Sure Dividend. September 2017 Edition LONG-TERM INVESTING IN HIGH QUALITY DIVIDEND STOCKS. By Ben Reynolds & Nicholas McCullum. Edited by Brad Beams

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1 Sure Dividend LONG-TERM INVESTING IN HIGH QUALITY DIVIDEND STOCKS September 2017 Edition By Ben Reynolds & Nicholas McCullum Edited by Brad Beams

2 2 Table of Contents Opening Thoughts - The Similarities Between Dividend Growth Investing and Warren Buffett s Investing Style... 3 The Sure Dividend Top 10 - September Analysis of Top 10 Stocks... 5 W.W. Grainger (GWW)... 5 Exxon Mobil (XOM)... 8 Target (TGT) Cardinal Health (CAH) Occidental Petroleum (OXY) International Business Machines Corporation (IBM) Nike, Inc. (NKE) Helmerich & Payne (HP) Kohl s Corporation (KSS) Qualcomm (QCOM) Closing Thoughts - The Difference Between Valuation Risk and Business Risk Portfolio Building Guide Examples Performance of the Sure Dividend Strategy List of Stocks by Sector List of Stocks by Rank... 43

3 Opening Thoughts - The Similarities Between Dividend Growth Investing and Warren Buffett s Investing Style Warren Buffett is inarguably the best investor of our time. He has grown his investment conglomerate, Berkshire Hathaway, to a market capitalization of ~$444 billion, and often shares his investment knowledge accumulated over decades through his insightful Berkshire Hathaway shareholder letters. Warren Buffett s investment success is not up for debate. Conversely, there is some notable friction on what kind of investor Warren Buffett really is. Most would say that Buffett is primarily a value investor. In the early days of his career, Warren Buffett ran a quasi-hedge fund called the Buffett Partnership where he invested in micro-cap stocks often trading below liquidation value. During this time, Buffett was without a doubt a devoted value investor. This did not last. Warren Buffett s investment approach changed significantly over time. The Oracle of Omaha began to favor long-term investing in high-quality businesses with durable competitive advantages. Don t just take my word on it. Here is Buffett himself describing Berkshire Hathaway s investment strategy: We select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business: (1) favorable long-term economic characteristics; (2) competent and honest management; (3) purchase price attractive when measured against the yardstick of value to a private owner; and (4) an industry with which we are familiar and whose long-term business characteristics we feel competent to judge. The description of Warren Buffett s transformed investment philosophy is very much aligned with the Sure Dividend strategy, and the approach of many other dividend growth investors. This symmetry can also be seen when looking at Buffett s current stock holdings. Today, Warren Buffett s investment portfolio contains many legendary dividend growth stocks, including the Coca-Cola Company (KO), Johnson & Johnson (JNJ), Wal-Mart (WMT), Procter & Gamble (PG), and Verizon Communications (VZ), among others. About 91% of Warren Buffett s portfolio is invested in dividend stocks, and his top 4 holdings have an average dividend yield of 2.6%. By and large, Buffett s portfolio resembles that of a dividend investor. Given Buffett s investing success, it is useful to consider the other similarities between his investing style and the Sure Dividend strategy. The first and perhaps most notable congruence between dividend growth investing and Warren Buffett s strategy is the emphasis on competitive advantages. Buffett s portfolio contains many businesses that have superb competitive positioning because of their brand (Kraft Heinz, Apple), their scale (Wells Fargo, Phillips 66), or their presence in a highly regulated industry (Moody s, MasterCard). Dividend growth investors also search for stocks with robust competitive advantages. The Sure Dividend newsletter identifies these businesses by screening securities for low volatility; competitive advantages allow these stocks to report relatively stable operating performance over time. The similarities do not stop there: Buffett s portfolio has an emphasis on dividend yield; only 11 of his 43 positions do not pay dividends; and many of his holdings have paid rising dividends for decades. Warren Buffett is a highly skilled investor. We view his closet dividend growth investing strategy as another piece of evidence to support the merits of long-term dividend growth investing for Sure Dividend investors. 3

4 The Sure Dividend Top 10 - September 2017 Name Price Fair Value Score Months 2017 P/E Yield Payout Growth Beta W.W. Grain. (GWW) $164 $ % 46% 6.0% 0.74 Exxon Mobil (XOM) $77 $ % 39% % 0.81 Target (TGT) $56 $ % 57% 4.5% 0.61 Cardinal Health (CAH) $68 $ % 43% 13.0% 0.80 Occidental Pet. (OXY) $60 $ % 50% 4 3.0% 0.65 IBM (IBM) $144 $ % 49% 4.3% 0.97 Nike, Inc. (NKE) $53 $ % 29% 13.8% 0.59 Helm. & Payne (HP) $43 $ N/A 6 6.6% 73% 7 8.0% 1.20 Kohl s Corp. (KSS) $40 $ % 61% 7.0% 1.15 Qualcomm (QCOM) $52 $ % 52% 6.0% 1.29 Notes: The Score column shows how close the composite rankings are between the top 10. The highest ranked stock will always have a score of 1. The Months column shows the number of consecutive months a stock has been in the Top 10. The Price column shows the price as of the date the newsletter was published. The Fair Value column gives a rough estimate of the fair value of each stock. Real fair value is unknowable. The Growth column shows the expected future growth rate of intrinsic value on a per-share basis used in rankings P/E shows current price divided by expected fiscal 2017 adjusted earnings-per-share. All but one (KSS) of this month s top 10 have been previously recommended in the Sure Dividend Newsletter. Three stocks changed from the previous month. Vector Group, Johnson Controls, and CVS Health were replaced by Nike, Helmerich & Payne, and Kohl s Corporation. The stability of the top 10 list shows the ranking method is consistent, not based on rapid swings. Stocks that fall out of the top 10 are holds, not sells. Selling occurs rarely; only when a stock becomes extremely overvalued, or if it reduces its dividend. Extremely overvalued is qualified as a stock with a price-to-earnings ratio (P/E ratio) over 40. An equally weighted portfolio of the top 10 has the following characteristics: Top 10 S&P500 Dividend Yield: 4.2% 1.9% Growth Rate: 7.7% 7.4% Expected Total Returns: 11.9% 9.3% 4 1 Expected 2017 cash flow per share used, not earnings. 2 Using fiscal 2018 earnings estimates. Cardinal Health has already completed its fiscal EPS are very low due to low oil prices, and do not reflect real earnings power, resulting in the high P/E ratio. 4 Expected 2017 cash flow per share used, not earnings. 5 Using fiscal 2018 earnings estimates. Nike has already completed its fiscal Helmerich & Payne is expected to report a net loss in fiscal Accordingly, the P/E ratio is not a useful valuation metric. 7 Expected 2017 cash flow per share used, not earnings.

5 Analysis of Top 10 Stocks W.W. Grainger (GWW) Overview & Current Events W.W. Grainger is the largest business-to-business distributor of maintenance, repair, and operating (MRO) supplies and other related products and services. The company is remarkably shareholderfriendly, with 45 years of consecutive dividend increases and 3.6 million shares repurchased in Grainger has a significant ecommerce presence with ~65% of the company s orders originating from online channels. The company recently (6/5/17) bolstered its online presence through the launch of Gamut.com, an ecommerce platform designed to provide useful information to industry professionals. Grainger s headline event of the summer was the company s second quarter earnings release (7/19/17). Quarterly sales of $2.6 billion increased 2% from the same period a year ago, in-line with the company s expectations. Profit numbers were weak; Grainger s adjusted earnings-per-share declined ~5% year-over-year, again in-line with expectations. The decline was due primarily to price cuts. Grainger s pricing was previously higher than its competitors on many items. Grainger reiterated sales and earnings-per-share guidance for the full-year of The company is expecting sales growth of 1%-4% and adjusted EPS in the range of $10.00-$11.30 (down from $11.58 in 2016) is likely to print a temporary EPS drawdown, but the company s streamlining and pricing improvements should leave it well-positioned for long-term growth moving forward. Competitive Advantage & Recession Performance Grainger s competitive advantage comes from its distribution and supply chain excellence, which creates significant cost savings to be passed on to customers via lower product prices. W.W. Grainger s focus on selling business-to-business industrial supplies means that it performs well during recessions. Grainger saw adjusted earnings-per-share decline by 14% during the worst of the recession, and the company set a new record for earnings-per-share in the subsequent year. Growth Prospects, Valuation, & Catalyst W.W. Grainger has grown its adjusted earnings-per-share at fantastic double-digit rates over the past decade. It is reasonable to expect 8%-10% growth over the long run, driven by online sales growth. Enduring investor pessimism stemming from the competitive threats of other ecommerce participants (notably Amazon) has led to a prolonged buying opportunity in this stock. Grainger is trading at a price-to-earnings ratio of about 14.9 using the midpoint of 2017 s expected earnings, which compares very favorably to its 5-year average of ~20. A P/E of 20 combined with 2017 s earnings guidance gives a fair value estimate of $213 for this high-quality stock, a ~30% upside from current prices. Key Statistics, Ratios, & Metrics Maximum Drawdown 8 : 56% 10 Year EPS Growth Rate: 13.0% Dividend Yield: 3.1% 10 Year Dividend Growth Rate: 17.0% Most Recent Dividend Increase: 4.9% 10 Year Historical Avg. P/E Ratio: 18.1 Estimated Fair Value: $ Year Annualized Total Return: 7.8% Dividend History: 45 years of increases Next Ex-Dividend Date: 11/10/17 (estimated) 5 8 Maximum drawdown occurred in October of 2000

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8 Exxon Mobil (XOM) Overview & Current Events Exxon Mobil is the world s largest publicly traded integrated energy company with a market capitalization of $340 billion. The company operates in four segments: Upstream, Downstream, Chemical, & Corporate and Financing. Exxon Mobil can trace its roots back to Rockefeller s Standard Oil and is a Dividend Aristocrat, with 35 years of consecutive dividend increases. Earlier this summer, Exxon Mobil reported (7/28/17) another quarter of significantly improved financial performance. Second quarter net income increased 97% while diluted earnings-per-share increased 90%, partially offset by an increased share count. Year-to-date figures are even better: Exxon s net income and diluted earnings-per-share more than doubled, growing by 110% and 106%, respectively, from the prior year s six-month period. Most importantly, Exxon s $0.77/share quarterly dividend is now covered by its earnings ($0.78 per diluted share in the quarter). Exxon s dramatically improved financial performance was unsurprisingly caused by higher oil prices. Exxon also benefitted from disciplined spending. Year-to-date capital expenditures of $8.1 billion decreased 21% year-over-year, and are well below half of the company s full-year capex guidance of $22 billion. Despite Exxon Mobil s dramatic recovery from last year s performance, the stock dropped by ~2% post-earnings as performance came in slightly below analyst expectations and Exxon also posted inferior performance relative to some of the other energy supermajors. Looking ahead, we expect Exxon s performance will continue to improve and consider this company to be one of the safest energy plays in today s market. Competitive Advantage & Recession Performance Exxon Mobil s most notable competitive advantage is its industry-leading size and scale, which allows it to operate worldwide and generate considerable operational efficiencies. Exxon Mobil s financial strength which garners an AA+ credit rating from S&P - is hard to overstate, and allows the company to aggressively pursue growth opportunities that its smaller, weaker peers cannot. Exxon Mobil s earnings-per-share declined by 54% during the financial crisis. Profits will naturally swing along with commodity prices, but Exxon s financial strength gives it the flexibility to endure even the worst downturns in oil prices. Growth Prospects, Valuation, & Catalyst Exxon Mobil s near-term growth is largely dependent on rising oil prices. The company s adjusted earnings-per-share are expected to return to the ~$8.50 range over the next several years, which combined with a price-to-earnings ratio of 13 (in-line with the company s historical average) gives a long-term fair value estimate of $110. Shares are currently trading for around $77/share. Key Statistics, Ratios, & Metrics Maximum Drawdown 9 : 47% 10 Year EPS Growth Rate: -1.5% Dividend Yield: 4.0% 10 Year Dividend Growth Rate: 9.5% Most Recent Dividend Increase: 2.7% 10 Year Historical Avg. P/E Ratio: 12.9 (excluding 16) Estimated Fair Value: $ Year Annualized Total Return: -0.4% Dividend History: 35 years of increases Next Ex-Dividend Date: 11/11/17 (estimated) 8 9 Maximum drawdown occurred in October of 1974.

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11 Target (TGT) Overview & Current Events Target is a well-known U.S. retail giant with headquarters in Minneapolis. Founded in 1902, the company operates 1,816 stores with a supply chain of 38 distribution centers. Target s headline event in August was the company s second quarter earnings release (8/16/17), which was better than the market had anticipated on both the top and bottom lines. Sales of $16.4 billion expanded 1.6% and adjusted earnings-per-share of $1.23 were unchanged from the prior year s period. Importantly, Target delivered comparable store sales growth of 1.3% and digital channel sales growth of 32%. Target also repurchased $296 million of company stock in the quarter. Looking ahead, Target raised its full-year 2017 adjusted earnings-per-share guidance to $4.34-$4.54 (up from $3.80-$4.20 previously). Using the midpoint of each band, Target s new guidance is up 11% from the company s previous forecast. All said, it was an excellent quarter from this retail giant and Target s stock rose ~5% after the earnings release (although shares retraced these gains through the rest of the month). Previously, Target announced (8/14/17) the acquisition of transportation technology company Grand Junction in what appears to be an accelerated effort to transform the company s supply chain. The terms of the deal were not disclosed to the public. Target also appears to be laser-focused on technology improvements; in the past month, the company hired (8/24/17) a new Chief Strategy and Innovation Officer from McKinsey while also breaking ties (8/29/17) with Amazon Web Services (AWS) its cloud computing provider opting instead to build its own technology infrastructure. Competitive Advantage & Recession Performance Target s competitive advantage comes from its unique mix of low prices and high-quality stores. Target also has exceptional brand equity Forbes estimates the Target brand to be worth $7.3 billion. As a discount retailer, Target is quite recession-resistant. The company saw adjusted earnings-pershare decline by 14% peak-to-trough during the worst of the financial crisis. Earnings rebounded the next year and the company saw a new level of per-share profitability two years later. Growth Prospects, Valuation, & Catalyst Target s future growth will be driven by its transition to a true omni-channel shopping experience. Digital sales contributed just 4.3% to Target s sales in the last quarter, but have grown at an astounding 28% annual rate, on average, since 2Q2014. Continued 20%+ digital sales growth is highly likely. Despite Target s remarkable online growth runway, the company is trading at a rock-bottom valuation just 12.3x the midpoint ($4.44) of 2017 s adjusted earnings-per-share guidance. Target s long-term average price-to-earnings ratio of 15.3 implies a fair value of $68, a ~21% premium to today s price. Investors should also note that Target s dividend yield of 4.5% is more than double the average S&P 500 dividend yield and near an all-time company high, compensating the patient buy-and-hold investor. Key Statistics, Ratios, & Metrics Maximum Drawdown 10 : 63% 10 Year EPS Growth Rate: 5.5% Dividend Yield: 4.4% 10 Year Dividend Growth Rate: 19.5% Most Recent Dividend Increase: 3.3% 10 Year Historical Avg. P/E Ratio: 15.3 Estimated Fair Value: $68 10 Year Annualized Total Return: 0.8% Dividend History: 46 years of increases Next Ex-Dividend Date: 11/14/17 (estimated) Maximum drawdown occurred in March of 2009 during the worst of the Great Recession.

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14 Cardinal Health (CAH) Overview & Current Events Cardinal Health is one of the big three drug distribution companies along with McKesson and AmerisourceBergen. Cardinal Health serves over 25,000 U.S. pharmacies and more than 70% of U.S. hospitals. The company is also a top 10 medical distributor in China. Early last month, Cardinal Health s stock experienced a significant ~8% drop after the company reported earnings (8/2/17) for the fourth quarter and full-year of fiscal On the surface, results were quite good: the quarter s adjusted EPS increased by 15%, complimented by 5% revenue growth. The smaller Medical segment continues to offset shrinking profits in the core Pharmaceutical segment, posting 13% profit growth compared to a 7% decline in the later. So why the 8% drop in share price? Cardinal Health also announced guidance for fiscal 2018, which deeply disappointed investors. The company expects mid-single-digit revenue growth, and adjusted earnings-per-share of $4.85-$5.10 (down from $5.40 in fiscal 2017). While a small decline in next year s earnings is certainly not positive news, it appears the market has overreacted; this stock holds appeal for long-term investors. Earlier this year, Cardinal Health announced (4/18/17) the purchase of Medtronic s Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency segments for $6.1 billion. The deal closed on July 31 and is expected to contribute $0.21 (or ~4%) to 2018 s adjusted earnings-per-share. Competitive Advantage & Recession Performance Cardinal Health has a scale-based competitive advantage and operates in an oligopoly (along with McKesson and AmerisourceBergen) that is extraordinarily price competitive. In the last quarter, the company reported a net profit margin of just 1.26%, which has the unintended benefit of discouraging potential competitors and makes Cardinal s scale-based competitive advantage even more powerful. Like many healthcare stocks, Cardinal Health is exceptionally recession-resistant. Earnings-per-share declined during the Great Recession, but only because of the spinoff of CareFusion. Revenues, dividends, and segment profits continued to grow despite a broad economic downturn. Growth Prospects, Valuation, & Catalyst Cardinal Health s long-term growth will come from the secular trend of rising prescription drug purchases. Similar to midstream energy companies, Cardinal Health operates a toll road business model, so its profits are insulated from changes to drug pricing compared to pure-play pharmaceutical companies. With that said, competitive pricing practices among drug distributors and lowered 2018 guidance has led to widespread pessimism, presenting a buying opportunity for prospective investors. Cardinal Health anticipates earning $5/share in fiscal 2017, indicating that the company is trading at a price-to-earnings ratio of ~13.6 right now. If 2018 s performance beats expectations, we see Cardinal trading at 17x earnings for a fair value estimate of $85 (a premium of ~25% from current prices). Key Statistics, Ratios, & Metrics Maximum Drawdown 11 : 63% 10 Year EPS Growth Rate: 1.5% Dividend Yield: 2.7% 10 Year Dividend Growth Rate: 21.0% Most Recent Dividend Increase: 3.0% 10 Year Historical Avg. P/E Ratio: 16.8 Estimated Fair Value: $85 10 Year Annualized Total Return: 1.5% Dividend History: 32 years of increases Next Ex-Dividend Date: 9/30/ Maximum drawdown occurred in November of 2008.

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17 Occidental Petroleum (OXY) Overview & Current Events Occidental Petroleum is a multinational oil and gas company that is primarily involved in energy exploration and production (E&P). Occidental also has two smaller segments: the manufacturing of industrial chemicals, plastics, and fertilizers; and the operation of pipelines. The company s second quarter earnings release (8/2/17) showed a continued rebound in operations. Occidental exceeded expectations, with revenues up 40.6% from the prior year s period and adjusted earnings-per-share of $0.15 showing significant improvement from last year s net loss of $0.18. In the first quarter (5/4/17), Occidental previously reported adjusted earnings-per-share of $0.15, which was significant because it ended five consecutive quarters of net losses for the company. Unsurprisingly, the main driver of Occidental s operational progress was an improved oil price environment, which contributed to superior financial results across each of the company s three operating segments. Previously, Occidental Petroleum increased (7/13/17) its quarterly dividend to $0.77 per share, representing a 1.3% increase from the prior year s payout. This marks Occidental s 15 th consecutive annual dividend increase, solidifying its stance as a member of the Dividend Achievers. Competitive Advantage & Recession Performance Occidental Petroleum s competitive advantage comes from its size and technical expertise in its three operating segments: E&P, chemicals, and pipelines. Occidental s size, scale, and diversified business model allows it to remain viable in even the toughest operating environments (as we ve seen recently). Occidental Petroleum is not the most defensive stock in this month s newsletter. The company saw adjusted earnings-per-share decline by 58% during the financial crisis and reported losses in both 2015 and 2016 due to low oil prices. With that said, Occidental is well-capitalized. Cash and equivalents totaled $2.2 billion at the end of the quarter (up from $1.5 billion previously), which compares favorably to its aggregate quarterly dividend payments ~$584 million. Growth Prospects, Valuation, & Catalyst Occidental Petroleum s main catalyst is an improved oil price environment. On a conference call earlier this year, management noted that every $1/barrel increase in the price of crude oil increases Occidental s annual operating cash flow by about $110 million. Over the past decade, Occidental has traded at an average price-to-earnings ratio of 13.4 (excluding 2015 and 2016, when the company reported operating losses). Occidental is expected to earn about $0.95 per share this year and $5.00 per share by Earnings-per-share of $5.00 gives a long-term fair value estimate of $67 at its long-term average price-to-earnings ratio of For context, OXY is trading at ~$60 right now. While fair value is unlikely to be met until oil prices recover (as we expect), investors can sit back and happily collect Occidental s 5.2% dividend yield in the meanwhile. Key Statistics, Ratios, & Metrics Maximum Drawdown 12 : 63% 10 Year EPS Growth Rate: -11.5% Dividend Yield: 5.2% 10 Year Dividend Growth Rate: 16.5% Most Recent Dividend Increase: 1.3% 10 Year Historical Avg. P/E Ratio: Estimated Fair Value: $67 (long-term) 10 Year Annualized Total Return: 3.8% Dividend History: 15 years of increases Next Ex-Dividend Date: 09/08/ Maximum drawdown occurred in March of Excluding 2015 and 2016

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20 International Business Machines Corporation (IBM) Overview & Current Events IBM was founded in 1911 and is a top 10 U.S. technology company by market capitalization. IBM operates in five segments: Technology Services & Cloud Platforms, Global Business Services, Systems, Cognitive Solutions, and Global Financing. IBM s recent tendency to report declining revenue and stagnant or slightly rising earnings-per-share continued with the company s second quarter earnings release earlier this summer (7/18/17). Revenue declined 5% year-on-year (3% in constant currency) while adjusted earnings-per-share increased by a modest 1%. Importantly, IBM s Strategic Imperatives revenue which includes social, mobile, analytics, cloud, and security technologies contributed $34.1 billion to quarterly revenue, an 11% (12% in constant currency) increase from the prior year s period. This was IBM s 21 st consecutive quarter of declining revenue, which resulted in a number of downgrades from equity analysts; however, we maintain that investors are likely to be handsomely rewarded if IBM s turnaround is successful. IBM is taking advantage of widespread investor pessimism by repurchasing a large number of company shares at undervalued prices. In the second quarter, IBM spent $1.4 billion on share repurchases. IBM has $2.4 billion (less than two quarters worth) remaining on its existing share repurchase authorization, so an increase to its current buyback is likely. Competitive Advantage & Recession Performance IBM s largest competitive advantage as a technology company comes from its existing intellectual property and future innovation capabilities. IBM files an astounding number of patents; 2016 saw IBM be the leader in U.S. patents awarded for the 24 th consecutive year, driven by its ~$6 billion annual R&D budget. IBM has a long-term goal of investing 6%-7% of revenue in R&D each year, showing its willingness to play the long game in the ever-competitive information technology sector. IBM s recession resiliency was demonstrated during the Great Recession. The company increased its adjusted earnings-per-share by 39.4% from Looking ahead, IBM is currently wellpositioned to survive any upcoming downturns. IBM ended the second quarter with $11.7 billion of cash and equivalents, which compares favorably to core (non-global Financing) debt of $16.7 billion. Growth Prospects, Valuation, & Catalyst Long-term, IBM s growth will be driven by the expansion of the Strategic Imperatives businesses, whose robust growth continues to somewhat offset a secular decline among the broader IBM enterprise. A few quarters of consistent revenue growth should catalyze IBM s valuation upwards. IBM s adjusted earnings-per-share guidance for fiscal 2017 is at least $ Using this guidance, IBM is trading at a price-to-earnings ratio of just 10.4x. The company s 2017 guidance combined with a P/E of 13 gives a fair value estimate of $179, a premium of 24% from its current price. Key Statistics, Ratios, & Metrics Maximum Drawdown 14 : 77% 10 Year EPS Growth Rate: 10.0% Dividend Yield: 4.2% 10 Year Dividend Growth Rate: 19.0% Most Recent Dividend Increase: 7.1% 10 Year Historical Avg. P/E Ratio: 12.4 Estimated Fair Value: $ Year Annualized Total Return: 4.1% Dividend History: 22 years of increases Next Ex-Dividend Date: 11/8/17 (estimated Maximum drawdown occurred in August of 1993.

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23 Nike, Inc. (NKE) Overview & Current Events Nike is a designer, developer, and marketer of footwear, apparel, equipment, and athletic accessories. The company was founded in 1964 by Phil Knight and has grown to a market capitalization of $98 billion. Through a dual-class share structure, Mr. Knight retains effective control of the long-term direction of Nike; his holding company Swoosh LLC owns ~78% of Nike s privately-held Class A shares, which holds the power to elect 10 members of Nike s 14-person Board of Directors. Nike s most notable news in recent months was the publication (6/29/17) of its fourth quarter earnings release. Nike beat expectations on both the top and bottom lines, with revenue of $8.7 billon growing 5.3% year-on-year and diluted earnings-per-share rising 22%. For the full year of fiscal 2017, Nike s diluted earnings-per-share rose 16%. Importantly, the quarter s digital commerce sales grew by 30% while Nike s direct-to-consumer revenues expanded by 18%. Nike s impressive performance was driven by global revenue growth, lower selling and administrative expenses, and a reduced share count. More recently, Nike along with other sports apparel corporations experienced significant negative price action in the month of August, helping the company s shares to enter this month s Top 10. The cause? Weak earnings announcements and guidance reductions from related companies in the apparel industry, including Dick s Sporting Goods (8/15/17), Foot Locker (8/18/17), Hibbett Sports (8/18/17), and Finish Line (8/28/17). Make no mistake Nike s recent performance has been spectacular, and the company s recently-issued guidance calls for mid-to-high single-digit revenue growth in fiscal 2018 (already underway). Recent price movements reflect the performance of Nike s competitors, not the company itself, and allow investors to pick up this high-quality stock on the cheap. Competitive Advantage & Recession Performance Nike s competitive advantage comes unsurprisingly from its brand recognition. The company s iconic swoosh logo is well-recognized across the world. Further, Forbes estimates Nike s brand to be worth $30 billion, making it the most valuable brand in sports and the 16 th most valuable brand in the world. One would think that Nike is not recession-resistant since it sells premium-priced consumer discretionary products. This is not the case: Nike s remarkable brand recognition and significant advertising budget (more than $3 billion per year) allow it to perform well through all economic environments. Nike grew its earnings-per-share each year through the financial crisis. Growth Prospects, Valuation, & Catalyst Nike s brand and growth prospects cause it to typically trade at an expensive valuation; with that said, the company s recent price action has created a highly attractive buying opportunity for this fastgrowing stock. Nike is expected to earn about $2.75/share in fiscal 2018, implying a fair value of ~$56 at its long-term average P/E of For context, the stock currently trades at ~$53. Nike is not trading at a significant discount right now, but Nike s strong performance makes it a buy nonetheless. Key Statistics, Ratios, & Metrics Maximum Drawdown 15 : 75.2% 10 Year EPS Growth Rate: 12.5% Dividend Yield: 1.4% 10 Year Dividend Growth Rate: 16.0% Most Recent Dividend Increase: 12.5% 10 Year Historical Avg. P/E Ratio: 20.5 Estimated Fair Value: $56 10 Year Annualized Total Return: 15.8% Dividend History: 15 years of increases Next Ex-Dividend Date: 12/1/17 (estimated) 15 Maximum drawdown occurred in October of

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26 Helmerich & Payne (HP) Overview & Current Events Helmerich & Payne is a provider of contracted drilling services to oil & gas producers. Founded in 1920, Helmerich & Payne has a market capitalization of $5.4 billion and generated $1.6 billion of revenue in fiscal The company operates primarily in the United States. Helmerich & Payne recently reported (7/27/17) financial results for the third quarter of fiscal The quarter reflected an improved operating environment, positively impacting each of H&P s businesses. Operating revenues soared by 36%, while the company s net loss of $22 million was essentially in-line with the prior year s period. On a per-share basis, Helmerich & Payne s net loss of $0.21 per share showed meaningful improvement from the prior quarter s net loss of $0.45 per share, but worsened slightly from the prior year s net loss of $0.20. Helmerich & Payne is not as safe as many of the other investments featured in this month s Top 10; a sharp decline in oil prices could eventually cause a dividend cut. The company s operating cash flows cover its dividend, but H&P s free cash flow does not. Importantly, Helmerich & Payne has a solid balance sheet. The company reported cash and equivalents of $573 million at the end of the most recent quarter, and currently distributes about $75 million per quarter in dividend payments. The company has a 7 quarter buffer for its dividend even if it generated no cash flows. Company management stated on a conference call earlier this year that it would likely not issue debt to cover the dividend, but would issue debt for attractive business opportunities. Management also stated they plan to sustain the dividend at current levels for the foreseeable future. Competitive Advantage & Recession Performance Helmerich & Payne s competitive advantage comes from its technological leadership and market share in the oil drilling industry. The company s advanced FlexRigs allow it to drill more complicated well systems for its customers, and Helmerich & Payne holds a ~20% share of the U.S. land drilling market. H&P s financial performance is highly correlated to crude oil prices. The company saw adjusted EPS decline by 37% during the financial crisis, though earnings rebounded to new highs two years later. More recently, Helmerich & Payne reported a loss in 2016 amid the crude oil bear market. Growth Prospects, Valuation, & Catalyst Along with rebounding oil prices, H&P is well-positioned to benefit from another industry trend the shift from vertical drilling to horizontal drilling. H&P s recent acquisition of horizontal drilling technology company MOTIVE Drilling makes H&P well-positioned to benefit from this trend. H&P s book value per share is $ The company s historical average price-to-book-ratio over the last decade is 1.6. This implies a fair value price of $63. H&P is currently trading for $43; our fair value estimate suggests a 47% upside from current prices. Key Statistics, Ratios, & Metrics Maximum Drawdown 16 : 76.4% 10 Year EPS Growth Rate: 7.5% Dividend Yield: 6.5% 10 Year Dividend Growth Rate: 32.0% Most Recent Dividend Increase: 1.7% 10 Year Historical Avg. P/E Ratio: 12.8 Estimated Fair Value: $63 10 Year Annualized Total Return: 5.1% Dividend History: 18 increases since 87 Next Ex-Dividend Date: 11/17/17 (estimated) Maximum drawdown occurred in December of 2008.

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29 29 Kohl s Corporation (KSS) Overview & Current Events Kohl s owns and operates family-focused department stores in every U.S. state excluding Hawaii. Founded in 1927, Kohl s has grown to a market capitalization of $7.1 billion, annual sales of $19 billion, and an employee count of ~138,000. Today, Kohl s operates 1,154 locations. Last month, Kohl s announced (8/10/17) financial results for its fiscal 2017 second quarter, which ended July 29. The company reported a modest 0.9% decline in sales, but cost-cutting initiatives and share repurchases helped Kohl s bottom line perform better. Adjusted diluted earnings-per-share of $1.24 was a 1.6% increase over the $1.22 reported in the prior year s period. Perhaps most importantly, Kohl s comparable store sales declined just 0.4%, significantly better than the 1.4% decline expected by the analyst community. All said, Kohl s second quarter was well-received by the market and the stock rose nearly 5% in after-hours trading following the announcement. More recently, Kohl s announced (8/22/17) the intent to open four small format stores and its fifth ecommerce fulfilment center. These investments, which are expected to be completed during the already-underway third quarter, underscore Kohl s strategic emphasis on the omni-channel shopping experience. Competitive Advantage & Recession Performance Kohl s competitive advantage comes from the nature of its store base. Approximately 90% of Kohl s locations are free-standing or located in strip malls, which helps isolate the company from the trend of declining mall traffic. Kohl s recession resilience is on par with many other retailers; the company s adjusted earnings-pershare dipped by 14.7% during the financial crisis and recovered to a new high in just two fiscal years. Regarding the company s high yield, Kohl s dividend appears safe for the foreseeable future. The company currently pays a quarterly dividend of $0.55 per share and reported adjusted earnings-per-share of $1.24 in the most recent quarter for a payout ratio of just 44%. Growth Prospects, Valuation, & Catalyst Kohl s future growth will be driven by the transition to an omni-channel shopping experience. Key to this initiative is the company s ship-from-store and pickup-from-store online shopping capabilities, which simultaneously boosts online sales and reduces the need to build external distribution centers. Kohl s traded at an average price-to-earnings ratio of 14.3 over the past 10 years and an average priceto-earnings ratio of 13.8 over the past 5 years. The company is expected to earn about $3.60/share in fiscal 2017, which implies a P/E ratio of 11.0 at current prices. If Kohl s can deliver a few quarters of comparable store sales growth, the company s valuation could easily revert back to its long-term average of ~14x earnings (a price of $50), 25% upside for existing investors at the current $40 price. Key Statistics, Ratios, & Metrics Maximum Drawdown 17 : 68.3% 10 Year EPS Growth Rate: 3.0% Dividend Yield: 5.5% 10 Year Dividend Growth Rate: N/A Most Recent Dividend Increase: 10.0% 10 Year Historical Avg. P/E Ratio: 14.3 Estimated Fair Value: $50 10 Year Annualized Total Return: -1.6% Dividend History: 6 years of increases Next Ex-Dividend Date: 9/4/17 17 Maximum drawdown occurred in November of 2008.

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32 Qualcomm (QCOM) Overview & Current Events Qualcomm is a semiconductor and telecommunications equipment company that primarily manufactures components for mobile devices. The company pioneered the 3G and 4G networks and is now investing heavily into 5G. Founded in 1985, Qualcomm has a market capitalization of $78 billion. Qualcomm shares continue to be weighed down by the company s legal troubles. In May (5/26/17), Qualcomm and Blackberry announced an agreement that awarded Blackberry $940 million after it overpaid royalties to Qualcomm. More importantly, Qualcomm is embroiled in a hostile lawsuit with Apple, which is seeking $1 billion for excessive royalty charges. In June, Apple requested (6/2/17) that a court rule Qualcomm s royalty agreements invalid, which would be a serious hit to Qualcomm s business if ruled in Apple s favor. The impact of the Apple lawsuit on Qualcomm s investment prospects is hard to overstate Qualcomm investors should monitor the situation very closely. Until recently, Qualcomm s performance had been strong despite its legal trouble. This changed last quarter (7/19/17). Revenues and adjusted earnings-per-share declined by 12% and 28%, respectively, primarily due to the Apple lawsuit. Apple contract manufacturers have ceased to fully report (and pay fees on) sales of products that use Qualcomm technologies. We will continue to monitor the situation closely; Qualcomm s next quarterly earnings release should be published in mid-september. More recently, Qualcomm announced (8/25/17) that its President, Derek Aberle, will step down effective December 31. His replacement will be current Executive Vice President Alex Rogers. Rogers previous role included the leadership of Qualcomm s commercial litigation unit, which seems fitting given the company s current legal troubles. Rogers has been with Qualcomm since Competitive Advantage & Recession Performance Qualcomm s competitive advantage comes from its intellectual property and patent portfolio. The company invests heavily in research, spending $1.4 billion on R&D in each of the last two quarters. Qualcomm is fairly recession-resistant; adjusted earnings-per-share declined by 15.6% during the Great Recession. Moreover, Qualcomm held $37.8 billion in cash and equivalents at the end of the most recent quarter, and pays a very safe dividend, with a 2016 dividend payout ratio of just 45%. Growth Prospects, Valuation, & Catalyst Qualcomm s current legal battles have weighed on its stock price for some time now. Investors stand to be handsomely rewarded if the Apple lawsuit can be resolved in Qualcomm s favor. Qualcomm is trading at 12.2x 2017 s expected earnings-per-share of $4.25. This is very low for a company that was recently producing steady double-digit EPS growth. If current legal uncertainty is resolved, we see Qualcomm trading at 16x earnings or higher, for a fair value estimate of $68. This is 31% upside from the current $52 share price. Key Statistics, Ratios, & Metrics Maximum Drawdown 18 : 87% 10 Year EPS Growth Rate: 14.5% Dividend Yield: 4.4% 10 Year Dividend Growth Rate: 19.0% Most Recent Dividend Increase: 7.5% 10 Year Historical Avg. P/E Ratio: 15.4 Estimated Fair Value: $68 10 Year Annualized Total Return: 5.2% Dividend History: 15 years of increases Next Ex-Dividend Date: 11/28/17 (estimated) Maximum drawdown occurred in August of 2002.

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35 35 Closing Thoughts - The Difference Between Valuation Risk and Business Risk - Investors spend a significant amount of time thinking about risk. And rightly so risk plays an enormous role in the success of a proper investment strategy. There are many types of unique risks that investors can expose themselves to in the financial markets. This month s Closing Thoughts seeks to explain the important fundamental differences between two types of risk that dividend growth investors expose themselves to: valuation risk and business risk. Valuation risk is the risk of buying overvalued stocks and then losing money when the stock s valuation returns to more normalized levels. In other words, valuation risk is the risk that a company s stock declines, often for reasons that have little to do with the operating performance of the underlying business. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments. Warren Buffett Conversely, business risk is the risk that an underlying business will have performance that is worse than expected. Said another way, business risk is the risk of decline at the underlying company s level. Because business risk involves factors that occur at the business level (and not the security level), it is far different than valuation risk. While valuation risk and business risk are very distinct, they have an important relationship because of their ability to offset one another. A company with a higher level of business risk can often make a fantastic investment if valuation risk is absent. Sometimes, the worst case scenario of a company s business risk profile is not realized, and investors who bought at low valuations are handsomely rewarded. The best thing that happens to us is when a great company gets into temporary trouble We want to buy them when they re on the operating table. Warren Buffett The opposite can also be true: buying great companies at not-so-great valuations is a recipe for investment disaster. Thanks to low interest rates and a long bull market, this is the case with many businesses right now. Importantly, investors do not have any direct control over business risk. Since we are not usually employees of the businesses we invest in, our insights into a business long-term prospects are limited to financial statements, annual reports, SEC filings, management s comments on earnings calls, and other arm s-length research. With valuation risk, investors have much more control. There is no limit to how long we can wait before deploying money in an attractive investment opportunity we are never forced to overpay for stocks. There are plenty of opportunities today that avoid significant valuation risk and business risk, and this newsletter aims to analyze them for your benefit in two ways. First, the newsletter contains only companies that are trading at discounts to their 10-year historical P/E ratio, minimizing valuation risk. Second, the newsletter s in-depth, qualitative overview for each company provides a summary of the business risk experienced by each company. Together, these features are designed to help our subscribers avoid exposing themselves to needless amounts of valuation risk or business risk, delivering superior long-term risk-adjusted performance. The next newsletter publishes on Sunday, October 1 st, 2017 Disclaimer Nothing presented herein is, or is intended to constitute, specific investment advice. Nothing in this newsletter should be construed as a recommendation to follow any investment strategy or allocation. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. While Sure Dividend has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third-party information presented herein. No guarantee of investment performance is being provided and no inference to the contrary should be made. There is a risk of loss from an investment in securities. Past performance is not a guarantee of future performance.

36 36 Portfolio Building Guide The process of building a high quality dividend growth portfolio is not complex: Each month, invest in the top ranked stock in which you own the smallest dollar amount out of the Top 10. Over time, you will build a well-diversified portfolio of great businesses purchased at attractive prices. Alternatively, the Top 10 list is also useful as an idea generation tool for those with a different portfolio allocation plan. If you are looking to add additional yield to your portfolio, the Sure Retirement Newsletter offers a Top 10 list with 5%+ dividend yields. Examples Portfolio 1 Portfolio 2 Ticker Name Amount Ticker Name Amount GWW W.W Grainger $ 1,002 GWW W.W Grainger $ 4,374 XOM Exxon Mobil $ - XOM Exxon Mobil $ 4,878 TGT Target Corporation $ - TGT Target Corporation $ 4,353 CAH Cardinal Health $ - CAH Cardinal Health $ 7,428 OXY Occidental Petroleum $ - OXY Occidental Petroleum $ 3,309 IBM Int l Business Machines $ - IBM Int l Business Machines $ 8,099 NKE Nike, Inc. $ - NKE Nike, Inc. $ 5,629 HP Helmerich & Payne $ - HP Helmerich & Payne $ 2,176 KSS Kohl s Corporation $ - KSS Kohl s Corporation $ 1,079 QCOM Qualcomm $ - QCOM Qualcomm $ 4,864 - If you had portfolio 1, you would buy XOM, the top ranked stock you own least. - If you had portfolio 2, you would buy KSS, the top ranked stock you own least. If you have an existing portfolio or a large lump sum to invest, switch over to the Sure Dividend strategy over 20 months. Each month, take 1/20 of your initial portfolio value, and buy the top ranked stock you own the least out of the Top 10. When you sell a stock use the proceeds to purchase the top ranked stock you own the least. Reinvest dividends in the same manner. This simple investing process will build a diversified portfolio of high quality dividend stocks over a period of less than 2 years. Further, higher ranked stocks will receive proportionately more investment dollars as they will stay on the rankings longer. You will build up large positions in the highest quality stocks over your investing career. If your portfolio grows too large to manage comfortably (for example, you are not comfortable holding 40+ stocks which would happen after around 4 years of the Sure Dividend system), you will need to sell holdings. I recommend eliminating positions that have the lowest yields if you are in or near retirement. If you are not near retirement, eliminate positions that rank the lowest in the newsletter until you are comfortable with the number of positions in your portfolio. Reinvest proceeds into the highest ranked stocks you currently own, until your highest ranked holding makes up 10% of your portfolio s total value. Then add to the next highest ranked holding, and so on.

37 37 Performance of the Sure Dividend Strategy The portfolio building guide is designed to build a high-quality dividend growth portfolio over time. I expect this approach to slightly underperform the market during bull markets, and significantly outperform the market during bear markets (on a relative basis). Hypothetical returns from investing $1,000 per month since Sure Dividend s inception (April 2014) into the highest ranked stock you own the least out of the Top 10 is shown below. Once the portfolio reaches 30 holdings, the highest ranked stock you already own is purchased, as long as the purchase does not push ownership of any stock above 10% of total portfolio value. Transaction costs are not included, but are minimal for either strategy. S&P 500 and Dividend Aristocrat returns are calculated using the ETFs SPY and NOBL respectively, and assume purchasing $1,000 per month. Returns assume dividends are reinvested. Sure Dividend S&P 500 (SPY) Dividend Arist. (NOBL) Cumulative Return of $ : $1.48 $1.46 $1.43 Compound Annual Growth Rate: 12.2% 11.7% 11.1% Annualized Volatility: 8.2% 10.4% 8.9% Sharpe Ratio 20 : $1.60 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 Cumulative Return of $1.00 in Each Strategy Sure Dividend S&P 500 (SPY) Dividend Aristocrats (NOBL) The performance of the Sure Dividend strategy has exceeded expectations so far. It has kept pace with the S&P 500 over the last 3 years (with lower volatility), despite a near constant bull market. As can be seen in the image above, the strategy significantly outperformed during the mini bear market of early Additionally, the strategy has outperformed the Dividend Aristocrats ETF while keeping a similar bull/bear market profile. 19 Data through 8/4/ % risk free rate used