The Big Boys are Playing

I was starting to wonder when – not if – and how the big guns would start deploying their cash stash.  Most have investors to answer to and it has been a relatively quiet year so far – so it must be time to begin prowling for deals to bake and pots to stir.

First out of the chutes was the kingpin Warren fresh off the aborted Unilever deal.  Leaving 3G in his dust, last week he ran one from his playbook that worked before.  This time the victim being Home Capital Group which required a cash infusion following a run on deposits.  His $C2B 9.0% loan is at better terms than the one currently in place provided by the Healthcare of Ontario Pension Plan.  He’s also getting a discounted share price on a stake that could equal 38%.  The advisors were RY and BMO in which I’m long both.  As an aside … if the US dollar weakens further, profits could be booked on the FX angle as well.

Then only this morning he announced a 9.8% stake in Store Capital.  This one should provide support for REITs in general while (at least on paper) be an investment that meets his standards for playing nice.

This morning brought the announcement that Dan Loeb’s Third Point has amassed a 1.3% stake in Nestlé.  This appears to be a ploy to pressure the company to create ‘shareholder value’ by shedding assets and taking on debt.  It could be argued that Nestlé’s stake in L’Oreal is a slight hedge against commodity pricing and their conservative nature is an asset rather than liability.  I see this as more of an attempt at greenmail with minimal risk.  If pundits are correct, the Swiss Franc should get stronger versus the US dollar this year.  If so, even without spurring corporate change, profits could be booked on the currency.

In today’s most twisted play, the title goes to Tiger Global who reportedly have shorted Tesco plc while being long Amazon.  Not a bad call with Amazon’s Whole Foods announcement last week hurting grocery retailers.  But if the FT report is correct and this position was initiated in January, one has to wonder if they were privy to inside information?  Especially when initiated anonymously through an offshore entity?

So much for this week’s questions … and onward toward month end.

Small Banking Revisited

Periodically I encounter an article that hits at the core of one of my strategies.  As many of  you know, I’m currently a little overweight financials with an emphasis on regional banks.  This was not always the case as I (fortunately) exited the sector in late 2007  reentering only in early 2013.  My five year pause was bookended by what Richard J. Parsons refers to as the Great Panic of 2008-2009.  His article, Finding Alpha In Reliable Dividend Banks(14 June 2017) struck a chord with me and illustrated some of the style I came to embrace for a time. Though I’m not selling my banks, other than special situations, I’m currently not a buyer either.  If you are a bank investor (or considering being one) I’d recommend reading his article.

His article highlights 30 regionals that actually raised dividends during the Panic.  By comparison, my hypothesis was segmented into three ‘buckets’ which were:
1.Good dividend payers
2.Stock dividend payers
3.Acquisition candidates

Although he includes some stock payers (CMBH, AROW, SBSI, and FLIC (roundups on splits)) this is not his article’s focus.  I’ve written on these before so I’ll exclude them.

His article also points out that only one of the original 30 was acquired which is a slight disappointment when one of my goals is to obtain a merger premium.  Several on his list were acquirers which kind of proves my rationale to expand the universe to include potential acquisition targets in my bank holdings a couple of years ago.

Leaving us with his list.  One notable point is his geographic analysis.  “Certain states are more likely to be home to these reliable dividend banks: Indiana, Texas, California, Kentucky, Missouri, and upper state New York.”  This melds with my findings though I attributed this to state regulatory agencies as certain states had disproportionate numbers of bank failures.  Therefore I excluded western (California) and southern US banks.  To his mix, I found Pennsylvania to be a viable candidate as well.  This difference could be that mutual conversions (notably preeminent in PA, NY, NJ, VA and MA) were identified as likely targets by my study.

Another note on his analysis, “…a few critical factors influence long-term success in banking: hands-on expert management…”  In fact he elaborates a little on this in the comment stream.  A tidbit is both Missouri banks on his list were established by the Kemper family.

So the actual question is how do my portfolio holdings stack up against his list?  Half of the thirty are owned.  Of the nine owned by Richard, seven are owned (one obtained via a merger).  One being in California was excluded by geographic screening.  I’m not sure offhand though, why I excluded CBU out of New York.  My primary takeaway from his article was a validation of my strategy and I need to further investigate a few.

His complete list follows:

Access National	ANCX	1.4B	VA
Arrow Financial Corp.	AROW	2.7B	NY
Auburn National Bancorp	AUBN	.8B	AL
BancFirst Corp.	BANF	7.2B	OK
Bar Harbor Bankshares	BHB	3.4B	ME
Bank of Marin Bancorp	BMRC	2.0B	CA
Bryn Mawr Bank Corp.	BMTC	3.3B	PA
Bank of Oklahoma	BOKF	32.6B	OK
Commerce Bancshares	CBSH	25.3B	MO
Community Bank System	CBU	8.9B	NY
Cullen/Frost Bankers	CFR	30.5B	TX
Community Trust Bancorp	CTBI	4.0B	KY
First Capital	FCAP	.8B	IN
First of Long Island Corp.	FLIC	3.6B	NY
Farmers & Merchants Bancorp	FMCB	3.0B	CA
Horizon Bancorp	HBNC	3.2B	IN
National Bankshares	NKSH	1.2B	VA
Norwood Financial Corp.	NWFL	1.1B	PA
Bank of the Ozarks	OZRK	19.2B	AR
Prosperity Bancshares	PB	22.5B	TX
People’s United Financial, Inc.	PBCT	40.2B	CT
Stock Yards Bancorp	SYBT	3.0B	KY
Tompkins Financial Corp.	TMP	6.3B	NY
United Bankshares	UBSI	14.8B	WV
UMB Financial Corp.	UMBF	20.6B	MO
Westamerica	WABC	5.4B	CA
Washington Trust	WASH	4.4B	RI
First Source	SRCE	5.5B	IN
First Financial	THFF	3.0B	IN
Southside Bancshares	SBSI	5.7B	TX
Bold-owned by Richard, Italics-owned by me

Recent Buy – KSU

Usually I don’t announce my incremental purchases, preferring instead to report in bulk as part of my monthly recap.  There are occasions when an exception is warranted so I figured I’d share my thought process with this week’s post – and the subsequent events.

Kansas City Southern is the smallest of the Class I railroads in the US and operates in Mexico through a wholly owned subsidiary.  Since the election, it has been beaten down as Mexico is reviewing its’ concession, concerns over NAFTA trade and a weakened peso (impacting earnings).

While reviewing my holdings last weekend, I noticed:

1. The price appeared to have hit bottom and began moving higher
2. The current price was significantly lower than my $115.07 cost basis
3. The ex-dividend date was around the corner (Jun 12th)
4. The Mexican peso has risen over 5% (now 6%) against the USD since October

Figuring there was minimal downside left, on Monday (June 5th) I bought enough (at $95.87) to average down my cost basis to $98.69 – though it’s still less than 1% of my portfolio.

Where it gets interesting is:

• June 6th – US and Mexico reach agreement on sugar trade – KSU closes at $96.57
• June 7th – US appears to seek resolution in lumber spat with Canada ($97.46 close)
• June 8th – Guy Adami (CNBC’s Fast Money) announces position ($98.86 close)
• June 9th – Pete Najarian (Fast Money) announces position ($99.59 close)

I certainly did not expect this level of activity but sure am glad I chose to average down when I did.  Also not sure what option activity got Fast Money’s attention but suspect we’ll see a little pullback as we go ex-dividend.  Still, 3.7% price improvement in a week and now I’m no longer underwater plus the dividend (small though it may be) – have to say it was a good week!

Now to attempt an encore …

Scraping the Bottom of the Barrel

I’m rarely at a loss for my weekly observations – especially post inauguration – with this week being no exception.  Without further introduction, I’ll dive right into current headlines and my take on the impact to investors.

May 2017 Update

May was generally quiet with the market trending generally higher.  With few pullback opportunities, I barely deployed new dividends so my cash position increased again.  At least the turmoil I experienced moving from Loyal3 subsided and I could resume a more moderate pace.  An upcoming election in the UK may present a buying opportunity on weakness in the GBP versus the US dollar.  The S&P ended the month up 1.16% while my portfolio recorded a gain of 1.37%.  For the year (so far), I’m ahead of the index by 4.07%

Headlines impacting my portfolio (bold are owned):

• 5/1 – DRE sells medical office portfolio to HTA
• 5/1 – TIS suspends dividend
• 5/4 – FHN to acquire CBF
• 5/30 – JNS/HGG.L merger completed (becoming JHG)
• 5/31 – KEY acquires HelloWallet from MORN

Portfolio Updates:

• Initiated position in SGAPY
• Added to IVZ
• Added to PWCDF (proceeds from sale of TIS)
• Added to DST
• Added to PLD

Dividends:

• May delivered an increase of 51.44% over May 2016 with the vast majority of this attributable to foreign dividend cycles not held last year.
• May delivered an increase of 38.94% over last quarter (Feb) for the same reason.
• Declared dividend increases averaged 8.89% with 48.02% of my portfolio delivering at least one increase (2 cuts – XRX and YUM; 1 suspension – TIS)
• YTD dividends received were 47.11% of total 2016 dividends which if the current run rate is maintained would exceed last year’s total in early November.

Note: with 14.6% of current dividends paid by foreign sources, the weakening US dollar is providing a tailwind with exchange rates i.e., increasing my return.

Spinoffs:

The MET spin (Brighthouse Financial – BHF) remains in regulatory review.

Mergers:

Agrium/POT, SGBK/HOMB remain pending

Federal Budget and Investing Impacts

Trump’s first budget was unveiled this week and in its wake left much to dislike.  The talking heads are parsing the details and if enacted as is (which is certainly debatable) will result in probably the largest transfer of wealth between classes that I have ever seen.  The obvious campaign promises (wall, security, etc.), the social welfare programs (which are garnering the headlines) and calculation errors (double counting on both sides of the ledger) will be the news.  But as I prefer the more obscure, my questions are more aligned to the question of impact on investments.  To this end, my focus is on two areas – farmland and healthcare REITs.

Portfolio Breakdown by Geography

I’m always intrigued by how investors position themselves in providing a measure of protection against market downturns.  Most common is sector diversification where the theory is a downturn in one area of the economy is offset by outperformance – or at least stability – in other areas.  DivHut recently posted his quarterly sector review which – as he indicated – is reasonably aligned with his risk tolerance and goals.  The weakness in this approach is his low exposure to Technology or in my case an overexposure to Financials.  So long as potential weaknesses are identified, this approach does allow a portfolio to be tilted towards sectors which the investor believes will outperform the broader market.

Another approach was presented by Roadmap2Retire last March where the attempt was made to isolate the geographic revenue diversification of the companies he owned.  A daunting effort to be sure, but I’m not sure the data he obtained was complete.  As an example, he reports BCE’s revenue as 100% Canadian.  That is likely as reported in filings.  Not reported is their 37.5% stake in Maple Leaf Sports which owns the Maple Leafs (NHL) and Raptors (NBA).  The NBA pays revenue sharing in US dollars (not Canadian).  Basically any minority stake, investments or joint ventures with other companies are likely to be excluded from any of the companies he owns.  The question becomes – is this revenue identifiable and negligible?

The approach I take is – first sector and secondly the country where the company is headquartered.  Dividends paid are recorded post exchange to US currency which does result in some fluctuation based on the relative strength (or weakness) of the dollar.  The following table illustrates the non-US source for roughly 15% of my dividends.

8.98% Canada
0.53% United Kingdom
0.04% Bahamas
2.44% Australia
0.13% Ireland
0.32% Mexico
0.00% China*
1.29% Hong Kong
0.20% Chile
0.26% Luxembourg
1.47% Singapore

* no dividend paid at this time

The UK dividends are set to increase once a merger involving one of my US companies is complete.  I may be forced to slow foreign purchases as recent political events have resulted in the US dollar weakening and the Yen and Swiss Franc strengthening.  If so, I’m sure I can find a few US companies to put my money into!