Weekly Musings – 13 Aug

Periodically, I post my thoughts on current news or recent postings adding my slightly irreverent take on the events and a sometimes offer a slightly contrarian view.  So follows the current installment.

Observation #1 – MET

This week, my allocation from MET’s spin of BHF arrived.  In layman’s terms, Brighthouse is a domestic play while MET has both domestic and international operations.  Personally, I viewed the logic as being a way to strengthen their hand (MET) in the ongoing court battle with the US regarding the SIFI designation -a view not presented in any interviews I saw.  Once trading began, it was widely panned as a lackluster performance.  Now this was a spin not an IPO, my take was it was aggressively valued – meaning (in theory) greater value was retained by the mother ship.  What garnered my wrath was the incompetence MET exhibited with the spin.

First the costs associated with the spin were underestimated.  This requires consent from bondholders to modify debt covenants (for a fee) with the alternative being selling common stock to attain appropriate debt ratios (dilution).  Secondly, a special meeting has been called (more costs) to vote on dividend payment tests included in the corporate charter.  The press release states:

These changes would avoid potential dividend and common stock repurchase restrictions which could occur as a result of the August 4, 2017 spin-off of Brighthouse Financial, Inc.

Why was this issue only identified post spin?  This gross mismanagement has placed MET into my Penalty Box and one has to wonder whether a meeting should be called to replace the CEO and Board?

Observation #2 – NUE

Sure Dividend analyzed Nucor recently, but his usual precision was (in my opinion) lacking.  Invoking “Trump” in the headline was bound to get visits and his ‘Take a pass’ recommendation hit the mark but the review missed in a few areas:

1.  The claim of dumping is certainly an allegation yet no part of his analysis was to drill down on the validity of this claim.  Such as a strong US dollar.  Or the findings of the WTO.
2. He does address electricity as being a significant cost component to the manufacturing process but fails to note that they entered into a 20+ year contract with Encana (ECA) for natural gas in 2012.  Any failure to perform (deliver) could be detrimental to NUE’s margins.
3. Lastly in a dent to NUE’s dumping claims, their 2016 JV with JFE (JFEEF) to build a Mexican factory to supply the auto industry has a hollow ring to it.  As in, Who’s really doing the dumping?

Observation #3 – DIS

While roaming the channels this morning I came across a segment on Fox (FOX) about how to invest despite the troubles in North Korea.  One talking head said Disney citing their theme park exposure was insulated from it.  Really?  Perhaps he ignores the fact that 18-20% of US Disney visitors are foreign.  How would this be impacted?  What would the traffic count (or currency repatriation) be like in China?  What about travel to Paris or Tokyo?  Just one more reason why Fox is not my choice for news.

Hope you enjoyed this segment … until next time.

Recent Buy – VLO

Right out of the gates with the new month, I added to my Valero position.  It wasn’t an average down scenario, but rather a reaction to geopolitical events.  Since May the stock has been on an upward trend.  At month end it dropped to $66.69 – which I missed, but  wound up adding on August 1st at $69.64 which locks in a yield of 4.02% on my new shares.  By adding prior to the record date, they are also eligible for the September dividend.

The news cycle last week was on the Venezuela election – or notably any US reaction (sanctions) to it.  The reason for my hesitation in purchasing was to understand the impact of possible oil import sanctions on Gulf Coast refineries.  It turns out only one of Valero’s refineries has significant exposure to oil from Venezuela, basically on par with Phillips 66 (PSX).  Subsequently – contrary to Trump’s earlier pronouncements – the actual response has been relatively muted thus far.  Perhaps the administration recognizes potential impacts to the economy (refinery jobs in Trumpland or higher gas prices nationally) with a more bombastic approach.  The day following my purchase, VLO announced an agreement to export refined fuels to Mexico through iEnova (SRE subsidiary) with an option to attain 50% stake in storage facilities in Vera Cruz, Mexico City and Puebla.

Last week The Dividend Guy also published an an analysis on Seeking Alpha that reinforced my conclusions – albeit via differing metrics.  Although in concurrence with his findings, I would add that Valero also spawned Nustar Energy (NS – 2006) in addition to his mention of CST (now ANCTF) and Valero Partners (VLP).

Therein lies my rationale for my first August purchase.

July 2017 Update

The general upward trend continued in July with major indices again hitting new highs.  With my strategy shift in place, I did deploy new capital but only in a positioning move ahead of a spin. The S&P ended the month up 1.93% while my portfolio trailed with a gain of 1.77% largely due to the financial sector lagging the market.  For the year, I’m ahead of the index by 4.86%.

Headlines impacting my portfolio (bold are owned):

• 7/5 – YUMC indicates reviewing possible dividend payout
• 7/7 – MET acquires FIG’s asset management business
• 7/10 – CM acquires Geneva Advisors
• 7/11 –BR acquires Spence Johnson Ltd
• 7/12 – ABM acquires GCA Services
• 7/12 – AAPL adds PYPL as appstore pymt option
• 7/13 – MFC reportedly reviewing sale or IPO of John Hancock
• 7/17 – CHD to buy waterpik
• 7/17 – China places restrictions on loans to Wanda (AMC)
• 7/18 – MKC to buy RBGPF’s food business
• 7/18 – CCI acquires Lightower
• 7/19 – HRNNF (H.TO) to acquire AVA
• 7/20 – SRC considering spinoff of Shopko properties
• 7/21 – BX and CVC Capital offer $3.7B for Paysafe (PAYS.L)
• 7/26 – SHPG rumored to be takeover target
• 7/27 – Ackman discloses stake in ADP
• 7/28 – IRM acquires Mag Datacenters LLC
• 7/31 – BX (w/ ETP 50.1%) buys 49.9% of holding co. that owns 65% of Rover pipeline

 Note: my comment of July 21st on AMC (Dividend Diplomats) remains prescient in light of their warning on August 1st.  I believe now is a viable entry point if cognizant of possible risk to the dividend particularly as related to lender covenants.  EPR may have a slight risk as well.

Portfolio Updates:

• Added to MET (spinoff positioning)

Dividends:

• July delivered an increase of 2.14% Y/Y with the vast majority of the increase being attributable dividend increases.
• July delivered a decrease of 8.85% over last quarter (Apr) with TIS (dividend suspension) and foreign cycles (interim/final) being the culprits.
• Declared dividend increases averaged 10.81% with 61.02% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension)
• YTD dividends received were 69.81% of total 2016 dividends which if the current run rate is maintained would exceed last years’ total in early November

Spinoffs:

MET has declared their spinoff – Brighthouse Financial (BHF) – effective August 4th.  Holders as of July 19th will be entitled to 1 share for each 11 MET shares owned.

Mergers:

AGU/POT (Nutrien), SGBK/HOMB remain pending

Summary

Overall another positive month with the only disappointment being the Q/Q dividend decline – which was expected.  The primary metric (annual dividend increase) remains on target and well ahead of inflation.

Musings (Jul 2017)

This is the time of the month that results in added scrutiny on various levels.  Not so much on the strategy, but on events that have the ability to impact my investments.  With July going to the wire with seven dividends being paid Monday.  It will likely be Wednesday when I get the final results and my performance will probably hinge on the exchange rate.  Which triggered my random thought process – which at times is scary.

Observation #1

• The USD has been weakening as I reflected on in a prior post.  Japan faced a mini-crisis vis-à-vis North Korea on Friday.  Previously, in such times, the dollar would strengthen while the Yen weakened.  This time, it was the Euro that strengthened versus the Yen.  

Observation #2

• With a weaker USD, gas prices have pretty much increased in inverse tandem as world oil is priced in USD (reserve currency, etc.)  Although the weaker dollar should be good for exports, how long until inflation begins its’ ascent?

Observation #3

• Several companies have reported earnings that missed on revenue forecasts yet beat on profits.  While I don’t place significant value on analyst’s opinions, it’s telling that if this trend continues, profits will be next to suffer.
• This I expected from regional banks which was why I anticipated a pickup in M&A activity going into the last half of the year.

Observation #4

• The Swiss observed that the Franc may be overvalued.  Could this be a precursor to another devaluation?  If so, to what impact on the USD?

These are some of the reasons why I chose to modify my strategy earlier this month.  Not to mention the potential political impacts – or lack thereof.  Perhaps a clear US direction will be established enabling us little guys to try to navigate choppy waters.

Baseball and Screeners

This is one of the times that another blogger’s post has triggered my (loosely defined) creative juices.  The post in question was Lanny’s (Dividend Diplomats)  Waste Management analysis.  Now I have no disagreement with his conclusion, in fact you could compare the DD Screener to delivering a fastball right down the middle.  The only alternatives to a strike are whether the pitch is high or in the dirt.

Personally, I like a little more strategy – the brush back before throwing a curve that nicks the corner.  Questions like EPA regulations or NIMBY impact on landfills.  Or the number of municipal contracts that are competitive versus monopolistic.  Issues obscured by a strict reading of batting and earned run averages.

The jewel in his analysis was:

I was driving around my neighborhood and was surrounded by a few waste disposal service trucks …

Aha!  A twist on the old kitchen cupboard investing strategy.  You know the drill … identify the companies behind the products you use.  I’m not sure of the absolute merits of this strategy, but there is comfort in investing in companies whose products and/or brands are familiar.  And it is one I use (to a degree) as well.  My assumption being, why not have my spending subsidized by companies I do business with through dividends?

I think I stated earlier I thrive in the obscurities, case in point being that last week I required a new prescription.  My meds generally delivered by mail from Humana (HUM).  One-off situations are handled by a local pharmacy.  In this case I chose Tom Thumb grocery as they accepted Humana insurance and I could wait at the Starbucks (SBUX) nearby.  I noticed on my paperwork that Argus Health was used for claim processing.  Argus is owned by one of my companies, DST.

There we have it.  Humana paid Tom Thumb which paid a processing fee to DST while I paid Starbucks while waiting.  Of which HUM, DST and SBUX all will provide a rebate (dividend) to me.  Although a topic I’ve mused on before, it is also one I feel never gets old.  One can always posit that this level of detail is irrelevant and perhaps it is.  But I feel it provides a broader snapshot of the business when inter-relationships are recognized.

 

2017 Mid Year Correction

Each year I establish a basic plan to govern my investing activity based on sectors, segments or locales able to deliver a little alpha to my portfolio.  The past couple of years had a focus on the Financial industry with the outcome being rewarded with mergers (small banks) and outsized dividend increases (money center banks).  I also began increasing my Canadian allocation in 2015 from 2.5% of my dividends to the current 8.6%.  Since the election, I was accelerating the increase in my other foreign holdings to the current 13.6% on two theories, 1) gridlock in Congress would persist as the Republican majority would be too narrow to push through sweeping changes, and 2) this inaction would result in a weaker dollar.  It appears I was correct on both counts as the US dollar is now at an eight month low.

With my alpha agendas now too pricey (at least for slam dunk results), a re-prioritization is in order. With the Fed Chairs’ testimony this week indicating that GDP growth of 3% would be difficult, the Trump agenda which projects a higher growth rate is likely in peril – even ignoring the self-inflicted wounds.  Without an improvement in the GDP, deficit hawks will be circling.  It is likely the last half of the year will present some opportunities, but my view these will be predicated on external events.  My eyes will remain open to the USD exchange rate – on strength I may buy foreign issues.

My portfolio allocation between holdings labeled Anchor, Core and Satellite have been imbalanced for a year or two primarily due to merger activity and the acceleration of adding foreign issues.  Now that the major mergers have completed, the last this past January, and other alternatives are slim, I figure it’s time to get back to basics.

My going forward strategy can be summarized as follows:

1. Non-US equities when secured at a favorable exchange rate
   a)I have 2 Japanese, 2 Swiss, 1 UK and 1 Swedish company on my watch list in the event an attractive price presents itself
2. Assess corporate actions (spins, splits, mergers) for opportunities
   a) Generally I’m agnostic to splits except when the result would be a weird fractional.  I can easily manage tenths or hundredths of shares.  Smaller sizes are troublesome so I avoid when possible.
   b) Spins (and mergers) are assessed to prevent (if possible) weird fractionals.  For instance, I added to my MET position earlier this month as their spin will be at a ratio of 11:1 which would have otherwise delivered a weird fractional.
3. Assess portfolio for average down and other opportunities
   a) An example of this was last months’ purchase of KSU.  To this end, I recently updated my Dividends (Div Dates) Google sheet to flag when the current price is lower than my cost basis.
   b) An example of “Other Opportunities” would be BCBP which is resident in my Penalty Box due to dilution.  The dilution (secondary) might be explained (now) with their announced acquisition of the troubled IA Bancorp.  If the regulators provide their seal of approval, it may be time to remove BCBP from Penalty status and perhaps add to this 3.5% yielder.
4. Add to holdings that are below target weighting
   a) This is where I expect most of my second half activity to reside.

Of my 26 stocks labeled Anchor, Core or Satellite; 5 can be considered at their target weight (within .5% of the target) and 4 I consider to be overweight.  The remaining 17 will receive most of my attention.  As most of these rarely go on sale, I’ll likely ignore price and place a higher priority on yield and events – at least until I’ve exceeded last years’ total dividends.

The following table highlights this portion of my portfolio:

JAN/APR/JUL/OCT

COMPANY	TYPE	PORT DIV%
Kimberley-Clark/KMB	A-(6%)	4.01%
First of Long Island/FLIC	C-(3%)	0.85%
Sysco/SYY	C-(3%)	1.81%
Bank of the Ozarks/OZRK	C-(3%)	0.67%
PepsiCo/PEP	S-(1.5%)	1.51%
First Midwest/FMBI	S-(1.5%)	0.3%
Comcast/CMCSA	S-(1.5%)	8.32%
Toronto-Dominion/TD	S-(1.5%)	1.58%
NOTE: Not all payment schedules coincide completely

FEB/MAY/AUG/NOV

COMPANY	TYPE	PORT DIV%
Clorox/CLX	A-(6%)	3.68%
PNC Financial Services/PNC	C-(3%)	0.30%
Legacy Texas Financial/LTXB	C-(3%)	1.48%
Starbucks/SBUX	C-(3%)	1.07%
Blackstone/BX	S-(1.5%)	2.58%
Apple/AAPL	S-(1.5%)	1.26%
Lakeland Bancorp/LBAI	S-(1.5%)	1.04%
Webster Financial/WBS	S-(1.5%)	0.82%
NOTE: Not all payment schedules coincide completely

MAR/JUN/SEP/DEC

COMPANY	TYPE	PORT DIV%
WEC Energy/WEC	A-(6%)	5.61%
3M/MMM	C-(3%)	0.76%
Home Depot/HD	C-(3%)	7.32%
Blackrock/BLK	C-(3%)	.22%
ADP/ADP	C-(3%)	1.60%
Southside Bancshares/SBSI	S-(1.5%)	0.96%
Chevron/CVX	S-(1.5%)	9.52%
Norfolk Southern/NSC	S-(1.5%)	1.99%
Flushing Financial Corp/FFIC	S-(1.5%)	0.99%
Wesbanco/WSBC	S-(1.5%)	1.14%
NOTE: Not all payment schedules coincide completely

I will provide the caveat that this plan is subject to not only the whims of  the market but of my own as well.  In addition, this plan may be changed if/when a better idea comes along.

An Infrastructure Rebuttal

Subsequent to the US election, many have pondered the impact to the economy at-large or at a micro level.  Consider Cramer’s Trump stocks or the Trigger app as examples.  I too have not been immune as I bought into Europe, Canada, Mexico and Australia as presidential comments resulted in temporary pricing weakness.  The question remains what – if anything – can be accomplished on his agenda. With healthcare and tax reform fraught with partisan politics, it appears the best option of the remaining campaign promises is infrastructure as on the surface there still is the hope of bi-partisanship.  Yet aside from a vague “public-private” partnership, details have been lacking probably due to resources allocated to the aforementioned agenda items.