In This Issue We’re Adding, Deleting and Reinvesting A · 2012. 9. 7. · Chesapeake Utilities (CPK) Chesapeake Utilities is being deleted because we believe its relative valua-tion

We’re Adding, Deleting and ReinvestingAfter several months with no transactions, we have two changes to announce

for the DI portfolio. First, Chesapeake Utilities (CPK) is being replaced by Travel-ers Companies (TRV). Second, we are reinvesting the cash accumulated in the DI tracking portfolio from the payment of dividends into McDonald’s Corp. (MCD) and Norfolk Southern Corp. (NSC).

Chesapeake Utilities is being deleted because of its valuation. We continue to view the company as being fundamentally sound; we simply think the yield has fallen to a level that is too low on a relative basis. Travelers, conversely is trading at a reasonable valuation. Plus, it further diversifies the DI portfolio.

The cash balance in the DI tracking portfolio has grown to approximately 1% of the total balance. Since this is an all-stock portfolio, we want to put the cash to work rather than accumulate further. McDonald’s and Norfolk Southern are among our smallest holdings, and the upside potential of both warrants reinvest-ment.

August DI PerformanceThe DI tracking portfolio had a total return of 2.0% in August, slightly trailing

our benchmark, the Dow Jones U.S. Index fund (IYY). The DI tracking portfolio’s performance is composed of capital gains (stock price increases) of 1.8% and income returns (dividends received) of 0.2%. The Dow Jones U.S. Index fund did not pay any dividends last month, making its 2.5% total return composed entirely of capital gains.

Year-to-date, the DI tracking portfolio has a total return of 8.1%. This return is composed of capital gains totaling 6.3% and income returns totaling 1.8%. The Dow Jones U.S. Index fund has a total return of 11.5% since January. This return is composed of capital gains totaling 10.6% and income returns totaling 0.9%.

The DI tracking portfolio’s yield of 3.2% compares to a yield of 1.7% for the Dow Jones U.S. Index fund.

We are pleased with the performance of the DI tracking portfolio, especially considering that throughout much of August risk tolerances widened. Investors sought out more economically sensitive stocks, and shifted out of less economi-cally sensitive stocks, such as utilities. At the same time, yields on the 10-year Treasury bond rose during much of the month, another sign that the safety premium was being deflated a bit.

We saw this shift in our portfolio as well. As you can see in the Portfolio Hold-ings table on page 3, our three remaining telecom and utility stocks were the month’s worst performers. Their declines were more than offset by gains in our economically sensitive stocks, whose businesses are more cyclical. One of the advantages of diversification is that it increases the odds of being in the right asset class at the right time.

DI Portfolio AlertsAs stated, there are two changes this month. First, Chesapeake Utilities is be-

ing replaced by Travelers Companies. Second, we are reinvesting the DI tracking portfolio’s cash balance into McDonald’s and Norfolk Southern.

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 ReportsMicrosoft Corporation (MSFT) 8

Creator of Windows and Office rolling out some major changes.

Travelers Companies (TRV) 10This new addition is financially sound and gives the portfolio additional diversification.

V.F. Corporation (VFC) 12One of the world’s largest apparel companies has room to grow dividends.

Wisconsin Energy Corp. (WEC) 14Lower capital expenditures to lead to 10% annual dividend growth.

DI ArticleDividend Yield as a Valuation Measurement 16

Dividend yields can highlight attractive stocks, provided the payment is sound.

Next Publication Date: October 5, 2012

September 2012Volume I Issue 7

www.AAIIDividendInvesting.com

TM

2 September2012

Portfolio Deletion: Chesapeake Utilities (CPK)

Chesapeake Utilities is being deleted because we believe its relative valua-tion has become too high. The stock’s 3.1% yield is more than 20% below the stock’s five-year average yield of 3.9%.

Since stock prices, and thereby yields, fluctuate, we tabulated new indicators to determine what has been a typical valuation range for a stock. The first indicator is the five-year average low yield. This is calculated by averaging the low dividend yield for each of the past five years. The low yield for a given year is determined by dividing the dividends paid during the year by the high stock price during the calendar year.

The second indicator is the five-year average high yield, which is calculated using the low prices observed over each of the last five years. By creating both of these numbers, we can observe a normal range for the stock’s yield.

Yields near or below the five-year average low yield imply the stock is overvalued relative to its historical norm. Yields near or above the five-year high average imply that the stock

is undervalued relative to its historical norm. Remember, yield and price have an inverse relationship: as one rises, the other falls.

In the case of Chesapeake Utilities, the stock’s steady price gains have out-paced its growth in dividends, pushing down its yield. At the end of August, its 3.1% dividend yield was 0.2 percentage points below its five-year average low yield of 3.3%. Only two other stocks in our portfolio have current yields below their five-year average low yields, V.F. Corp. (VFC) and Genuine Parts Co. (GPC). V.F. Corp’s current 1.9% yield is 0.6 percentage points below its five-year average low yield, while Genuine Parts’ current 3.1% yield is 0.2 percent-age points below its five-year average low yield. Why not sell all three? We already have two other utility stocks in the portfolio and we believe Chesa-peake Utilities offers the least amount of potential upside of the three stocks.

There is nothing fundamentally wrong with the company itself. We expect Chesapeake Utilities to continue growing and increasing its dividend, but better risk-reward opportunities

are available. This is purely a valuation call. By choosing to remove the stock at this time, the DI tracking portfolio will realize a total return of 9.7% on the stock. This profit is composed of 7.9% in capital gains and 1.8% in income. The stock was one of the original holdings when we constructed the portfolio at the begin-ning of this year. Note that Chesapeake Utilities

will trade ex-dividend on Wednesday, September 12, 2012. If you sell the stock on Monday or Tuesday, you will not get this dividend. On Wednesday, the stock will open with a reduction in its price to account for the dividend payment and sellers will get the $0.365 per share dividend on October 5, 2012.

Portfolio Addition: Travelers Companies (TRV)

The proceeds from the sale of Chesapeake Utilities will be used to add Travelers Companies (TRV) to the DI portfolio. The total dollar amount used in the transaction will be close to the average position size of all the stocks in the DI tracking portfolio. Therefore, we will not need to use any of the cash ac-cumulated from dividend payments to fund the addition of Travelers.

Travelers is one of the oldest insur-ance organizations in the United States, having been founded in 1853. The company merged with Citicorp in 1998 to form Citigroup Inc. (C). Travelers was then spun off in an initial public offering in 2002. In 2004, it merged with Saint Paul Companies. Travelers replaced Citi-

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 MonthSeptember Portfolio Deletions:

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price* Alert Date Purchase* Purchase*Chesapeake Utilities (CPK) 9/7/2012 $46.93 12/31/2011 9.7% 11.4%

September Portfolio Additions:LatestPrice Dividend

Company (Ticker) (9/5/2012) Yield* Sector: IndustryNew Portfolio Additions:Travelers Companies (TRV) $64.53 2.9%

Purchase of Additional Shares with Excess Cash:McDonald's Corp. (MCD) $89.06 3.1%Norfolk Southern Corp. (NSC) $70.08 2.9%*Data as of 9/5/2012.

Transportation: Railroads

Financial: Insurance (Property & Casualty)

Portfolio Deletion AlertCompany (Ticker)

Services: Restaurants

September2012 3

AAII DIvIDeND INveSTINg

group as a member of the Dow Jones industrial average in 2009.

The company provides commercial and personal property and casualty insurance products. Travelers is orga-nized into three reportable business segments: business insurance (51% of premiums written in 2011); financial, professional and international insurance (11%); and personal insurance (35%).

The company is fiscally sound. It has $230 million in cash and short-term in-vestments. Long-term debt is at low lev-els. Profits have been reported for each of the past five years, and Travelers is on pace to resume earnings growth this year. It consistently generates free cash flow. The earnings and free cash flow payout ratios are 31.1% and 27.1%, respectively.

The company has raised its dividend each year since the 2004 merger with Saint Paul Companies. Over the past five years, dividends have increased at an annualized rate of 9.5%. A five-cent per share increase was announced this past April. (The stock went ex-dividend on September 6, 2012, with the dividend payable on September 28, 2012, to shareholders of record on September

10, 2012. The next dividend should be announced in October and paid at the end of the year. This will be the first payment that the DI tracking portfolio will be eligible for.)

The stock trades at a reasonable valu-ation. Its price-earnings ratio of 11.7 is below the property & casualty insur-ance industry median of 12.4. During the past five years, Travelers has traded at an average of 9.6 times earnings. The current yield of 2.8% is roughly even with the stock’s five-year average of 2.7% and above the industry’s current median of 1.8%.

We chose Travelers for a few rea-sons. The company is financially stable and has a low risk profile. The stock’s reasonable valuation should provide up-side. We think the company will benefit from a rise in interest rates, because the higher yields will allow it to earn more on its reserves. Finally, Travelers will be our first property & casualty holding, further diversifying the portfolio.

Portfolio Reinvestment: McDonald’s Corp. (MCD) and Norfolk Southern Corp. (NSC)

Our strategy for managing the DI

tracking portfolio is to collect dividend payments in cash. When a stock is sold, the proceeds of that sale and any existing cash in the portfolio are used to fund the addition of a replacement stock. If the total cash available exceeds the average position size for the portfo-lio, not all of the available cash may be used to acquire the new stock.

This is the case with Chesapeake Utili-ties and Travelers Companies. Chesa-peake’s position was approximately even to the average position size of all 24 stocks held in the portfolio. We also had accumulated a cash position equivalent to approximately 1% of the DI tracking portfolio’s total value from the payment of dividends over the past few months. If we used both the pro-ceeds from the sale of Chesapeake and the accumulated dividend cash to fund the purchase of Travelers, the new stock would instantly become one of our larg-est holdings.

Rather than do this, we are going to segment the cash balance. The pro-ceeds from the sale of Chesapeake Utili-ties will be used to acquire Travelers, a one-to-one swap from the standpoint of portfolio weighting. We will then use

DI Pur- Latest Augustchase viD/niaGecirP

Ticker Company Date Price Price (8/31/12) (Loss) Stock Index Yield IndustryABM ABM Industries, Inc. 12/31/11 $20.48 $20.89 $20.22 8.7% (1.9%) 11.5% 2.9% Business ServicesAFL AFLAC Incorporated 12/31/11 $43.26 $45.04 $46.18 5.5% 4.8% 11.5% 2.9% Insurance (Accident & Health)T AT&T Inc. 12/31/11 $30.24 $30.48 $36.64 (3.4%) 25.5% 11.5% 4.8% Communications ServicesCVX Chevron Corporation 12/31/11 $106.40 $110.91 $112.16 2.4% 3.6% 11.5% 3.2% Oil & Gas - IntegratedETN Eaton Corporation 12/31/11 $43.53 $45.52 $44.72 2.0% 0.6% 11.5% 3.4% Electronic Instruments & ControlsEMR Emerson Electric Co. 12/31/11 $46.59 $48.13 $50.72 6.2% 7.9% 11.5% 3.2% Scientific & Technical InstrumentsGD General Dynamics 12/31/11 $66.41 $68.28 $65.51 3.3% (2.0%) 11.5% 3.1% Aerospace and DefenseGPC Genuine Parts Co. 12/31/11 $61.20 $61.63 $63.16 (1.4%) 4.2% 11.5% 3.1% Auto & Truck PartsITW Illinois Tool Works 12/31/11 $46.71 $48.18 $59.29 9.1% 24.7% 11.5% 2.6% Auto & Truck PartsINTC Intel Corporation 12/31/11 $24.25 $24.70 $24.83 (3.4%) 2.8% 11.5% 3.6% SemiconductorsLEG Leggett & Platt, Inc. 5/4/12 $21.49 $21.48 $23.74 2.4% 12.0% 3.1% 4.9% Furniture & FixturesMCD McDonald's Corp. 12/31/11 $100.33 $99.19 $89.49 0.1% (7.7%) 11.5% 3.1% RestaurantsMDT Medtronic, Inc. 12/31/11 $38.25 $38.89 $40.66 3.1% 6.6% 11.5% 2.6% Medical Equipment & SuppliesMCHP Microchip Technology 12/31/11 $36.63 $35.92 $34.75 4.1% (0.3%) 11.5% 4.0% SemiconductorsMSFT Microsoft Corp. 12/31/11 $25.96 $26.94 $30.82 4.6% 16.6% 11.5% 2.6% Software & ProgrammingNSC Norfolk Southern Corp. 12/31/11 $72.86 $74.18 $72.46 (2.1%) (0.4%) 11.5% 2.8% RailroadsPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $72.43 (0.4%) 10.4% 11.5% 3.0% Beverages (Non-Alcoholic)TGT Target Corporation 12/31/11 $51.22 $51.28 $64.09 5.7% 27.1% 11.5% 2.2% Retail (Specialty Non-Apparel)

na na 2.8% Insurance (Property & Casualty)UTX United Technologies 12/31/11 $73.09 $74.97 $79.85 7.3% 10.1% 11.5% 2.7% Aerospace and DefenseVFC V.F. Corporation 12/31/11 $126.99 $130.20 $152.68 2.3% 18.5% 11.5% 1.9% Apparel/AccessoriesVVC Vectren Corporation 2/7/12 $29.55 $29.36 $28.21 (5.5%) (0.4%) 4.7% 5.0% Natural Gas UtilitiesWDR Waddell & Reed Fin'l 12/31/11 $24.77 $25.36 $29.60 1.8% 18.6% 11.5% 3.4% Investment ServicesWEC Wisconsin Energy Corp. 12/31/11 $34.96 $34.68 $37.96 (6.8%) 12.2% 11.5% 3.2% Electric UtilitiesData as of 8/31/2012. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

TRV Travelers Companies 9/7/12 na na $64.74 3.3%

Portfolio Holdings

4 September2012

AAII Dividend Inves�ng Por�olio

Performance

Dividend Yield %7.1%2.3

TotalReturn

IncomeReturn

CapitalGain/(Loss)

TotalReturn

IncomeReturn

CapitalGain/(Loss)

August 2.0% 0.2% 1.8% 2.5% 0.0% 2.5%2012 YTD 8.1% 1.8% 6.3% 11.5% 0.9% 10.6%From Inception 8.1% 1.8% 6.3% 11.5% 0.9% 10.6%Performance as of 8/31/2012.

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)

Performance of DI Portfolio

the cash accumulated from dividend payments to acquire more shares of McDonald’s and Norfolk Southern, rais-ing the position size of each to close to the portfolio average.

Both companies are trading at price-earnings ratios that are below their respective five-year averages and with yields that are above their five-year averages, a sign of undervaluation. Weakness overseas and sluggish growth in the U.S. are hurting comparable sales right now for McDonald’s, but analysts do expect the company to continue growing earnings. A decline in coal ship-ments and concerns about the pace of

economic growth are impacting railroad stocks in general this year.

Should you also acquire more shares of McDonald’s and Norfolk Southern? It depends on what your strategy for the dividend income is. You can follow our strategy for using dividend payments to fund future stock purchases. You can withdraw the dividend cash for portfolio income. You can also reinvest the divi-dends as they are paid, acquiring more shares of the same stock. All three are good options.

If you don’t need the dividends for portfolio income and you want to mimic the performance of the DI tracking

portfolio, then you should reinvest the dividends you have received so far into the two stocks. Following our addition, deletion and reinvestment alerts is the best way to mimic the performance of the DI tracking portfolio.

New Data in In-Depth Stock Reports

In this month’s in-depth stock reports, which start on page 8, you will see six new data points.

On the left-hand side, we have added the date of the last dividend increase and the size of the dividend increase. Since many companies announce divi-dend hikes about the same time each year, this information tells you when the next hike should occur and gives you a measure to compare it against. Displayed in parentheses next to the five-year average yield are now the average five-year high and low yields. This information shows you the range in which the yield has fluctuated. We have also expanded the historical listing of past dividend payments to six quarters.

On the right-hand side, we are now displaying the high and low yields for each of the past five years. This provides you with more detail about the stock’s volatility and valuation range. The high yields are indicative of the lower valu-ation band the stock has historically fallen to. The low yields are indicative of the higher valuation band the stock has historically risen to. We explain the concept of relative valuation and why we look at it on page 16.

DI Portfolio News

Strongest Stocks During AugustIllinois Tool Works (ITW) has seen its

stock price rise steadily after dipping below $50 per share during July. ITW is up over 20% from its intraday low of $49.07 on July 12, 2012, and led the DI portfolio during August with its 9.1% price gain during the month.

Illinois Tool Works registered a mild positive earnings surprise on July 24, 2012, when it also lowered guidance for the remainder of the year. Company performance was stronger than the

September2012 5


investment community expected, given the headwinds of the economy.

ITW increased its dividend payment a few weeks after its earnings announce-ment. The 5.6% dividend increase helps to keep the current 2.6% dividend yield attractive, even after its recent stock price run-up.

ITW also agreed to sell off a 51% stake in its decorative surfaces segment to a fund managed by Clayton, Dubilier & Rice LLC. Illinois Tool Works will receive cash proceeds of approximately $1.05 billion at closing and will retain a 49% equity interest in the business. ITW in-tends to use the proceeds to repurchase shares to help offset associated earnings dilution. The transaction is expected to be completed in the fourth quarter of 2012.

These moves by ITW come as man-agement has been under some activist pressure to get rid of slower growth and lower margin business segments. In a Wall Street Journal interview, Chief Executive Officer David Speer indicated that the company intends to focus on fewer, but larger, deals that have greater long-term growth potential.

ABM Industries Inc.’s (ABM) stock price has been on a roller-coaster ride lately. ABM gained 8.7% during August after two months of underperformance. Unfortunately, much of the gain was lost on September 6, 2012, after the company announced disappointing results for the second quarter in a row. Gains in ABM’s parking lot management and security services segments could not overcome continued weakness with the facility solutions segment due to reduced U.S. government work and higher overall costs. The big negative surprise came from the lower margins in the company’s bread and butter janitorial services segment. Investors expected extra costs from an additional workday during the quarter, but were surprised with higher state and federal payroll taxes, greater self-insurance reserve adjustments and the difficulty of passing higher costs on to customers. Separately, ABM Industries announced a $50 million share repurchase program.

United Technologies (UTX) was the

third-best-performing stock in the DI portfolio with its 7.3% gain during Au-gust. The gain came after United Tech-nologies received regulatory approv-als to proceed with its acquisition of Goodrich Corporation. UTX had to agree to sell its Electric Power Systems busi-ness and Goodrich’s Connecticut-based Pumps and Engine Controls business. For now, investors are ignoring pros-pects of reduced government spending on the defense segments of United Technologies business. The Goodrich ac-quisition represents a stronger push into the aerospace segment, which is char-acterized by higher-than-average growth and profit margins. The large acquisition will make it difficult to project earnings and cash flow over the near term.

Emerson Electric Co. (EMR) was the fourth-best-performing stock of the DI portfolio, gaining 6.2% during the month of August. Helping to drive the stock higher were its fiscal third-quarter results. Sales rose 3% to $6.5 billion, led by robust growth in the Process Management segment. Underlying sales grew 6%, but the strengthening dollar deducted 3% from growth. Earnings totaled $1.04 per share, a 16% increase from the prior year. The I/B/E/S con-sensus earnings estimate was $1.00 per share. Operating cash flow was $846 million, a decrease of 6% from the prior-year quarter, as strong earnings growth was offset by higher receivables. Free cash flow was unchanged from the prior year at $705 million, as capital expendi-tures decreased to $141 million.

Investors seemed generally pleased with the earnings announcement as shares gained 2% on the day of the an-

nouncement, accompanied by relatively high volume.

Weakest Stocks During AugustAfter starting the month by trading at

a record intraday high, shares of Wis-consin Energy Corp. (WEC) proceeded to fall throughout August. Shares fell by a total of 6.8% for the month, hitting price levels not seen since June. This de-cline was the worst in the DI portfolio.

The rotation out of Wisconsin Energy was caused by a combination of factors. The primary factor was the switch in in-vestor attitudes toward more economi-cally sensitive stocks. This shift marked a reversal from the second quarter, when the stock was favored because of the company’s perceived lower risk. Second-ary factors likely included the exiting of momentum traders who had participat-ed in the stock’s upward run. Valuation may have also played a role, with shares reaching a price-earnings multiple of 18.6 at the end of July.

Vectren Corp. (VVC) shed 5.5% in August, making it the second-worst-per-forming stock. Due to its more diverse operations, Vectren did not experience the same second-quarter upward run that Wisconsin Energy enjoyed. None-theless, the stock fell as investors chose more economically sensitive stocks.

Also contributing to Vectren’s weak-ness was a lowered profit forecast. The company cut its full-year 2012 earnings guidance to a range of $1.65 per share to $1.85 per share, from $1.75 per share to $1.95 per share. The reduc-tion reflected expectations for a coal mining loss, slightly lower results for the Energy Services unit and a larger loss

Recent earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %ABM ABM Industries, Inc. Sep 5 $0.370 $0.420 (11.9%)CPK Chesapeake Utilities Aug 8 $0.520 $0.395 31.6%EMR Emerson Electric Co. Aug 7 $1.040 $0.998 4.2%MDT Medtronic, Inc. Aug 21 $0.850 $0.850 0.0%MCHP Microchip Technology Aug 2 $0.480 $0.480 0.0%TGT Target Corporation Aug 15 $1.060 $1.007 5.3%VVC Vectren Corporation Aug 1 $0.310 $0.231 34.2%WEC Wisconsin Energy Corp. Aug 1 $0.510 $0.442 15.4%Data as of 9/5/2012. Sources: I/B/E/S and company releases.

6 September2012

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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 2.9% -- --AFL AFLAC Incorporated 3, 6, 9, 12 Mon Aug 13, 2012 Tue Sep 4, 2012 $0.3300 $1.32 2.9% Yes YesT AT&T Inc. 2, 5, 8, 11 Fri Jul 6, 2012 Wed Aug 1, 2012 $0.4400 $1.76 4.8% Yes YesCVX Chevron Corporation 3, 6, 9, 12 Wed Aug 15, 2012 Mon Sep 10, 2012 $0.9000 $3.60 3.2% Yes YesETN Eaton Corporation 2, 5, 8, 11 Thu Aug 2, 2012 Fri Aug 24, 2012 $0.3800 $1.52 3.4% Yes YesEMR Emerson Electric Co. 3, 6, 9, 12 Wed Aug 15, 2012 Mon Sep 10, 2012 $0.4000 $1.60 3.2% Yes YesGD General Dynamics 2, 5, 8, 11 Wed Oct 3, 2012 Fri Nov 9, 2012 $0.5100 $2.04 3.1% -- --GPC Genuine Parts Co. 1, 4, 7, 10 Wed Sep 5, 2012 Mon Oct 1, 2012 $0.4950 $1.98 3.1% -- YesITW Illinois Tool Works 1, 4, 7, 10 Wed Sep 26, 2012 Wed Oct 10, 2012 $0.3800 � $1.52 2.6% -- YesINTC Intel Corporation 3, 6, 9, 12 Fri Aug 3, 2012 Sat Sep 1, 2012 $0.2250 � $0.90 3.6% Yes YesLEG Leggett & Platt, Inc. 1, 4, 7, 10 Wed Sep 12, 2012 Mon Oct 15, 2012 $0.2900 � $1.16 4.9% -- YesMCD McDonald's Corp. 3, 6, 9, 12 Thu Aug 30, 2012 Tue Sep 18, 2012 $0.7000 $2.80 3.1% Yes YesMDT Medtronic, Inc. 1, 4, 7, 10 Wed Oct 3, 2012 Fri Oct 26, 2012 $0.2600 $1.04 2.6% Yes YesMCHP Microchip Technology 3, 6, 9, 12 Mon Aug 20, 2012 Wed Sep 5, 2012 $0.3510 � $1.40 4.0% -- --MSFT Microsoft Corp. 3, 6, 9, 12 Tue Aug 14, 2012 Thu Sep 13, 2012 $0.2000 $0.80 2.6% Yes YesNSC Norfolk Southern Corp. 3, 6, 9, 12 Thu Aug 9, 2012 Mon Sep 10, 2012 $0.5000 � $2.00 2.8% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Wed Sep 5, 2012 Fri Sep 28, 2012 $0.5375 $2.15 3.0% Yes YesTGT Target Corporation 3, 6, 9, 12 Mon Aug 13, 2012 Mon Sep 10, 2012 $0.3600 � $1.44 2.2% Yes YesTRV Travelers Companies 3, 6, 9, 12 Thu Sep 6, 2012 Fri Sep 28, 2012 $0.4600 $1.84 2.8% -- YesUTX United Technologies 3, 6, 9, 12 Wed Aug 15, 2012 Mon Sep 10, 2012 $0.5350 � $2.14 2.7% Yes YesVFC V.F. Corporation 3, 6, 9, 12 Thu Sep 6, 2012 Thu Sep 20, 2012 $0.7200 $2.88 1.9% -- YesVVC Vectren Corporation 3, 6, 9, 12 Mon Aug 13, 2012 Tue Sep 4, 2012 $0.3500 $1.40 5.0% Yes YesWDR Waddell & Reed Fin'l 2, 5, 8, 11 Mon Jul 9, 2012 Wed Aug 1, 2012 $0.2500 $1.00 3.4% -- --WEC Wisconsin Energy Corp. 3, 6, 9, 12 Fri Aug 10, 2012 Sat Sep 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 8/31/2012.

AmountPayment

Quarterly Dividend Payment

Dividend Payments

for ProLiance. Notably, utility earnings are projected to be five cents per share stronger than previously forecasted.

AT&T Inc. (T) was the third-worst-per-forming stock in the DI portfolio, losing 3.4%. Shares ended July with a notable upward run, setting the stock up for a difficult month-to-month comparison.

Speculation that wireless subscribers are waiting for the release of Apple’s iPhone 5 before upgrading may have caused some overhang, though it is im-possible to quantify this. An analyst with Jefferies & Co. estimated that between 9 million and 10 million iPhone custom-ers who purchased iPhones in the fall of 2010 could have their wireless contracts expire this quarter and next.

AT&T agreed to acquire NextWave Wireless Inc., which holds licenses in the Wireless Communications Service

(WCS) and Advanced Wireless Services (AWS) bands. If the FCC approves a joint proposal from AT&T and Sirius XM Radio Inc., AT&T would be able to begin initial deployment of the WCS spectrum for added 4G LTE network capacity.

Intel Corp. (INTC) tied for the third-worst-performing stock in the DI portfo-lio, also losing 3.4%.

The company finds itself in a changing environment, one in which traditional personal computers (PCs) have an un-certain future. The general consensus is that consumers are moving toward a cloud-based computing environment, with increased use of mobile devices such as tablets and smartphones. Intel’s chips are mainly used in servers and on traditional desktop computers. Although the server side of its business will flour-ish due to the increased demand of

servers to which mobile devices connect and operate, its traditional computing business may suffer. Intel chips are not widely used in smartphones and tablets. Intel is making strides entering this are-na—smartphones with Intel chips were introduced as we went to press—but the company is coming from behind.

Investor fears on Intel’s future were compounded following the release of Dell (DELL) and Hewlett-Packard’s (HPQ) financial results. During the week ending August 24, 2012, Dell and HP released poor earnings announcements and forecast stagnant or declining revenues across the board. Intel was hit especially hard during the week, declin-ing 5.4%, as its chips are used heavily in both PC manufacturers systems. Intel faces headwinds going forward, and we are keeping an eye on its prospects. ▪

September2012 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 16.0 2.9% 2.8% 2.5% na 4.9% 1965 46 45% 47% 20% 56% $1,093AFL 8.5 2.9% 3.4% 2.3% 10.6% 17.5% 1973 28 24% 28% 4% 88% $21,625T 48.9 4.8% 6.1% 5.5% 9.9% 5.1% 1984 28 230% na 64% 61% $211,376CVX 8.4 3.2% 3.3% 3.3% (0.1%) 9.0% 1912 25 24% 30% 54% 41% $220,074ETN 10.7 3.4% 3.4% 2.9% 9.2% 12.9% 1923 3 34% 43% 49% 57% $15,098EMR 15.5 3.2% 3.3% 2.8% 10.0% 9.2% 1947 55 47% 45% 49% 57% $36,890GD 9.6 3.1% 3.1% 2.3% 7.1% 15.4% 1979 15 29% 24% 24% 61% $23,111GPC 16.4 3.1% 3.4% 3.8% 8.3% 5.9% 1948 56 49% 54% 43% 53% $9,796ITW 14.9 2.6% 3.1% 2.7% 8.6% 13.3% 1933 41 30% 42% 35% 47% $27,796INTC 10.5 3.6% 4.2% 2.9% 11.9% 14.4% 1992 9 34% 46% 44% 33% $124,225LEG 21.6 4.9% 5.0% 5.1% 15.0% 10.4% 1939 41 99% na 54% 59% $3,338MCD 16.8 3.1% 3.0% 3.1% 9.4% 20.4% 1976 35 51% 52% 66% 58% $90,245MDT 12.4 2.6% 2.8% 2.0% 4.9% 17.1% 1977 35 28% 31% 24% 48% $41,678MCHP 22.3 4.0% 4.3% 4.5% 10.0% 7.6% 2003 8 85% 88% 68% 36% $6,731MSFT 15.4 2.6% 3.0% 2.2% 8.9% 14.9% 2003 2 40% 29% 23% 45% $258,376NSC 12.4 2.8% 2.7% 2.4% 14.1% 19.5% 1901 10 31% 33% 61% 67% $23,152PEP 19.1 3.0% 3.2% 2.8% 4.6% 11.8% 1952 40 54% 47% 67% 72% $112,721TGT 14.7 2.2% 2.3% 1.6% 12.1% 20.1% 1967 42 27% 21% 40% 66% $41,972TRV 11.7 2.8% 3.4% 2.7% 10.7% 9.5% 2003 7 31% 26% 27% 76% $24,948UTX 13.6 2.7% 2.6% 2.3% 10.3% 12.8% 1936 18 40% 32% 36% 70% $72,806VFC 18.4 1.9% 2.4% 3.1% 12.9% 6.1% 1941 39 33% 44% 32% 52% $16,779VVC 14.5 5.0% 5.1% 5.3% 5.0% 2.4% 1946 52 72% 78% 456% 69% $2,315WDR 15.0 3.4% 3.0% 2.8% 12.1% 7.2% 1998 2 49% 52% 42% 50% $2,540WEC 16.6 3.2% 3.5% 2.8% 6.1% 17.7% 1939 9 48% 40% 166% 70% $8,748Data as of 8/31/2012. 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 September2012

Microsoft Corporation is a worldwide leader in software, services and solutions for individuals and businesses. The company’s products include operating systems for per-sonal computers (PCs), servers, phones, and other intel-ligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. The company has five segments: Windows & Windows Live Divi-sion (accounting for 25% of revenue), Server and Tools Divi-sion (25%), Online Services Division (4%), Microsoft Business Division (33%), and Entertainment and Devices Division (13%).

Microsoft is devoting significant resources to developing competitive cloud-based software. The company has a strong infrastructure and high cash flows for research and develop-ment, but whether it will attract the users or generate the revenue required to be successful going forward is uncertain.

Why Own MSFT?Microsoft currently trades at its seven-year average price-

earnings ratio of 15.4, which is below the 19.0 median for the technology sector and 23.8 median for the software and programming industry. The current price-earnings ratio is higher than it has been in recent years due to a $6.2 billion goodwill impairment charge taken, which reduced earnings by $0.73 per share. Microsoft is currently trading at 10.3 times its forward earnings estimate.

Sales have increased at an 8.1% annual rate over the last three years, while net income has expanded at a 5.2% annual growth rate and earnings per share (EPS) have grown at a 7.3% annual rate, even after accounting for the large goodwill impairment charge. The positive impact of share buybacks is highlighted by EPS growth well above net income growth.

Analysts are expecting earnings to be $3.02 per share for fiscal 2013 ending in June and $3.31 per share in fiscal 2014. This compares with earnings of $2.69 per share and $2.00 per share for fiscal years 2011 and 2012, respectively. Going forward, Microsoft is expected to grow at a long-term annual-ized rate of 8.9%.

MSFT has very strong cash flows, with cash flow from operations of over $31 billion for fiscal 2012, while capital expenditures for the firm were $2.3 billion and dividends paid amounted to $6.4 billion. Free cash flow per share has grown by 28.6% over the last three years and 17.8% over the last five years.

Dividend AnalysisMicrosoft has a recent history of returning excess cash to its

shareholders in the form of dividends and share buybacks. Its dividend yield is currently 2.6%, above its five-year average of 2.2%. The company has paid a dividend every year since 2003 but did not increase its dividend in 2010. However, MSFT increased its dividend aggressively during 2011 and 2012. Dividends have expanded at a 14.9% annual rate over the last five fiscal years. Its last dividend increase was 25%, declared on September 20, 2011. We are expecting a dividend increase to be announced around the same time this year.

MSFT has a low current earnings payout ratio of 39.6%, which is higher than its historical average of 29.0%. Given the company’s strong free cash flow, we see the dividend as very safe. MSFT is also sitting on $63 billion, or $7.59 per share, in cash. This high cash balance leads us to believe that the company will continue to aggressively increase dividends and buy back its shares.

RisksMicrosoft is one of the world’s largest companies. Its Win-

dows and Office products are found in personal computers around the globe. Microsoft is in the process of releasing its latest version of Windows and Office, Windows 8 and Office 2013. Both Windows 8 and Office 2013 are being radically changed by Microsoft as a response to the changing environ-ment. Consumers are shifting more toward mobile devices and tablets, and they value working collaboratively over the “cloud.” Windows 8 is an operating system aimed at being functional on desktop computers, tablets and smartphones. Additionally, one of the main features of Office 2013 is its ca-pability for users to work collaboratively. Although Microsoft is heading in the right direction, the main risk is whether there will be customer backlash to the radically different products. Demand for Microsoft products may be squeezed from two fronts if there is a backlash from desktop and laptop users, while tablet and mobile demand for Windows 8 is subdued.

Microsoft operates in an intensely competitive environ-ment. Its products face competition from the largest compa-nies, such as Apple, to specialized single-product companies and even from the open-source environment. The competi-tive pressures faced by Microsoft may lead to depressed sales, margins and net income. In addition, there is, and will continue to be, illegal copying of Microsoft software. This piracy will suppress sales somewhat in the U.S., but more so internationally, where there are less rules and regulations to protect intellectual property. ▪

Microsoft Corporation (MSFT)

Bullish Factors• Refresh of two main products—Windows and Office• Financially stable with very strong cash flow• Trading at a relatively high yield and low payout ratio

Bearish Factors• Radical change in Windows 8 may not be accepted by

consumers• Proliferation of mobile devices and cloud computing

means uncertainty for Microsoft products• Operates in intensely competitive environment

September2012 9


MSFT $30.82 ($32.95 - $24.26)Addition Alert Date: 12/31/2011Price at Alert: $25.96 Risk Index: 1.47Market Cap (Million): $258,376.3Avg Daily Dollar Volume (Million): $1,250.8Primary Sector: TechnologyPrimary Industry: Software & Programming

Indicated Annual Dividend: $0.80 8002/69002/60102/61102/62102/6tnerruCselpitluMLatest Dividend Increase: Date Dividend Yield (%): Avg 2.6 3.0 2.4 2.2 1.9 1.4Latest Dividend Increase: % 7.10.35.38.24.3hgiH :)%( dleiY dnediviD %0.52Dividend Yield: Current 2.6% 2.14.17.10.27.2woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 6.5 7.5 9.9 9.1 6.1 5.8Dividend Paid Since: 1.715.610.111.013.314.51sgninraE/ecirP3002Number of Years of Div Increases: 2 Price/Earnings (Industry) 23.8 24.9 23.4 21.4 21.1 26.5Direct Invest Option: Yes Price/Book Value 3.9 3.4 4.0 4.4 6.1 8.2DRIP Plan: 0.51.43.33.30.35.3selaS/ecirPseY

8002/69002/60102/61102/62102/6tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.2000 Payout Ratio: EPS (%) 39.6 39.6 23.4 24.4 31.9 23.2$0.2000 Payout Ratio: FCFPS (%) 22.9 22.9 22.1 20.7 29.2 22.3$0.2000 Gross Margin (%) 76.2 76.2 77.7 80.2 79.2 80.8$0.2000 Operating Margin (%) 29.5 29.9 38.9 38.7 36.3 36.9$0.1600 Operating Margin (%) (Ind) (2.3) (1.0) 1.2 0.0 (4.9) (0.8)

3.929.420.031.330.320.32)%( nigraM teN0061.0$Rel Strgth 5.254.838.348.445.723.62)%( EOR

Rank ROE (%) (Industry) 10.5 10.3 8.3 8.3 8.9 8.90.623.919.228.328.418.41)%( AOR%96keeW 44.18.11.26.26.26.2oitaR tnerruC%26keeW 312.052.944.645.743.543.54)%( stessA ot seitilibaiL%94keeW 62

%67keeW 25 Liab to Assets (%) (Ind) 49.8 50.5 51.1 50.0 50.6 46.89.08.08.07.06.06.0revonruT tessA

8002/69002/60102/61102/62102/6MTTstnemetatS laicnaniFraeY 5 htworG024,06734,85484,26349,96327,37327,37)M$( selaS%9.41sdnediviD228,84282,64980,05663,45391,65391,65)M$( emocnI ssorG%6.7selaSANANANANANAN)M$( noitaicerpeD%8.3emocnI teN

598,5391,6)M$( artxE/lausunU%0.7cisaB SPE (80) (10) (532) 0172,22522,12761,42142,72160,22367,12)M$( emocnI gnitarepO%1.7tnoC liD SPE

Interest Expense ($M) 380 380 295 151 38 0SUE Score Pretax Income ($M) 22,267 22,267 28,071 25,013 19,821 23,814

2.60 Net Income ($M) 16,978 16,978 23,150 18,760 14,569 17,6811.30 Operating Cash Flow ($M) 31,626 31,626 26,994 24,073 19,037 21,612

Annual Investing Cash Flow ($M) (24,786) (24,786) (14,616) (11,314) (15,770) (4,587)6/2014 Financing Cash Flow ($M) (9,408) (9,408) (8,376) (13,291) (7,463) (12,934)

28 Capital Expenditures ($M) 2,305 2,305 2,355 1,977 3,119 3,182$3.31 Net Cash Flow ($M) (2,672) (2,672) 4,105 (571) (4,263) 4,228

09.136.131.237.220.220.2)$( cisaB SPE53.3$78.126.101.296.200.200.2)$( tnoC detuliD SPE1pU veR # 44.025.025.046.008.008.0)$( erahS/sdnediviD3nwoD veR # 89.187.115.209.294.305.3)$( erahS/wolF hsaC eerF93.3$ogA .soM eerhT

6/2012 3/2012 12/2011 9/2011 Total 266,32744,13887,63277,25040,36040,36)M$( hsaC($0.06) $0.60 $0.78 $0.68 $2.00 Goodwill/Intangibles ($M) 16,622 16,622 13,325 13,552 14,262 14,081$0.69 $0.61 $0.77 $0.62 $2.69 Total Assets ($M) 121,271 121,271 108,704 86,113 77,888 72,793

Long-Term Debt ($M) 10,713 10,713 11,921 4,939 3,746 06/2012 3/2012 12/2011 9/2011 Total Total Liabilities ($M) 54,908 54,908 51,621 39,938 38,330 36,507$2.15 $2.07 $2.49 $2.07 $8.78 Book Value/Share ($) 7.91 7.90 6.72 5.24 4.42 3.89$2.06 $1.95 $2.35 $1.88 $8.24 Avg Shares Outst'g (M) 8,388.00 8,396.00 8,490.00 8,813.00 8,945.00 9,328.00

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 8/31/2012.

2.2% (2.9% - 1.8%)

0.980.931.01

3 Year

Sep 13, 2012Jun 14, 2012Mar 8, 2012

1.02

Jun 13, 2012Mar 13, 2012Dec 14, 2011 Feb 14, 2012

May 15, 2012Aug 14, 2012

Microsoft is engaged in developing, licensing and supporting a range of software products, services and computer hardware as well as online advertising. MSFT has five segments: Windows & Windows Live Division, Server and Tools Division, Online Services Division, Microsoft Business Division and Entertainment and Devices Division. Its products include operating systems for personal computers (PCs), servers, phones and other intelligent devices; server applications; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. Its cloud-based computing services include Bing and WindowsLive.

Sep 20, 2011

Jul 19, 2012Apr 19, 2012

Nov 15, 2011

4%8%(4%)18%

StockGain

Dec 8, 2011

Rel StrgthIndex

Aug 16, 2011

TTM25.0%5.4%

(26.7%)(26.0%)(25.9%)

15.4%8.1%5.2%7.4%7.3%

EPS$0.67$0.60

% Surp8.4%4.3%

Annual6/2013

35$3.02Current

Month Ago $0.59 $3.03$0.59

Est Surprise

EPS Estimates# of Estimates

EPS (Qtr)

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

1102 ,81 guA1102 ,51 nuJMar 14, 2011 May 17, 2011 May 19, 2011

Sep 20, 2011

5$3.09

04

$0.66

2

Quarterly9/2012

31

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Sep 2007 Sep 2008 Sep 2009 Sep 2010 Sep 2011

Div

iden

d Yi

eld

$0

$5

$10

$15

$20

$25

$30

$35

$40

Share Price

10 September2012

Travelers Companies (TRv)The Travelers Companies is one of the oldest insurance

organizations in the United States, having been founded in 1853. The company was spun off from Citigroup in 2002 and then merged with the Saint Paul Companies in 2004. Travelers was added to the Dow Jones industrial average in 2009.

Travelers provides commercial and personal property and casualty insurance products. It also offers surety and financial liability insurance products. The company is organized into three reportable business segments: business insurance (51% of premiums written in 2011); financial, professional and international insurance (11%); and personal insurance (35%). The business insurance segment offers property and casualty insurance products to commercial enterprises primarily in the U.S. The financial, professional and international insur-ance segment offers surety and financial liability insurance products in the U.S., United Kingdom, Canada, Ireland and other countries. The personal insurance segment is essentially evenly split between automobile and homeowners insur-ance products offered in the U.S. Travelers offers its products through a variety of brokers and independent agents.

Why Own TRV?This is a financially sound, large-cap company trading at a

reasonable valuation and attractive yield. Travelers weathered the 2008 financial crisis, maintaining profitability. It currently has a strong balance sheet with $230 million in cash and a low level of long-term debt. The company consistently gener-ates free cash flow. Key to Travelers’ success is a focus by management on making prudent underwriting decisions.

The stock trades at a reasonable valuation. Its price-earn-ings ratio of 11.7 is below the property & casualty insurance industry median of 12.4. During the past five years, Travelers has traded at average of 9.6 times earnings. The current yield of 2.8% is roughly even with the stock’s five-year average of 2.7% and above the industry’s median of 1.8%.

Analysts project the company to increase earnings by 86%

this year to $6.26 per share. The sharp increase partially re-flects weather-related losses that occurred last year. For 2013, analysts currently expect earnings to reach $6.40 per share.

Return on equity (ROE) over the past four quarters is 9.0%. The company’s goal is to achieve a return on equity based on operating earnings in the mid-teens. In order to do so, calmer weather patterns than seen over the past few years and a rise in bond yields from current levels will be needed. Nonethe-less, Travelers’ current ROE is above the property & casualty insurance industry median of 7.3%.

Management is friendly toward shareholders. Since May 2006, the company has repurchased the equivalent of 49% of the then outstanding shares. Combined with rising dividends payments, Travelers has returned almost $21.5 billion to shareholders during this period.

Dividend AnalysisTravelers yields 2.8%. This is approximately even with the

five-year average yield of 2.7%. During the past five years, the yield has fluctuated between an average low of 2.2% and an average high of 3.3%.

Travelers has raised its dividend each year since its 2004 merger with the Saint Paul Companies. During the past five years, the growth rate has averaged 9.5% on annualized basis. A five-cent per share increase was announced this past April.

The company has the financial ability to raise its dividend further. Travelers pays out 31.1% of its earnings and 27.1% of its free cash flow in dividends. By means of comparison, the median payout ratio of the property & casualty insurance industry is 20.5%.

The stock went ex-dividend on September 6, 2012, with a dividend scheduled to be paid on September 28, 2012, to shareholders of record on September 10, 2012. The next dividend should be announced in October and paid near the end of this year.

RisksNatural catastrophes, such as storm-related damage, have

a direct, negative impact on earnings—particularly when the damage is worse than expected. For example, Travelers incurred catastrophe-related losses of $2.56 billion in 2011 due to tornados in Alabama and Missouri, Hurricane Irene, wildfires in Texas and the Northeast’s October snowstorm.

Low bond yields are a headwind. One of the ways insur-ance companies realize profits is by investing premiums. Doing so allows their reserves to grow and helps to widen the spread between what they bring in in premiums and pay out in claims. When yields are low, as they are now, investment income is reduced.

Though earnings are projected to rebound strongly this year, analysts are projecting slow growth for the next two years ahead. Earnings are forecast to grow by just 2% in 2013 and 3.4% in 2014. The five-year projected growth rate is 10.7% based on forecasts by five analysts. ▪

Bullish Factors• Financially sound, with a strong balance sheet; remained

profitable during the 2008 financial crisis• The stock trades at price-earnings ratio of just 11.7,

which is below the industry median• Management is shareholder friendly, having both

repurchased stock and increased the annual dividend

Bearish Factors• Current low yields are limiting investment income and

thereby hurting overall profitability• Analysts project earnings to grow only 2% in 2013 and

3% in 2014• Sensitivity to weather patterns; severe storms cost the

company $2.56 billion last year

September2012 11


TRv $64.74 ($65.72 - $45.97) Addition Alert Date: 9/7/2012

41.1 :xednI ksiRAN :trelA ta ecirPMarket Cap (Million): $24,948.1Avg Daily Dollar Volume (Million): $160.2Primary Sector: FinancialPrimary Industry: Insurance (Property & Casualty)

Indicated Annual Dividend: $1.84 7002/218002/219002/210102/211102/21tnerruCselpitluMLatest Dividend Increase: Date Dividend Yield (%): Avg 2.8 2.9 2.7 2.8 2.7 2.2Latest Dividend Increase: % 4.21.47.30.35.3hgiH :)%( dleiY dnediviD %2.21Dividend Yield: Current 2.8% 0.20.23.25.25.2woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 8.6 6.1 12.7 14.5 11.0 13.2Dividend Paid Since: 6.71.99.69.73.617.11sgninraE/ecirP3002Number of Years of Div Increases: 7 Price/Earnings (Industry) 12.4 14.0 9.7 7.2 13.9 10.1Direct Invest Option: No Price/Book Value 1.0 0.9 1.0 0.9 1.0 1.3DRIP Plan: 3.11.10.10.19.00.1selaS/ecirPseY

7002/218002/219002/210102/211102/21tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.4600 Payout Ratio: EPS (%) 31.1 46.8 21.1 19.3 24.4 16.1$0.4600 Payout Ratio: FCFPS (%) 27.1 30.5 22.0 16.4 22.6 13.9

ANANANANANAN)%( nigraM ssorG0014.0$$0.4100 Operating Margin (%) 27.8 5.3 17.1 19.1 15.2 23.9$0.4100 Operating Margin (%) (Ind) 28.4 3.4 10.7 11.2 2.1 17.9


Rank ROE (%) (Industry) 7.3 4.2 8.9 10.3 0.5 13.60.46.23.30.33.11.2)%( AOR%06keeW 4ANANANANANANoitaR tnerruC%95keeW 319.679.670.579.576.670.67)%( stessA ot seitilibaiL%87keeW 62

%48keeW 25 Liab to Assets (%) (Ind) 73.3 75.0 74.8 74.0 75.0 73.0ANANANANANANrevonruT tessA

7002/218002/219002/210102/211102/21MTTstnemetatS laicnaniFraeY 5 htworG710,62774,42086,42211,52644,52135,52)M$( selaS%5.9sdnediviD419,9406,7954,8001,8492,5327,6)M$( emocnI ssorG%3.0selaS

Net Income (19.6%) Depreciation ($M) NA NA NA NA NA NAEPS Basic (11.1%) Unusual/Extra ($M) 0 0 0 0 0 0EPS Dil Cont (10.6%) Operating Income ($M) 7,085 1,352 4,306 4,711 3,716 6,216

Interest Expense ($M) 385 386 388 382 370 346SUE Score Pretax Income ($M) 2,795 1,352 4,306 4,711 3,716 6,216

(0.60) Net Income ($M) 2,244 1,414 3,188 3,593 2,901 4,5647.00 Operating Cash Flow ($M) 2,533 2,169 3,054 4,231 3,138 5,286

Annual Investing Cash Flow ($M) 416 1,152 2,109 (899) (162) (2,526)12/2013 Financing Cash Flow ($M) (2,988) (3,306) (5,221) (3,442) (2,868) (2,953)

25 Capital Expenditures ($M) 41 0 0 0 0 0$6.40 Net Cash Flow ($M) (43) 14 (55) (95) 79 (188)


6/2012 3/2012 12/2011 9/2011 Total 172053552002412032)M$( hsaC$1.26 $2.02 $1.51 $0.75 $5.54 Goodwill/Intangibles ($M) 3,770 3,798 3,867 3,953 4,054 4,180

($0.87) $1.93 $1.95 $2.11 $5.12 Total Assets ($M) 104,330 104,602 105,656 109,560 109,632 115,224Long-Term Debt ($M) 6,349 6,255 6,502 6,154 6,181 6,242

6/2012 3/2012 12/2011 9/2011 Total Total Liabilities ($M) 79,281 80,125 80,181 82,145 84,313 88,608$16.39 $16.31 $15.81 $14.58 $63.09 Book Value/Share ($) 64.56 58.87 53.32 48.54 42.34 40.65$15.26 $14.66 $14.14 $13.91 $57.97 Avg Shares Outst'g (M) 388.00 415.80 476.50 563.20 595.90 652.00


Quarterly9/2012

24

1

Annual12/2012

25

$6.39

10

$1.29

0

1102 ,03 peS1102 ,2 guAApr 21, 2011 Jun 8, 2011 Jun 30, 2011

EPS (Qtr)

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

Est Surprise

EPS Estimates# of EstimatesCurrentMonth Ago $1.31 $6.27

$1.31 $6.26

EPS$1.26$2.01

% Surp(6.3%)32.2%

7.7%8.2%

10.1%1.3%

(21.3%)(11.3%)(11.2%)

TTM16.8%0.2%(4.6%)

Gain

Dec 30, 2011

Rel StrgthIndex

Sep 7, 2011

The Travelers Cos. provides a range of commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals. The company is organized into three business segments: business insurance; financial, professional and international insurance; and personal insurance. The business insurance segment offers an array of property and casualty insurance primarily in the United States. The financial, professional and international insurance segment includes surety and financial liability coverage as well as property and casualty products. The personal insurance segment writes a range of property and casualty insurance.

Oct 19, 2011

Jul 19, 2012Apr 19, 2012

Dec 7, 2011

2%7%

12%29%

Stock

Jul 19, 2012Apr 19, 2012Jan 23, 2012 Mar 7, 2012

Jun 6, 2012Sep 6, 2012

1.081.10

3 Year

Sep 28, 2012Jun 29, 2012Mar 30, 2012

1.00

2.7% (3.3% - 2.2%)

0.97

Apr 19, 2012

0%

1%

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12 September2012

V.F. Corp. is one of the world’s largest apparel companies, designing and manufacturing a variety of apparel and foot-wear for all ages. The company’s business segments include outdoor & action sports, jeanswear, imagewear, sportswear and contemporary brands.

The company offers jeanswear under the Lee, Lee Europe, Wrangler, Wrangler Hero, Genuine Wrangler, Wrangler 47, Wrangler Jeans Co., Wrangler Europe, Rigs, Aura, 20X, Rustler, Riders, and Maverick brands; outdoor products under the Vans, The North Face, JanSport, Kipling, Reef, Napapijri, Eagle Creek, Eastpak and Lucy brands; imagewear under the Ma-jestic, Red Kap, Bulwark, Chef Designs and The Force brands; contemporary brands under Seven For All Mankind, Ella Moss and Splendid; and sportswear under the Nautica and Kepling brands.

On September 13, 2011, V.F. Corp. acquired The Timberland Company—a global leader in designing, engineering and mar-keting premium-quality footwear, apparel and accessories—for $2.3 billion. It markets products under the Timberland, Timberland PRO, Mountain Athletics, SmartWool, Timberland Boot Company and Howies brands. On April 30, 2012, the company completed its sale of John Varvatos Enterprises Inc. to private equity firm Lion Capital LLP.

VFC sells its products through specialty stores, department stores, national chains, and mass merchants, along with licensees and distributors. Moreover, the company operates through V.F. Outlets, which sell a range of excess quantities of V.F.-branded products coupled with apparel and accessories.

Why Own VFC?On March 11, 2011, the company announced its “The Next

Five Years” plan, outlining plans of reaching 2015 goals of adding $5 billion in revenues and $5 per share in earnings per share growth from 2010 levels. To reach those goals, the com-pany has implemented a strategic plan to drive revenues at a 10% annual rate and earnings at a 12% annual rate, as well as raising operating margins to 15%.

As part of its growth strategy, the company expects 15% annual growth in international revenues, including an-nual growth in Asia of 28% and 11% growth in Europe. The company is targeting growth in the Americas’ region of 11% annually.

Lastly, as a result of these initiatives, the company is fore-casting a cumulative boost in its cash flow from operations of $6 billion over the five-year period ending in 2015.

Over the last five years, earnings per share have been grow-ing at 11% a year, while analysts are expecting earnings per share to grow, on average, by 12.9% over the next three to five years. On July 19, 2012, the company announced earn-ings of $1.11 per share, which was 18.1% above the consen-sus estimate for the period. At that time, the company raised its 2012 adjusted earnings guidance by $0.05 to $9.45 per share. This was due to stronger-than-expected results during the first half of the fiscal year.

Dividend AnalysisVFC shares currently yield 1.9%, based on an indicated

dividend of $2.88 per share. This is below the five-year aver-age low yield, making V.F. Corp. the most expensive DI stock based on dividend yield. V.F. Corp. has been paying a dividend since 1941 and has increased its annual dividend in each of the last 39 years. Over the last five years the company, on av-erage, has been increasing dividends by 6.1% a year. Currently the company is paying out 33.1% of earnings as dividends and 32.1% of free cash flow. This, along with the company’s rising free cash flow growth, indicates the company has room to grow dividends and/or buy shares back.

RisksWith many of its brands reaching maturity, V.F. Corp. must

look to acquisitions to boost its growth. While the Timberland acquisition seems to be providing a positive lift to the com-pany, growth by acquisition can be risky. The risks involved include overestimating the value of a business and integration issues.

While V.F. Corp. has managed to navigate the current economic downturn reasonably well, it is at the mercy of global consumer spending. Continued weakness in the global economy, or a pronounced downturn, would negatively im-pact the company’s profitability.

V.F. Corp.’s strong international presence—international sales now account for more than 35% of total revenues—makes it vulnerable to currency translation effects. A strong U.S. dollar makes its goods more expensive overseas. Fur-thermore, revenues denominated in foreign currencies are worth less when translated back to U.S. dollars. As of the end of the second quarter, V.F. Corp. was forecasting the full-year negative impact of foreign currency translation to be $0.42 per share.

Lastly, V.F. Corp. operates in a highly competitive, albeit fragmented, marketplace. ▪

v.F. Corporation (vFC)

Bullish Factors• As one of the largest apparel companies in the world,

V.F. Corp. benefits from economies of scale in sourcing and distribution

• The company’s business is highly diversified across brands, products, distribution channels and geographies

Bearish Factors• In 2010, 21% of revenues came from the five largest

customers; Wal-Mart represents 10% of total sales• Pursuing higher-priced goods may not be well received

given the current economic climate, especially in Europe• The company is at the high end of its historical valuation

range, as measured by dividend yield

September2012 13


vFC $152.68 ($156.15 - $111.12)Addition Alert Date: 12/31/2011Price at Alert: $126.99 Risk Index: 1.5Market Cap (Million): $16,779.3Avg Daily Dollar Volume (Million): $130.1Primary Sector: Consumer CyclicalPrimary Industry: Apparel/Accessories

Indicated Annual Dividend: $2.88 7002/219002/10102/11102/11102/21tnerruCselpitluMLatest Dividend Increase: Date Dividend Yield (%): Avg 1.9 2.3 3.1 3.8 3.8 2.7Latest Dividend Increase: % 3.31.61.55.32.3hgiH :)%( dleiY dnediviD %3.41Dividend Yield: Current 1.9% 3.28.20.37.28.1woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 5.4 7.1 6.5 6.6 8.8 6.6Dividend Paid Since: 2.513.112.513.510.414.81sgninraE/ecirP1491Number of Years of Div Increases: 39 Price/Earnings (Industry) 15.7 14.1 13.8 11.2 12.1 20.2Direct Invest Option: No Price/Book Value 3.7 2.7 2.2 1.8 1.9 2.5DRIP Plan: 3.19.00.11.13.16.1selaS/ecirPseY

7002/219002/10102/11102/11102/21tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.7200 Payout Ratio: EPS (%) 33.1 32.1 46.3 56.7 42.2 41.6$0.7200 Payout Ratio: FCFPS (%) 32.1 34.3 30.2 29.8 46.8 35.2$0.7200 Gross Margin (%) 45.5 45.8 46.7 44.3 43.9 43.5$0.7200 Operating Margin (%) 12.2 13.2 10.7 10.2 12.3 13.4$0.6300 Operating Margin (%) (Ind) 5.2 5.6 6.1 6.8 4.1 7.4




7002/219002/10102/11102/11102/21MTTstnemetatS laicnaniFraeY 5 htworG912,7346,7022,7307,7954,9953,01)M$( selaS%1.6sdnediviD931,3953,3591,3795,3133,4417,4)M$( emocnI ssorG%8.8selaSANANANANANAN)M$( noitaicerpeD%8.01emocnI teN0022120200)M$( artxE/lausunU%0.11cisaB SPE669939737128542,1062,1)M$( emocnI gnitarepO%0.11tnoC liD SPE

Interest Expense ($M) 93 78 78 86 94 72SUE Score Pretax Income ($M) 1,212 1,165 750 655 848 907

4.30 Net Income ($M) 929 888 571 461 603 5921.20 Operating Cash Flow ($M) 1,197 1,081 1,001 974 678 821

Annual Investing Cash Flow ($M) (2,385) (2,460) (181) (317) (216) (806)12/2013 Financing Cash Flow ($M) 925 912 (743) (319) (390) (51)

21 Capital Expenditures ($M) 247 249 125 96 135 120$10.96 Net Cash Flow ($M) (281) (451) 61 350 60 (21)


6/2012 3/2012 12/2011 10/2011 Total 223283237297143133)M$( hsaC$1.40 $1.91 $2.28 $2.69 $8.28 Goodwill/Intangibles ($M) 4,925 5,065 2,725 2,944 2,727 2,766$1.17 $1.82 $0.49 $2.22 $5.70 Total Assets ($M) 9,426 9,313 6,458 6,474 6,434 6,447

Long-Term Debt ($M) 1,831 1,832 936 939 1,142 1,1456/2012 3/2012 12/2011 10/2011 Total Total Liabilities ($M) 4,902 4,787 2,596 2,659 2,878 2,870

$19.61 $23.13 $26.41 $25.08 $94.23 Book Value/Share ($) 41.42 41.41 35.50 34.56 32.55 32.39$16.87 $18.10 $19.67 $20.69 $75.33 Avg Shares Outst'g (M) 109.22 109.29 108.76 110.39 109.23 110.44


Oct 24, 2011

0$9.50

01

$3.57

1

Quarterly9/2012

20

1102 ,91 peS1102 ,12 luJApr 29, 2011 Jun 8, 2011 Jun 20, 2011

EPS (Qtr)

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

Est Surprise


$3.48

Annual12/2012

20$9.53

EPS$1.11$1.94

% Surp18.1%3.7%

45.8%45.0%

3.9%7.4%13.8%13.8%13.8%

TTM12.0%27.0%48.1%

Gain

Dec 19, 2011

Rel StrgthIndex

Sep 7, 2011

V.F. Corp. is a global apparel company that designs and manufactures or sources from independent contractors a variety of apparel and footwear for all ages. VFC is a diversified apparel company across brands, product categories, channels of distribution and geographies. The company owns a portfolio of brands in the jeanswear, outerwear, packs, footwear, sportswear and occupational apparel categories. These products are marketed to consumers shopping in specialty stores, upscale and traditional department stores, national chains and mass merchants. V.F. Corp.is also engaged in travel gear, backpacks and technical outdoor equipment, and occupational apparel.

Oct 24, 2011

Jul 19, 2012Apr 27, 2012

Dec 7, 2011

2%14%4%

32%

Stock

Jul 19, 2012Apr 27, 2012Feb 16, 2012 Mar 7, 2012

Jun 6, 2012Sep 6, 2012

3 Year

Sep 20, 2012Jun 18, 2012Mar 19, 2012

1.01

3.1% (4.3% - 2.5%)

1.031.011.13

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14 September2012

Wisconsin energy Corp. (WeC)Wisconsin Energy is an electric and natural gas utility poised

to benefit from rising cash flows. The company is the largest utility in the state of Wisconsin.

It serves 1.1 million electric customers and 1.0 million natural gas customers in both the state of Wisconsin and in the upper peninsula of Michigan.

The company operates in two primary segments: utility energy and non-utility energy. The utility energy segment is composed of Wisconsin Electric and Wisconsin Gas, both of which operate under the name of “We Energies.” The non-energy segment is primarily composed of We Power. We Power owns and leases four power generation plants to Wisconsin Electric. Approximately 62% of the electric supply is generated from coal powered plants, though the company recently announced plans to convert one of its plants to use natural gas instead.

Why Own WEC?Utility companies are not traditionally associated with

growth, but this company bucks the sector’s reputation. Wisconsin Energy is the only member of the S&P utilities index and the Dow Jones utilities index to have grown both earnings per share and dividends every year since 2003. Dur-ing the past five years, earnings per share have risen at an annualized rate of 10.6% and dividends have grown by 17.7%. Growth should continue with the company targeting earnings per share growth of 4% to 6% and annual dividend increases in excess of 10% between 2012 and 2014.

The other area where Wisconsin Energy should see growth is in cash flow. In 2001, the company created a 10-year plan to increase the supply and reliability of the electricity it produces. The completion of its “Power the Future” strategy

is freeing up cash flow previously spent on capital projects. Wisconsin Energy expects to reduce investment spending from $792 million in 2011 to $625 million in 2014. By means of comparison, the company spent $939.5 million on capital expenditures in 2006.

The stock’s price-earnings ratio of 16.6 is close to the elec-tric utilities industry median of 16.3. It is below the utilities’ sector median of 17.7, however. Since historical earnings and dividend growth has been stronger than the industry and sec-tor medians, a higher valuation could be argued for.

Dividend AnalysisWisconsin Energy first paid dividends in 1939 and has raised

them for nine consecutive years. The stock yields 3.2%, an amount that is below the electric utilities industry and the utilities sector medians of 3.6%. Though down from a year prior, Wisconsin Energy’s current yield remains above its five-year average of 2.8%. This indicates that the stock is not over-valued on a relative basis, despite its upward run this year.

Wisconsin Energy’s earnings payout ratio is 48.1%. The company’s executives have publicly expressed their intent to raise the payout ratio to 60% by 2014. In doing so, Wisconsin Energy would bring its payout ratio closer to the industry and sector medians of 63.5% and 66.1%, respectively.

Like many utilities, Wisconsin Energy does not generate positive free cash after both its capital expenditures and divi-dend payments are paid. On a pre-dividend basis, however, the company generated nearly $156 million in free cash flow over the past 12 months. We expect free cash flow to rise as capital expenditures decline.

RisksLike all utility stocks, the company’s earnings are influenced

by weather patterns, which are unpredictable. Warmer than expected temperatures during the first quarter of 2012 caused revenues to decline 10.3% from the first three months of 2011. Conversely, warmer temperatures in the second-quarter of 2012 increased power usage. (Total revenue fell in the second quarter of 2012, however, because of a planned outage at a large customer.)

Though the yield suggests the stock is not overvalued, the stock’s price-earnings ratio of 16.6 is above the five-year aver-age of 14.4. The price-to-book ratio of 2.1 is above its five-year average of 1.6 and the electric utilities industry group median of 1.4.

The stock’s performance is influenced by market attitudes toward risk. Shares rose during the spring and early summer when investors were leery of holding economically sensitive stocks. Conversely, during the first quarter of 2012 and more recently in August 2012 shares lagged the broader market. A rise in bond yields or a change in dividend tax rates could also cause investor sentiment to become less favorable toward utility stocks. ▪

Bullish Factors• Only member of the S&P utilities and the Dow Jones

utilities indexes to grow earnings and dividends every year since 2003

• Management expects to reduce capital expenditures from $792 million in 2011 to $625 million in 2014, freeing up cash flow

• The company intends to raise dividends by 10% annually and increase the payout ratio to 60%

Bearish Factors• Revenues are influenced by weather patterns; an

unseasonably warm winter caused first-quarter revenues to fall 10.3%

• The price-earnings ratio of 16.6 is above the industry’s median and the stock’s five-year average

• The stock is viewed as a defensive play and has lagged when the broader market has risen this year

September2012 15


WeC $37.96 ($41.48 - $29.82) Addition Alert Date: 12/31/2011Price at Alert: $34.96 Risk Index: 0.78Market Cap (Million): $8,747.8Avg Daily Dollar Volume (Million): $56.4Primary Sector: UtilitiesPrimary Industry: Electric Utilities

Indicated Annual Dividend: $1.20 7002/218002/219002/210102/211102/21tnerruCselpitluMLatest Dividend Increase: (Date) Dividend Yield (%): Avg 3.2 3.3 3.0 3.1 2.6 2.2Latest Dividend Increase: (%) 4.21.37.34.39.3hgiH :)%( dleiY dnediviD %4.51Dividend Yield: Current 3.2% 0.22.27.26.29.2woL :)%( dleiY dnediviD Dividend Yield: 5-Year Avg (High-Low) Earnings Yield (%) 6.0 7.0 7.1 7.3 7.1 6.2Dividend Paid Since: 1.611.417.310.413.416.61sgninraE/ecirP9391Number of Years of Div Increases: 9 Price/Earnings (Industry) 16.3 14.4 13.2 12.5 14.1 17.4Direct Invest Option: Yes Price/Book Value 2.1 1.8 1.7 1.4 1.5 1.7DRIP Plan: 3.11.12.15.16.10.2selaS/ecirPseY

7002/218002/219002/210102/211102/21tnerruCsoitaRtnuomAelbayaPetaD viD-xEderalceD$0.3000 Payout Ratio: EPS (%) 48.1 46.0 41.0 41.2 35.1 34.7$0.3000 Payout Ratio: FCFPS (%) 165.6 148.8 1,533.1 (85.0) (31.8) (17.2)$0.3000 Gross Margin (%) 86.6 29.7 24.4 21.5 13.6 24.8$0.2600 Operating Margin (%) 21.7 19.8 19.3 16.1 14.9 14.8$0.2600 Operating Margin (%) (Ind) 15.3 16.1 15.1 14.8 14.7 15.0




7002/218002/219002/210102/211102/21MTTstnemetatS laicnaniFraeY 5 htworG532,4204,4101,4302,4684,4203,4)M$( selaS%7.71sdnediviD250,1795388420,1133,1527,3)M$( emocnI ssorG%3.2selaS823423343603033543)M$( noitaicerpeD%7.01emocnI teN

00)M$( artxE/lausunU%9.01cisaB SPE (198) (231) (488) (7)726556066018788639)M$( emocnI gnitarepO%6.01tnoC liD SPE

Interest Expense ($M) 260 263 259 235 240 241SUE Score Pretax Income ($M) 824 777 704 591 570 552

6.80 Net Income ($M) 537 526 457 382 359 3360.70 Operating Cash Flow ($M) 954 993 810 629 736 532

Annual Investing Cash Flow ($M) (838) (893) (634) (736) (906) (543)12/2013 Financing Cash Flow ($M) (113) (111) (173) 96 175 1

17 Capital Expenditures ($M) 798 831 798 815 1,134 1,210$2.40 Net Cash Flow ($M) 3 (10) 4 (12) 5 (10)

44.145.146.159.162.233.2)$( cisaB SPE04.2$24.105.195.129.181.292.2)$( tnoC detuliD SPE2pU veR # 05.045.086.008.040.121.1)$( erahS/sdnediviD2nwoD veR #

50.007.086.0)$( erahS/wolF hsaC eerF04.2$ogA .soM eerhT (0.79) (1.70) (2.90)6/2012 3/2012 12/2011 9/2011 Total 723302524131)M$( hsaC$0.51 $0.74 $0.49 $0.55 $2.29 Goodwill/Intangibles ($M) 442 442 442 442 442 442$0.41 $0.72 $0.53 $0.47 $2.13 Total Assets ($M) 13,888 13,862 13,060 12,698 12,618 11,720

Long-Term Debt ($M) 4,298 4,614 3,932 3,876 4,075 3,1736/2012 3/2012 12/2011 9/2011 Total Total Liabilities ($M) 9,776 9,868 9,227 9,101 9,251 8,591$4.10 $5.17 $4.82 $4.53 $18.62 Book Value/Share ($) 17.71 17.04 16.26 15.26 14.27 13.26$4.24 $5.69 $4.66 $4.16 $18.75 Avg Shares Outst'g (M) 230.40 232.60 233.80 233.80 233.80 233.80


Jan 19, 2012

0$2.28

50

$0.56

8

Quarterly9/2012

9

1102 ,1 peS1102 ,12 luJApr 21, 2011 May 11, 2011 Jun 1, 2011

EPS (Qtr)

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

Est Surprise


$0.57

Annual12/2012

16$2.32

EPS$0.51$0.74

% Surp15.4%1.0%

5.0%7.0%

24.4%0.6%13.6%13.6%13.3%

TTM0.0%(1.9%)3.6%

Gain

Dec 1, 2011

Rel StrgthIndex

Aug 10, 2011

Wisconsin Energy Corp. is a diversified holding company that operates through two segments: a utility energy segment and a non-utility energy segment. Primary subsidiaries include Wisconsin Electric Power Company, Wisconsin Gas LLC and W.E. Power LLC. Wisconsin Electric and Wisconsin Gas operate together under the trade name of We Energies. WEC's non-utility energy segment derives its revenues primarily from the ownership of electric power generating facilities for long-term lease to Wisconsin Electric. As of December 31, 2010, the company had a 26.2% interest in American Transmission Company LLC (ATC).

Oct 20, 2011

Aug 1, 2012May 1, 2012

Nov 9, 2011

(6%)0%

11%21%

Stock

Jul 19, 2012Apr 19, 2012Jan 19, 2012 Feb 10, 2012

May 10, 2012Aug 10, 2012

3 Year

Sep 1, 2012Jun 1, 2012Mar 1, 2012

0.93

2.8% (3.3% - 2.5%)

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16 September2012

The dividend yield is a useful measure of value for selecting undervalued securities and pruning overpriced stocks from your portfolio. A stock’s dividend yield is computed by taking the indicated dividend—the expected dividend payment over the next year—and dividing it by the share price. If a stock’s price rises faster than the dividend, the dividend yield will fall, indicating that the price may have been bid up too high and may be ready for a decline. Conversely, if the dividend yield rises to a high level, the stock may be poised for an increase in share price, if the dividend can be sustained.

Like the price-earnings ratio, the dividend yield attempts to highlight stocks that are out of favor. Contrarian techniques such as this are based upon the premise that markets tend to overreact to good or bad news and push the price of a stock away from its intrinsic value. Investors try to identify these mispriced stocks through a set of rules called a valuation model. Valuation models give you a framework to analyze a stock and ask relevant questions—a process that helps to keep your emotions in check.

Absolute or relative yields may be used to measure value, but we find that relative yield analysis works better over a range of market environments. An absolute test might require a minimum yield of 4% before you would consider buying a stock. Absolute requirements could lead to passive market timing, as you build up cash levels when you cannot find suit-able investments that meet the minimum yield requirement during market extremes. Absolute requirements will also typi-cally push your portfolio into a few industries that tradition-ally trade with higher dividend yields, such as utilities.

Relative yield models examine the historical relationship of a stock’s yield with a benchmark. It is common to com-pare a stock’s dividend yield to the overall market yield, the industry yield, the company’s own historical average yield or even against an interest rate benchmark. These benchmark yields will fluctuate, but you would be concerned if the stock’s normal relationship to the benchmark has deviated. If a stock has normally traded with a yield above the market average and now trades with a yield below that of the market, it may indicate that the stock is overvalued. We require that a stock’s yield be above the yield of the Dow Jones U.S. Total Stock Market Index when adding a stock to the DI portfolio.

Comparing a stock’s yield to its own historical average can be a very revealing test. A deviation from the normal aver-age can point to a mispriced stock, or highlight that a fun-damental shift has occurred with the company’s prospects. Firms with high dividend yields normally have lower capital appreciation potential—their earnings are expected to grow at slower rates. A growing dividend may signal that that firm is past its explosive growth and capital-intensive stage. The company is generating excess cash that is not needed to fund internal expansion. Firms increase dividends only when they feel confident of the ability to maintain the new level. De-creasing or eliminating a dividend is tantamount to announc-ing to the investment community that the firm is in trouble, a

situation that firms would like to avoid. So an increase in the annual cash dividend is a strong, positive statement by the firm that they believe future earnings, liquidity and financial position warrant the dividend increase. We are seeing many technology companies either initiating a dividend or boost-ing their dividend payout. A higher dividend yield for these stocks may be the new norm for the industry as it continues to mature.

When calculating the average yield, the first issue revolves around which time period to use for the calculation. Select-ing a time period is a balance between using one that is too short and only captures a partial segment of the market cycle and one that is too long and includes a time period that is no longer representative of the current company, industry or market. Periods between five and 10 years are most common for these types of comparisons. Most of the tables in AAII Dividend Investing currently display the average using five years of data. This period captures both a severe bear market and the subsequent bull market.

The Dividend Analysis table on the DI website and on page 7 of this issue lists the current yield, the yield one year ago and the five-year average yield. Wisconsin Energy Corp.’s (WEC) 3.2% dividend yield is below the 3.5% observed one year ago. Wisconsin Energy boosted its dividend 15.4% this past January, but its 21% stock increase over the last year has pushed down the yield. Wisconsin Energy has an average yield of 2.8% over the last five years. WEC’s current yield is above the historical average, a positive valuation sign. How-ever, the company was in the midst of a capital expenditure stage to increase the generation and supply of cost-efficient electricity and retained more of its cash flow than normal. Going forward, Wisconsin Energy is planning on double-digit annual dividend increases as it expands its dividend payout.

Even greater insight can be gained by looking at the year-by-year dividend yields and calculating the annual high-low range of the dividend yield. The low yield for a given year is determined by dividing the dividends paid during the year by the high stock price during the calendar year, while the high yield is calculated using the low price during the year. These high and low yields can be thought of as a valuation trad-ing range that is driven by both dividend and price changes. Yields near or below the five-year average low yield imply the stock is overvalued relative to its historical norm. Yields near or above the five-year average high yield imply that the stock may be undervalued relative to its historical norm. Wisconsin Energy’s high yield has averaged 3.3% over the last five years, while its low annual yield has averaged 2.5%. Wisconsin Energy’s current yield of 3.2% compares favorably to its 3.3% average high yield over the last five years.

Comparing a stock’s current yield to relative benchmarks is based upon the time-honored rule of buying low and selling high. The relative yield models provide a useful framework to measure valuations, but one must look at the complete picture. ▪

Dividend Yield as a valuation Measurement

Documents

In This Issue We’re Adding, Deleting and Reinvesting A · 2012. 9. 7. · Chesapeake Utilities (CPK) Chesapeake Utilities is being deleted because we believe its relative valua-tion