Dividend Increases & a Buy

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Each week I catch up on blogs, comment on a handful and generally learn a thing or two.  On occasion I take issue with a post (or a portion thereof) – and provide a (hopefully) meaningful comment.  The most recent being Lanny’s post which included, the lines:

I don’t know about you, but the dividend increases keep coming in hot, right off of the Tax Cuts, Jobs Act!  and Let’s just say tax reform has continued to be nice, as it relates to dividend increases.

The rationale for my comment being – assuming all of his US company increases were a result of the tax plan, this would be a 12.45% increase.  Not shabby by any means but a far cry from his reported total of 20.13%.  The difference being his foreign holdings which weren’t beneficiaries of a tax cut but of strength in ore prices and China shipments.  My quibble is not the numbers – only the presentation of the tax bill being a panacea for businesses.  It may well be, however the rules are still being written and the jury is still out.

Contrast this sentiment with that of one of my companies, Ottawa Bancorp (OTTW).  In their recent earnings report in which a loss was reported they state:

The fourth quarter and annual 2017 results were negatively impacted by a reduction in value of the Company’s net deferred tax assets which resulted in a charge of approximately $0.8 million, or $0.25 per basic and diluted common share, to income tax expense. This income tax adjustment resulted from the December 22, 2017 enactment of the Tax Cuts and Jobs Act …

At the very least, the tax plan is a mixed bag for not only individuals but obviously companies as well.  The dividend was not the primary motivation for this purchase, the M&A possibility was.  I’m still waiting to see if a dividend is declared this quarter since they swung to a loss.

Update 14 Mar 2018 – a 25% dividend increase plus a $.065 special dividend was announced payable 5 Apr – in line with Tom’s observations in the comments section.

Yes, both Lanny and I are seeing double digit increases so far in 2018 and this exceeds the projected increase for the S&P 500 (Barron’s 8.9% ).  Note: the WSJ data cited is inaccurate as GE delivered their 2017 announced cut in 2018.  My portfolio is indicating that the increases will be on par with last year and the shareholder return being more in the form of buy-backs and special dividends.

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“What protection teaches us is to do to ourselves in time of peace what enemies seek to do to us in time of war.”  (regarding tariffs)

Henry George 1839-1897

While the aspirations of this president may be noble, the reality that emerges will resemble more a nightmare than his dream.  Consider one beneficiary, Timken Steel (TMST) which will “make efforts to grow its business with the excess funds made from the tariffs”.  This from the current TWO per shift.  Or perhaps pipelines.  How much lead time is required to retool or build factories since the US has virtually no current pipeline manufacturing capability.  The list goes on … however,  having grown up in a mill town, the jobs are not coming back.  At least not in unskilled labor or sheer numbers previously enjoyed.  A handful, perhaps.  Anything further – without automation – would be sheer folly on the part of management.  Timken rose from the ashes, many more did not.

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“When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win”

Pres. Donald J. Trump, March 2, 2018

This perhaps was true in the early to mid twentieth century.  Globalization – particularly in supply chains – has changed the equation.  With this concept in mind, I decided to wade into the market once again on the heels of a potentially looming trade war and the markets reeling on the news of the Gary Cohn resignation.  This time I nabbed my first Swedish company.

Volvo Group has made it into my portfolio.  Not the car division (which was sold to Ford and then to Geely) but the bus, truck and heavy equipment division.  This is probably a counter-intuitive decision which is why I’m presenting my thought process.  Barring an economic downturn, I see plenty of tailwinds for this company.

  • The Tax Cuts and Jobs Act provides for immediate expensing.  Truck fleets will be modernized with the pace probably accelerated.  Volvo trucks (plants in MD/VA) and the iconic Mack trucks (PA) can benefit as the current US tests for rules of origin are met.
  • NovaBus, built in New York, meets the “Buy America” requirements of this administration and also are “green” operating on CNG and qualify for federally funded procurement contracts.
  • Positioned to benefit from the Rebuilding Infrastructure in America program.  If enacted, the Construction Equipment group could benefit with new orders and parts requirements.  Based in Pennsylvania, other than its’ ultimate foreign ownership, this division meets the newly minted protectionist rhetoric espoused by this administration.
  • The Swedish krona has been deteriorating against the Euro (similar to the US dollar’s weakness).  Unlike the US, the cause has been the reticence of the Riksbank to strengthen the currency (boosting exports).  This, I believe, is a short-term event.
  • In the event tariffs trigger an all-out trade war, they could win orders from Caterpillar on the basis of their non-US ownership.

These are my reasons – not to mention they contribute roughly 13,000 jobs to the US economy.  The icing on the cake?  Getting in prior to the ex-div date nets me the annual dividend which – if approved at the AGM – is proposed to increase by 30.77% (local currency).

So much for thinking that after February’s market gyrations, March might be the beginning of a normalization process.  Well, there’s always April!


2 thoughts on “Dividend Increases & a Buy

  1. SR, Many companies had to take one time write downs of their deferred tax assets at the end of 2017 to account for the changing tax law per generally accepted accounting principles. The deferred tax asset is worth less because of the lower tax rates in the future. It is a one time non cash charge to earnings that will be more than offset annually by higher cash flows from the lower tax rates. In other words, a one time non cash write down today for future higher cash flows due to the lower tax rates tomorrow. I’m not saying the tax cut is a panacea for companies and us owners who want higher dividends, it is a mixed bag just like for us individually as you say. I’m not sure, however, the comparison you draw is a fair one between real cash flows and non cash accounting adjustments. Respectfully submitted, Tom

    Liked by 1 person

    • Point taken and appreciate the response. Following your reasoning, they are taking the earnings report medicine today for a reduced tax liability tomorrow (improving future profitability). Which is one item I failed to consider watching them following their two-step conversion (abnormally large write downs). In theory, barring covenants limiting dividend payments on a reported loss (which I’ll probably browse Edgar this weekend to review), perhaps I got a little ahead of myself on this one due to their March dividend yet to be declared.

      Thanks for the clarification.


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