In This Issue DI Portfolio Stands Pat for August T · Dividend Analysis 7 In-Depth Stock Reports Emerson Electric Co. (EMR) 8 Global tech engineering company is repositioning its

DI Portfolio Stands Pat for AugustThere are no changes to the DI portfolio for August. A month after Britain’s unexpected vote to leave the European Union, coined

“Brexit,” on June 23, markets have more than bounced back. Initial concerns regarding Brexit and its impact have subsided for many investors.

Domestically, the Federal Open Market Committee (FOMC) revised its assess-ment of the U.S. economy’s recent performance, stating that “near-term risks to the economic outlook have diminished.” The FOMC’s meeting statement also said that the labor market has “strengthened,” which is a significant change from the assessment six weeks ago, when the central bank said the pace of job growth had “slowed.”

While last month investors were speculating that the Federal Reserve would not raise rates again in 2016, there was some scuttlebutt following the release of the July meeting statement about the possibility of a second rate hike occur-ring later this year. The futures market is not pricing in an increase, however. The CME’s FedWatch Tool is predicting a 67% chance of the FOMC keeping the target interest rate at 0.25% to 0.50% at the December 2016 FOMC meeting. Fed chair Janet Yellen has repeatedly said that changes in monetary policy will depend on economic data. The pace and size of rate increases will depend on economic data in the U.S. and abroad, among other things.

Interest rate movements affect the stock market as a whole, but the DI port-folio takes a long-term approach to investing; therefore, decisions are not made based on short-term macroeconomic events.

Analyzing Quarterly Earnings ResultsAs we move through earnings season, we thought it may be helpful to review

some key aspects for investors to analyze within quarterly results and conference calls.

1. Year-over-year comparisonComparing a company’s quarterly results is usually done on a year-over-year

basis. The second quarter of 2016 should be compared to the second quarter of 2015 because many companies’ operations experience seasonality through-out each calendar year. For example, retail companies generally see an uptick in sales around Christmas because of increased consumer spending during the holiday season, while agricultural companies may see increased sales during crop season. These seasonal patterns lead the first quarter to behave like last year’s first quarter, the second quarter to behave like last year’s second quarter, etc. For many companies, seasonality is driven by the weather (winter, spring, summer and fall), but weather is not the only cause of seasonality. However, seasonality is different than cyclicality: Cycles are generally much longer than one calendar year and reflect industry, economic or product trends.

When a company announces quarterly earnings, compare its results to the comparable quarter for the previous year to see if operations, earnings, cash flow and revenue have improved.

Also be aware that there are one-time items that may render a company’s

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 ReportsEmerson Electric Co. (EMR) 8

Global tech engineering company is repositioning its operations.

PepsiCo, Inc. (PEP) 10Snack-food business offsetting decline in global demand for carbonated soft drinks.

Texas Instruments (TXN) 12Analog chip leader with strong record of dividend growth funded with strong free cash flow.

Wyndham Worldwide Corp. (WYN) 14The hotel and vacation firm continues to trade at an attractive valuation.

DI Article Deconstructing the Altman Z-Score: Retained Earnings to Total Assets 16

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

Next Publication Date: September 2, 2016

August 2016Volume V Issue 8

www.AAIIDividendInvesting.com

TM

2 August 2016

year-over-year results incomparable. These items may include a sale of an asset, write-offs, restructuring, ac-quisitions or currency fluctuations. Companies will often report “adjusted” earnings or results, but it’s important to analyze what the adjustments exclude or include.

2. Compare to previous guidanceFuture expectations are what drive

stock prices. Quarterly results are more than just numbers; they affirm the ap-propriateness of market expectations about the company and whether the stock was priced accordingly. Quarterly conference calls allow investors to adjust their outlook and perspective on a company’s economic and operating environment, competition and, subse-quently, market value.

When a company announces quar-terly earnings, go back to last quarter’s announcement and compare current results with management’s previously issued guidance. Not all companies issue forward guidance, but many have chosen to in order to properly set ana-lysts’ and investors’ expectations for the future.

If the company did offer guidance, how accurate was it? Did the company miss or beat its previously issued expec-tations, and if it did, why?

For example, during Eaton Corp.’s (ETN) fourth-quarter 2015 conference call, the company issued guidance for the first quarter of 2016, expecting operating earnings between $0.80 per share and $0.90 per share. The compa-ny subsequently reported first-quarter 2016 earnings of $0.88 per share, near the top of its forecast range.

3. Compare to analyst expectationsAlong with the company’s expecta-

tions, analysts issue earnings expecta-tions based on fundamental analysis, financial modeling and research.

While analysts’ estimates are often inaccurate, their projections show the general expectation of future earnings, and wheter expectations are improving or worsening.

A stock’s market value is determined by investor expectations, and many investors look to analysts to provide future expectations. When a company reports earnings that are lower than the consensus of analyst estimates, the market may react adversely. Investor perception changes to thinking that the market may have overpriced the stock because higher earnings were anticipated.

If a company is continually missing analyst expectations, it may be because the firm is not giving clear guidance into

its operations or because analysts are incorrectly assessing the company’s prospects; either situa-tion can cause significant mispricing in the market.

For example, the Recent Earnings Announcements table on page 5 shows 12 DI hold-ings that have beaten

analysts’ estimates during July (as of July 27). The largest surprise of the group, at 20.0%, came from Qualcomm Inc. (QCOM). Qualcomm gained 11.1% following the company’s earnings announcement on July 20 and was sub-sequently the second-best performing DI holding during July (see more about Qualcomm on page 4).

4. Compare to competitorsHow were the quarterly results of the

company’s main competitors?Over the long term, companies that

are more successful than their competi-tors are often sought because “better” metrics often display a competitive advantage. If a firm is continually un-derperforming its competitors, its stock price will suffer in the long run.

For example, in each of the last six years DI holding Caterpillar Inc. (CAT) has had a higher return on equity (ROE) than its mining equipment competitor Joy Global (JOY). Caterpillar’s revenue has grown at an annualized rate of 2% over the last five years, while Joy’s revenue has declined 2.1% over the same period. Caterpillar has increased its dividend at an annualized rate of 11.6% over the last five years, while Joy’s dividend has increased 2.7%. While Caterpillar’s diluted earnings have declined at an annualized rate of 3.4%

Published monthly by the American Association of Individual Investors 625 N. Michigan Ave., Chicago, IL 60611 312-280-0170, www.aaii.com. Annual DI subscription, $199.

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

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

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

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

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

Printed in the U.S.A.

Portfolio Alerts This MonthAugust Portfolio Deletions

Portfolio Stock Total Index TotalAddition Return Since Return Since

Date Price Alert Date Purchase Purchaseno portfolio deletions for August

August Portfolio Additions

Company (Ticker) Latest PriceDividend

Yield Sector: Industryno portfolio additions for August

Company (Ticker)Portfolio Deletion Alert

August 2016 3

AAII DIvIDeND INveSTINg

over the last five years, Joy’s earnings have declined 36.5% over the same period.

5. Analyze the segmentsConsider the size of each segment of

a company relative to the rest of the company. Depending on its size, one segment may or may not significantly influence profitability.

For example, DI holding Microsoft Corp.’s (MSFT) “more personal comput-ing” segment was 39.4% of fourth-quar-ter 2016 revenue, but only 15.7% of operating income. Within the segment, Microsoft identifies several revenue drivers: Windows original equipment manufacturer (OEM) non-professional, Windows OEM professional, Surface, phone and search advertising.

The company’s fiscal fourth-quarter conference call mentioned that phone revenue declined 71% compared to the fourth quarter of 2015. While this number sounds significant at first, an in-vestor needs to take a deeper look into how much mobile revenue contributes to Microsoft’s total revenue. The more personal computing segment’s revenue declined 4% as a whole. By deduction,

this implies that revenue from the mobile element contributes only a small portion to the segment’s total revenue and has an even smaller impact on the company’s overall revenues.

6. Read the conference call transcriptIn each conference call, manage-

ment typically discusses the economic environment the company is facing, but they may mention other key topics also. A report issued by FactSet ana-lyzed the most commonly used words and phrases in earnings transcripts between May 24 and July 14. Popular topics included currency fluctuations, interest rates, oil and gas, Brazil, China, Brexit, wages, weather and the election. Analyzing management’s comments and insights on these topics can prove useful for investors.

Aside from what management is say-ing during the conference call, con-sider listening to or reading the analyst comments and questions at the end of the conference call. This can give insight into what analysts are concerned about, what the company may not have accurately addressed during its presen-tation, and additional figures that may

have otherwise been excluded from the conference call.

Many websites, including Seeking Alpha, provide free conference call tran-scripts. Some companies also post con-ference call information on the investor relations section of their website.

DI Portfolio AlertsAs stated, no additions or deletions

are being made to the portfolio for August.

There were no companies passing the minimum criteria for consideration that we felt would warrant a change to the portfolio. Additionally, we often prefer to wait until after earnings season to make portfolio changes because not only are DI holdings announcing, but prospective holdings are as well.

July DI PerformanceFor the month, the DI portfolio gained

5.2% through July 27, composed of 5.1% in capital gains (price appreciation) and 0.1% in income return (dividends). The portfolio’s benchmark, the Dow Jones U.S. ETF (IYY) gained 3.4% over the same period, composed solely of price appreciation.

DI Pur- Latest Julchase Price Gain/ Div

Ticker Company Date Price Price (7/26/16) (Loss) Stock Index Yield IndustryAAPL Apple Inc. 4/4/14 $75.97 $75.26 $96.67 1.1% 34.9% 21.1% 2.4% Communications EquipmentT AT&T Inc. 12/31/11 $30.24 $30.48 $42.38 (1.9%) 78.5% 84.4% 4.5% Communications ServicesCAT Caterpillar Inc. 11/7/14 $101.76 $102.36 $82.75 9.2% (13.4%) 9.2% 3.7% Construction & Agricultural MachineryCMI Cummins Inc. 10/3/14 $135.10 $136.18 $122.05 8.5% (5.5%) 13.6% 3.4% Misc. Capital GoodsDE Deere & Company 2/7/14 $86.56 $87.59 $78.99 (2.5%) (3.3%) 22.6% 3.0% Construction & Agricul MachineryEMN Eastman Chemical Co. 2/6/15 $73.20 $74.67 $69.99 3.1% (2.8%) 8.0% 2.6% Chemical ManufacturingETN Eaton Corporation 12/31/11 $43.53 $45.52 $64.57 8.1% 63.0% 84.4% 3.5% Electronic Instruments & ControlsEMR Emerson Electric Co. 8/7/15 $49.19 $50.05 $56.18 7.7% 16.7% 4.3% 3.4% Scientific & Technical InstrumentsIBM IBM Corp. 10/2/15 $144.58 $149.54 $162.12 6.8% 28.3% 9.7% 3.5% Computer ServicesIP International Paper Co. 4/4/14 $45.81 $45.69 $45.68 7.8% 8.3% 21.1% 3.9% Paper & Paper ProductsIVZ Invesco Ltd. 6/6/14 $38.18 $37.82 $28.37 11.1% (20.1%) 14.5% 3.9% Investment ServicesMSFT Microsoft Corp. 12/31/11 $25.96 $26.94 $56.76 10.9% 138.9% 84.4% 2.5% Software & ProgrammingOXY Occidental Petroleum 1/9/15 $77.54 $75.96 $74.69 (1.2%) 4.5% 9.3% 4.1% Oil & Gas - IntegratedPEP PepsiCo, Inc. 12/31/11 $66.35 $66.66 $108.20 2.1% 84.9% 84.4% 2.8% Beverages (Non-Alcoholic)PG Procter & Gamble Co. 12/7/12 $70.29 $70.89 $85.27 0.7% 35.5% 61.5% 3.1% Personal & Household ProductsQCOM Qualcomm, Inc. 3/6/15 $71.51 $72.60 $61.35 14.5% (11.7%) 6.5% 3.5% Communications EquipmentSSI Stage Stores Inc. 8/7/15 $16.67 $16.58 $5.84 19.7% (61.8%) 4.3% 10.3% Retail (Apparel)TGT Target Corporation 12/31/11 $51.22 $51.28 $76.22 9.2% 67.9% 84.4% 3.1% Retail (Department & Discount)TXN Texas Instruments 4/5/13 $34.20 $34.80 $71.42 14.0% 124.2% 46.1% 2.1% SemiconductorsUNP Union Pacific Corp. 7/2/15 $96.66 $97.23 $93.01 6.6% (1.8%) 5.9% 2.4% RailroadsWEC WEC Energy Group 12/31/11 $34.96 $34.68 $64.67 (1.0%) 140.5% 84.4% 3.1% Electric UtilitiesWFC Wells Fargo & Co. 12/7/12 $33.23 $33.40 $47.97 1.4% 58.5% 61.5% 3.2% Regional BanksWSM Williams-Sonoma, Inc. 6/3/16 $53.25 $54.00 $52.83 1.3% (1.5%) 3.1% 2.8% Furniture & FixturesWYN Wyndham Worldwide Corp. 3/4/16 $76.04 $75.36 $77.19 8.4% 3.9% 10.8% 2.6% Hotels & MotelsData as of 7/26/2016. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Portfolio AlertTotal Return

Since Purchase

Portfolio Holdings

4 August 2016

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

$90,000

$100,000

$110,000

$120,000

$130,000

$140,000

$150,000

$160,000

$170,000

$180,000Growth of $100,000

AAII Dividend Investing Portfolio

Performance

Dividend Yield 3.1% 1.9%

Total Return

Income Return

Capital Gain/(Loss)

Total Return

Income Return

Capital Gain/(Loss)

July 5.2% 0.1% 5.1% 3.4% 0.0% 3.4%2016 YTD 11.3% 2.1% 9.2% 7.1% 1.0% 6.1%2015 (7.7%) 2.9% (10.6%) 0.4% 1.9% (1.5%)2014 12.2% 3.0% 9.2% 12.9% 2.0% 10.9%2013 36.5% 3.6% 32.9% 32.6% 2.3% 30.3%2012* 10.2% 3.5% 6.7% 14.3% 2.2% 12.1%From Inception 73.3% 22.1% 51.2% 84.1% 14.8% 69.3%Performance as of 7/27/2016

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

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

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

AAII Dividend Investing Portfolio

Performance of DI Portfolio

Fourteen DI holdings declared quar-terly dividends during July thus far, and two of those declarations represented an increase over the prior quarter’s payment: Cummins Inc. (CMI), which raised its payment 5.1%, and Occidental Petroleum (OXY), which increased its payment by 1.3%. While both increases were lower than the respective com-pany’s historical average increase. The hikes were welcome, considering the broader macroeconomic and industry conditions both companies face.

Portfolio NewsStrongest Stocks in July

Posting a 19.7% gain month-to-date, Stage Stores Inc. (SSI) was the top-per-forming stock in the DI portfolio for July. There was no company-specific news for Stage Stores in July, but the month saw investors go “risk on,” buying sectors, industries and companies that had been underperforming. The Dow Jones U.S. Apparel Retailers Index jumped 8.6% from the end of June through the close of July 26. The stock is yielding 10.3%

after falling nearly 68% over the last 12 months. The company is expected to re-port its next quarterly results on August 18. Analysts are forecasting earnings for the quarter of $0.05 per share, which would be a 2% increase from a year ago.

Qualcomm Inc. (QCOM) rose 14.5% in July following the release of its third-quarter results that surpassed consensus estimates and left investors feeling more confident about the firm’s prospects.

Qualcomm reported quarterly non-GAAP diluted earnings of $1.16 per share, 20% above the consensus expec-tations from I/B/E/S of $0.97 per share. Qualcomm had provided guidance of $0.90 to $1.00 for its adjusted earnings per share and revenue of $5.2 billion to $6.0 billion for the quarter. Quarterly revenue came in at $6.0 billion, match-ing the high end of company guidance. The company is focused on reducing its costs and is on track to realize at least $700 million in savings in its 2016 fiscal year, an increase of $100 million from its original estimate.

The company expected its mobile chip sales to be between 175 million and 195 million units, but saw sales rise to 201 million units. Qualcomm raised its fourth-quarter revenue projection to a range of $5.4 billion to $6.2 billion. Adjusted fourth-quarter earnings are now expected in the range of $1.05 to $1.15 per share. Mobile chip sales are expected to be in the range of 195 million to 215 million. Global 3G/4G devices sales are expected to grow at a low single-digit rate year over year.

Qualcomm has returned $5.9 billion in the first nine months of its current fiscal year through dividends and repurchases of common stock. Qualcomm increased its quarterly cash dividend by 10% in April, to $0.53 per share, and now trades with dividend yield of 3.5%. The current yield remains well above its five-year average of 2.0%. The dividend yield is also above where it stood one year ago at 3.1%.

Texas Instruments (TXN) strong quar-terly performance helped to lift its stock price 14.0% during July. The company

August 2016 5


reported second-quarter revenue of $3.27 billion, net income of $779 mil-lion and earnings per share of $0.76. Earnings surpassed the consensus esti-mate of $0.725 per share by 4.8%.

Revenue and earnings per share for the quarter were in the upper half of the firm’s guidance range. President and CEO Rich Templeton noted, “Compared with a year ago, demand for our products continued to be strong in the automotive market, and grew in the in-dustrial and communications equipment markets. Despite sequential growth, de-mand in the personal electronics market was down from a year ago.”

“Gross margin of 61.2% reflected the quality of our product portfolio, as well as the efficiency of our manufac-turing strategy, including the benefit of 300-millimeter analog production,” added Templeton.

Cash flow from operations came in at $4.5 billion for the trailing 12 months, while free cash flow for the trailing 12 months was up 7% from a year ago, to $3.9 billion.

Texas Instruments’ third-quarter out-look is for revenue in the range of $3.34 billion to $3.62 billion, and earnings per share are expected to be between $0.81 and $0.91.

As a result of its strong price perfor-mance, the stock’s dividend yield has dropped to 2.1%, below its 3.0% level one year ago and below its five-year average of 2.5%.

After incurring a 22% drop during the two trading days following the Brexit referendum, shares of Invesco Ltd. (IVZ) rebounded by 11.1% in July. CEO Martin Flanagan described the flows into and out of his company’s funds as being “consistent with what we’ve seen in other volatile markets, but not exceptional” at the end of June. Then in mid-July, Invesco said its assets under management declined 1.5% for all of June on a month-over-month basis. The data may have helped to reassure the markets. [Just before we went to press, the company revealed that it ended the second quarter with assets under management of $779.6 billion, which represents a year-over-year decrease of

3.0%.]Also helping Invesco was June’s broad-

er rebound in the stock market and the stock’s low valuation. Shares of Invesco ended June with a yield of 4.7% and a price-earnings ratio of 11.7. During the past five years, Invesco’s average high yield was 3.3% and its average low price-earnings ratio was 15.5. The stock remains cheap even after July’s rebound with a yield of 3.9% and a price-earn-ings ratio of 13.9 as of July 26, 2016.

Earlier this year, Invesco said it would it focus more on buybacks than divi-dends. The company has held true to its word. Following the Brexit vote, the company announced a $150 million accelerated share repurchase agree-ment. In its second-quarter earnings announcement, Invesco said 4.7 million shares were repurchased under this agreement, for a total of $120 million. The weighted average share price for the buybacks was $27.14.

On July 22, 2016, the company’s board of directors authorized an additional $1.5 billion for the share repurchase program with no stated expiration date.

Weakest Stocks in JulyDeere & Co. (DE) was the worst-per-

forming stock in the DI portfolio, losing 2.5% during July. Deere announced factory worker adjustments, inform-ing roughly 120 production employees at the East Moline, Illinois plant that they will be placed on indefinite layoff effective September 6. The factory’s workforce currently includes 1,050

production employees.Also, Piper Jaffray analyst Brett Wong

downgraded the stock. Wong’s report stated that he believes the current agricultural downturn is going to persist into 2017, marking the fourth consecu-tive down year. The report said, “After touring around the cornbelt, checking on the crop and discussing production expectations with growers, agronomists, and dealers, we believe growing condi-tions have been extremely favorable and expect another large U.S. corn crop this year. We expect grain prices to re-main weak, pressuring farmer profitabil-ity and resulting in further declines in farm machinery demand. The farm ma-chinery OEM stocks continue to trade at elevated multiples, expecting that this year will be trough demand with a re-covery next year. We believe that overall global farm machinery demand will be down next year, which does not support current expectations for the stocks, and that estimates and valuation multiples are at risk.”

Shares of AT&T Inc. (T) declined by 1.9% in July following a 7.3% gain in June. The relatively flat performance oc-curred as investors showed an appetite for greater risk-taking throughout the month.

AT&T’s second-quarter earnings failed to sway investors. Adjusted earnings of $0.72 per share essentially matched expectations. The company incurred net losses in video entertainment subscrib-ers and in total consumer mobility subscribers.

Recent earnings AnnouncementsDate Reported Expected Surprise

Ticker Company Reported Earnings Earnings %AAPL Apple Inc. Jul 26 $1.420 $1.384 2.6%T AT&T Inc. Jul 21 $0.720 $0.718 0.3%CAT Caterpillar Inc. Jul 26 $1.090 $0.959 13.7%IBM IBM Corp. Jul 18 $2.950 $2.886 2.2%MSFT Microsoft Corp. Jul 19 $0.690 $0.581 18.8%PEP PepsiCo, Inc. Jul 7 $1.350 $1.299 3.9%QCOM Qualcomm, Inc. Jul 20 $1.160 $0.967 20.0%TXN Texas Instruments Jul 25 $0.760 $0.725 4.8%UNP Union Pacific Corp. Jul 21 $1.170 $1.166 0.3%WEC WEC Energy Group Jul 27 $0.570 $0.560 1.8%WFC Wells Fargo & Co. Jul 15 $1.010 $1.008 0.2%WYN Wyndham Worldwide Corp. Jul 27 $1.400 $1.370 2.2%Data as of 7/27/2016. Sources: I/B/E/S and company releases.

6 August 2016

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

Ticker Company Paid Date Payable Div Yield Invest PlanAAPL Apple Inc. 2, 5, 8, 11 Thu Aug 4, 2016 Thu Aug 11, 2016 $0.5700 $2.28 2.4% -- --T AT&T Inc. 2, 5, 8, 11 Wed Jul 6, 2016 Mon Aug 1, 2016 $0.4800 $1.92 4.5% Yes YesCAT Caterpillar Inc. 2, 5, 8, 11 Mon Jul 18, 2016 Sat Aug 20, 2016 $0.7700 $3.08 3.7% Yes YesCMI Cummins Inc. 3, 6, 9, 12 Thu Aug 18, 2016 Thu Sep 1, 2016 $1.0250 � $4.10 3.4% Yes YesDE Deere & Company 2, 5, 8, 11 Tue Jun 28, 2016 Mon Aug 1, 2016 $0.6000 $2.40 3.0% Yes YesEMN Eastman Chemical Co. 1, 4, 7, 10 Mon Jun 13, 2016 Fri Jul 1, 2016 $0.4600 $1.84 2.6% Yes YesETN Eaton Corporation 3, 5, 8, 11 Wed Aug 3, 2016 Fri Aug 19, 2016 $0.5700 $2.28 3.5% Yes YesEMR Emerson Electric Co. 3, 6, 9, 12 Wed May 11, 2016 Fri Jun 10, 2016 $0.4750 $1.90 3.4% Yes YesIBM IBM Corp. 3, 6, 9, 12 Mon Aug 8, 2016 Sat Sep 10, 2016 $1.4000 $5.60 3.5% Yes YesIP International Paper Co. 3, 6, 9, 12 Thu Aug 11, 2016 Thu Sep 15, 2016 $0.4400 $1.76 3.9% Yes YesIVZ Invesco Ltd. 3, 6, 9, 12 Wed May 11, 2016 Fri Jun 3, 2016 $0.2800 � $1.12 3.9% Yes YesMSFT Microsoft Corp. 3, 6, 9, 12 Tue Aug 16, 2016 Thu Sep 8, 2016 $0.3600 $1.44 2.5% Yes YesOXY Occidental Petroleum 1, 4, 7, 10 Wed Sep 7, 2016 Fri Oct 14, 2016 $0.7600 � $3.04 4.1% Yes YesPEP PepsiCo, Inc. 1, 3, 6, 9 Wed Aug 31, 2016 Fri Sep 30, 2016 $0.7525 $3.01 2.8% Yes YesPG Procter & Gamble Co. 2, 5, 8, 11 Wed Jul 20, 2016 Mon Aug 15, 2016 $0.6695 $2.68 3.1% Yes YesQCOM Qualcomm, Inc. 3, 6, 9, 12 Mon Aug 29, 2016 Wed Sep 21, 2016 $0.5300 $2.12 3.5% Yes YesSSI Stage Stores Inc. 3, 6, 9, 12 Thu May 26, 2016 Wed Jun 15, 2016 $0.1500 $0.60 10.3% -- --TGT Target Corporation 3, 6, 9, 12 Mon Aug 15, 2016 Sat Sep 10, 2016 $0.6000 � $2.40 3.1% Yes YesTXN Texas Instruments 2, 5, 8, 11 Thu Jul 28, 2016 Mon Aug 15, 2016 $0.3800 $1.52 2.1% Yes YesUNP Union Pacific Corp. 3, 6, 9, 12 Thu May 26, 2016 Thu Jun 30, 2016 $0.5500 $2.20 2.4% Yes YesWEC WEC Energy Group 3, 6, 9, 12 Wed Aug 10, 2016 Thu Sep 1, 2016 $0.4950 $1.98 3.1% Yes YesWFC Wells Fargo & Co. 3, 6, 9, 12 Wed Aug 3, 2016 Thu Sep 1, 2016 $0.3800 $1.52 3.2% Yes YesWSM Williams-Sonoma, Inc. 3, 6, 9, 12 Wed Jul 20, 2016 Fri Aug 26, 2016 $0.3700 $1.48 2.8% -- --WYN Wyndham Worldwide Corp. 3, 6, 9, 12 Wed May 25, 2016 Fri Jun 10, 2016 $0.5000 $2.00 2.6% -- --

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

Data as of 7/26/2016.

Quarterly Dividend PaymentPaymentAmount

Dividend Payments

The stock’s yield remains low relative to its historical basis. The dividend yield is currently 4.5%, whereas the five-year average yield is 5.4%. On absolute basis, the yield looks more attractive, with AT&T ranking among the 20 highest-yielding stocks in the S&P 500 index.

Occidental Petroleum (OXY) fell 1.2% in July, finishing as the third-weakest performer in the DI portfolio. The com-pany’s share price rose with the price of oil in the preceding months, but saw its market value slip as oil fell roughly 18% from its peak price of around $51 a bar-rel in June to about $42 in July.

Occidental maintained a strong enough cash flow to declare a surprise dividend increase that was announced mid-July. The quarterly dividend of $0.76 was 1.4% higher than the previ-ous quarter’s payment. The dividend increase came as most energy resource companies have slashed their dividends

as they burn through their cash reserves due to the drop in the price of oil.

Although Occidental’s current 4.1% dividend yield is below its mark of 4.3% one year ago, it is above its five-year average of 3.0%. Occidental remains in a better position than other compet-ing companies, as over 350,000 energy jobs have been lost worldwide, but it is still unable to shake investors’ concerns about the lack of short-term opportuni-ties within the energy resources market. Early in July, Occidental’s recently ap-pointed CEO, Vicki Hollub, reiterated her company’s pledge not to lay off workers.

WEC Energy Group (WEC) declined 1.0% in July following June’s 7.0% rise. As was the case with AT&T, WEC Energy’s relatively flat performance oc-curred as investors sought riskier stocks. Unlike previous months, there was not a noticeable change in WEC Energy’s stock price or in the price of other utility

stocks in reaction to movement in the benchmark 10-year Treasury’s yield.

Also like AT&T, WEC Energy’s valuation is elevated. The stock’s yield of 3.1% compares to a five-year average low of 3.0%. Its price-earnings ratio of 25.0 compares to a five-year average high of 19.6.

Near the end of July, WEC Energy reported its second-quarter results. The company earned $0.57 per share on an adjusted basis, topping expectations by $0.01 per share, but earnings were still down 1% compared to the same period a year prior. Both electricity sales and natural gas deliveries rose. A near dou-bling of the number of “cooling degree days” (days when the temperature rises to a level where a building needs to be cooled) helped to boost energy usage by customers. ▪

August 2016 7


Est Consec- PayoutEPS Div First utive Ratio:

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

Ticker (TTM) Current Ago Avg (3-5 Yr) (5 Yr) Paid Raised Month Avg Month) Assets (Mil)AAPL 10.8 2.4% 1.7% na 9.1% na 2012 4 23% 17% 21% 57% $533,173T 18.3 4.5% 5.5% 5.4% 9.5% 2.3% 1984 32 82% 137% 67% 69% $264,359CAT 39.5 3.7% 3.9% 2.6% 8.9% 11.6% 1933 22 164% 43% 66% 81% $45,946CMI 16.2 3.4% 2.9% 2.0% (0.4%) 32.0% 1948 7 49% 28% 46% 53% $20,135DE 15.9 3.0% 2.5% 2.4% 1.0% 15.7% 1971 11 48% 27% 159% 88% $24,487EMN 11.3 2.6% 2.2% 2.0% 6.5% 13.2% 1994 6 28% 26% 27% 73% $10,668ETN 15.7 3.5% 3.7% 3.1% 8.0% 15.3% 1923 7 54% 45% 47% 51% $29,069EMR 19.4 3.4% 3.7% 3.0% 5.7% 7.0% 1947 59 65% 53% 54% 65% $35,777IBM 13.2 3.5% 2.4% 2.2% 2.9% 14.9% 1915 21 32% 28% 26% 87% $156,138IP 19.8 3.9% 3.5% 3.2% 6.4% 32.6% 1946 4 73% 63% 79% 86% $18,552IVZ 13.9 3.9% 2.8% 2.7% 10.3% 19.6% 1994 12 53% 41% 48% 65% $11,855MSFT 27.0 2.5% 3.9% 3.1% 8.5% 17.6% 2003 4 68% 54% 45% 63% $445,924OXY na 4.1% 4.3% 3.0% 181.4% 15.1% 1975 14 na na (257%) 43% $56,906PEP 30.5 2.8% 3.0% 3.0% 7.1% 7.9% 1952 44 80% 58% 52% 83% $156,897PG 28.5 3.1% 3.5% 3.1% 5.9% 7.5% 1890 60 81% 65% 59% 54% $228,387QCOM 18.0 3.5% 3.1% 2.0% 11.3% 20.1% 2003 14 57% 35% 45% 40% $89,495SSI na 10.3% 3.4% 2.5% na 18.3% 2005 6 na 140% (34%) 55% $152TGT 14.4 3.1% 2.7% 2.6% 9.3% 19.0% 1967 45 41% na 43% 69% $44,962TXN 24.9 2.1% 3.0% 2.5% 10.0% 23.4% 1962 12 49% 46% 39% 37% $66,500UNP 18.1 2.4% 2.3% 2.1% 7.3% 27.4% 1899 5 43% 33% 60% 63% $76,861WEC 25.0 3.1% 3.7% 3.3% 6.8% 16.8% 1939 13 70% 57% 244% 70% $20,659WFC 11.8 3.2% 2.6% 2.6% 8.7% 49.1% 1939 6 37% 28% 52% 89% $244,308WSM 15.8 2.8% 1.7% 2.1% 8.8% 19.3% 2006 6 42% 38% 36% 49% $4,822WYN 15.4 2.6% 2.6% 1.9% na 28.5% 2007 7 na 31% 0% 92% $8,621Data as of 7/26/2016. Sources: AAII Stock Investor Pro, Thomson Reuters, I/B/E/S and company releases.

Payout Ratio:Dividend Yield EPS

Dividend Analysis

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

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

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

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

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

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

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

Dividend Yield—1 Year Ago: The stock’s

dividend yield (dividends divided by price) from one year ago. 5 Year Average: The stock’s average dividend yield over the past five years.

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

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

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

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

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

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

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

Definitions of Terms Used in Tables

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

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

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

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

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

8 August 2016

Emerson Electric is a global diversified manufacturing and technology company providing products and services to the industrial, commercial and consumer markets. Emerson Electric has approximately 111,000 employees and 205 manu-facturing facilities worldwide.

The company operates in five primary business segments: process management (37% of fiscal-2015 sales), industrial automation (18%), network power (19%), climate technolo-gies (18%) and commercial and residential solutions (8%). In fiscal 2015, the company generated roughly 48% of revenues in the U.S. and Canada, with 22% coming from Asia, 18% from Europe, 6% from Latin America and the remainder from the Middle East and Africa.

Why Own EMR?In an attempt to jump-start growth, in June 2015 the com-

pany announced plans to spin off or sell its network power business, which accounted for about 19% of total sales in fiscal 2015. Sales in this segment have continually declined. Emerson expects to complete the spin-off/sale by the end of fiscal 2016. Emerson also announced that it was exploring “strategic alternatives” for its motor and drives, power gen-eration and remaining storage businesses and expects these strategic moves to be substantially completed within the next several quarters. With the proceeds of the sale/spin-off, EMR is considering acquisitions.

The reorganized Emerson will have a more focused and nimble portfolio of businesses—industrial automation, process management and commercial and residential heat-ing and air conditioning—with leadership positions in high-growth end markets. The company’s goal is to drive profitabil-ity and increase shareholder value.

The company bundles its products into total systems. This allows Emerson to customize solutions for customers as their own needs evolve. While the global macroeconomic environ-ment will continue to challenge Emerson, the company said that demand levels have begun to stabilize and order trends

have supported the company’s underlying sales forecasts in the third and fourth quarters of 2016. For the third quarter of 2016, EMR expects adjusted earnings of $0.85 per share, above the I/B/E/S estimate of $0.84 per share.

For full-year 2016 Emerson expects adjusted earnings of $3.05 to $3.25 per share, above the I/B/E/S consensus esti-mate range of $3.00 to $3.15 per share.

Dividend AnalysisEMR currently trades with a 3.4% dividend yield, above

its five-year average of 3.0%. Emerson Electric has paid a dividend every year since 1947 and has increased its annual payout for 59 consecutive years. On November 3, 2015, the company raised its quarterly cash dividend by 1.1%. We will be monitoring Emerson’s dividend policy moving forward, given the expected decline in earnings following the proposed spin-off and realignment.

Emerson has a current earnings payout ratio of 64.8%, which is above the five-year average of 52.5%. The company currently has a free-cash-flow payout ratio of 54.3%, which is above the five-year average of 47.7%. If Emerson were to maintain its dividend following the spin-off of its network power business, these payout ratios would both rise signifi-cantly above historical norms. However, EMR has demonstrat-ed its ability to generate free cash flow in a difficult macro backdrop; second-quarter 2016 free cash flow represented 12.5% of sales.

Emerson has increased its dividend payment at an an-nualized rate of 7.0% a year over the last five years. During 2015, Emerson returned $3.8 billion to shareholders through dividends and share repurchases.

During the first quarter of 2016, Emerson repurchased 12 million shares for $554 million. For fiscal 2016, Emerson plans to spend $1 billion on repurchases.

RisksEmerson’s largest segment, process management, has 43%

of its revenue tied to the oil and gas industry, and the current volatility in the marketplace has negatively impacted sales.

Second-quarter 2016 revenue declined 8.7% compared to the second quarter of 2015. Quarterly revenue was negativ-ity impacted by headwinds from lower oil prices, a global slowdown in industrial capital spending, weakening demand in emerging markets and the strength of the U.S. dollar.

Emerson expects difficult conditions to persist in its served markets during 2016. Underlying sales for 2016 are expected to decline 2% to 5%, excluding negative currency translation of approximately 1% and a 2% deduction from completed divestitures.

While the company is working hard to reorganize its structure, the process could be difficult or take longer than anticipated. Restructuring costs are already expecting to be between $70 million and $80 million in 2016. Extensive re-structuring can make year-over-year comparisons difficult. ▪

emerson electric Co. (eMR)

Bullish Factors• Planned divestitures will allow focus on higher-growth,

higher-margin businesses• History of returning value to shareholders through

dividend increases and share repurchases• Expanding presence in emerging markets

Bearish Factors• Transaction and corporate rationalization costs will

weigh on near-term earnings• High exposure to energy sector hurting operations due

to current marketplace volatility• International operations mean exposure to foreign

currency fluctuations

August 2016 9


eMR $56.18 ($56.82 - $41.25)

Addition Alert Date: 8/7/2015Price at Alert: $49.19 Risk Index: 1.48Market Cap (Million): $35,776.8Avg Daily Dollar Volume (Million): $211.3Primary Sector: TechnologyPrimary Industry: Scientific & Technical Instruments

Indicated Annual Dividend: $1.90 Multiples Current 9/2015 9/2014 9/2013 9/2012 9/2011Latest Dividend Increase: Date Dividend Yield (%): Avg 3.4 3.6 2.7 2.7 3.3 2.7Latest Dividend Increase: % 1.1% Dividend Yield (%): High 4.5 3.0 3.1 3.7 3.5Dividend Yield: Current 3.4% Dividend Yield (%): Low 3.0 2.4 2.3 3.0 2.2Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 19.4 13.1 21.0 22.3 18.2 15.6Dividend Paid Since: 1947 Price/Earnings (Industry) 27.4 24.2 25.5 22.5 19.0 18.1Number of Years of Div Increases: 59 Price/Book Value 4.7 4.4 4.4 4.2 3.5 3.7Direct Invest Option: Yes Price/Sales 1.7 1.6 1.8 1.8 1.5 1.6DRIP Plan: Yes Ratios Current 9/2015 9/2014 9/2013 9/2012 9/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 64.8 46.7 56.1 58.7 59.4 41.7

$0.4750 Payout Ratio: FCFPS (%) 54.3 68.6 41.2 39.6 49.0 39.9$0.4750 Gross Margin (%) 40.2 40.4 41.4 40.3 40.0 39.5$0.4750 Operating Margin (%) 13.9 14.7 14.4 13.8 13.5 15.9$0.4700 Operating Margin (%) (Ind) 6.6 5.0 5.9 8.0 9.3 8.5$0.4700 Net Margin (%) 9.2 12.2 8.8 8.1 8.1 10.2$0.4700 ROE (%) 24.1 29.8 20.7 19.2 19.0 24.6

Rel Strgth ROE (%) (Industry) 9.2 10.2 9.5 8.6 8.8 10.9Rank ROA (%) 8.7 11.7 8.8 8.3 8.3 10.6

4 Week 76% Current Ratio 1.2 1.3 1.3 1.4 1.4 1.413 Week 48% Liabilities to Assets (%) 64.7 63.4 58.1 57.2 56.8 56.426 Week 75% Liab to Assets (%) (Ind) 45.5 42.3 44.7 40.3 41.8 39.152 Week 72% Asset Turnover 0.9 1.0 1.0 1.0 1.0 1.0

Financial Statements TTM 9/2015 9/2014 9/2013 9/2012 9/2011Growth 5 Year Sales ($M) 20,958 22,304 24,537 24,669 24,412 24,222

Dividends 7.0% Gross Income ($M) 8,422 9,012 10,158 9,952 9,768 9,557Sales 1.2% Depreciation ($M) 203 214 225 220 241 261Net Income 4.6% Unusual/Extra ($M) 217 211 563 606 711 100EPS Basic 6.9% Operating Income ($M) 2,910 3,271 3,542 3,413 3,289 3,853EPS Dil Cont 9.0% Interest Expense ($M) 206 200 194 218 224 246

Pretax Income ($M) 2,903 4,161 3,348 3,196 3,115 3,631SUE Score Net Income ($M) 1,930 2,710 2,147 2,004 1,968 2,480

1.60 Operating Cash Flow ($M) 2,806 2,529 3,692 3,649 3,053 3,2334.90 Investing Cash Flow ($M) (398) 591 (1,159) (789) (806) (848)

Annual Financing Cash Flow ($M) (2,258) (2,948) (2,559) (1,933) (1,899) (1,887)9/2017 Capital Expenditures ($M) 573 685 767 678 665 647

23 Net Cash Flow ($M) 66 (95) (126) 908 315 460$3.28 EPS Basic ($) 2.92 4.03 3.07 2.79 2.69 3.31$3.30 EPS Diluted Cont ($) 2.90 4.01 3.05 2.77 2.68 3.26

# Rev Up 2 EPS DC Year/Year Chg (%) (23.6) 31.4 10.0 3.5 (17.7) 25.2 # Rev Down 7 Dividends/Share ($) 1.89 1.88 1.72 1.64 1.60 1.38Three Mos. Ago $3.32 Dividend Year/Year Chg (%) 5.0 9.3 4.9 2.5 15.9 3.0Year/Year Chg 6.8% Free Cash Flow/Share ($) 3.48 2.74 4.18 4.14 3.27 3.45

3/2016 12/2015 9/2015 6/2015 Total Cash ($M) 3,322 3,054 3,149 3,275 2,367 2,052$0.57 $0.54 $0.95 $0.84 $2.90 Goodwill/Intangibles ($M) 8,079 8,179 8,871 9,181 9,864 10,740$1.42 $0.76 $0.59 $1.04 $3.80 Total Assets ($M) 21,764 22,088 24,177 24,711 23,818 23,861

Long-Term Debt ($M) 4,062 4,289 3,559 4,055 3,787 4,3243/2016 12/2015 9/2015 6/2015 Total Total Liabilities ($M) 14,072 14,007 14,058 14,126 13,523 13,462$7.68 $7.25 $8.58 $8.27 $31.77 Book Value/Share ($) 11.98 12.00 14.45 14.75 14.09 13.89$7.93 $8.08 $9.78 $9.02 $34.81 Avg Shares Outst'g (M) 642.00 673.30 700.20 717.70 730.60 748.50

Sources: AAII Stock Investor Pro, Thomson Reuters and I/B/E/S. Data as of 7/26/2016.

1.06

3 Year

Jun 10, 2016Mar 10, 2016Dec 10, 2015

1.06

Sep 10, 2015

Rel Strgth

1.14

3% (3.5% - 2.6%)

0.96

Emerson Electric Co. is engaged in offering technology and engineering together that provides solutions for customers in industrial, commercial, and consumer markets around the world. The company currently operates through five business segments: process management, industrial automation, network power, climate technologies, and commercial and residential solutions. However, the company plans to spin off the network power business and is exploring strategic alternatives for its motors and drives, power generation to focus on its process management, industrial automation, and commerical and residential solutions businesses.

Aug 4, 2015

May 3, 2016Feb 2, 2016Nov 3, 2015 Nov 10, 2015

Feb 10, 2016May 11, 2016

Jun 10, 2015Mar 10, 2015

Nov 3, 2015

Aug 12, 2015

(23.7%)

EPS$0.66

May 5, 2015Feb 3, 2015 Feb 11, 2015

13%0%30%11%

Stock

% Surp4.4%

10.7%

Index

May 13, 2015

(23.6%)

5.5%(3.0%)11.3%14.3%14.4%

5.0%(13.1%)

TTM

Gain

(26.8%)

$0.56

Est Surprise

EPS Estimates# of Estimates

Feb 2, 2016May 3, 2016

Year Ago

TTM

TTMSales/Sh (Qtr)

Quarterly

EPS (Qtr)

Year Ago

CurrentMonth Ago

6/201623

0.0%

Annual9/2016

$0.85 $3.08$0.84 $3.07

(23.4%)

25

06

$0.85

0

$3.107

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Aug 2011 Aug 2012 Aug 2013 Aug 2014 Aug 2015$0

$10

$20

$30

$40

$50

$60

$70

$80

Div

iden

d Yi

eld Share Price

10 August 2016

PepsiCo is a global food and beverage company, making, marketing, selling and distributing 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 2015, the company had 22 billion-dol-lar brands (in terms of annual revenues): 14 beverage brands and eight food brands.

The company is organized into six reportable segments: Frito-Lay North America (22% of 2015 sales, 39% of division operating profit before corporate overhead), Quaker Foods North America (4.0% of sales, 5.1% of operating profit), Latin America Foods (13% of sales, 11% of operating profit), PepsiCo Americas Beverages (33% of sales, 25% of operating profit), Europe (17% of sales, 11% of operating profit), and Asia, Middle East and Africa (10% of sales, 9.5% of operating profit).

Why Own PEP?While PepsiCo is in second place, behind Coca-Cola Co.

(KO), in the global cola market, it is the world’s largest snack food company through its Frito-Lay division, with estimated global market share of more than 25%. PepsiCo controls around 64% of the U.S. salty snack market, 60% of the market in Brazil and 46% in the U.K. The company is also the leader in the U.S. non-carbonated beverage market, with brands such as Gatorade and Tropicana.

PepsiCo generates roughly 50% of its revenue outside the U.S. and continues to invest in developing and emerging mar-kets, which have significant growth opportunities due to their relatively low per-capita consumption and rising income lev-els. The company expects, going forward, that two-thirds of revenues will come from emerging and developing markets.

In 2013, PepsiCo extended its restructuring program, which is expected to save the company $5 billion through 2019. The company is estimating an additional $1 billion of productivity gains in fiscal 2016. As a result, the company’s core operating

margin has improved 115 basis points over the first half of fiscal 2016.

PepsiCo has also responded to trends in health and well-ness by eliminating trans fats from many of its snack foods and introducing “good for you” foods under the Quaker Oats brand. These products now account for nearly 20% of total revenue.

Over the last five years, sales have grown at an average annual rate of 1.7% while earnings have declined, on average, by 1.3% a year. In 2015, PepsiCo saw organic revenue grow by 5% and core constant currency earnings grow by 10%. Analysts are projecting pro forma earnings to grow by 29.6% this year and by an average of 7.1% over the next three to five years. The company is projecting core constant-currency earnings per share growth of 9% in fiscal 2016.

Dividend AnalysisPEP shares currently yield 2.8%, based on an indicated divi-

dend of $3.01 per share. This is below the five-year average yield of 3.0% and is at the low end of the five-year average high-low range (2.7% to 3.4%). PepsiCo has been paying a dividend since 1952 and has increased its annual dividend in each of the last 44 years. On May 3, the company declared a 7.1% increase in its annual dividend. Over the last five years, the dividend rate has been rising, on average, by 7.9%. PepsiCo’s strong operating cash flows ($10.6 billion in 2015) and free cash flows ($8.1 billion in 2015) should allow it to continue returning capital to investors. In fiscal-year 2015, the company returned $9 billion to shareholders via dividends and share repurchases. For fiscal 2016, the company expects to return a total of $7 billion to investors through dividends and share buybacks and is forecasting cash from operations of $10 billion and free cash flow of more than $7 billion.

RisksThe carbonated soft drink business has been hurt by chang-

ing consumer preferences and rising health consciousness.As the U.S. dollar has strengthened relative to many global

currencies, PepsiCo has been facing increased negative currency impacts. Foreign currency fluctuations negatively impacted reported earnings growth by 11% for fiscal 2015. For fiscal 2016, the company is estimating a negative four per-centage point impact to revenue and earnings from currency translation.

PepsiCo has been under pressure from activist investors to spin off its beverage business, which management has flatly rejected. The company estimates that its strategy of operat-ing both a beverage and snack food portfolio generates $800 million to $1 billion in synergies.

Commodity prices make up a large percentage of the company’s costs, and while PepsiCo is able to hedge roughly three-quarters of its raw material costs, it is still vulnerable to commodities price fluctuations as well as rising labor costs. ▪

PepsiCo, Inc. (PeP)

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

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 are having a measurable negative

impact on sales and earnings

August 2016 11


Addition Alert Date: 12/31/2011Price at Alert: $66.35 Risk Index: 1.01Market Cap (Million): $156,897.0Avg Daily Dollar Volume (Million): $510.9Primary Sector: Consumer Non-CyclicalPrimary Industry: Beverages (Non-Alcoholic)

Indicated Annual Dividend: $3.01 Multiples Current 12/2015 12/2014 12/2013 12/2012 12/2011Latest Dividend Increase: Date Dividend Yield (%): Avg 2.8% 3.1 2.9 2.9 3.1 3.1Latest Dividend Increase: % 7.1% Dividend Yield (%): High 3.6 3.3 3.3 3.4 3.5Dividend Yield: Current 2.8% Dividend Yield (%): Low 2.7 2.5 2.6 2.9 2.8Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 30.5 24.5 20.8 18.0 17.3 16.2Dividend Paid Since: 1952 Price/Earnings (Industry) 29.9 26.0 31.4 29.1 18.5 19.0Number of Years of Div Increases: 44 Price/Book Value 12.6 11.0 7.6 4.9 4.7 5.0Direct Invest Option: Yes Price/Sales 2.5 2.1 2.0 1.8 1.6 1.5DRIP Plan: Yes Ratios Current 12/2015 12/2014 12/2013 12/2012 12/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 80.0 74.5 58.8 51.3 53.7 49.6





Dividends 7.9% Gross Income ($M) 34,417 34,672 35,799 35,172 34,201 34,911Sales 1.7% Depreciation ($M) 71 75 92 110 119 133Net Income (2.9%) Unusual/Extra ($M) 1,607 1,589 418 173 295 712EPS Basic (1.4%) Operating Income ($M) 8,239 8,353 9,581 9,705 9,112 9,633EPS Dil Cont (1.3%) Interest Expense ($M) 1,033 953 888 812 899 856


2.00 Operating Cash Flow ($M) 10,740 10,580 10,506 9,688 8,479 8,9444.50 Investing Cash Flow ($M) (5,019) (3,569) (4,937) (2,625) (3,005) (5,618)

Annual Financing Cash Flow ($M) (3,479) (3,828) (8,264) (3,789) (3,306) (5,135)12/2017 Capital Expenditures ($M) 2,845 2,758 2,859 2,795 2,714 3,339

22 Net Cash Flow ($M) 2,084 2,962 (3,241) 3,078 2,230 (1,876)$5.16 EPS Basic ($) 3.58 3.71 4.31 4.37 3.96 4.08$5.12 EPS Diluted Cont ($) 3.55 3.67 4.27 4.32 3.92 4.03

# Rev Up 19 EPS DC Year/Year Chg (%) (17.9) (13.9) (1.3) 10.1 (2.8) 3.0 # Rev Down 2 Dividends/Share ($) 2.86 2.76 2.53 2.24 2.13 2.03Three Mos. Ago $5.12 Dividend Year/Year Chg (%) 7.2 9.1 13.1 5.3 5.1 7.1Year/Year Chg 8.4% Free Cash Flow/Share ($) 5.47 5.32 5.07 4.47 3.70 3.56


Long-Term Debt ($M) 30,847 29,213 23,821 24,333 23,544 20,5686/2016 3/2016 12/2015 9/2015 Total Total Liabilities ($M) 60,463 57,744 53,071 53,199 52,344 52,294

$10.67 $8.20 $12.81 $11.13 $42.81 Book Value/Share ($) 8.59 8.22 11.65 15.84 14.40 13.14$10.79 $8.23 $13.38 $11.43 $43.82 Avg Shares Outst'g (M) 1,443.00 1,469.00 1,509.00 1,541.00 1,557.00 1,576.00


3% (3.4% - 2.7%)

1.020.981.08

Sep 30, 2016Jun 30, 2016Mar 31, 2016

0.99

Mar 2, 2016Jun 1, 2016Aug 31, 2016

Jul 16, 2015

29.6%

9.1%

13%

Stock

(1.3%)(4.1%)

7.2%

Sep 2, 2015

Est Surprise EPS

(18.2%)

$1.35

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.

Nov 19, 2015

3 Year

Jan 7, 2016

Rel StrgthIndex

May 5, 2015 Jun 3, 2015

Jul 14, 2016May 3, 2016Feb 4, 2016

Dec 2, 2015

6%5%12%

Gain

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

$0.89Jul 7, 2016

EPS (Qtr)

Apr 18, 2016

267.0%

Quarterly9/2016EPS Estimates

$1.35

CurrentMonth Ago

# of Estimates

TTM

May 3, 2016

2

17

$1.35$1.31

214

(17.9%)

(4.8%)(20.4%)

(2.2%)

% Surp3.9%

(2.2%)

$4.73

Sep 30, 2015Jun 30, 2015

$4.76

Annual12/2016

22

17$4.73

9.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


$20

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$60

$80

$100

$120

Div

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PeP $108.20 ($110.94 - $76.48)

12 August 2016

Texas Instruments (TI) is a global semiconductor design and manufacturing company with design, manufacturing or sales operations in more than 30 countries and it sells its chips to electronics designers and manufacturers globally. It operates in two primary segments: analog (62% of 2016 second-quar-ter sales; 69% of operating profit) and embedded processing (23% of sales; 17% of operating profit). A third segment called “other” (14% of sales; 14% of operating profit) includes DLP

projector products, calculators, custom ASIC products and royalties.

Texas Instruments is the world’s largest maker of analog chips. Analog semiconductors are used to condition, amplify or convert signals such as sound, temperature, pressure or images to data that can be processed by other semiconduc-tors. Analog semiconductors are also used to manage power in every electronic device, whether plugged into a wall or running off a battery.

Texas Instruments also sells custom semiconductor prod-ucts, which are designed for a specific customer for a spe-cific application and are sold only to that customer. The life cycles of custom products are determined by end-equipment upgrade cycles and can be as short as 12 to 24 months. It also sells catalog semiconductor products through both distribu-tion and direct channels.

Why Own TXN?Texas Instruments’ broad range of offerings that are shipped

worldwide enables it to supply over 100,000 customers, so it is not dependent on one or a few very significant customers for sales. Its largest customer accounts for 11% of revenue. In addition to its leading position in analog chips, Texas Instruments is the world’s second-largest maker of embed-ded processing products, which include digital signal proces-sors and microcontrollers. With an 18% market share, Texas Instruments is number one in analog chips.

Texas Instruments offers hundreds of products, with the largest product accounting for only 1% of revenue.

Texas Instruments targets keeping more than 80% of its cash onshore to ensure availability for the business or to distribute to shareholders.

Dividend AnalysisTexas Instruments is committed to returning 100% of free

cash to its shareholders through dividends and share repur-chases. The company currently trades with a 2.1% dividend yield, which is below its five-year average yield of 2.5%. The company has paid a dividend every year since 1962 and in-creased its annual payout for 12 consecutive years.

In recent years, Texas Instruments has been aggressive in increasing its dividend, with a five-year average growth rate of 23.4%. TI raised its dividend 11.8% last October. The company targets a dividend payout of approximately 50% of the trailing four years’ average free cash flow.

Texas Instruments has a current earnings payout ratio of 49.4%, which is above its five-year average of 45.7%. The company currently has a free-cash-flow payout ratio of 38.9%, which is also slightly above its five-year average of 34.1%. The company generated strong operating cash flows of over $4.2 billion in 2015, while capital expenditures were $551 million. Free cash flow as a percentage of revenue is in the top 15% of S&P 500 companies.

Given its strong free cash flows and earnings coverage, we expect the company to continue increasing its dividend payments going forward as well as repurchasing shares (the company spent $2.7 billion for share repurchases during 2015 and $2.8 billion during 2014).

Texas Instruments is in the top 10% of S&P 500 companies when it comes to returning cash to shareholders (including dividends and share repurchases), according to the company.

RisksTI’s strong price appreciation has pushed up its price-

earnings ratio to 24.9 times trailing earnings and 23.4 times 2016 forecasted earnings. This is up from 18.0 one year ago and above the five-year average of 18.6. It is also above the industry median ratio of 22.5.

The semiconductor industry is highly cyclical. Its cyclicality is exacerbated by companies that typically hold smaller invento-ries during economic downturns and larger inventories during economic expansion, causing many semiconductor firms to go through large variances in product orders during changing market cycles. Additionally, although the embedded process-ing sector is very promising, profits and margins remain low and success is far from guaranteed. The semiconductor indus-try is also highly fragmented and deeply competitive.

The life cycle of product designs varies: While catalog prod-ucts—which are designed for use by many customers or many applications—can sell for many years, other products have a much shorter cycle. Application-specific standard products may only sell for 12 to 24 months. ▪

Texas Instruments (TXN)

Bullish Factors• Aggressive dividend increases over the past few years

and strong share repurchase program• Leader in lucrative analog chip market• Focus is on its primary growth segments (analog chips

and embedded processors)

Bearish Factors• Operates in a highly cyclical and competitive

marketplace• Valuation starting to get rich relative to historical norms• Uncertainty of its investment in embedded processing

paying off

August 2016 13


TXN $71.42 ($72.58 - $43.49)

Addition Alert Date: 4/5/2013Price at Alert: $34.20 Risk Index: 1.54Market Cap (Million): $66,499.9Avg Daily Dollar Volume (Million): $422.1Primary Sector: TechnologyPrimary Industry: Semiconductors

Indicated Annual Dividend: $1.52 Multiples Current 12/2015 12/2014 12/2013 12/2012 12/2011Latest Dividend Increase: (Date) Dividend Yield (%): Avg 2.1% 2.7 2.6 2.8 2.4 1.8Latest Dividend Increase: (%) 11.8% Dividend Yield (%): High 3.2 3.1 3.4 2.8 2.3Dividend Yield: Current 2.1% Dividend Yield (%): Low 2.3 2.2 2.4 2.1 1.5Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 24.9 18.3 18.7 19.8 20.0 16.2Dividend Paid Since: 1962 Price/Earnings (Industry) 22.5 21.7 20.7 22.2 18.7 16.7Number of Years of Div Increases: 12 Price/Book Value 7.3 5.4 4.9 3.8 3.1 3.2Direct Invest Option: Yes Price/Sales 5.6 4.1 3.9 3.4 2.7 2.6DRIP Plan: Yes Ratios Current 12/2015 12/2014 12/2013 12/2012 12/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) 49.4 49.0 47.6 55.3 47.2 29.3





Dividends 23.4% Gross Income ($M) 7,568 7,560 7,416 6,353 6,351 6,722Sales (1.4%) Depreciation ($M) -- 319 319 323 325 87Net Income (1.6%) Unusual/Extra ($M) 100 22 (51) (182) 372 290EPS Basic 1.5% Operating Income ($M) 4,391 4,274 3,947 2,832 1,973 2,992EPS Dil Cont 1.5% Interest Expense ($M) 87 90 94 95 85 42


4.40 Operating Cash Flow ($M) 4,455 4,268 3,892 3,384 3,414 3,2561.90 Investing Cash Flow ($M) 352 (302) (377) (3) (1,039) (6,172)

Annual Financing Cash Flow ($M) (4,756) (4,165) (3,943) (3,170) (1,951) 2,58912/2017 Capital Expenditures ($M) 585 551 385 412 495 816

32 Net Cash Flow ($M) 51 (199) (428) 211 424 (327)$3.34 EPS Basic ($) 2.99 2.86 2.61 1.94 1.53 1.91$3.25 EPS Diluted Cont ($) 2.86 2.82 2.57 1.91 1.51 1.88

# Rev Up 25 EPS DC Year/Year Chg (%) 46.4 9.7 34.7 26.7 (19.8) (28.4) # Rev Down 2 Dividends/Share ($) 1.48 1.40 1.24 1.07 0.72 0.56Three Mos. Ago $3.26 Dividend Year/Year Chg (%) 45.1 12.9 15.9 48.6 28.6 14.3Year/Year Chg 9.4% Free Cash Flow/Share ($) 3.81 3.61 3.29 2.71 2.58 2.12


Long-Term Debt ($M) 2,975 3,120 3,630 4,158 4,186 4,2116/2016 3/2016 12/2015 9/2015 Total Total Liabilities ($M) 5,731 6,284 6,982 8,131 9,060 9,545$3.22 $2.99 $3.15 $3.35 $12.71 Book Value/Share ($) 9.81 9.66 9.76 9.84 9.68 9.52$3.11 $3.01 $0.35 $3.30 $9.78 Avg Shares Outst'g (M) 1,016.00 1,030.00 1,065.00 1,098.00 1,132.00 1,151.00


Jul 29, 2015

41.6%

2.5% (3.0% - 2.1%)

Aug 17, 2015May 18, 2015

Jul 28, 2016

Index1.11

1.39

Nov 16, 2015

Rel Strgth

Feb 8, 2016

1.161.24

TTM

19%20%41%46%

StockGain

Texas Instruments (TI) designs, makes and sells semiconductors to electronics designers and manufacturers across the world. TI operates through two segments: analog and embedded processing. The analog segment includes high volume analog and logic, power management, high performance analog and Silicon Valley analog. The embedded processing segment includes processor, microcontroller and connectivity products. TI is also engaged in smaller product lines, such as DLP projector products, certain custom semiconductors known as application-specific integrated circuits, calculators, baseband products, and applications processors and connectivity products.

Oct 15, 2015

Jul 25, 2016

Jul 21, 2016Apr 20, 2016Jan 21, 2016 Jan 28, 2016

Apr 28, 2016

Jul 16, 2015

24.8%0.5%

19.4%23.2%

46.4%

45.1%3 Year

8.2%

$2.96$0.86

$0.65

$0.822 2

$2.96

27

Year Ago

Year Ago

TTM

TTMSales/Sh (Qtr)

EPS (Qtr)

Apr 15, 2015 Apr 28, 2015

9/2016

EPS$0.76

13.3%

$0.82

27

Apr 27, 2016

45.8%

33.7%

EPS Estimates

Est Surprise

25Month Ago

Quarterly

# of EstimatesCurrent

Oct 15, 2015

Annual12/2016

% Surp

32

4.8%4.5%

$3.05

23.2%

Aug 15, 2016May 16, 2016

Oct 28, 2015

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$10

$20

$30

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Aug 2011 Aug 2012 Aug 2013 Aug 2014 Aug 2015

Div

iden

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14 August 2016

Wyndham Worldwide Corp. (WYN)Wyndham Worldwide Corp. is one of the world’s largest

hospitality companies. Though known by many for its hotels, the company also derives significant revenues from time-share and vacation properties.

The hotel group includes Wyndham, Ramada, Days Inn, Super 8, Travelodge, and Dolce, among others. It is the world’s largest hotel company based on number of proper-ties, with 7,876 hotels and over 683,000 hotel rooms world-wide as of June 30, 2016. Slightly more than 70% of the hotel properties are located in North America and Europe, with the remainder in the Asia Pacific, Latin American and Middle East regions. Wyndham franchises hotel properties and offers management and property services to hotel owners.

Wyndham Destination Network segment offers vacation exchange services for time-share developers and owners. This allows time-share owners to stay at other properties instead of their own. This segment also facilitates the rental of vaca-tion properties by individual owners.

Wyndham’s Vacation Ownership segment is the largest time-share business in the world. As of June 30, 2016, the company had 216 vacation ownership resorts in the U.S., Canada, Mexico, the Caribbean and the South Pacific.

Why Own WYN?Wyndham offers extensive reach both in terms of geog-

raphy and price categories. Its hotel properties range from economy to what the company describes as “upper upscale.” The company’s vacation property rental network offers scale in what is a highly fragmented market. The time-share unit provides a source of recurring revenues.

Sales and earnings per share have increased over the past five years at annualized rates of 5.3% and 20.2% respectively. Growth is expected to continue this year, with Wyndham recently guiding for 2016 revenues of $5.61 billion to $5.75 billion, an approximate increase of 2.5%. Earnings per share are projected to rise to $5.46 to $5.60, up 11.9%. (The I/B/E/S

consensus estimate currently calls for 2016 earnings per share of $5.69.)

Though Wyndham’s debt is high (a liabilities-to-assets ratio of 91.8% as of the end of the first quarter), the company’s interest coverage ratio has been above the hotels and motels industry average. Wyndham has also realized higher operating margins than its peers.

On a valuation basis, the stock is attractive. Shares trade at 15.4 times earnings, a discount to the five-year average of 16.7 and the current industry average of 21.8. The current yield of 2.6% is above the stock’s five-year average of 1.9%. Both measures show that shares are currently trading at valuations below what investors have historically been willing to pay.

Dividend AnalysisThe company’s capital allocation philosophy is to invest in

the business and then return capital to shareholders through dividends (raised at a pace that is at least equivalent to the rate of earnings growth) and share repurchases. This past February, Wyndham announced a 19.0% increase in the dividend. It was the seventh consecutive year of dividend increases. During the past five years, Wyndham’s dividend has grown at a 28.5% annualized pace.

The dividend is covered by a regular stream of earnings and cash flow. Both the earnings and cash flow payout ratios are at low absolute levels of 32.4% and 25.8%, respectively, based on year-end data for 2015.

RisksWyndham is incurring a rising level of defaults among its

time-share loans even though its underwriting standards have not changed. CFO Thomas Conforti blames “third parties” for encouraging consumers to stop making payments on their vacation properties. CEO Stephen Holmes says the company is pursuing legal actions against individuals and companies that are targeting owners of Wyndham time shares, but cautions that there are currently “no silver bullets.” As such, he does not expect the situation to go away within the next year.

The second-quarter’s increase in earnings per share was solely due to a reduction in shares outstanding. Adjusted net income declined in the second quarter by 1.8%. Wyndham still expects adjusted net income to increase for the full year by 5.6%, however.

The hospitality industry is economically sensitive. RevPAR (revenue per available room) was flat on a constant currency basis in the second quarter, reflecting weakness in oil-pro-ducing regions and in China. The average net price per rental in the company’s Destination Network also decreased last quarter. Exchange rate fluctuations have hurt revenues and earnings as well.

Newer competitors such as AirBnB pose a competitive threat. So far, however, Wyndham’s executives have not seen any significant impact. The company also has distribution deals with travel websites Booking.com and HomeAway. ▪

Bullish Factors:• The 19% dividend increase announced earlier this year

extended a streak of strong dividend growth• Vacation rental network and time-share properties offer

some diversification to hotel properties• Inexpensively valued, particularly given its five-year

growth trends and sound financial position

Bearish Factors:• Defaults are rising among Wyndham’s time-share

property owners• Second-quarter earnings growth was solely due to a

reduction in the share count• RevPAR declined last quarter, as did the average net

price per rental in the company’s Destination Network

August 2016 15


Addition Alert Date: 3/4/16Price at Alert: $76.04 Risk Index: 1.82Market Cap (Million): $8,621.4Avg Daily Dollar Volume (Million): $102.6Primary Sector: ServicesPrimary Industry: Hotels & Motels

Indicated Annual Dividend: $2.00 Multiples Current 12/2015 12/2014 12/2013 12/2012 12/2011Latest Dividend Increase: Date Dividend Yield (%): Avg 2.6 2.0 1.8 1.8 2.0 1.9Latest Dividend Increase: % 19.0% Dividend Yield (%): High 2.4 2.1 2.2 2.5 2.4Dividend Yield: Current 2.6% Dividend Yield (%): Low 1.8 1.6 1.6 1.7 1.6Dividend Yield: 5-Year Avg (High-Low) Price/Earnings 15.4 16.0 18.4 19.8 16.6 12.6Dividend Paid Since: 2007 Price/Earnings (Industry) 21.8 24.7 25.6 22.0 21.1 15.4Number of Years of Div Increases: 7 Price/Book Value 10.4 10.2 7.6 5.2 3.4 2.3Direct Invest Option: No Price/Sales 1.6 1.8 1.8 1.7 1.5 1.2DRIP Plan: No Ratios Current 12/2015 12/2014 12/2013 12/2012 12/2011Declared Ex-Div Date Payable Amount Payout Ratio: EPS (%) -- 32.4 33.1 35.7 32.9 23.3

$0.5000 Payout Ratio: FCFPS (%) nmf 25.8 23.4 20.0 16.5 12.7$0.5000 Gross Margin (%) 50.7 51.2 52.6 52.2 53.8 52.4$0.4200 Operating Margin (%) -- 18.3 17.8 16.0 16.4 17.8$0.4200 Operating Margin (%) (Ind) 11.3 11.2 8.4 10.2 12.0 6.5$0.4200 Net Margin (%) -- 11.1 10.0 8.6 8.8 9.8$0.4200 ROE (%) -- 55.5 36.8 24.3 19.2 16.2

Rel Strgth ROE (%) (Industry) 10.1 3.4 7.3 8.7 1.8 10.0Rank ROA (%) -- 6.3 5.4 4.5 4.3 4.5



Dividends 28.5% Gross Income ($M) 2,825 2,836 2,777 2,615 2,441 2,229Sales 5.3% Depreciation ($M) -- 234 233 216 185 178Net Income 10.1% Unusual/Extra ($M) -- 13 46 129 128 71EPS Basic 19.5% Operating Income ($M) -- 1,015 941 799 744 759EPS Dil Cont 20.2% Interest Expense ($M) 0 125 113 131 132 140

Pretax Income ($M) 881 916 845 683 628 650SUE Score Net Income ($M) -- 612 529 432 400 417

0.70 Operating Cash Flow ($M) -- 991 984 1,008 1,004 1,0030.40 Investing Cash Flow ($M) -- (302) (276) (401) (519) (256)

Annual Financing Cash Flow ($M) -- (675) (701) (605) (431) (753)12/2017 Capital Expenditures ($M) -- 222 235 238 208 239

10 Net Cash Flow ($M) -- (12) (11) (1) 53 (14)$6.28 EPS Basic ($) -- 5.19 4.23 3.25 2.80 2.57$6.32 EPS Diluted Cont ($) 5.01 5.14 4.17 3.20 2.76 2.51

# Rev Up 0 EPS DC Year/Year Chg (%) 119.1 23.5 30.2 16.0 9.8 22.6 # Rev Down 1 Dividends/Share ($) 0.00 1.68 1.40 1.16 0.92 0.60Three Mos. Ago $6.34 Dividend Year/Year Chg (%) 74.0 20.0 20.7 26.1 53.3 25.0Year/Year Chg 10.5% Free Cash Flow/Share ($) -- 6.52 5.99 5.79 5.57 4.72

3/2016 12/2015 9/2015 6/2015 Total Cash ($M) 318 171 183 194 195 142$0.84 $1.22 ($0.75) $2.36 $3.67 Goodwill/Intangibles ($M) 2,679 2,686 2,665 2,742 2,755 2,610$1.02 ($2.92) $1.69 $1.88 $1.67 Total Assets ($M) 10,165 9,689 9,679 9,741 9,463 9,023

Long-Term Debt ($M) 5,180 4,928 4,792 4,608 4,018 3,7733/2016 12/2015 9/2015 6/2015 Total Total Liabilities ($M) 9,328 8,739 8,424 8,118 7,533 6,791

$11.53 $11.41 ($9.17) $22.54 $36.31 Book Value/Share ($) 7.41 8.05 10.04 12.20 13.50 13.78$10.57 ($22.70) $12.83 $19.97 $20.66 Avg Shares Outst'g (M) 113.00 118.00 125.00 133.00 143.00 162.00


0.90

3 Year

Jun 1, 2016Mar 24, 2016Dec 15, 2015

1.08

Sep 14, 2015

Rel Strgth

1.04

1.9% (2.3% - 1.6%)

1.06

Wyndham Worldwide franchises hotels, operates a vacation rental network and develops and sells time-share properties. Its hotel group is the largest in the world based on the number of properties, with Wyndham, Ramada, Days Inn, Super 8, Travelodge, and Dolce among its brands. Wyndham Destination Network is the world’s largest network connecting vacation suppliers, including affiliated time-share developers, individual homeowners, and vacation park operators with vacationers. Wyndham Vacation Ownership develops time-share resorts in the U.S., Canada, Mexico, the Caribbean and the South Pacific.

Aug 13, 2015

May 10, 2016Feb 25, 2016Nov 12, 2015 Nov 25, 2015

Mar 9, 2016May 27, 2016

Jun 12, 2015Mar 27, 2015

Feb 25, 2016

Aug 26, 2015

118.5%

EPS$1.12

May 14, 2015Feb 26, 2015 Mar 11, 2015

15%10%18%(5%)

Stock

% Surp1.4%1.1%

Index

May 27, 2015

119.1%

22.2%6.9%

15.2%22.9%23.1%

74.0%67.6%

TTM

Gain

109.3%

$0.98

Est Surprise

EPS Estimates# of Estimates

Feb 9, 2016Apr 26, 2016

Year Ago

TTM

TTMSales/Sh (Qtr)

Quarterly

EPS (Qtr)

Year Ago

CurrentMonth Ago

6/20167

(41.8%)

Annual12/2016

$1.39 $5.71$1.37 $5.69

10.6%

8

01

$1.40

0

$5.702

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


$10

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WYN $77.19 ($83.32 - $60.59)

16 August 2016

This is the third installment of the series discussing the original Altman Z-Score, which was developed to indicate the probability of a manufacturing company going bankrupt or facing significant financial distress. The Altman Z-Score consists of five performance ratios that are combined into a single score. This month, we focus on retained earnings to total assets. For the complete formula, see the May DI Monthly back page article, posted to the Articles area of the DI website.

Retained EarningsRetained earnings refer to the percentage of earnings from

operations not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. In effect, it’s a cumulative earnings figure rather than the last year’s retained earnings. It is recorded under shareholder’s equity on the balance sheet. In most cases, companies retain their earnings in order to invest them into areas where the com-pany can create growth opportuni-ties, such as buying fixed assets (property, plant or equipment) or spending the money on more research and development.

Ending Retained Earnings (RE) Balance = Beginning RE Balance + Net Income – Dividends Paid – Common Stock Repurchased

Should a net loss be greater than beginning retained earnings, retained earnings can become negative, creating a deficit. Furthermore, profitable compa-nies may have negative retained earnings if they have cumulatively paid out more to shareholders or spent more on share repurchases than they reported in profits.

Generally, the older the firm, the more time it’s had to build up retained earnings than, say, a younger firm that may have had losses or very low profits in the earlier years. As a result, the retained earnings ratio is a very good indicator when evaluat-ing the likelihood of a company failing. Statistics have shown that young firms have a much higher

probability of default and bankruptcy than older firms.

Retained Earnings to Total AssetsThe ratio of retained earnings to total assets measures cu-

mulative profitability over time as a proportion of total assets. It helps measure the extent to which a company relies on debt, or leverage. The lower the ratio, the more a company is funding assets by borrowing instead of through retained earn-ings which, again, increases the risk of bankruptcy if the firm cannot meet its debt obligations.

Generally speaking, a higher-than-industry ratio as well as a ratio that is rising over time are good signs for a company.

The table here lists the companies in the DI portfolio along with their retained earnings to total asset values for the last two fiscal years. Analyzing values over time can offer insights into a company’s financial condition.

Texas Instruments (TXN) has the highest ratio of retained earnings to total assets for the last fiscal year. Since total assets equal the sum of total liabilities and owner’s equity, the only way for retained earnings to exceed total assets is if there is a contra-account on the balance sheet. In the case of Texas Instruments, as well as IBM Corp. (IBM), both companies hold treasury stock—shares outstanding that the company has repurchased but not retired—that lowers the owner’s equity account. Texas Instruments has seen its retained earnings grow, on average, by 5.9% a year over the last six years, while total assets have grown 5% a year over the same period.

In contrast, Microsoft (MSFT) has the lowest retained earnings to total assets ratio at 1.2%. The ratio has fallen from 5.2% the year before as retained earnings fell 74.9% and total assets grew 11%. Without the company’s 10-K for the fiscal year ended June 30, 2016, we can only surmise that the company paid more in dividends and share repurchases than it earned in net income. In addition, Microsoft had an accu-mulated deficit until 2013. ▪

Deconstructing the Altman Z-Score: Retained earnings to Total Assets

Company (Ticker) Y1 Y2Texas Instruments (TXN) 192.1% 170.7%IBM Corp. (IBM) 132.2% 117.5%Emerson Electric Co. (EMR) 96.5% 82.2%PepsiCo, Inc. (PEP) 72.5% 69.6%Cummins Inc. (CMI) 68.2% 60.6%Procter & Gamble Co. (PG) 65.5% 58.9%QUALCOMM, Inc. (QCOM) 61.5% 63.4%Occidental Petroleum (OXY) 59.8% 64.1%Union Pacific Corp. (UNP) 55.4% 52.3%Deere & Company (DE) 39.9% 35.9%Caterpillar Inc. (CAT) 37.3% 40.0%Eastman Chemical (EMN) 33.0% 28.3%Apple Inc. (AAPL) 31.8% 37.6%Williams-Sonoma, Inc. (WSM) 27.7% 30.1%Eaton Corpora�on (ETN) 23.7% 21.1%Target Corpora�on (TGT) 20.3% 23.4%Invesco Ltd. (IVZ) 17.7% 19.3%Wyndham Worldwide (WYN) 16.4% 12.2%Interna�onal Paper Co. (IP) 15.2% 15.4%WEC Energy Group (WEC) 14.7% 27.6%Stage Stores Inc. (SSI) 8.6% 10.6%AT&T Inc. (T) 8.4% 10.5%Wells Fargo & Co. (WFC) 6.8% 6.3%Microso� Corpora�on (MSFT) 1.2% 5.2%

Retained Earn.to Total Assets

Source: AAII's Stock Investor Pro/Thomson Reuters. Data as of 7/22/2016.

https://www.aaiidividendinvesting.com/resources/monthlyarticle.cfm?id=2

Documents

In This Issue DI Portfolio Stands Pat for August T · Dividend Analysis 7 In-Depth Stock Reports Emerson Electric Co. (EMR) 8 Global tech engineering company is repositioning its