Special Report the Value of Dividends

8/12/2019 Special Report the Value of Dividends

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Value of Dividends

Over time, dividend income has comprised a signicant 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.


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Dividend Payers:Higher Returns, Lower Risk

Some 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 rst 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-ying 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

Yield

10Year U.S. Treasury YieldDividend 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


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No doubt, numerous folks today are more concerned with return ofprincipal

than return onprincipal 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 ination 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 nds 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.


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More importantly, numbers weve crunched from Fama and French dating back

to 1927 nd 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

Hypothetical

$100

Invested

on

06.

30.

27

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%

LargeCapStocks

MidCapStocks

SmallCapStocks

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

An

nualized

Return

Capital Appreciation Income

Over the past eight decades, dividends and

other income have made up a significant

portion of the annualized return.

Figure 2:

Contribution to return


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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

Hypothetical

$100

Invested

on

06.

30.

92

All Dividend Payers (12.7%)All NonDividend Payers (8.3%)

While the findings 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

Hypothetical$

100

Invested

on

06.3

0.9

2

All NonDividend Payers (9.4%)All Dividend Payers (8.3%)

...although the horse race has had a differen

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


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5%

10%

15%

20%

25%

30%

35%

10050095

AverageStandardDeviation

of

Trailing36MonthlyReturn

s

Non-DividendPayers

Dividend

Payers

0%

10%

20%

30%

40%

50%

60%70%

80%

100090807060504030

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)

AverageStandardDeviationof

Trailing36MonthlyReturns

Non-Dividend

PayersDividend

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 nd 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 rst 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-ying 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 Appleor ExxonMobilas 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 nd equal-weighting to be very germane.


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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 signicant

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

dened 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 signicant 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

Trailing

Annualized

3

YearReturn

NonDividend PayersDividend Payers


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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) rst 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

reects this enthusiasm. We also note that we are nding bargains aplenty in the

Energy sector, another segment with many big-dividend payers, and our broadly

diversied 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 rst 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

Yield

Fed Funds Effective RateS&P 500 YieldFed Fund Rate MedianS&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


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equally weighted) return gures 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

nd 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 signicantly lower their borrowing costs. Barrick Goldrepaid $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 prio

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 RatesDIVIDENDS & 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 fro m Professor. Robert J. Shiller and Profs. Eugene F. Fama &

Kenneth R. French

DIVIDENDS & AVERAGE CHANGE IN FED FUNDS EFFECTIVE RATE


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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 rst quarter secured a total of $10.5

billion in senior note and bank term-loan nancing 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 prots, 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!


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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 Pfizer 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 diversied listing of 20 of our

most favored undervalued dividend-paying stocks.

All trade for signicant discounts to our determination of

long-term fair value and/or offer favorable risk/reward pro-

les. 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

diversied 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 scal 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-efcient

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. 1Tangible book value. 2Enterprise value-to-earnings before interest taxes depreciation and amortization. 3Tangible equity. SOURCE: Al Frank using data from Bloomberg

Target Price Multiples EV/ Debt/ Div Mkt

Symb Company Price Price EPS S TBV1 EBITDA2 TE3 Yld Cap Industry Group


12/16

12

is that it has a touchscreen...and the bottom line in this

business is capacitors that we sell are basically lters. 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 Prots Tax and economic difculties 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

ow, 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 benet 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 ef-

ciencies, business plan execution, and aftermarket sales

and services. Additionally, we see longer-term benets

from continuing to migrate production to lower-cost re-

gions. CAT has solid free cash ow 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 afrmed 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 ow to increase its dividend (the yield is

2.5%) and buy back shares.

Eni SpA (E)

Rome-based Eni is a diversied oil major with vertical-

ly integrated businesses focusing on international explo-


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13

ration and production (E&P) and European natural gas,

rening, power generation and chemicals. E shares con-

tinue to face headwinds as Europe slogs through econom-

ic difculties 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-

ets 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

rm operates across six continents with one of the new-

est jackup and deepwater eets 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 ow. We believe that

the outlook for deepwater drilling remains attractive and

Ensco is well positioned to benet 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 trafc 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 ow and the

rm 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 o

glass and ceramic substrates found in liquid crystal dis

plays, ber-optic cables, automobiles and laboratory prod

ucts. The company has ve primary divisionsdisplay

technologies, telecommunications, environmental tech

nologies, specialty materials and life sciences. We believe

that while there may be short-term difculties 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 nance trade between Asia and

the West, HSBC is today one of the worlds largest bank-

ing and nancial services organizations serving some

58 million customers. Headquartered in London, HSBC

operates through long-established businesses and an in

ternational network of thousands of ofces 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 potentia

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-


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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, debrillators,

heart valves, stents, insulin pumps and spinal xation

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 ow, of which management ex-

pects $25 billion over the next ve 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 benet 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 rm 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 rm generates strong free cash ow, giving man-

agement operational exibility 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 rm stands to benet 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

agship 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 Ofce 2013 suite, which

still doesnt offer a uid 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


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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 signicant 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 ow generation and attrac-

tive operating ratios over the past ve 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 oor 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

nancial footing, cash ow 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.

Pfizer (PFE)

One of the worlds largest research-based pharmaceu-

tical rms, Pzer 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 Pzers

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 ow, 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, Pzer 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 Portuga

Telecom. The company, which also benetted 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 ber optic infra

structure and build out its TV product. That said, we like

that even though a signicant 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

ow 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 potentia

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.


16/16

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 nancial 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-specific risk. We buy only those stocks we find 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 findings 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 first 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 specific investment or investment strategy will be profitable 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 diversified portfolio of securities that

are undervalued and holding them for their long-term potential appreciation. Diversification 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.

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Special Report the Value of Dividends

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