Must be Merger week

For the second time this week, I rolled out of bed to find my portfolio had been changed.  Now this one was not unexpected as First Niagara was a resident of my Penalty Box.  So unlike DUK’s all cash acquisition of PNY, Key Bank will acquire FNFG in a stock and cash transaction.

What this means for me:

  1. $2.30 cash per share
  2. .68 KEY shares per FNFG share

With KEY closing at $13.38 and FNFG closing at $10.38, total value comes in at roughly $11.40 per FNFG share.  This represents a premium of about 9% – not large, but probably fair given FNFG’s issues.  With my cost basis $8.44, my gain on this investment comes in at 35% for less than 2 years work.

Looks like I’m happy to become part of the KEY family.

What a morning …

Today, I turned on the TV to the news that Duke Energy (DUK) was acquiring Piedmont Natural Gas (PNY) in what appears to be an all cash transaction.  Needless to say, this news changed my morning’s agenda to one of research.  I first purchased PNY in February 2009 and shortly thereafter enrolled in their DRIP.  On price dips I continued to add a little here and there.  Last year I came to the realization that their ownership interest in the Constitution and Atlantic Coast pipelines were probably undervalued and increasing my position to 3.17% of the portfolio.  Today’s news validated my thought process and opened for trading with about a 39% pop – meaning the market is pricing in a high likelihood of the deal completing 2H 2016.

Next Steps

  1. Verify the terms of the deal.  If it is indeed $60 per share cash, then (verified 27 Oct)
  2. Turn off dividend reinvestment.  There is no sense in adding to a fully valued position with minimal upside potential (changed 28 Oct – PNY currently purchases shares in a DRIP at a discount to market.  As long as this continues, a slight upside potential is provided)
  3. Collect the dividends while waiting for the deal to close,
  4. Remove PNY as a Core portfolio position
  5. Upgrade FLIC from Satellite to Core
  6. Add FMBI as a new Satellite position
  7. Investigate and add a new utility (leading contender is PNW) to my portfolio
  8. Redeploy the cash received at the deal’s closing.

Recent Purchase – October

Generally I prefer to post my portfolio changes as one monthly post but I do allow for exceptions.  One such exception is my purchase yesterday of Hawthorn Bancshares.  This is a company that has not appeared in any DGI portfolio that I’m aware of – and I have 206 DGI portfolios with 919 companies resident in a database.  There are a host of reasons why it would fail a screen –

  • 16 quarters without a dividend increase
  • reduced their dividend in 2008/2009
  • like many banks, required TARP
  • payout ratio is a little high
  • thinly traded
  • 1.5% yield

Any or all of these reasons would be reason enough to take a pass as I initially did as well.  But something about this one kept gnawing at me.  They repaid their TARP loan and repurchased US Treasury warrants in June 2013.  They strengthened their balance sheet over 2014 by selling off foreclosed property.  A gamble still – yes – but less now than before.

What sold me was what Yahoo didn’t reveal.  Yes it currently pays a nickel per share per quarter, translating to about 1.5% per year.  For the past four years they have paid a 4% stock dividend in July.  Stock dividends – unlike cash dividends – are taxed only at the time of sale.  Assuming they continue this process, the 1.5% cash PLUS the 4% stock = 5.5% overall return with an increasing YOC via the stock dividend.

Because it is thinly traded, the spreads are all over the map.  I would suggest using limit orders if choosing to purchase this issue.

Portfolio Structure

Whimsical Dividends recently wrote a piece on monthly dividends – posing some good and thoughtful questions.  So rather than answer in a lengthy response, I figured this would be a good starting point for my weekly (or thereabouts) post.

When I first started investing one of my goals was to build a monthly paying portfolio.  This goal was achieved many years ago.  But when I retired, I guess I had too much time on my hands so I wondered if it was possible to build a weekly paying portfolio.  To this end I have pretty much succeeded.

My research began with Dave Fish’s CCC list.  A wonderful repository of data.  I also used articles by Dividend House as a resource.  Although she’s a recent convert to DGI, and I’m not at all in full agreement with some selections, her style and illustrations make her a must read.

My end result is I have placed 26 companies (of about 105 in my portfolio) into three categories, segmented by quarter, with two payees per week.  The result is (almost) weekly payments.

(updated 26 Oct due to PNY merger)

1 A Kimberly-Clark KMB 1 C PNC Financial PNC 1 A WEC Energy WEC
2 C Piedmont Nat. PNY 2 A Clorox CLX 2 C 3M MMM
3 C Sysco SYY 3 C Legacy Texas LTXB 3 C Home Depot HD
4 C Bnk of The Ozarks OZRK 4 C Starbucks SBUX 4 C Blackrock BLK
1 S PepsiCo PEP 1 S Blackstone BX 5 C ADP ADP
2 C First Long Island FLIC 2 S Apple AAPL 1 S Southside Banc. SBSI
3 S Comcast CMCSA 3 S Lakeland Bancorp LBAI 2 S Chevron CVX
4 S Lake Sunapee Bnk LSBG 4 S Webster Financial WBS 3 S Norfolk Southern NSC
 2  S  First Midwest  FMBI 4 S Flushing Financial FFIC
5 S Wesbanco WSBC

As the Dust Settles …

Disclosure: I sold my similar names in this space (PXD, PE) in Feb and Mar.  I remain long TRP, CVX and VLO.  Also long BMO, BX and PJT.  Never owned MHR.

Interesting week over in Magnam Hunter land (MHR).  It had all the makings of a soap opera and highlights the dark underbelly of the penny stock space which several of the oil plays have become residents of.  If you have a morbid curiosity, Google MHR on Seeking Alpha, American Business Journals, Twitter,  Basically, an analyst decided to launch a takeover attempt after tweeting potentially libelous and/or slanderous accusations about the CEO and board.  As of this writing, this was also done without a 13F filing within the 10 day window.  I’m sure this is only the beginning of this saga.

Now this is where this gets interesting.  For several months I’ve suggested buying BX to get in front of the PJT spinoff.  I’ve also suggested increasing your BMO holdings.  After a couple of letters from the analyst/activist, MHR decided to hire a firm to assist with “strategic alternatives”.

MHR has one asset they’ve been trying to monetize.  A pipeline partially owned by MS.  MHR’s interest in this pipeline is collateral for a BMO loan.  And who was hired to assist MHR?  None other than PJT!  Talk about playing both angles without much risk.  I’m sure there will be more to this story.