Work Freedom Day

Once per year – assuming a static or growing portfolio – the day arrives where current year dividends paid exceed the prior years’ total dividends.  For me, yesterday (October 19th) was the day.  Now the term, coined by Dividend Life in 2014, is a little bit of a misnomer as I don’t work but the concept is applicable.  This compares favorably with last year (October 25th) but still shy of my all time best (in retirement) of October 4th in 2016.  The improvement this year is largely attributable to Tax Cuts and Jobs Act which resulted in increased regular and special dividends.  Whether this is a one-off or sustainable remains to be seen but as my mother was fond of saying, “Don’t look a gift-horse in the mouth.”

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I’ve been noodling over an article for awhile – one of those that need to be absorbed in doses.  I see bits and pieces of me across all levels, but probably a three – maybe a four.  The relevance?  In a recent post (9 Sep) I stated:

Bank OZK (OZK) has had some curious moves of late with a costly name change and repositioning from federal to state oversight. These, along with their increasing exposure to high value CRE gives me pause.

Obviously the esteemed Jason Fieber is not among my handful of readers as he initiated a position on 1 October citing:

There are some concerns over its loan portfolio (when are there not concerns about a business?), especially seeing as how the bank has aggressively moved into construction lending in recent years. This tiny bank is behind some of the biggest projects in some of the biggest markets in the US.

But these concerns seem to be more than priced in. It’s almost as if the last four years of growth are worth nothing. Of course, growth could, and likely will, slow in the new construction market. And sticking to strict lending standards means opportunities might dry up.

The market’s (and my) concerns were that “strict lending standards” weren’t consistently followed.  Fast forward to Thursday’s earnings report:

On July 16, 2018, the Bank changed its name to Bank OZK, changed its ticker symbol to “OZK,” and adopted a new logo and signage, all as part of a strategic rebranding. As a result of this name change and strategic rebranding, the Bank incurred pretax expenses of $10.8 million during the third quarter and $11.4 million for the first nine months of 2018.

During the third quarter of 2018, the Bank incurred combined charge-offs of $45.5 million on two Real Estate Specialties Group (“RESG”) credits. These two unrelated projects are in South Carolina and North Carolina, have been in the Bank’s portfolio since 2007 and 2008, and were previously classified as substandard. The combined balance of these credits, after the charge-offs, is $20.6 million.

The CRE issues are centered on two projects in the Carolinas, one a mall with Sears exposure.  I have no conviction that these are one-time issues.  Much depends on the economy and the hurricane related recovery in this area.  Yet I couldn’t resist the the opportunity to average down yesterday on the 26% price drop.  So yes my crystal ball worked this time, but no I didn’t sell in September, nor did I short.  Which is why I may not be a Level 4.

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Inspired by Catfish Wizard and Jim Cramer’s Power Rankings, this weekend I’ll add the 2019 DGI Picks by Sector as a Menu Item (fun and games only!).  If you’d like to be included, submit your top pick for each sector.  I’ll probably recalibrate the results around Thanksgiving to provide a level playing field.  🙂