Dividend Achievers IIG Research - January...“Time is the friend of the wonderful business, the...

Please refer to slide 17 of this presentation for detailed disclosure and certification information

Dividend Achievers IIG Research

January 2018

Investment Strategy

• Identify and invest in a portfolio of high-quality incomestocks

• Outperform over a full market cycle by providingdownside protection in declining markets andparticipating in rising markets

• Seeks diversification across sectors• Tax efficient with low turnover• Targets a better-than-market yield for the portfolio

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$25.08

$27.42$29.93 $30.13

$31.77

$34.73

$37.75

$44.56

$48.47

$52.83

$58.02

$63.55

$25.08$27.75

$28.41

$22.42 $22.73$26.43

$31.30

$35.00

$39.56

$43.39

$45.71

$49.04

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Dividend Achievers: Dividends Per Share (Indexed to S&P 500 in 2006)

S&P 500: Dividends Per Share

The Benefit of Consistent Income Growth

Indexed to the S&P 500 Dividends/Share in 2006Sources: S&P Index Data, FactSet, D.A. Davidson & Co. 3

+153%

+96%

Dividend Achievers – Annual Dividend Growth Rate: 8.8%S&P 500 – Annual Dividend Growth Rate: 6.3%

“Time is the friend of the wonderful business, the enemy of the mediocre.”- Warren Buffett, 1989 Berkshire Hathaway Shareholder Letter

• Over the last three decades, contribution to total stock market return has been a negatively skewed distribution– According to a study by Longboard Asset Management of 14,455

stocks analyzed for the period of 1989-2015, 11,513 collectively had a total return of 0%, while 2,942 – just 20% of the investible universe – accounted for all gains

Source: http://www.berkshirehathaway.com/letters/1989.html, http://longboardfunds.com/defense-wins-championships/ 4

Dividend Growth Improves the Quality of Businesses in the Investible Universe

Dividend Achievers requires a minimum of 10 consecutive years of dividend increases and a positive outlook for future growth for inclusion in the portfolio

• Dividend increases are directly related to the fundamental performance and cash flows of the underlying business

• Due to the stigma associated with cutting the dividend, management teams are likely to be conservative with respect to dividend increases, implying that the actual business fundamentals should improve at a more rapid rate than the dividend is increasing

• Consistent increases demonstrate management’s capital allocation discipline and commitment to return cash to shareholders

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Dividend GrowthImproves the Probability of Outperformance

• IIG Research’s analysis of dividend data from FactSet’s US equity universe from 1990-2015 confirms that limiting the universe to Dividend Achievers-eligible companies has reduced its negative skew

– This is particularly notable during times of market stress, as the 5- and 10-year returns for qualifying stocks as of FY 2000 demonstrate the desired downside protection through periods including the Tech Bubble and the GFC

• We believe the inefficiency in this investible universe is likely to persist as behavioral biases make the majority of investors unwilling or unable to remain invested in like strategies through periods of underperformance, particularly in rising markets where we expect to lag the broad market

• The universe is sufficiently diversified and currently consists of ~300 names, with ~75 more expected to join the universe following 1 or 2 more years of dividend increases

Source: D.A. Davidson & Co., FactSet 6

Dividend Achievers % of Eligible Companies Outperforming S&P 500

Universe Ending Subsequent 5 Years Subsequent 10 Years Subsequent 15 Years

FY 2000 80% 78% 66%

FY 2005 58% 49%

FY 2010 45%

Portfolio Construction

• The dividend growth requirement serves as a universe limitation rather than a quantitative screen– Many qualifying stocks still underperform, so fundamental analysis remains a

key part of the investment process

• From the investible universe, we build a concentrated portfolio of 15 high-conviction stocks – Identify high-quality businesses with sustainable competitive advantages– Value-oriented approach favors stocks trading at a discount to fair value– Historical turnover has ranged from 0 to 3 stocks per year– The portfolio is equally weighted– Security selection accounts for the majority of excess returns

• Relative sector weights are monitored to ensure diversified portfolio exposure is maintained

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Sell Discipline

• Stocks are sold when– Fundamental analysis indicates the investment thesis no longer

holds– The company’s streak of dividend growth is no longer expected to

continue– Dividend growth continues but at levels not justified by the

underlying business or at the expense of balance sheet health– The stock trades above fair value

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Portfolio Holdings As of December 31st, 2017

Represents Dividend Achievers stocks as of the date of this presentation; may not reflect subsequent changes to Dividend Achievers

(A) D.A. Davidson & Co. was making a market in this security at the time this presentation was publishedSource: Company reports

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Example – Add VFC, Sell GPC November 2016

Add VFC• High-quality company with above-

average gross margins and high returns on capital

– Gross margins of 47% consistently outperform apparel competitors at 43%

– The company has averaged a 17% return on invested capital over the past 5 years

• Low expectations due to lack of visibility as to the next acquisition target and the stock is attractively valued

• Double-digit dividend growth expected over the next several years

Sell GPC• Low single-digits earnings growth

expected in the near term with little visibility to future acceleration

• Margins in the Automotive segment (57% of operating profit) well above historical averages

• Stock valued at a premium to both the sector and the S&P 500

• Moderating outlook for dividend growth rate given elevated payout ratio

Source: Company filings, FactSet 10

Sector WeightingsAs of December 31st, 2017

11Source: FactSet

8%

12%

7% 7%

19%

13%

20%

0% 0%

6%7%

12%

8%

6%

15%14%

10%

24%

3% 3%2%

3%

0%

5%

10%

15%

20%

25%

30%

ConsumerDiscretionary

ConsumerStaples

Energy Financials Health Care Industrials InformationTechnology

Materials Real Estate Telecom Utilities

Dividend Achievers S&P 500

Portfolio CharacteristicsAs of December 31st, 2017

Source: FactSet 12


Gross Margin(10-Year Average) 43.8% 31.0%

Operating Margin (10-Year Average) 17.7% 13.3%

ROE (10-Year Average) 25.8% 15.3%

ROIC (10-Year Average) 17.2% 9.6%

Total Debt / Capital (Most Recent) 46.3% 49.0%

Net Debt / EBITDA (LTM) 1.4x 1.8x

Dividend Payout Ratio(NTM) 51.6% 35.7%

Definitions:ROE = return on equityROIC = return on invested capitalNTM = next twelve months (i.e., forward)LTM = last twelve months (i.e., trailing)


Price-to-Earnings (NTM) 18.7x 18.2x

Price-to-Sales (NTM) 2.0x 2.1x

Price-to-Book (LTM) 4.6x 3.3x

EV / EBITDA (LTM) 12.8x 12.3x

Free Cash Flow Yield (LTM) 4.4% 4.5%

Dividend Yield (NTM) 2.8% 2.0%

Total Return Since InceptionAs of December 31st, 2017

$50,000 initial investment at 10/6/05; performance is represented gross of fees; dividends reinvested for S&P 500.Sources: S&P Index Data, FactSet, D.A. Davidson & Co., * = Bloomberg as of 12/31/2017 13

Performance

Portfolio S&P 500

YTD 16.0% 21.8%

One Year 16.0% 21.8%

Three Year 10.1% 11.4%

Five Year 12.9% 15.8%

Ten Year 9.8% 8.5%

ITD (Cumulative) 223.9% 190.6%

ITD (Annualized) 10.1% 9.1%

Standard Deviation

Portfolio S&P 500

Three Year 8.8% 9.9%

Five Year 8.9% 9.4%

Risk

Portfolio S&P 500

Tracking Error (est.)* 4.3%

Upside Capture 78.9%

Downside Capture 69.2%

Active Share* 89.2%

Largest Drawdown 37.7% 50.9%

James Ragan, CFAPortfolio Manager

James Ragan, CFA is Director of IIG Research for D.A. Davidson. He and his team provide portfolio-based equity research and market commentary for the firm’s Financial Advisors and their clients. James is co-manager of the D.A. Davidson Dividend Achiever, Focus List, and Income Opportunities model portfolios. In addition, he publishes a monthly market strategy report. As an equity analyst he has covered a wide range of mid-cap and large cap companies across multiple sectors.

James has worked in the financial services industry since 1992 with D.A. Davidson, Crowell Weedon (acquired by D.A. Davidson in 2013), and UBS Paine Webber. James also worked for the Federal Reserve Bank of San Francisco. James is a graduate of the University of California, Los Angeles with both a BA degree in economics and management, also holds an MBA in finance. In addition, he is a holder of the Chartered Financial Analyst® (CFA) designation.

James lives in Seattle with his wife and one of their daughters. He enjoys outdoor activities including hiking, volleyball, and skiing in addition to reading and volunteering in youth activities.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. 14

Matthew Griffith, CFAPortfolio Manager

Matthew Griffith, CFA has been helping clients manage investment portfolios for over 14 years. In 2015, he joined D.A. Davidson as Senior Research Analyst. Matt provides research coverage of individual equities and also serves as co-portfolio manager of IIG’s Dividend Achievers list.

Matt joined D.A. Davidson with strong experience as an analyst. At Cohen & Steers, he covered the energy, industrial, and technology sectors for the firm’s Large Cap Value product. During his time with the firm, Matt also led the development and implementation of the Large Cap Focused Value product. In 2014 and 2015, Matt presented at VALUEx Vail, an annual conference for professional value investors.

In addition to his work as an equity analyst, Matt has experience in virtually all aspects of managing investment portfolios, including asset allocation, alternative investments, manager research, trading, quantitative analysis, operations, and technology. His experience comes from investing on behalf of and advising sophisticated investors while working at Russell Investments, Vulcan Capital, and Fidelity Investments.

Matt has a B.A. from Boston College in Computer Science and is a CFA®

charterholder. He serves as President of CFA Seattle, and the Board of Trustees, Investment Committee, and Finance Committee at Seattle Preparatory School. He lives in Clyde Hill, WA with his wife and three children.


IIG Research Team


Matt Griffith, CFASenior Research Analyst

Brent Williams, CFAResearch Analyst

James Ragan, CFADirector of IIG Research

Doug Christopher, CFASenior Research Analyst

Joe MalachResearch Associate

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D.A. Davidson & Co. expects to receive, or intends to seek, compensation for investment banking services from the companies mentioned in this report in the next three months.

D.A. Davidson & Co. is a full service investment firm that provides both brokerage and investment banking services. The analysts identified in this report will receivecompensation that is based upon (among other factors) D.A. Davidson & Co.’s investment banking revenue. D.A. Davidson & Co.’s analysts, however, are not directlycompensated for involvement in specific investment banking transactions.

James Ragan, the analyst who prepared this report, or his immediate family owns an investment position in: T, IBM, MSFTMatt Griffith, the analyst who prepared this report, or his immediate family owns an investment position in: ADP, CVS, VFC

Analyst Certification: We, James Ragan, CFA, and Matt Griffith, CFA, attest that (i) all the views expressed in this research report accurately reflect our personal views aboutthe common stock of the subject company, and (ii) no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or viewsexpressed by us in the report.

Dividend Achievers Securities Selection and Publication Process: Dividend Achievers is prepared by James Ragan and Matt Griffith of D.A. Davidson & Co.’s IndividualInvestor Research Group. To be eligible for inclusion in Dividend Achievers, securities must be covered by D.A. Davidson’s Individual Investor Group Research, InstitutionalResearch, or Morningstar Equity Research (the “Research Universe”). Other than Mr. Ragan and Mr. Griffith, D.A. Davidson analysts who publish Institutional or IndividualInvestor Group research are not involved in the preparation of Dividend Achievers.

Of all the eligible securities from the Research Universe, those ultimately selected for inclusion in Dividend Achievers will have a minimum 10-year history of consecutivedividend increases and, in the opinion of Mr. Ragan and Mr. Griffith, have a positive outlook for future growth. The overall dividend yield for Dividend Achievers is expected to beabove the average market yield. Dividend Achievers may not have holdings in all sectors at all times, but Mr. Ragan and Mr. Griffith strives to maintain diversity across mosteconomic sectors. Dividend Achievers will be a periodic publication that will highlight the current securities included. Securities may be removed from Dividend Achievers if theunderlying company fails to sustain its record of consecutive annual dividend increases or if there is a significant change in company fundamentals. Changes to DividendAchievers may also be prompted by Mr. Ragan and Mr. Griffith’s views of the risk/reward profile offered by individual securities.

Other Disclosures: The information contained herein has been obtained by sources we consider reliable, but is not guaranteed. Any opinions expressed are based on ourinterpretation of data available to us at the time of the original publication of the report. Assumptions, opinions, and estimates constitute our judgment as of the date of this reportand are subject to change without notice. Investors must bear in mind that inherent in investments are the risks of fluctuating prices and the uncertainties of dividends, rates ofreturn and yield, as well as broader market and macroeconomic fluctuations and unforeseen changes in the fundamentals or business trends affecting the securities referred toin this report. Investors should also remember that past performance is not necessarily an indicator of future performance and D.A. Davidson & Co. makes no guarantee,express or implied, as to future performance. The information is not intended to be used as the primary basis for investment decisions. Because of individual clientrequirements, it should not be construed as advice designed to meet the particular investment needs of any investor. It is not a representation by us, or an offer, or thesolicitation of an offer, to sell or buy any security. Further, a security described in a report may not be eligible for solicitation in the states in which a client resides. D.A. Davidson& Co. does not provide tax advice and investors should consult with their tax professional before investing. Further information and elaboration is available upon request.

For a copy of the most recent reports containing all required disclosure information for covered companies referenced in this report, please contact your D.A. Davidson & Co.representative or call 206-389-8000.

Required DisclosuresCopyright D.A. Davidson & Co., 2018. All rights reserved. Member SIPC.

Appendix

Q4 2017 Recap

Dividend Achievers increased by 5.8% (total return including dividends) during the fourth quarter, relative to a positive 6.6% total return for the S&P 500 over the same time period. For the full year period, Dividend Achievers earned a total return of 16.0% compared to 21.8% for the S&P 500.

The Industrials sector contributed the most to this quarter’s relative performance, with both of our holdings – Emerson Electric (EMR, +11.8% in Q4 – all returns specified as total returns including dividends) and United Technologies (UTX, +10.6%) – outperforming the sector, which returned +6.1%. Other outperformers for the quarter were VF Corp (VFC, +17.2%) and Microsoft (MSFT, +7.3%), while CVS Health (CVS, -10.3%) and Novartis (NVS, -2.2%) were the only stocks with a negative total return.

EMR is a stock that has recently demanded patience. We have held the stock since the inception of Dividend Achievers in 2005, and through 12/31/2013 it returned +11.9% annually versus +7.7% for the S&P 500. Several years of negative business conditions, including turmoil in the energy markets and a weak U.S. dollar, have led to year-over-year underlying sales declines in its Automation Solutions business since FY2014 and underperformance of the stock. We continue to hold it because we believe EMR operates several high-quality businesses and investors will be rewarded when the cycle turns back in its favor. During these difficult past three fiscal years, EMR has maintained an average trailing-twelve month return on invested capital from continuing operations of 16.5%. Gross margins over this same period averaged 41.3%, above its ten-year average of 39.0% despite the sales decline, indicating that customers continued to find value in EMR’s product suite. Finally, the Company generated $5.7 billion (B) of free cash flow, while paying $3.7B in dividends and maintaining a net-debt-to-total capital ratio below 0.25. This past quarter, trailing-three month underlying sales have turned positive, increasing by 11%. If the company can sustain this sales growth across its repositioned portfolio of businesses over an extended period, we believe the stock could continue to outperform the market over the next several quarters.

In December, CVS announced an agreement to acquire health insurer Aetna (AET). We have received many questions from investors expressing concern about CVS’ entrance into a new, non-retail focused business, but this vertical integration actually began many years ago. Since its acquisition of Caremark in 2007 for $21B, CVS Pharmacy Services segment has been highly profitable, generating a cumulative $30B of operating profit. Additionally it appears that volume from its Pharmacy Services business has also helped the Retail Pharmacy segment operate more profitably, with 13.1% annualized growth in operating income versus only a 7.9% annualized increase in store count and same store sales combined. While we have a positive view of CVS’ long-term prospects, CVS is financing the acquisition with an additional $45B of debt, which brings the Company well above its targeted leverage ratio of near three times debt-to-adjusted EBITDA. In order to maintain its credit profile, CVS has indicated it will hold its dividend steady until its leverage is back to target. Given our strategy’s focus on annual dividend growth, if CVS does not increase its dividend prior to Q3 2018, we unfortunately would need to look for alternative positions within our universe of dividend growers. The stock remains in the portfolio and we foresee this continuing until either it is no longer eligible or the stock’s price more closely reflects our estimate of its underlying value.

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Example – Add CVS, Sell MCD February 2016

Add CVS• Management has built a well-

integrated business that should benefit from trends toward lower costs in the health care industry

– Leading PBM business reduces prescription drug costs

– In-store clinics are an alternative to high-cost primary care and ER while providing revenue synergies

– Store concentration in Eastern US leaves room for expansion

• Strong free cash generation should lead to 15-20% dividend growth for the next 3-5 years

Sell MCD• Earnings growth was driven by

stock buybacks– EPS grew by 45% from 2008 to

2015, though net income increased by only 5%

– Debt-to-Capital increased from 0.43 to 0.77

• In our view, US SSS growth due to the rollout of All-Day Breakfast is unlikely to persist beyond this year

• Saturated market and increasing leverage limits dividend growth profile going forward

Source: Company filings, FactSet 20

Monthly Total Return Since InceptionGross of Fees

Year January February March April May June July August September October November December Full Year S&P 500

2005 0.20% 2.19% 1.74% 4.17% 5.23%

2006 2.18% 1.21% -0.95% 2.40% -2.16% 0.90% 3.18% 2.62% 0.89% 2.93% 1.57% 1.96% 17.91% 15.79%

2007 2.01% -1.58% 2.40% 3.47% 2.33% -2.33% -2.55% 2.74% 2.98% -2.00% -2.83% -1.15% 3.18% 5.49%

2008 -5.15% -2.99% 3.42% 1.83% 3.10% -8.18% -0.83% 2.25% -5.06% -10.53% -2.04% 5.13% -18.63% -37.00%

2009 -7.98% -11.54% 6.90% 5.89% 3.06% 0.40% 8.07% 1.84% 2.49% -1.42% 6.94% 0.36% 13.78% 26.46%

2010 -1.85% 2.32% 4.61% 2.13% -6.12% -1.88% 6.51% -0.62% 5.69% 3.33% -1.19% 3.85% 17.26% 15.06%

2011 0.62% 3.35% 1.14% 4.09% 0.01% -0.80% -3.25% -0.06% -3.43% 7.11% 1.34% 2.58% 12.94% 2.11%

2012 0.73% 1.78% 2.23% 2.19% -2.91% 3.57% 2.59% 0.36% 1.92% -1.09% 0.98% 0.75% 13.73% 16.00%

2013 6.29% 2.12% 3.90% 2.60% -2.17% -0.03% 4.98% -4.30% 2.90% 3.84% 1.73% 0.79% 24.57% 32.39%

2014 -2.05% 2.18% 2.10% 3.03% -0.62% 0.67% -3.21% 2.96% -0.71% 3.56% 2.06% 0.15% 10.31% 13.69%

2015 -2.17% 2.36% -2.48% 1.95% 0.07% -2.73% 2.76% -5.80% 0.03% 8.00% 0.02% 1.23% 2.60% 1.38%

2016 -0.55% 0.89% 6.34% -0.65% 1.34% 4.18% 0.91% -1.59% -0.26% -3.29% 1.08% 3.44% 12.07% 11.96%

2017 1.04% 3.26% -0.12% 0.75% 0.44% 1.39% 2.16% -1.10% 1.45% 1.47% 2.89% 1.37% 16.00% 21.83%

Sources: S&P Index Data, FactSet, D.A. Davidson & Co.*Dividend Achievers monthly returns are examined by a third-party firm on a quarterly basis. 21

Dividend AchieversDelivering Downside Protection During Volatile Markets

Sources: S&P Index Data, FactSet, D.A. Davidson & Co. 22

Peak-to-Trough Drawdown for S&P 500:5.5%

Peak-to-Trough Drawdown for Dividend Achievers:3.5%

23Sources: FactSet, D.A. Davidson & Co.

10 YR Ann. Div. Growth Rate: 3.3% 10 YR Ann. Div. Growth Rate: 9.5% 10 YR Ann. Div. Growth Rate: 10.4%

10 YR Ann. Div. Growth Rate: 5.9%






10 YR Ann. Div. Growth Rate: 8.8% 10 YR Ann. Div. Growth Rate: 11.9%





Dividend AchieversConsistent Dividend Growth

24Sources: FactSet, D.A. Davidson & Co.(A) D.A. Davidson & Co. was making a market in this security at the time this presentation was published

Dividend AchieversStoried History of Dividend Payers

(A)

(A)

(A)

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Sources: FactSet, D.A. Davidson & Co.Note: Dates correspond to the actual or prospective pay date of the most recently announced dividend increase; percentages refer to the year-over-year change in the indicated annual dividend at the time of publishing(A) D.A. Davidson & Co. was making a market in this security at the time this presentation was published

Dividend AchieversLatest Dividend Increases

(A)

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