Who Loves a Surprise?

This week has been flowing a river of surprises and I’m not talking about the nasty ones, like dividend cuts – of which I’ve had my fair share already this year. Rather I’m talking about the good surprises, the ones that put a smile on your face and lift your spirits. The ones that validate theories and reward accordingly. In this holiday shortened week, I have three to share.

Qualcomm/Apple Peace Treaty

On the eve of their dirty laundry being aired in court, the battle ended. Worldwide. Mark Hibben covers essentially all of the thought process I had when I topped off my holdings a little last July. My current thinking is that Intel was having some difficulty engineering a design that avoided patent violations and emanating minimal heat. When asked my position on this, I allowed it is a win for all three parties – QCOM in the short tern, AAPL in the mid to long term and Intel long term. My rationale? The length of the agreement is double Moore’s law providing Intel and/or Apple the runway to leapfrog 5G and focus on 6G – securing some initial patents for themselves. (Long QCOM, AAPL)

Blackstone Converts (finally …)

The long rumored conversion of Blackrock from a partnership to C-Corp will be effective July 1st. This was greeted enthusiastically by the markets, and I applaud as well. This is a positive result of Trump’s tax plan but my reasons are more the personal impact. In my portfolio I hold Blackstone in an IRA resulting in the annoyance of a K-1 as well as the possibility of Unrelated Business Taxable Income (UBTI). Going forward I’ll have the opportunity to add to this holding without looking over my shoulder at tax consequences. (Long BX)

AB Volvo (Wow!)

The one least expected actually occurred two weeks ago but I had to spend a little time digging into their numbers a little to figure out the why. The announcement from Volvo was a dividend increase to SEK 5.00 (17.65%) plus a SEK 5.00 special dividend. As they pay annually, this will hit my account this month. As the news reports in the states depicts Europe on the brink of a recession, I just had to plow through their report.

Looking at the numbers, I see a little weakness in the bus line, likely due to uncertainty around the revised NAFTA. Their otherwise record results included increases in construction, trucks and heavy equipment. Currency was a positive impact as well. As a multinational, they appear poised for continued strength in light of the Trump team’s escalating war of sanctions with the EU. Deere and Caterpillar were named last week as possible retaliatory targets. (Long VLVLY)

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All in all a nice and surprising week. Here’s hoping these April showers result in a torrent of May flowers!

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Views on Emergency Funds

Many posts have been penned over the years regarding the necessity of an emergency fund. In this concept, there is a broad agreement. In fact, a commonly quoted phrase is, “40% of US adults don’t have enough savings to cover a mere $400 emergency“. As with all things statistical, this is likely debatable and/or a one-sided view, but there are enough stories being shared that it is difficult to deny the plausibility. Where the views diverge, politics tend to stand in the way of a consensus. One example being Sen. Cory Booker’s (D-NJ) proposal to open a savings account at birth with government seed money. I fail to see this gaining much traction particularly if farmed out to FDIC insured institutions managed by the likes of Jamie Dimon who proved last week he was clueless in the ways to reduce wealth inequality. But I digress …

Today is tax day and based on the grumblings, appearances are that most are unhappy. Part of this is messaging, part is radical change, part is perceived promises broken … Pick a reason and you’ll find an issue, mine being an accelerating deficit backed my the ‘promise’ of an administration best illustrated as:

I would gladly pay you Tuesday for a hamburger today.

attributed to J. Wellington Wimpy, a character of E.C. Segar’s Popeye

Yes my check is grudgingly going in the mail today after spending most of the quarter paring back my regular stock investments and cutting a little on my discretionary spending. The telltale evidence of this activity is reflected in my March report showing my typical ~20% year on year dividend increases dropping mysteriously to 8.46%. My cash position is my first line of defense when emergency funds are required which is why I don’t report it as an investment position. I have found over the years in situations emergency funds are required, generally a little lead time is provided.

Contrast this with a friend who owns his own business. Over the years, we’ve discussed his lack of an emergency fund. His rationale being his ROI was better reinvesting in his business rather than holding idle cash. All well and good until the unexpected occurs. With a breakout year behind him – his business nearly doubled – he was ready to add a couple of employees and expand into another business line until he saw his tax bill. His check will be going to the government tomorrow and his business expansion is now on hold.

I guess the moral to this non-fictional tale is that the fruits of an expanding economy are only present when the growth outpaces an underlying deficit. As my friend found, reserves are a necessary evil to fuel the future. Perhaps these are isolated incidents, perhaps we’ll hear more like these in the days ahead. One can only hope that perhaps this presidential promise – unlike Wimpy’s – will be paid on Tuesday as today’s hamburger is now in hand.

Observations – r2019.4.7

Last weeks’ update mentioned the – at that time – inverted yield curve. The economists views on what this portends is all over the map from impending recession to this time is different. A couple of articles on Seeking Alpha address these concerns, with Christopher VanWert advocating a position in Consumer Staples and bonds and the self-professed contrarian Peter Schiff spinning a more ominous conclusion. My take? It’s always wise to be aware of all possibilities when setting a course. Banks – moreso the community banks – will bear the brunt of any prolonged inversion setting the stage for potential further consolidation. It might be too late for a meaningful increase in Staples as they’ve become rather pricey of late. Bonds may be an alternative but still carry a premium to what I’m willing to pay. Not mentioned are utilities as they have a perceived sensitivity to interest rates. What is often overlooked is that regulated utilities have the ability to pass this through to their customers, albeit with a delay. My action items will – first and foremost – address the speculative portion of my portfolio to de-risk to a degree.

It’s a little gratifying when other bloggers see a social issue in a similar vein, as in Bert’s piece on stock buybacks. Other issues gaining traction – outside my rants last month – found their way over to Dividend Ninja with his take on the low unemployment rate. As he is Canadian, the US centric version would also have to consider the acceleration of expensing as part of last year’s tax plan – the result being companies getting a tax break to increase automation to increase throughput (or reduce headcount). Also of note is his piece on dividend cuts. I’ll acknowledge cuts may be a sign of proactive management but it is easily a sign of mismanagement – especially when triggered by debt covenants. Most investors don’t have the time or energy to sort through the issues – hence the common rule of thumb, Sell on the news.

This week will be decision time – did I allow enough cash to accumulate to pay the tax man (or woman). I scaled my reinvestment back during the quarter so we’ll see if I have to sell a little or not. Interestingly, an analyst on CNBC last week attributed the slow-down in new car sales to the surprises in store with the tax plan. That has me wondering if that could translate into the housing market OR if that’s why the Trump team is so driven for the Fed to cut rates?

As always, comments are welcome and have a good week!

March 2019 Update

With it being tax time in the US, closing out the first quarter and a yield curve inversion – this week’s installment has plenty to offer. With the market generally on the rise for the month I decided to maintain a cash heavy (for me) position while putting the finishing touches on my tax return. My general attitude has been one of caution for the past several months with the markets finally putting a yield curve inversion on display. Larry Kudlow was making the rounds this morning maintaining this is an aberration – and it very well could be. But it easily could be an omen of a looming recession – perhaps as early as late this year. Meanwhile, the S&P rose 1.76% while my portfolio rose 1.05%. For the year, I’m slightly behind the benchmark by -0.71%.

PORTFOLIO UPDATES

• Increased my ETF position (CUT,VGK,EWA,EWW,JPMV)
• added WSFS and lost BNCL (merger)

DIVIDENDS

While my primary focus resides on dividends with the goal being a rising flow of dividends on an annual basis, I’m placing less emphasis on the quarterly numbers as the number of semi-annual, interim/final and annual cycles have been steadily increasing in my portfolio.

• March delivered an increase of 8.34% Y/Y, the largest impacts being dividend cuts and a couple of cycle changes offset by increases.
• March delivered a 23.3% increase over last quarter (Dec) – basically a return to normalcy.
• Dividend increases averaged 6.19% with 34.55% of the portfolio delivering at least one increase (including 4 cuts (two being OMI)). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980. The most recent one being UNIT whose largest customer declared bankruptcy.
• 2019 Dividends received were 27.12% of 2018 total dividends putting me on target to exceed last years’ total in late October.

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

SPINOFFs

NVS spin of Alcon (ALC) scheduled for April 9th, 1:5 ratio

On Oct 4,2018 MSG filed a confidential Form 10 to spin the sports business

MERGERS

XRX merger with Fujifilm cancelled (still being litigated).

BNCL merger into WSFS completed March 1st

BHBK to merge into INDB

TRUMP TAX PLAN IMPACT

This is a brief preview of the tax changes at a personal level. Headlines have previously reported that early filers were seeing lower average refunds – my guess is most of these did not adjust their withholding. Since then, the IRS has reported that the refunds have begun to ‘normalize’. As one who itemizes, my sense is that many filers are beginning to identify their own impact. In my case, I have a tax increase – not a cut – primarily due to being just below the new threshold for itemization. The standard deduction coupled with the tax brackets did a little number on me – which is what I was expecting so I wasn’t caught unaware. Adding salt to the wound was another change that disallows my minimal IRA contribution (as a non W-2 wage earner). On the bright side, my foreign taxes paid on dividends can still be applied as a tax credit. Bottom line – only in Trump World would the path to Making America Great Again run through the field of non-US stocks – assuming one wants as low a tax liability as possible.

SUMMARY

The blog data conversion to 2019 is almost complete still being worked on. The most significant error is my cost basis (dividend date screen) which doesn’t yet account for all DRIP additions or additional purchases. At this rate it may be 2020 before I finish this update.

Hope your month/quarter was a good one!

One More on Ecology

The past couple of weeks have dealt on topics that are front and center in the current news cycle with the one commonality being that barring significant personal convictions there is no mainstream investing approach to capitalize on these trends. This isn’t to imply there won’t be or that some investors in these spaces aren’t at the bleeding edge. It’s just the current risk reward potential is skewed more towards the speculative side.

I’m not immune to a degree of speculation so long as I can see a viable (personal opinion) business model and a path towards profit while – at the very least – making at least an incremental improvement to a problem facing society. One such conundrum hit my inbox this week in the form of a Greenpeace (Netherlands) video on plastic waste. I will first stipulate that there is a real (and growing) problem with plastic waste. I will further stipulate that one of the Greenpeace success stories has been to raise public awareness. But their pitfall, in my opinion, has been their dogged determination to play the all or nothing game. Their inability to claim a partial win to use as a steppingstone on the path towards proactive engagement in accomplishing even greater things can just as easily backfire.

• Solid waste management plans have a typical hierarchy of:
  1. Reduce
  2. Reuse
  3. Recycle
  4. Waste minimization and WTE
  5. Landfilling

The fourth item is one that I identified last year as a viable investment candidate, particularly the WTE space. With incineration, the biggest drawbacks have been air quality (dioxin release) and ash disposal. While further advances in anaerobic digestion hold promise, Covanta (for one) is commercializing today’s technology to at least make one step forward in improving the quality of life.

So, no my approach is not a wholesale change agent, but more like W. Edward Deming’s theory of small incremental changes. Next week we return to the markets with end of quarter results and my inability to sidestep yet another dividend cut 😦

The Green New Deal

Momentum has been gaining over the past several years over Environmental, Social and Governance (ESG) investing considerations.  Initially reserved for ‘sin’ stocks (tobacco, alcohol and gambling), this movement has evolved to encompass a wide array of ethically questionable, albeit legal, activities including guns and ammunition, farming practices and corporate benefits to name a few.  Notably with the release of the release of the United Nations’ Global Warming of 1.5°C report on October 8, 2018, a renewed emphasis has been heard from some parts of the community, particularly as related to environmental issues.

I first touched on the issue of moral investing last June in concert with the border issues and Paul Tudor Jones’ initiation of the JUST ETF.  Other than a cursory acknowledgement, only one purchase (and no divestments) were performed with ESG in mind. The sole activity being the purchase of Amalgamated Bank (AMAL).  Further deconstruction questioned whether the JUST approach was only a ‘Greenwash’.

Over on the other side of the pond, there has been more angst and soul-searching, my guess as to the cause – a greater formalization of constructive movement towards some of the goals, such as Germany’s coal phase out.  To this end, one of the better posts explaining investing issues and alternatives surrounding ESG is Mindy’s as she performs her due diligence. With the dizzying array of options available, especially when ala carte choices are included, no wonder her “… brain tends to fog over when thinking about investments.”

Then again, there’s always the well-reasoned do-nothing approach proposed by Ditch the Cave.  His reasoning follows a similar vein to that of Pitchfork Economics in that the basis of ownership is an event providing no direct benefit to the corporation.  While this is true, I would further add that any ownership stake that most of us could amass would be so minuscule as to be less than a rounding error on the corporate books.

Another school of thought – and more the focus of this piece – comes from DIY Investor (UK) who is currently repositioning his portfolio, in theory, to one less damaging to the climate.  At the very least, it provides comfort that his efforts are doing a small part in contributing to the betterment of society. I have minimal or no debate with his conclusions as we’re dealing with probabilities rather than certainties.  My quibble is with a portion of his analysis – primarily due to the emotional level of the debate on these issues. In my opinion, to present a case inclusive of incorrect – or incomplete – data provides an opportunity for detractors to seize upon and raise questions concerning the legitimacy of the remaining thesis.

Perhaps I was mistaken for a ‘detractor’ when we engaged last week as my comment of:

I applaud your research and investing convictions.  However some conclusions you arrive at may be somewhat flawed.

1) The ‘Green New Deal’ has climate change as only one element. It is too broad an endeavor to gain much traction. A better play would’ve been to select one or two of the contained issues to focus on.

2) The PG&E bankruptcy filing had ‘probable’ equipment malfunction as a cause of the deadly forest fire. Climate change was not listed as a factor, although I would suspect it was a contributor. The article referenced was an editorial (opinion) – not necessarily a factual piece.

3) To take asset managers to task is misguided, I believe. Their growth is largely due to the rise in passive investing (ETFs). Although they are listed as ‘registered owners’ it is on behalf of ‘beneficial owners’, i.e., the vast majority of individual investors with ETFs in their portfolio

The response provided was:

Thanks for your observations Charlie. I may be misguided but I would err on the side of caution with fossil fuel investments. You may have read about the decision by the worlds largest sovereign wealth fund to divest out of 134 of its oil exploration holdings.  The writing is clearly on the wall for everyone to see (or ignore).

So let’s break apart my objections.

1. The Green New Deal can best be described as aspirational at best and is highly unlikely to be passed in any manner close to its’ current form. The essence of the resolution is to re-engage in the Paris Accord, ensure existing laws (particularly Labor and EPA) are strengthened or adhered to, strengthen laws pertaining to collective bargaining and improve the economy with a focus on infrastructure.  The one piece with any short term chance of passing is infrastructure as it melds with Trump’s economic priorities. Regardless, it remains too lacking in focus to be a viable basis for investment decisions.
2. The PG&E filing was based on California law that holds a company liable for claims even when fault is not proven (one of the reasons I rarely invest in California).  It appears the direct cause was ‘equipment malfunction’ predicating the filing. His claim that the filing was due to global warming may be partially true but is based on an op-ed (opinion) piece in the LA Times.
3. His quest against asset managers is akin to tilting at windmills for two reasons.  The majority of ETFs are rules based and merely a reflection of the base rule or index.  If the index is MSCI managed the determination would need to be made by MSCI – not the asset manager.  If the index was based on the S&P 500, the questionable company would need to be removed from the S&P before it would be reflected in the underlying index.  A more jermain reason is that asset managers based in the US (like Blackrock, Vanguard, Fidelity, et.al.) are required to adhere to a higher, government mandated, standard as related to shareholder engagement activities (activism).  To do otherwise would jeopardize their business model.

If engagement were to be considered, who would be the target?  Would it be a broad-brush approach or be laser focused? I mentioned MSCI earlier.  Would they get a pass as they create and manage indexes addressing both investing styles?  Or would their inclusion of questionable companies in some indexes place a target squarely on their backs?  I alluded to this type of inequity in my final sentence to DIY, “The quandary I encounter in my research are undefined secondary impacts. One example being solar. A by-product of manufacturing is silicon tetra-chloride. Therefore, is solar really green?”  The answer is a resounding yes, but, maybe ….

To make the implication that I’m a non-believer reinforces my contention that DIY Investor (UK) has a tendency to mold a conclusion based on opinions rather than facts.  The reality is that I have been looking at this type of strategy since at least 2015. One doesn’t have to look any further than the comment stream of one of Roadmap2Retire’s oldies but goodies on the renewable topic.  Today, the investing landscape in this space remains as muddled as ever and additional elements, perhaps brought into the spotlight by the Green New Deal, are being included. My concern is that this broadness will be result in its failure.  Call me a pragmatist, but current iterations include everything but the kitchen sink. You may also call me overly cautious, but not a naysayer.

The one investment on my watchlist that appears to meet much of the criteria is Brookfield Renewable Partners (BEP) with my core issues being valuation, debt and the K-1.  Therefore, on my watchlist it remains.

The one certainty continues to be each and every investor has their own core sets of values and beliefs – meaning that arriving at a consensus approach is unlikely at this time. I do have to applaud the energy and research being applied by newer investors coupled with their desire to invest in a manner matching their ideals.  For that is what will ultimately result in the world being a better place.

With that, I’ll get down off my soapbox and let you all have your turn 🙂

Buybacks (part 2)

To follow a theme outlined a couple of weeks ago, my going forward intent in my random musings segments is to view some of the issues of the 2020 presidential campaign under discussion.  My investing rationale has always been that to be successful, one has to understand all possible outcomes which means digging through a lot of crap to discern viable opportunities. It would appear at this early stage that much like 2016, 2020 will have plenty of that to wade through.  As an added bonus, I don’t want to disappoint my newest audience demographic by suppressing my irreverence. As always, these are only observations awaiting an investing opportunity that may never present itself.

The Pitchfork Economics series on buybacks continued on February 26th with Sen. Cory Booker (one of the multitude of Democratic presidential contenders) as a guest discussing his new bill, Workers Dividend Act.  Evidence cited to support his cause is twofold.

1. American Airlines (AAL) wage increase was roundly panned by analysts.   Booker states the analyst opinions were misguided – which is true. To parlay these opinions into supporting rationale against buybacks is equally misguided as these were partially collectively bargained.  (i.e., benefit to unionized employees which is a goal of the bill.)
2. His use of Walmart (WMT) as the proverbial case of buyback greed ignores some aspects that are detrimental to his position.  Walmart offers its’ employees matching 401K plans, stock ownership plans with a 15% discount and HSAs, of which some – if not all – allow employees to share proportionately in the “wealth” gained through buybacks.  The choice resides with the employee as to participation.

In an attempt to frame rhetoric with reality, I chose my oldest 15 holdings to identify what happened over the past three years.

Company	2018	2017	2016
Comcast	3.05% decline	1.83% decline	3.18% decline
WEC Energy	0.09% decline	.09% incr.	16.21% incr.
Chevron	0.46% incr.	1.33% incr.	0.11% decline
Kimberly-Cl.	1.77% decline	1.6% decline	1.26% decline
Norf. Southrn	3.48% decline	1.93% decline	2.76% decline
Clorox	1.19% decline	0.11% decline	0.8% decline
Prosperity B.	0.51% incr.	0.28% decline	0.53% decline
Sysco	0.5% decline	5% decline	3.26% decline
Owens & Minor	0.0% change	0.16% decline	0.16% decline
Walt Disney	1.51% decline	3.72% decline	4.1% decline
Home Depot	2.81% decline	3.82% decline	4.68% decline
PepsiCo	0.9% decline	0.96% decline	2.22% decline
Kimco Realty	0.62% decline	1.03% incr.	1.66% incr.
Towne Bank	0.13% incr.	0.08% incr.	1.05% incr.

Data from MacroTrends

In this scenario (excluding increases denoted bold/italic), the buybacks – as a percentage of the stock outstanding – actually decreased during each of Trump’s years as president despite the tax plan (from 2.1%/1.94%/1.45%).  Companies increasing their share count did so generally to use as currency in lieu of debt. In Chevron’s case this was to fund capital expenditures. Most of the others were for acquisitions.  It’s only slightly ironic that a merger cutting jobs and increasing capital concentration (banking sector) would be viewed more favorably due to an expanding share count

This discussion topic has also been picked up by Mr Tako Escapes who elaborates more skillfully than I.  I don’t dispute two points here, 1) Companies tend to have poor judgement in the timing of these transactions (buy high) and 2) the dollar amounts being expended.  But a dose of reality has to exist as well, I mean – realistically how many capex dollars should be spent to further the worldwide glut of steel (as one example)?

At least this exercise has been interesting but to draw any real conclusions requires a larger sample size.  More questions will also arise such as, ‘Are buybacks more prevalent in the overall S&P universe moreso than the DGI slice?’ or ‘Is my portfolio a large enough sample to be reflective of the stats bandied about by the Democratic candidates?’.  As usual in this blog, more questions than answers. I intend to complete this exercise for all of my holdings during the year

Other concepts will likely hit the garbage heap prior to getting much traction including a wealth tax (constitutional issues) and Modern Monetary Policy (hyperinflation).  As an aside, these concerns, per David McWilliams piece entitled Quantitative easing was the father of millennial socialism as presented by Ben Carlson makes for an interesting case. It certainly appears that the 2020 election season is off to a rousing start. Bottom line, I suspect some candidates will use this issue as a cry to rally the base with minimal substance to follow – similar in many ways to “Build the Wall” of yesteryear.  A reflection of what little has been learned over the last two years. In my mind not an investable theory.  

As always, opinions are welcome!