Value of Dividends

Over time, dividend income has comprised a signifcant portion of long-

term stock gains. Even better, over the long term, dividend-paying stocks
have delivered relatively better total-return performance than non-dividend
payers and generally have done so with lower volatility. And in todays
historically lower-yield environment, dividend payouts are all the more
attractive. As if this werent enough, our recent crunching of the historical
numbers reveals that dividend payers have proven the place to be even in
a rising rate environment. While not quite the Holy Grail, higher returns,
relatively lower risk and generous income make for quite a powerful
combination no matter the direction of interest rates.
August 2013
Dividends are not guaranteed. Stock investing involves risk and possible loss of principal.
2
Dividend Payers:
Higher Returns, Lower Risk
S
ome are warning that income-producing stocks are a crowded trade as many
have been singing the praises of dividend payers. However, such statements
ignore the fact that the 97 non-dividend-paying members of the S&P 500 outper-
formed the 403 dividend payers in 2012 by a score of 19.2% to 16.1%. The story was
the same, at least on a value- (market-cap) weighted basis, per data compiled by
Professors Eugene F. Fama and Kenneth R. French. The duo evaluated all NYSE,
AMEX and NASDAQ stocks, breaking the list down into non-dividend payers as
well as the lowest 30%, the middle 40% and the highest 30% of dividend payers. Be-
lieve it or not, the higher the yield in 2012, the weaker the performance as the non-
dividend payers gained 20.9% compared to 20.8%, 14.2% and 11.8% for the low-30%,
mid-40% and high-30%, respectively. Further, the Utilities, Energy and Consumer
Staples sectors of the S&P 500 received the least amount of love from investors last
year, despite a preponderance of high-yielding members.
We suspect that few are complaining, given the outsized returns on equities
across the board, but non-dividend payers won the performance derby again over
the frst seven months of 2013. Despite the excellent returns seen this year and
last, the forward (next 12 months) yield on the S&P 500 is now 2.1%, while the
Russell 3000 boasts an annual payout rate of 2.0%, so it is easy to see why pundits
would continue to extol the virtues of dividends. This is especially true after non-
income-producing and formerly high-fying gold and silver have recently become
a lot less precious, while many investors saw more red ink than they might have
expected on their bond investments when they opened their June statements.
4%
8%
12%
16%
60 70 80 90 00 10
From 12.31.49 through 06.30.13. SOURCE: Al Frank using data from Bloomberg
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10Year U.S. Treasury Yield
Dividend Yield (LTM) S&P 500
Yields on Treasuries have risen sharply in
recent months, but they remain extraordinarily
low by historical standards, while dividend
payouts have been on the rise.
Figure 1:
Equities versus Treasuries
3
No doubt, numerous folks today are more concerned with return of principal
than return on principal and they are sitting in the safety of cash and cash-like in-
vestments. Of course, deciding to place ones money into the modern-day equiva-
lent of the mattress allows the chance to earn a whopping one basis point (0.01%)
on average in taxable money market funds, according to iMoneyNet.com. Growth
of capital is obviously not the objective, but it is amusing that at the current mon-
ey-market rate, cash will double in just 6,932 years!
Others are hiding out in U.S. Treasuries, where the yield on the 10-year note is
currently hovering around 2.6%, the yield on the 20-year bond is near 3.4% and the
yield on the 30-year bond is in the 3.7% range. Considering that infation has aver-
aged 3% per annum over the past eight decades, those willing to accept the current
yields on 10-, 20- and 30-year Treasuries are likely to see a reduction in purchasing
power or little in the way of real return if they hold to maturity. And should they
wish to cash out prior to 2023, 2033 and 2043, respectively, they risk capital losses.
Clearly, equity investors must continue to steel their nerves for heightened
volatility, as concerns remain about Uncle Sams debt levels and potential addi-
tional government spending cuts, while the European sovereign debt crisis has
not exactly been placed in the rear-view mirror. Also, the strength of the global
economy is still very much in question, while question marks have arisen about
the patience of the U.S. Federal Reserve, not to mention central bankers around
the world, in maintaining their highly-accommodative stances on monetary policy.
Nevertheless, relative to Treasuries, dividend yields are as attractive as theyve
been in more than 50 years (see Figure 1). Aside from several months at the height
of the 08-09 Global Financial Crisis, the last time the yield on the S&P 500 was
as close as it is today to the yield on the 10-year Treasury was 1958. And, until the
recent spike in interest rates, stocks actually yielded more than the 10-year!
Whats more, corporations have actually been boosting their payouts as 348 of
the S&P 500 members either raised or initiated a dividend in 2012 and 258 have
done the same thus far in 2013. Standard & Poors (as of August 7) estimates that
operating EPS growth on the S&P 500 will reignite, jumping from $96.44 in 2011
and $96.82 in 2012 to $108.50 in 2013 and $122.38 in 2014. Hard to imagine divi-
dends not rising further were earnings to come close to those projections, espe-
cially as corporate balance sheets continue to be loaded with record levels of cash.
Value stocks (those trading for lower fundamental valuation metrics) are pro-
viding even more generous income streams. Breaking down our benchmark Rus-
sell 3000 index into its Value and Growth components, one fnds the former sport-
ing a forward yield of 2.3% compared to a 1.6% yield for the latter. The forward
yield on the Dow Jones Industrials is actually 2.4%, so the attractive payouts are
also available in the most well-known index.
It is nice to see the renewed interest in income, as we cant forget that dividends
and their reinvestment have long been a substantial contributor to the total return
on equities. As shown in Figure 2, data from Morningstars Ibbotson Associates go-
ing back to 1927 reveals that through the end of last year, the income component
of total return amounted to 42% for Large-Cap Stocks, 36% for Mid-Caps and 31%
for Small-Caps.
4
More importantly, numbers weve crunched from Fama and French dating back
to 1927 fnd that dividend payers have actually outperformed non-dividend payers
over the long term and they have done so with lower overall volatility! Not quite
the Holy Grail, but higher returns, relatively lower risk and generous income obvi-
ously make for a desirable combination.
$100
$1k
$10k
$100k
$1m
30 40 50 60 70 80 90 00 10
As of 12.31.12. Logarithmic scale. SOURCE: Al Frank using data from Professors Fama and French
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Top 30% Payers (11.2%)
Middle 40% Payers (10.3%)
Low 30% Payers (8.9%)
NonPayers (8.4%)
In general, stocks have delivered some
handsome long-term returns, but dividend
payers have won the long-term performance
derby...
Figure 3:
Dividend payer versus non-dividend
payer returns since 1927
5.6%
4.1%
6.9%
3.9%
7.7%
3.5%
9.8% 9.8%
10.9% 10.9%
11.4% 11.4%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
LargeCap
Stocks
MidCap
Stocks
SmallCap
Stocks
As of 12.31.12. Component figures do not sum due to the effects of dividend reinvestment and rounding. SOURCE: Al Frank via Ibbotson Associates
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Capital Appreciation Income
Over the past eight decades, dividends and
other income have made up a signicant
portion of the annualized return.
Figure 2:
Contribution to return
5
As Figure 3 shows, annualized returns dating back to 1927 using the value-
weighted monthly return series from Fama and French for dividend-paying stocks
have ranged between 8.9% (the lowest 30%) and 11.2% (the highest 30%) compared
to 8.4% for non-dividend payers. Interestingly, the higher the dividend yield, the
higher the long-term return!
$0
$300
$600
$900
$1,200
95 00 05 10
From 06.30.92 through 06.30.13. SOURCE: Al Frank using data from Thomson Reuters and Bloomberg
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All Dividend Payers (12.7%)
All NonDividend Payers (8.3%)
While the ndings are similar in the early 90s,
the equal-weighted-return series showed a
marked difference in the last decade.
Figure 5:
Equal-weighted dividend payer
versus non-dividend payer returns
since 1992
$0
$200
$400
$600
95 00 05 10
From 06.30.92 through 06.30.13. SOURCE: Al Frank using data from Thomson Reuters and Bloomberg
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All NonDividend Payers (9.4%)
All Dividend Payers (8.3%)
...although the horse race has had a different
result over the past two decades, with non-
dividend payers excelling during the Tech
Bubble.
Figure 4:
Market-capitalization weighted
dividend payer versus non-dividend
payer returns since 1992
6
5%
10%
15%
20%
25%
30%
35%
10 05 00 95
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Non-Dividend
Payers
Dividend
Payers
0%
10%
20%
30%
40%
50%
60%
70%
80%
10 00 90 80 70 60 50 40 30
Fama-French Study: Dividend versus Non-Dividend PayersRisk since 1927
Russell Study: Dividend versus Non-Dividend PayersRisk since 1992
From 12.31.27 through 12.31.12. Data points are as of July each year. SOURCE: Al Frank using data from data from Russell Investments via Bloomberg
(top chart) and Eugene F. Fama & Kenneth R. French (bottom chart)
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Non-Dividend
Payers
Dividend
Payers
Though volatility spiked during the Global
Financial Crisis, dividend payers nearly
always have shown lower standard deviation
statistics.
Figure 6:
Dividends and Volatility
Not simply content to take the word of the good Professors, we performed our
own calculations looking at returns for the Russell 3000 constituent list since 1992.
It is not easy to fnd accurate historical numbers as companies merge, issue spin-
offs and go out of business, but we have done our best to divide the Russell 3000
membership into dividend- and non-dividend-paying groups each year on July 31.
We then created two sets of return series, the frst consistent with each stocks
weighting in the index and the second utilizing an equal-weighted methodology.
Interestingly, we found that on a capitalization-weighted basis, as shown in Figure
4, non-dividend payers returned 9.4% per annum, versus 8.3% for dividend payers.
No doubt, the tremendous returns of Internet and other computer-related stocks,
most of which did not pay a dividend, during the Tech Bubble accounted for the
outperformance, though our research suggests a potential bias around the turn
of the Millennium that included and heavily weighted many high-fying non-div-
idend paying stocks in the Russell while they were rising, but excluded or lightly
weighted these companies as they quickly crashed and burned.
Of course, few of us invest on a cap-weighted basis. After all, one would have
to own eight to ten times as much Apple or ExxonMobil as opposed to Walgreen
or Baxter Intl to match the current weights in the Russell 3000. Indeed, since our
founding in 1977, we have worked within an equal-weighting framework for our
initial purchases. True, over time a big gain in stock X will mean that it outweighs
stock Y which has fallen in price, but we fnd equal-weighting to be very germane.
7
The Russell differences in our equal-weighted study are quite dramatically in
favor of dividend-payers. As Figure 5 illustrates, dividend payers have enjoyed a
440 basis point better total return per annum over the last 21 years. The signifcant
long-term performance advantage of the equal weighted numbers over the cap-
weighted illustrates the opportunities available to even average stock pickers!
Even more important to some, we also reviewed the annualized standard de-
viation of the trailing 36-month returns for the cap-weighted Russell and Fama-
French (combining the dividend payers) data sets to determine the spread of the
numbers. Standard deviation is the square root of the variance with the variance
defned as the average of the squared differences from the mean. In simpler terms,
the greater the standard deviation, the more volatile the return and the higher the
risk that the return will deviate from the norm. As shown in Figure 6, dividend
payers, despite their strong return characteristics, have actually had meaningful
lower standard deviation.
Hard to argue with the historical evidence that dividend-payers deserve a lions
share of any equity allocation and weve been incorporating dividends into our val-
uation analytics for a long time now. However, we remain equal opportunity stock
pickers and we wont discriminate against an undervalued company that chooses
not to currently pay a dividend. Our long-time holding of Apple, which only last
year initiated a payout, provides one such example.
We also note that dividend payers do not always outperform non-dividend pay-
ers. Figure 7 shows that there have been stretches over the past eight decades
when the tables have been turned. Interestingly, the periods of underperformance
include three of the last four full calendar years, with a signifcant gap in the re-
turns during 2009. That said, as contrarians, we dont mind this recent trend, as the
long-term evidence overwhelmingly favors dividend payers. Thus the majority of
Theyve been the best long-term performers,
but over several multi-year occasions,
dividend payers have lagged behind, including
several of the more recent three-year periods.
Figure 7:
3-year annualized returns since
1927

40%
0%
40%
80%
30 40 50 60 70 80 90 00 10
From 06.30.27 through 12.30.12. SOURCE: Al Frank using data from Professors Fama and French
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NonDividend Payers
Dividend Payers
8
our recommendations offer a dividend yield, which we hope provides a little added
comfort in a very uncertain geopolitical and economic environment.
Of course, it should be stated that we do not favor dividend-paying stocks for
their yield alone, especially as the aforementioned historical data reveal that only
30% to 40% of the total returns enjoyed by equities over the past 85 years have
come from income. With capital appreciation accounting for the lions share of
total return, we seek stocks that trade for inexpensive valuations (low multiples
of sales, earnings and book value, the historical data showing that these are also
excellent indicators of future price appreciation) frst and foremost, with dividends
always a secondary factor in our analysis.
Not surprisingly, this means that we do not simply buy the highest yielding
stocks, a strategy that has served us well this year as we have relatively light expo-
sure in our portfolios to some of the industry groups within the Russell 3000 index
that are generally associated with large dividend payouts. Indeed, high-yielding
Real Estate Investment Trusts (REITs), Telecom Services and Utilities actually
were among the weakest performers with respective 2013 returns through July 31
of 5.8%, 11.7% and 15.9%. Of course, given the relatively poor returns of late and
the reasonable valuations that have resulted for many stocks in these areas, we are
becoming more intrigued by these sorts of companies, and our recommended list
refects this enthusiasm. We also note that we are fnding bargains aplenty in the
Energy sector, another segment with many big-dividend payers, and our broadly
diversifed portfolios generally sport yields in excess of the benchmarks.
Looking at returns thus far in 2013, the 90+ non-dividend paying stocks in the
S&P 500 actually have outperformed the 400+ dividend payers by a score of 28.6%
to 21.6% over the frst seven months. Interestingly, and reminding us that there is
plenty of merit to active investing over passive index strategies, those average (i.e.
0%
5%
10%
15%
20%
60 70 80 90 00 10
From 07.31.54 through 06.30.13 SOURCE: Al Frank using data from Bloomberg and Professor Robert J. Shiller
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Fed Funds Effective Rate
S&P 500 Yield
Fed Fund Rate Median
S&P 500 Yield Median
Accommodative monetary policy eventually
will change, but it is a long way from near-
zero today on Fed Funds to the 5.01% median.
Figure 8:
S&P 500 Yield versus Fed Funds
Effective Rate
9
equally weighted) return fgures compare very nicely to the 19.6% return of the
actual capitalization-weighted S&P 500 index.
Many attribute the latest weakness in relative performance for dividend pay-
ers to the dramatic rise in interest rates. Incredibly, it was the fear of a Tapering
in the Federal Reserve Quantitative Easing program ($85 billion in monthly bond
purchases) that sent the yield on the 10-year Treasury soaring from 1.6% on May 2
to 2.6% on August 2. All things being equal, one would think that investors would
fnd dividend-paying stocks more attractive when the yield on the S&P 500 ex-
ceeds the yield on the 10-year.
After all, corporate borrowing costs were lower in Spring 2013. Recall that back
in April, Apple issued a record $17 billion in debt, ranging from a three-year note
yielding 0.45% to a 30-year bond that yielded 3.85%. The largest piece, $5.5 billion
in 10-year notes, yielded 2.4%. The debt offering is helping to fund a portion of
the consumer electronic giants $60 billion stock buyback plan! As a Standard &
Poors credit analyst concluded, It creates better returns for their shareholders.
The bond markets are practically begging corporations to issue debt because of
how cheap it is to raise money.
And, even those who choose not to buy back stock with their debt offering pro-
ceeds can signifcantly lower their borrowing costs. Barrick Gold repaid $500 mil-
lion in 6.125% notes by issuing 5-year notes at 2.5%, 10-year notes at 4.1% and 30-
Subsequent 12-month returns have been
better when Treasury and Fed Funds rates
have declined, but dividend payers beat non-
dividend payers for all periods, no matter how
the data are parsed (e.g. selected month vs.
1,3, 6 and 12 months ago for 10-year Treasury
and selected month-end averages for prior
3, 6 and 12 months vs. 3, 6 and 12 month
averages for the months ended 3, 6 and 12
months prior for Fed Funds.
Figure 9:
Returns & Rising/Falling Rates
DIVIDENDS & SIMPLE CHANGE IN 10-YEAR TREASURY RATE
Fed Funds Rate Count No Divs Low 30 Mid 40 High 30 All Divs
< 5.01% 345 8.9% 7.2% 8.3% 10.1% 8.6%
> 5.01% 345 8.4% 11.5% 13.2% 14.5% 13.2%

3-Month Drop 307 11.2% 11.1% 12.8% 13.8% 12.7%
3-Month Rise 378 6.3% 7.6% 8.8% 10.7% 9.1%

6-Month Drop 316 8.9% 9.5% 10.4% 12.0% 10.7%
6-Month Rise 363 8.0% 8.6% 10.5% 12.0% 10.5%

12-Month Drop 298 5.8% 6.8% 7.5% 9.6% 8.0%
12-Month Rise 369 10.7% 10.8% 12.9% 14.1% 12.8%
Long Int. Rate Count No Divs Low 30 Mid 40 High 30 All Divs
1-Month Drop 508 9.6% 10.1% 12.6% 13.7% 12.3%
1-Month Rise 506 6.9% 7.3% 7.7% 8.5% 8.0%

3-Month Drop 481 11.3% 11.2% 13.3% 13.9% 13.0%
3-Month Rise 531 5.4% 6.4% 7.3% 8.5% 7.5%

6-Month Drop 484 10.5% 10.5% 12.6% 13.3% 12.3%
6-Month Rise 525 5.9% 6.9% 7.7% 8.9% 8.0%

12-Month Drop 491 8.7% 9.1% 10.4% 10.8% 10.3%
12-Month Rise 512 7.1% 7.8% 9.4% 10.9% 9.5%
From 07.31.54 through 12.31.12. Subsequent 12-month geometric mean. SOURCE: Al Frank using data from Bloomberg and Profs. Eugene F. Fama & Kenneth R. French
From 6.30.27 through 12.31.12. Subsequent 12-month geometric mean. SOURCE: Al Frank using data from Professor. Robert J. Shiller and Profs. Eugene F. Fama &
Kenneth R. French
DIVIDENDS & AVERAGE CHANGE IN FED FUNDS EFFECTIVE RATE
10
year notes at 5.75%. Or, they can fund growth initiatives like the foray into oil and
gas via the acquisitions of Plains Exploration and McMoRan Exploration at Free-
port-McMoRan Copper & Gold, which in the frst quarter secured a total of $10.5
billion in senior note and bank term-loan fnancing at an average rate of just 3.1%.
Of course, the movements of the markets are seldom tied to just one factor
and a strong case can be made that interest rates are rising due to expectations of
stronger economic growth on the horizon. Such an occurrence would certainly be a
positive for the health of corporate profts, which in turn would make current valu-
ations appear even more reasonable. And we cant underestimate that rising rates
put in jeopardy the long-time love affair investors have had with bonds, which has
undoubtedly vacuumed up money that might have gone into stocks. The fact that
Treasuries proved that they are not without riskthe iShares 20+ Year Treasury
Bond ETF (TLT) suffered a -13.4% total return over the three months ended August
2is likely causing folks to rethink allocation strategies in favor of equities!
Nevertheless, it is hard to argue with the observation that dividend-paying
stocks are in vogue when rates are moving lower and they fall out of favor when
rates are moving higher...unless one actually looks at the weight of the historical
evidence. While anything can happen in the short run, a review of subsequent
12-month returns when the 10-year Treasury yield and the Fed Funds rate (see
Figure 8) have moved higher and lower over 1- 3-, 6- and 12-month periods tells
a different long-term story. Believe it or not, the analytics presented in Figure 9
show that on average dividend payers have outperformed non payers. Yes, stocks
generally have done better in a declining rate environment, but the odds favor
dividend payers even when rates are rising. And it is interesting to see the returns
when the Fed Funds rate is high. Of course, none of us want to see Fed Funds above
the 5.01% historical median anytime soon!
In Conclusion
We at AFAM Capital do not simply accept conventional wisdomwe do our own
homework and crunch our own numbers to ensure that what we believe philosoph-
ically actually corresponds to what has proven to be successful from a historical
perspective. Happily, while we always reserve the right to get smarter and we will
never rest on our laurels, our long-time emphasis on undervalued dividend-paying
stocks is validated by more than eight decades of market history. Past performance
is never a guarantee of future performance, but it is a fact that over the long-term
dividend-paying stocks on average have outperformed non-paying stocks, no mat-
ter the direction of interest rates, and they have done so with lower volatility!
11
AAPL Apple 454.45 690.40 11.3 2.4 3.5 5.1 0% 2.7% 412,866 Technology Hardware
AVX AVX 13.13 16.86 21.9 1.5 1.3 6.2 0% 2.7% 2,214 Technology Hardware
BHP BHP Billiton Ltd 67.68 83.94 11.2 1.4 3.0 7.4 41% 3.4% 172,955 Materials
BMR BioMed Realty Trust 19.98 25.11 nmf nmf 1.6 nmf nmf 4.7% 3,839 Real Estate
CAT Caterpillar 84.51 112.01 13.3 0.9 7.9 6.2 394% 2.8% 55,582 Capital Goods
DE Deere & Co 81.74 119.54 10.0 0.9 4.4 5.5 310% 2.5% 31,719 Capital Goods
E Eni SpA 45.76 64.75 11.7 0.3 1.1 4.0 34% 4.9% 83,150 Energy
ESV Ensco PLC 58.85 86.29 10.1 3.0 1.5 8.2 53% 3.4% 13,743 Energy
FL Foot Locker 34.52 43.82 13.0 0.8 2.3 5.6 6% 2.3% 5,204 Retailing
GLW Corning 15.09 22.38 11.6 2.8 1.1 7.6 17% 2.7% 22,037 Technology Hardware
HBC HSBC Holdings PLC 55.25 66.80 12.7 nmf 1.4 nmf nmf 4.5% 205,995 Banks
MDC MDC Holdings 29.34 60.25 13.3 1.0 1.3 17.3 72% 3.4% 1,434 Consumer Dur & App
MDT Medtronic 55.37 70.34 14.7 3.4 9.8 9.7 172% 2.0% 55,780 Health Care Equip/Srvcs
MET MetLife 49.77 67.77 9.1 nmf 1.1 nmf nmf 2.2% 54,605 Insurance
MOS Mosaic Co 42.51 67.20 10.4 1.8 1.6 5.4 9% 2.4% 18,102 Materials
MSFT Microsoft 32.70 37.86 12.2 3.5 4.4 6.9 21% 2.8% 272,326 Software & Services
NSC Norfolk Southern 73.98 104.96 14.2 2.1 2.3 8.0 83% 2.8% 23,078 Transportation
PFE Pzer 29.21 37.88 13.9 3.7 nmf 8.3 nmf 3.3% 207,193 Pharma/Biotech/Life Sci
PT Portugal Telecom 4.16 5.93 18.1 0.5 nmf 5.4 nmf 2.1% 3,729 Telecom Services
WMT Wal-Mart Stores 76.90 92.36 15.2 0.5 5.0 8.4 82% 2.4% 251,977 Food & Staples Retailing
W
eve put together a diversifed listing of 20 of our
most favored undervalued dividend-paying stocks.
All trade for signifcant discounts to our determination of
long-term fair value and/or offer favorable risk/reward pro-
fles. Note that, while we always seek substantial capital
Prudent Speculator Dividend Favorites
gains, we require lower appreciation potential for stocks
that we deem to have more stable earnings streams, more
diversifed businesses and stronger balance sheets. The
natural corollary is that riskier companies must offer far
greater upside to warrant a recommendation.
Apple (AAPL)
Shares of consumer electronics giant Apple remain
far below the $700 level that was pierced last September.
While fscal Q3 results beat estimates, many are worried
that the product cycles have been stretched beyond the
time consumers are prepared to wait, particularly with the
iPhone. Also, the company has not refreshed its top-sell-
ing MacBook Pro lineup with Intels new energy-effcient
Haswell line of processors before the back-to-school rush.
Happily, in the quarterly investor call, the company has
promised a fall launch of a new Mac Pro, OS X Mavericks
and iOS 7, in addition to some amazing new products.
Although Apple may see some margin compression dur-
ing the transition period, we believe that the introduction
of cheaper entry-level devices like the iPad Mini and a
refreshed line of premium devices will bolster the bottom
line. AAPL is very much a value investment, given that
it has a low P/E ratio, a superb balance sheet, a big share
buyback program and a generous 2.7% yield.
AVX (AVX)
AVX is a manufacturer and supplier of electronic com-
ponents, including ceramic and tantalum capacitors for
use in products that need to store energy. Approximately
72% of the company is owned by Kyocera of Japan. The
company reported solid second quarter earnings per
share, beating analyst estimates ($0.16 vs. $0.15 consen-
sus) as sales increased by 5% year over year, and its 90-day
backlog grew 6% since the previous quarter. CEO John
Gilbertson explained, One of the advantages of the tablet
As of 08.09.13. N/A=Not applicable. nmf=Not meaningful.
1
Tangible book value.
2
Enterprise value-to-earnings before interest taxes depreciation and amortization.
3
Tangible equity. SOURCE: Al Frank using data from Bloomberg
Target Price Multiples EV/ Debt/ Div Mkt
Symb Company Price Price EPS S TBV
1
EBITDA
2
TE
3
Yld Cap Industry Group
12
is that it has a touchscreen...and the bottom line in this
business is capacitors that we sell are basically flters. As
you put more electronic noise in a circuit with touchpads,
you generally need more of the products we sell. So, a
touchscreen, which is tablet-oriented, tends to be more
positive for us. We believe that tablet computing demand
will continue to build, providing a nice tailwind. Addition-
ally, we like that AVX continues to return money to inves-
tors with a buyback program and dividend yield of 2.7%.
BHP Billiton Ltd (BHP)
Australian conglomerate BHP is one of the worlds
largest miners, with diverse businesses that include alu-
minum, coal, copper, iron ore, mineral sands, oil, gas,
nickel, diamonds, uranium and silver. Though there are
headwinds, including Australias proposed Resource Su-
per Profts Tax and economic diffculties in some regions
of the global economy, we like that the company has a
low-cost, long-life portfolio of expandable operations that
is robust, diverse and well-suited for long-term growth.
We remain optimistic on the long-term demand for BHPs
stable of commodities as global economies continue
to work through their challenges and either accelerate
growth or move into recovery mode, while long-term in-
dustrialization trends continue in China, India and other
emerging markets. BHP generates attractive free cash
fow, supporting a dividend yield of 3.4%.
BioMed Realty Trust (BMR)
BioMed Realty Trust is a REIT that focuses on owning,
leasing, managing and developing commercial spaces for
life science tenants. BMR currently has a real estate port-
folio of approximately 16 million rentable square feet pri-
marily in the U.S. and stabilized occupancy rates above
90%. The leasing side of the business, we believe, will con-
tinue to beneft from the innovation and growth within
the life science industry, as well as the relatively easy ac-
cess to capital for its clients. The asset development and
investing side of the business should provide meaning-
ful opportunity to expand as it launches new projects and
partnerships. We also think that the recent merger with
Wexford Science & Technology will add important aca-
demic research space to the portfolio. Further, we think
the solid dividend yield of 4.7% is quite sustainable.
Caterpillar (CAT)
Caterpillar is the worlds leading manufacturer of con-
struction and mining equipment, diesel and natural gas
engines, industrial gas turbines and diesel-electric loco-
motives. CAT has a dominant share in the U.S. market
and is making headway in emerging economies such as
China, India, Africa and the Middle East. CATs exten-
sive dealer network and reputation for quality products
provide key competitive advantages. While the near-term
outlook remains variable, we like that management is fo-
cused on controlling what it can, such as operating eff-
ciencies, business plan execution, and aftermarket sales
and services. Additionally, we see longer-term benefts
from continuing to migrate production to lower-cost re-
gions. CAT has solid free cash fow generation, which
supports capital allocation strategies that start with
maintaining its A credit rating, followed by investing in
growth, steadily raising the dividend (up by 15% this year
to a yield of 2.8%), repurchasing shares ($2 billion bought
so far in 2013, with another $2.7 billion remaining on the
authorization) and funding the long-term pension plan.
Deere & Co (DE)
Deere is the largest manufacturer and distributor of
agricultural equipment worldwide with leading market
share in large farm-equipment segments. We believe that
DE is the best of the best in the agriculture universe. We
also think that long-term global demand for ag equip-
ment is likely to remain strong as socioeconomic trends
continue to evolve, especially within emerging markets.
Deere shares have retreated from January highs, and we
believe they are offering long-term investors an appealing
entry point. While management has tempered near-term
forecasts, they have also affrmed the full-year earnings
outlook. DE continues to see strong demand trends for
large farm equipment in the U.S., Canada and Brazil, and
we believe strength will build in emerging economies. We
believe that undervalued Deere will continue to utilize its
strong free cash fow to increase its dividend (the yield is
2.5%) and buy back shares.
Eni SpA (E)
Rome-based Eni is a diversifed oil major with vertical-
ly integrated businesses focusing on international explo-
13
ration and production (E&P) and European natural gas,
refning, power generation and chemicals. E shares con-
tinue to face headwinds as Europe slogs through econom-
ic diffculties and some of its more attractive assets are
located in sensitive geopolitical regions. That said, Eni is
widely respected for its strong global diplomatic ties and
its rich, relatively low-cost E&P pipeline of projects. Near-
term economic and geopolitical risks are offset somewhat
by Enis gas and power business, adding a measure of sta-
bility as this segment is less sensitive to volatile commod-
ity prices. Management has been touting its upstream
growth potential and its commitment to share the ben-
efts of windfall energy prices with its shareholders, the
latter illustrated by the generous 4.9% (net) yield.
Ensco PLC (ESV)
Ensco is the worlds second largest offshore driller. The
frm operates across six continents with one of the new-
est jackup and deepwater feets in the contract drilling
industry. In its last few earnings releases, ESV has shown
a relatively impressive ability to keep operating expenses
in check and generate solid free cash fow. We believe that
the outlook for deepwater drilling remains attractive and
Ensco is well positioned to beneft as newbuilds come on
line and it realizes favorable contract rollovers. ESV has
a solid balance sheet and future cash use should provide
another near-term catalyst, coming in the form of addi-
tional rig capacity, debt reduction or share buybacks and
dividend increases. ESV shares trade for 9 times forward
earnings estimates and offer a 3.4% dividend yield.
Foot Locker (FL)
Foot Locker is a leading global retailer of athletic
shoes and apparel. The company operates over 3,300
stores throughout 23 countries and also operates a di-
rect-to-customers business, offering its products to con-
sumers through its internet, mobile and catalog chan-
nels. Although investors have become a bit jittery over
the choppy mall traffc this summer, we believe that the
athletic cycle is still alive and well, with healthy momen-
tum in higher-priced basketball shoes. We like manage-
ments efforts to more closely collaborate with vendors on
products, to develop private label apparel and to remodel
stores. Foot Locker generates solid free cash fow and the
frm sports a strong balance sheet with over $6 of net cash
per share. FL currently yields 2.3%.
Corning (GLW)
Corning is the leading designer and manufacturer of
glass and ceramic substrates found in liquid crystal dis-
plays, fber-optic cables, automobiles and laboratory prod-
ucts. The company has fve primary divisionsdisplay
technologies, telecommunications, environmental tech-
nologies, specialty materials and life sciences. We believe
that while there may be short-term diffculties to over-
come, the company is well-positioned to take advantage of
its market-leading product lines over the long-term. Go-
rilla Glass, Cornings ultra-popular mobile device compo-
nent, has continued to gain traction with manufacturers
and consumers, while television panel pricing has been
relatively stable and a new endeavor in the automotive
glass space (sunroofs and instrument clusters) is promis-
ing. Cornings inexpensive valuation (P/E ratio less than
12) and 2.7% dividend yield are also appealing.
HSBC Holdings PLC (HBC)
Founded in 1865 to fnance trade between Asia and
the West, HSBC is today one of the worlds largest bank-
ing and fnancial services organizations serving some
58 million customers. Headquartered in London, HSBC
operates through long-established businesses and an in-
ternational network of thousands of offces in more than
80 countries and territories. While HSBC has had to over-
come challenges from the credit crisis, its true global foot-
print gives it unparalleled ability to offer services around
the world. We are pleased that management is refocusing
on core strengths, as well as increasing its presence in
fast-growing emerging markets. Additionally, cost cut-
ting initiatives seem to be having a positive impact and
the strengthened balance sheet has left management con-
structive on increased dividends as well as the potential
for future stock buybacks. HBC (note the ticker symbol) is
trading at 9 times estimated earnings and yielding 4.5%.
MDC Holdings (MDC)
MDC Holdings is a builder and seller of homes in Cali-
fornia, Colorado, Maryland, Virginia, Arizona and Nevada
under the name Richmond American Homes, and an orig-
14
inator of mortgage loans for home buyers. We believe that
the company is well positioned with a strong backlog, a
broad geographic footprint, solid net-new-order momen-
tum and improved gross margins. Though interest rates
have ticked up, the historically low environment should
continue to help the company sell to customers that have
been sitting on the sidelines, waiting for the economic
picture to improve. While there might be some lingering
uncertainty for buyers in the near term, we like that the
company has continued to actively acquire land in attrac-
tive markets across the country. MDC boasts a solid bal-
ance sheet and a healthy 3.4% dividend yield.
Medtronic (MDT)
Medtronic is one of the largest healthcare equipment
companies in the world, developing and manufacturing
therapeutic medical devices for chronic diseases. Its im-
plantable products, including pacemakers, defbrillators,
heart valves, stents, insulin pumps and spinal fxation
devices, are marketed to healthcare institutions and phy-
sicians in the U.S. and overseas, with foreign revenue ac-
counting for more than 40% of total sales. We like that the
relatively new management team continues to execute on
its strategy to enhance growth via better R&D productiv-
ity and we are encouraged by recent global market share
gains and momentum in emerging markets. Additionally,
we believe the companys pipeline and newer products
offer great potential. MDT has a solid balance sheet and
generates strong free cash fow, of which management ex-
pects $25 billion over the next fve years, with 50% expect-
ed to be returned to holders via buybacks and dividends.
MDT shares are attractively valued relative to its peers,
not to mention its historic average multiples.
MetLife (MET)
MetLife is a global provider of insurance, annuities
and employee beneft programs, with leading market po-
sitions in the U.S., Japan, Latin America, Asia, Europe
and the Middle East. We are fond of METs underwriting
discipline and its position as the market leader in group
life insurance. We also like that MET continues to pull
back on its variable annuity business, focusing on more
traditional insurance sales. The company has a relatively
strong capital position and, though the process took time,
we were very glad the frm has de-registered as a bank.
Having (for the time being) escaped Uncle Sams System-
atically Important Financial Institution designation, we
think that MET will become a bit more aggressive with
buybacks and dividend increases. MET boasts a forward
P/E multiple below 9 and a dividend yield of 2.2%.
Mosaic Co (MOS)
Mosaic, the worlds largest integrated producer of
phosphate, and the third largest global producer of pot-
ash, markets its North American-based production glob-
ally via export marketing groups and distribution assets
in 11 countries. Following an announcement by the CEO
of a major Russian potash producer that his company was
leaving a decades-old potash cartel and would pursue a
volume-based strategy that could damage global potash
pricing power industry wide, MOS shares fell by more
than 20%. Though anything can happen, we note that
these types of spats in cartels often dont result in anar-
chy, but instead lead to new agreements that evolve over
time. In the interim, we like that Mosaic has a fortress bal-
ance sheet that includes $6.25 per share of net cash, and
that the frm generates strong free cash fow, giving man-
agement operational fexibility to return capital to share-
holders via share repurchases and/or dividend increases.
While the operating environment will be challenging over
the coming quarters, the frm stands to beneft long term
from the positive global macro agriculture trends. Newly
inexpensive MOS offers a dividend yield of 2.4%.
Microsoft (MSFT)
Microsoft is the worldwide leader in software, services
and solutions that help people and businesses realize their
full potential. Launched in 2012, sales of the companys
fagship Windows 8 operating system have been slow and
the company desperately needs to launch its 8.1 (Blue)
update, in order to restore some of the legacy functions
of the software and win back some of the customer base.
In addition to the Windows 8.1 update, the company has
room to improve on its Microsoft Offce 2013 suite, which
still doesnt offer a fuid user experience across multiple
devices like competing products. We believe that straight-
forward access to the Cloud is of tremendous importance
to all MSFT products and normal teething problems in
15
new interfaces, like integrated touch-screen technology,
are likely to make consumers somewhat slower to adopt
the platforms. We expect enterprise customers will take a
more serious look at adopting Windows 8.1, though still at
a relatively slow rate. With plenty of bad news priced into
the stock, we look favorably upon the companys growth
prospects across its business segments, and we are drawn
to the dividend yield of 2.8% and the modest forward P/E.
Norfolk Southern (NSC)
Norfolk Southern provides rail transportation service
in the eastern U.S., operating 21,000 miles of route that
spans 22 states and Washington D.C. The rail company
has an extensive intermodal and coal service network and
a signifcant general freight business, including the larg-
est automotive shipping business in North America. NSC
has been one of the best run railroads on the continent,
shown by its strong free cash fow generation and attrac-
tive operating ratios over the past fve years. Norfolk, like
its counterparts, continues to face headwinds from the be-
leaguered coal market. While we believe this struggle has
not fully run its course, we see a foor building and believe
the long-term prospects for export coal are still attractive.
Additionally, we like NSCs overall growth trends in its
intermodal business. With solid business execution, good
fnancial footing, cash fow generation of better than $1
billion in 6 of the last 7 years and a 2.8% dividend yield,
the shares offer attractive long-term prospects.
Pzer (PFE)
One of the worlds largest research-based pharmaceu-
tical frms, Pfzer discovers, develops, manufactures and
markets medicines for humans and animals. Its products
include prescription drugs, non-prescription self-medica-
tions and animal health products such as anti-infective
medicines and vaccines. While recently approved generic
forms of Lipitor will very likely knock off one of Pfzers
key drugs, the companys foundation remains solid, with
a diverse basket of patent-protected drugs and other pop-
ular products, an appealing pipeline of new drugs and
deep pockets to offer competitive advantages in devel-
oping new drugs. In addition to the solid balance sheet
and strong free cash fow, we like that PFE is attractively
valued against its peers and that the company continues
to show its commitment to returning capital to sharehold-
ers. In fact, Pfzer recently announced a new $10 billion
repurchase authorization, adding to the $3.9 billion re-
maining from a prior buyback. PFE currently yields 3.3%.
Portugal Telecom (PT)
While turbulence in Europe has not helped and its
25% ownership stake in Brazilian telecom provider Grupo
Oi has seen a plunge in value this year, we remain fans
of international telecommunications provider Portugal
Telecom. The company, which also beneftted in the latest
quarter from its global asset base (58% and 43% of revenue
and EBITDA, respectively), continues to invest around
the world, using cash to acquire 4G network licenses, en-
hance residential internet speeds with fber optic infra-
structure and build out its TV product. That said, we like
that even though a signifcant amount of capital spending
has been completed, management remains disciplined in
its approach to growth and continues to be proactive in
shoring up the balance sheet. In sum, we believe that PTs
geographically diverse revenue stream will contribute
positively to earnings stability, while generating the cash
fow needed to keep borrowing costs in check and support
the revised dividend policy (0.10 euros per annum).
Wal-Mart Stores (WMT)
Wal-Mart is the worlds largest retailer with a presence
in 27 countries, operating supercenters and wholesale
warehouse clubs. In addition, the company is rolling out
smaller store formats, including exclusive grocery stores,
in an effort to penetrate historically under-represented
urban areas. The company continues to gain momentum
as it executes its Every Day Low Cost and Price (EDLC
& EDLP) initiatives across the international segment. We
believe that this unit, along with its growing e-commerce
business, gives Wal-Mart attractive long-term growth op-
portunities. Though there are concerns over the potential
growth rates of the domestic business, we believe that
there is still a solid sales outlook, supported by a leader-
ship team focused on such things as increasing the mer-
chandise assortment at attractive price points and con-
tinuing to improve its price-match guarantee programs.
With a solid balance sheet, lower-risk Wal-Mart offers a
reasonable valuation and 2.4% dividend yield.
Al Frank Asset Management, Inc
85 Argonaut, Suite 220
Aliso Viejo, CA 92656
P: 949.499.3215 / 888.994.6827 F: 949.499.3218
A division of:
AFAM Capital, Inc.
12117 FM 2244, Bldg. 3, Suite 170
Austin, TX 78738
AFAM Capital is committed to assisting our clients build wealth. We are a resource
for value-based investor information in the fnancial community, where we
combine our simple philosophy of buying securities that we believe are undervalued
for their long-term capital appreciation. We use our experience, hard work and
intensive research to give you actionable investment information that can be used
by individual investors.
For information regarding managed accounts,
please call us toll free at 888.994.6827
or visit us at alfrank.com.
Important Information
Readers should know we discriminate among potential investments primarily by their relative valuation metrics
and our assessments of stock-specic risk. We buy only those stocks we nd undervalued along several lines
relative to their own trading history, those of their peers or that of the market in general. The prices at which
well buy and sell stocks incorporate a range of fundamental risks (e.g. credit, customer and competitive
dynamic) that we believe the companies may face over our normal 3-to-5-year investing time horizon.
It is important to note that the Russell study period is quite short compared to the history of the market and
that the ndings from this portion of the study would not necessarily hold over to future periods.
To perform the Russell portion of the study from 1992 to present, we constructed a portfolio that mimics
the Russell 3000 index. We rst utilized a dividend payment series developed with Thomson Reuters and
Russell Investments to categorize each member of the Russell 3000 into dividend- and non-dividend-paying
groups for each month from July 1992 through June 2013. A stock was considered a dividend payer if it
had paid a dividend in the last twelve months. We utilized the last day of each July as, generally speaking,
index membership subsequent to that day each year accounts for changes from the annual reconstitution of
the index. From those two groups we then generated an equal-weighted portfolio return series, in addition
to a capitalization-weighted return series consistent with each stocks actual weighting in the Russell 3000.
Companies in the Russell 3000 without performance history were removed each month, after the companies
were broken into the various groups. The resulting returns series, combined with the actual Russell 3000
return series, form the basis of this study.
To perform the portion of the study from 1927 to present, we utilized the dividend-weighted portfolio data
from Eugene F. Fama and Kenneth R. French. The dataset is broken into four groups: non-dividend paying,
top 30% of dividend payers, middle 40% of dividend payers, and bottom 30% of dividend payers.
Opinions expressed are those of Al Frank Asset Management, a division of AFAM Capital, Inc., are subject to
change without notice and are not intended to be a forecast of future events, a guarantee of future results or
investment advice.
Past performance may not be indicative of future results. Therefore, you should not assume that the future
performance of any specic investment or investment strategy will be protable or equal to corresponding
past performance levels.
AFAM Capital, Inc. is registered with the Securities & Exchange Commission, is editor of The Prudent
Speculator (TPS) newsletter and is the Investment Advisor to certain no-load proprietary mutual funds and
individually managed client accounts. Registration of an investment advisor does not imply any level of skill
or training.
AFAM adheres to the same investment principles and philosophies in managing value-oriented individual
client accounts, its proprietary value mutual funds and in the information that appears in its investment
advisory newsletter, which is long-term growth of capital by owning a diversied portfolio of securities that
are undervalued and holding them for their long-term potential appreciation. Diversication does not protect
against loss in declining markets.
As adviser to its own proprietary mutual funds and manager of individual client accounts, AFAM may purchase,
sell or hold positions in the securities that appear in this presentation. Also, employees may hold, purchase
or sell any of the stocks that appear in this presentation subject to AFAMs Code of Ethics, Insider Trading,
and Personal Trading policies.