and rising income levels. The company expects, going forward, that the major-ity of its revenues will come from emerging and developing markets.

The company has been leveraging technology and new business models to further simplify, harmonize and automate processes; re-engineer its go-to-market and information sys-tems; simplify its organization and optimize its manufacturing and supply chain footprint.

The company’s efficiency initiatives over the years have boosted gross margins from 9.4% in 2015 to 55.4% for its lat-est fiscal year.

PepsiCo has also responded to trends in wellness by elimi-nating trans fats from many of its snack foods, introducing “guilt-free” foods and reducing beverage calories.

ValuationPepsiCo shares currently yield 3.4%, based on an indicated

annual dividend of $3.82 per share. This is above the five-year average yield of 3.0% and is at the upper range of the five-year high-low dividend range of 2.7% to 3.4%. PepsiCo has been paying a dividend since 1952 and has increased its an-nual dividend in each of the last 47 years.

PepsiCo’s strong operating cash flows ($9.65 billion in 2019) and free cash flow, expected to be $6 billion in 2020, give the company flexibility to continue returning capital to investors. In fiscal-year 2020, the company expects to return approxi-mately $7.5 billion to shareholders, including roughly $6.5 billion in dividends.

RisksCommodity prices make up a large percentage of the com-

pany’s costs, and while PepsiCo hedges roughly three-quarters of its raw material costs, it is still vulnerable to commodities price fluctuations and rising labor costs. ▪

PepsiCo, Inc. (PeP)

Bullish Factors• World’s largest snack food company, controlling roughly

40% of the world’s salty snack market• Innovation has led to a robust pipeline of new products• Focus on international businesses with better growth

prospects is showing promising results

Bearish Factors• Competitor Coca-Cola has been widening its lead in the

carbonated soft drink category in recent years• Shrinking North American carbonated soft drink market

due to increasing costs and changing consumer tastes• Currency fluctuations can have a measurable negative

impact on sales and earnings

April 2020 13


Addition Alert Date: 12/31/2011Price at Alert: $66.35 Risk Index: 1.13Market Cap (Million): $146,120.4Avg Daily Dollar Volume (Million): $712.0Primary Sector: Consumer Non-CyclicalsPrimary Industry: Non-Alcoholic Beverages

Indicated Annual Dividend: $3.82 Multiples Current 12/2019 12/2018 12/2017 12/2016 12/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 3.4% 3.1 3.3 2.9 2.9 3.1Latest Dividend Increase: % 3.0% Dividend Yield (%): High 3.6 3.7 3.1 3.2 3.6Dividend Yield: Current 3.4% Dividend Yield (%): Low 2.7 2.9 2.6 2.7 2.7Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 21.9 23.8 12.5 21.7 23.4 24.5Dividend Paid Since: 1952 Price/Earnings (Industry) 21.9 26.4 33.8 38.0 29.1 30.0Number of Years of Div Increases: 47 Price/Book Value 10.7 11.7 10.7 14.3 13.1 11.0Direct Invest Option: Yes Price/Sales 2.4 2.6 2.4 2.5 2.3 2.1DRIP Plan: Yes Ratios Current 12/2019 12/2018 12/2017 12/2016 12/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 72.5 72.5 40.6 93.0 67.4 74.5

$0.9550 Payout Ratio: FCFPS (%) 97.5 97.9 82.8 63.9 55.9 50.1$0.9550 Gross Margin (%) 55.4 55.4 54.6 54.7 10.1 9.4$0.9550 Operating Margin (%) 15.3 15.3 15.6 16.2 15.6 13.2$0.9550 Operating Margin (%) (Ind) 3.6 6.2 1.5 (0.5) 4.2 3.6$0.9275 Net Margin (%) 10.9 10.9 19.4 7.6 10.1 8.6$0.9275 ROE (%) 51.3 49.9 97.9 43.5 54.2 36.7



Financial Statements TTM 12/2019 12/2018 12/2017 12/2016 12/2015Growth 5 Year Sales ($M) 67,161 67,161 64,661 63,525 62,799 63,056Dividends 8.4% Gross Income ($M) 37,178 37,178 35,283 34,729 6,324 5,941Sales 0.1% Depreciation ($M) 2,432 2,432 2,399 2,369 2,368 2,416Net Income 2.4% Unusual/Extra ($M) 425 425 347 229 155 1,589EPS Basic 3.9% Operating Income ($M) 10,289 10,289 10,110 10,276 9,804 8,353EPS Dil Cont 4.0% Interest Expense ($M) 1,199 1,199 1,472 1,037 2,392 779

Pretax Income ($M) 9,312 9,312 9,189 9,602 8,553 7,442SUE Score Net Income ($M) 7,314 7,314 12,513 4,853 6,323 5,446

1.40 Operating Cash Flow ($M) 9,649 9,649 9,415 10,030 10,663 10,8644.80 Investing Cash Flow ($M) (6,437) (6,437) 4,564 (4,403) (7,150) (3,569)

Annual Financing Cash Flow ($M) (8,489) (8,489) (13,769) (4,186) (3,211) (4,112)12/2021 Capital Expenditures ($M) 4,232 4,232 3,282 2,969 3,040 2,758

17 Net Cash Flow ($M) (5,199) (5,199) 112 1,488 50 2,962$6.27 EPS Basic ($) 5.23 5.23 8.84 3.41 4.39 3.71$6.34 EPS Diluted Cont ($) 5.19 5.19 8.76 5.12 4.36 3.67

# Rev Up 2 EPS DC Year/Year Chg (%) (40.8) (40.7) 71.3 17.4 18.7 (13.9) # Rev Down 6 Dividends/Share ($) 3.79 3.79 3.59 3.17 2.96 2.76Three Mos. Ago $6.42 Dividend Year/Year Chg (%) 5.7 5.7 13.3 7.0 7.1 9.1Year/Year Chg 7.8% Free Cash Flow/Share ($) 3.89 3.87 4.33 4.96 5.30 5.52

12/2019 9/2019 6/2019 3/2019 Total Cash ($M) 5,738 5,738 8,993 19,510 16,125 12,009$1.28 $1.50 $1.44 $0.98 $5.19 Goodwill/Intangibles ($M) 31,544 31,544 30,633 28,582 27,863 27,258$4.21 $1.81 $1.82 $0.94 $8.78 Total Assets ($M) 78,547 78,547 77,648 79,804 73,490 69,667

Long-Term Debt ($M) 29,148 29,148 28,295 33,796 30,053 29,21312/2019 9/2019 6/2019 3/2019 Total Total Liabilities ($M) 63,761 63,761 63,130 68,915 62,395 57,744$14.82 $12.30 $11.74 $9.16 $48.02 Book Value/Share ($) 10.61 10.57 10.26 7.75 7.82 8.22$13.86 $11.66 $11.35 $8.85 $45.72 Avg Shares Outst'g (M) 1,393.00 1,399.00 1,415.00 1,425.00 1,439.00 1,469.00


$5.97

Mar 29, 2019Jan 7, 2019

$5.82

Annual12/2020

18

2$5.89

3.8%

TTM

Apr 30, 2019

6

16

$1.02$1.02

25

(40.8%)

3.9%(41.5%)

6.0%

% Surp1.0%

6.0%

$1.56Feb 13, 2020

EPS (Qtr)

Oct 3, 2019

3.7%

Quarterly3/2020EPS Estimates

$1.06

CurrentMonth Ago

# of Estimates

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

PepsiCo Inc. is a global food, snack and beverage company with brands that include Quaker Oats, Tropicana, Gatorade, Lay's and Pepsi. The company is organized into four business units: PepsiCo Americas Foods, which includes Frito-Lay North America, Quaker Foods North America and all of its Latin American food and snack businesses; PepsiCo Americas Beverages, which includes PepsiCo Beverages Americas and Pepsi Beverages Company; PepsiCo Europe; and PepsiCo Asia, Middle East and Africa. The company manufactures, markets and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages, dairy products and other foods.

Apr 30, 2019

3 Year

Jun 7, 2019

Rel StrgthIndex

Nov 15, 2018 Dec 6, 2018

Feb 10, 2020Nov 14, 2019Jul 11, 2019

Jun 6, 2019

(20%)(17%)(16%)

Gain

Sep 5, 2019Dec 5, 2019Mar 5, 2020

Feb 13, 2019

12.1%

8.6%

(6%)

Stock

2.3%5.0%

5.7%

Feb 28, 2019

Est Surprise EPS

(41.0%)

$1.45

3% (3.4% - 2.7%)

1.081.031.08

Mar 31, 2020Jan 7, 2020Sep 30, 2019

1.02

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Apr 2015 Apr 2016 Apr 2017 Apr 2018 Apr 2019$0

$20

$40

$60

$80

$100

$120

$140

$160

Divi

dend

Yie

ld Share PricePeP $113.84 ($147.20 - $101.42)

14 April 2020

Republic services, Inc. (Rsg)Republic Services Inc. provides services in the domestic

non-hazardous solid waste industry. The company, through its subsidiaries, provides integrated waste management services consisting of collection, transfer station, recycling and disposal of domestic non-hazardous solid waste for commercial, indus-trial, municipal and residential customers. Republic Services was founded in 1996 and—through a series of successful mergers and acquisitions—has quickly expanded to become one of the largest waste, recycling and environmental service providers in the U.S.

Republic Services in its current form was born out of the 2008 merger of Allied Waste Industries and Republic Services, which established the second-largest U.S.-based solid waste company. As a fully integrated waste hauler, it leverages a vast network of collection routes and transfer stations, which gives the company significant control over the waste stream, fun-neling trash from commercial, industrial and residential end markets into its own landfills. Intangible resources (like regula-tory permits for landfills), a modern truck fleet and substan-tial route density have enabled Republic to carve out a strong competitive position that has supported healthy core-pricing gains over the past years.

Growth TrendsRevenue for Republic Services has increased at a 3.2% an-

nual rate of growth over the last five years. Diluted earnings from continuing operations are much stronger, with a five-year annual growth rate of 16.9%.

Analysts expect earnings to expand 3.2% to $3.44 for the current fiscal year and 9.2% to $3.76 for 2021. Analysts esti-mate earnings growth of 7.4% annually over the next three to five years, down from 7.6% one month ago.

Republic has paid quarterly cash dividends since 2003 with-out interruption or reduction. In recent years, Republic has been steadily increasing its dividend, with a five-year average

growth rate of 7.6%. It raised its dividend 8.0% in July 2019. The company has increased its dividend for 10 straight years.

Financial StrengthRepublic Services’ ratio of total liabilities to assets has mar-

ginally increased from 62.1% to 64.2% over the last five years. This compares to the industry median of 59.8%.

The company’s ability to pay interest is strong, as mea-sured by the times interest earned ratio of 4.3, significantly higher than the industry median of 0.2. Republic Services has a current earnings payout ratio of 45.8%, slightly below its five-year average of 49.2%. The company has a free-cash-flow payout ratio of 42.7%, which is below its five-year average of 46.0%. Republic Services generated strong operating cash flows of over $2.35 billion over the last four quarters, while capital expenditures were $1.2 billion. Free cash flow per share continues to improve year over year.

Given the company’s ability to raise core prices on ac-quired volume—thanks to its vast ownership of landfills—the company is well positioned to support solid free cash flow generation. Republic Services’ priorities for capital allocation (according to its latest 2020 guidance) include $200 million for mergers and acquisitions followed by approximately $925 mil-lion of cash returned to shareholders through both dividends and share repurchases.

ValuationRepublic Services’ dividend yield of 2.3% is slightly above its

five-year average yield of 2.2%. The company is trading with a reasonable trailing price-earnings ratio of 21.4, which is below its five-year average of 24.0 and below the environmental services & equipment industry median of 23.3.

RisksRepublic Services’ traditional solid waste operations have

enjoyed macroeconomic tailwinds in recent years. However, its recycling division has encountered painful headwinds as the prices for recycled commodities that the company extracts and sells—particularly old corrugated cardboard—have plummeted on China’s decision to suspend most import licenses in early 2018.

Republic Services enjoys a solid competitive position in the waste industry, but it competes with numerous small, local and regional waste collection operations. Many of these smaller regional providers aren’t fully integrated with land-fill assets and do not enjoy the national scale that Republic Services enjoys. Often, these smaller competitors compete solely on price and may not exhibit price discipline during economic slowdowns. The company is a serial acquirer and, although its traditional solid waste acquisitions have largely proved to be value-accretive, this strategy inherently carries risk that the company overreaches or overpays in a large transaction that dilutes capital returns. ▪

Bullish Factors• Ability to generate predictable cash flows; in 2019

approximately 80% of revenue had an annuity-type profile

• Competitive advantage based on valuable and scarce regulatory permits for landfills

• Fully integrated waste hauler with the ability to leverage its vast network of collection routes and transfer streams

Bearish Factors• Unstable commodity prices and demand in recycling

industry • Lack of price discipline from smaller regional waste

management providers• Growth tied to ability to make acquisitions at a

reasonable price

April 2020 15


Rsg $71.49 ($100.91 - $65.37)Addition Alert Date: 3/27/2020Price at Alert: NA Risk Index: 0.77Market Cap (Million): $21,141.1Avg Daily Dollar Volume (Million): $107.1Primary Sector: IndustrialsPrimary Industry: Environmental Services & Equipment

Indicated Annual Dividend: $1.62 Multiples Current 12/2019 12/2018 12/2017 12/2016 12/2015Latest Dividend Increase: Date Dividend Yield (%): Avg 2.3% 1.9 2.0 2.1 2.4 2.7Latest Dividend Increase: % 8.0% Dividend Yield (%): High 2.2 2.3 2.3 2.9 2.9Dividend Yield: Current 2.3% Dividend Yield (%): Low 1.7 1.8 1.9 2.1 2.5Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 21.4 24.2 22.0 25.8 28.1 19.8Dividend Paid Since: 2003 Price/Earnings (Industry) 23.3 32.6 27.2 25.8 23.6 36.1Number of Years of Div Increases: 10 Price/Book Value 2.8 3.2 2.9 2.6 2.2 1.9Direct Invest Option: No Price/Sales 2.2 2.5 2.3 2.1 1.8 1.6DRIP Plan: No Ratios Current 12/2019 12/2018 12/2017 12/2016 12/2015Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 45.8 45.8 44.5 34.4 68.3 53.2

$0.4050 Payout Ratio: FCFPS (%) 42.7 42.9 39.4 47.8 45.5 54.4$0.4050 Gross Margin (%) 39.8 39.8 38.8 38.1 38.6 39.5$0.4050 Operating Margin (%) 17.4 17.4 17.3 16.6 14.3 17.1$0.3750 Operating Margin (%) (Ind) 0.5 0.4 (0.7) (2.2) 1.2 0.7$0.3750 Net Margin (%) 10.4 10.4 10.3 12.7 6.5 8.2$0.3750 ROE (%) 13.4 13.4 13.1 16.3 7.9 9.7



Financial Statements TTM 12/2019 12/2018 12/2017 12/2016 12/2015Growth 5 Year Sales ($M) 10,300 10,299 10,041 10,042 9,388 9,115Dividends 7.6% Gross Income ($M) 4,098 4,097 3,891 3,827 3,624 3,596Sales 3.2% Depreciation & Amort. ($M) 1,122 1,122 1,114 1,116 1,070 1,050Net Income 14.4% Unusual/Extra ($M) 30 30 39 18 237 0EPS Basic 16.8% Operating Income ($M) 1,787 1,787 1,736 1,668 1,341 1,559EPS Dil Cont 16.9% Interest Expense ($M) 392 392 384 318 318 318

Pretax Income ($M) 1,296 1,296 1,321 1,282 966 1,196SUE Score Net Income ($M) 1,073 1,073 1,037 1,278 613 750

0.60 Operating Cash Flow ($M) 2,352 2,352 2,243 1,911 1,848 1,6805.30 Investing Cash Flow ($M) (1,719) (1,719) (1,229) (1,330) (965) (1,483)

Annual Financing Cash Flow ($M) (589) (589) (1,060) (514) (857) (240)12/2021 Capital Expenditures ($M) 1,207 1,207 1,072 990 928 946

14 Net Cash Flow ($M) 44 44 (46) 66 27 (43)$3.76 EPS Basic ($) 3.34 3.34 3.17 3.79 1.79 2.14$3.84 EPS Diluted Cont ($) 3.33 3.33 3.16 2.40 1.78 2.13

# Rev Up 0 EPS DC Year/Year Chg (%) 5.5 5.5 31.4 35.1 (16.6) 39.5 # Rev Down 5 Dividends/Share ($) 1.53 1.53 1.41 1.31 1.22 1.14Three Mos. Ago $3.79 Dividend Year/Year Chg (%) 8.5 8.5 8.0 7.0 7.0 7.5Year/Year Chg 9.2% Free Cash Flow/Share ($) 3.58 3.57 3.58 2.73 2.68 2.10

12/2019 9/2019 6/2019 3/2019 Total Cash ($M) 47 47 71 86 68 32$0.90 $0.93 $0.78 $0.72 $3.33 Goodwill/Intangibles ($M) 11,767 11,767 11,507 11,457 11,346 11,401$0.93 $0.81 $0.71 $0.72 $3.16 Total Assets ($M) 22,684 22,684 21,617 21,147 20,630 20,536

Long-Term Debt ($M) 7,759 7,759 7,647 7,481 7,653 7,52712/2019 9/2019 6/2019 3/2019 Total Total Liabilities ($M) 14,566 14,566 13,690 13,188 12,938 12,762

$8.05 $8.26 $8.10 $7.67 $32.07 Book Value/Share ($) 25.38 25.28 24.25 23.61 22.42 22.21$7.80 $7.88 $7.69 $7.34 $30.72 Avg Shares Outst'g (M) 319.90 321.10 326.90 337.10 343.00 350.00


Mar 29, 2019

3.5%

2.2% (2.5% - 2.0%)

8.5%3 Year

Apr 15, 2020Jan 15, 2020Oct 15, 2019

0.94

1.03

1.051.01

TTM

Gain

Mar 31, 2020

Index

Republic Services Inc. provides services in the domestic non-hazardous solid waste industry. The company, through its subsidiaries, provides integrated waste management services consisting of collection, transfer station, recycling and disposal of domestic non-hazardous solid waste for commercial, industrial, municipal and residential customers. Republic Services was founded in 1996 and, through a series of successful mergers and acquisitions, has quickly expanded to become one of the largest waste and recycling companies in the U.S.

Apr 25, 2019

Feb 13, 2020

Feb 13, 2020Oct 22, 2019Jul 25, 2019 Sep 30, 2019

Dec 31, 2019

Feb 7, 2019

7.8%

Jun 28, 2019

(26%)(20%)(18%)(10%)

Year Ago

TTM

TTMSales/Sh (Qtr)

Year Ago

Quarterly

# of EstimatesCurrent

Oct 25, 2018 Dec 31, 2018Stock

3/2020

EPS$0.91$0.91

2.6%

Est Surprise

Oct 30, 2019

5.5%

EPS Estimates

3.1%20.6%23.2%

$3.44

3.2%EPS (Qtr)

$0.80

13

$3.52$0.80

10.6%

03

$0.81

Month Ago

5.3%

Jul 25, 2019

5$3.48

0

Annual

1512/2020

% Surp2.8%7.6%

23.3%

Jul 15, 2019

Rel Strgth

Apr 15, 2019Jan 15, 2019

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$20

$40

$60

$80

$100

$120

Apr 2015 Apr 2016 Apr 2017 Apr 2018 Apr 2019

Divi

dend

Yie

ld Share Price

16 April 2020

labor costs, taxes and interest payments. A positive cash flow from operations implies that a firm was able to gen-erate cash from continuing operations.

• The investing segment of the cash flow statement at-tempts to capture the company’s investment in the long-term capital of the firm. Factors recorded in this segment can include purchase of property, plant and equipment; investment or sale of marketable securities; and acquisi-tions of businesses.

• The financial segment of the cash flow statement exam-ines how the company finances its activities and how it re-wards its shareholders through dividend payments. Factors summarized by this segment are cash received from the issuance of stock or debt, payment of dividends and the cash used to repurchase stock.

Importance of Free Cash FlowIdeally, a company should not only cover the costs of pro-

ducing its goods and services, but also produce excess cash flow for its shareholders. Cash flow from operations repre-sents a good starting point for this type of analysis. Beyond current production, a growing company must reinvest its cash to maintain its operations and expand. While management may neglect capital expenditures in the short term, there are fundamental negative long-term growth implications to such neglect. Free cash flow refines the measure of cash flow from operations by considering capital expenditures. Therefore, free cash flow equals cash from operations minus capital expenditures (capex).

Firms with a cash flow deficit must consume cash on hand or obtain additional financing. The ability to raise cash and refinance existing debt is dependent upon the risk and return prospects of the company as well as the overall market envi-ronment. Firms had great difficulty borrowing money during the 2008 financial crisis and may face similar challenges now due to the impact of the coronavirus pandemic. Dividend Investing looks for companies with a positive free cash flow. With strong free cash flow, debt can be retired, new products developed, stock repurchased and most importantly, dividend payments can be made or increased.

Free cash flow per share measures the use or generation of cash over a period of time. Quarterly or annual figures can be used. A single quarterly figure is timelier, but it is less mean-ingful and subject to seasonal fluctuation. It should be com-pared to the same quarter one year ago. Free cash flow per share over the last four quarters (trailing 12 months) helps to capture the cash needs and generation over the course of a complete year.

The analysis of a company’s cash flow is a very revealing study of a firm. The free cash flow measure highlights the ef-fective management of overall company operations including factors such as sales, inventory control, production and em-ployee costs, accounts receivable management, interest pay-ment levels, product development and capital expenditures. ▪

While earnings are still the primary metric used to judge company performance and measure the attractiveness of a company’s stock price, investors also focus on cash flow. Cash flow can reveal whether a company is generating or con-suming cash in its normal operations, if it is investing for the future and whether it is rewarding investors with dividends or seeking additional capital from the equity or debt markets. Cash flow analysis often provides advance notice that a com-pany may be facing financial trouble even though earnings and sales still look strong.

Figures in the income statement and balance sheet are based upon the principles of accrual accounting. Accrual ac-counting attempts to match expenses to revenues when the revenues can be expected to be recognized. For example, cash used to build up inventory will not be reflected as an expense on the income statement until the inventory is sold. The in-come statement spreads the cost of buying a machine across its useful life, not when cash was used to acquire the machine.

The income statement includes a number of non-cash expenses that reduce earnings, while ignoring the immediate cash impact of capital expenditures or acquisitions. The most common examples of non-cash expenses are depreciation, amortization, asset write-downs and goodwill impairments. For example, on October 30, 2018, General Electric Co. (GE) announced in its third-quarter earnings results that it took a multibillion dollar impairment of goodwill charge related to its GE Power division. General Electric acquired Alstom SA’s power business in 2015 for $9.5 billion in cash to com-bine with its existing power & water business to form GE Power. The value of the acquisition above the book value of Alstom’s power business was recorded as goodwill on General Electric’s balance sheet and subject to regular impairment as-sessments. The industrial giant misjudged the profitability of the acquisition and in effect wasted its cash back in 2015, not in 2018 when the impairment charge occurred.

Accrual accounting requires many interpretations and esti-mates by management. Decisions regarding the capitalization of expenses, the recognition of revenue, and the creation of reserves against losses are examples of just a few of the fac-tors that may vary from firm to firm. Many of these issues are factors that relate to the “quality” of a firm’s earnings.

Cash Flow Statement CompositionCompanies are required to provide a statement of cash

flows that discloses the direct uses and sources of cash during an accounting period. The statement divides company uses and sources of cash into three primary cash flow segments: operating, investing and financing activities.• The operating cash flow segment is designed to measure

a company’s ability to generate and consume cash from normal operations as it provides goods and services to its customers. It considers factors such as cash from the collection of accounts receivable, the cash incurred to pro-duce any goods or services, payments made to suppliers,

Free Cash Flow Is King

in this issue turning trash into cash t...occidental petroleum is an international oil and gas...

Documents