Uh-Oh …

In last weeks’ post I shared that effective January, my portfolio will experience two dividend cuts.  Based on how my holdings are structured, the overall impact will be a but a blip.  The greater hit is to my pride.  Other than M&A or spinoff activity, never have I experienced more than one cut in a year.  This, my friends, is with forty years of investing under my belt.  And now we have two announcements in the span of one week.  Also (and perhaps warranted), The Dividend Guy published a piece that essentially says that, “hey, I might have screwed up on OZK but at least I never invested in these dogs”.  Like yours truly.  Happy fifth year to you bud and let’s see if that record holds for another thirty.

Seriously though, the GE and OMI situations can’t be any more different.  The only commonality is the cut.  The Dividend Guy mentions a couple of others as well – which I don’t own.  I continue to be suspicious of the real strength of the overall economy as MAIN also announced a revision to their dividend policy (though not directly a cut).  As an investor looking toward dividends, if this is the beginning of a trend it may be time to pare some of the speculation and migrate towards a more conservative posture.

Meanwhile, in these types of circumstances I feel compelled to share my reasoning and anticipated reactions.

Owens & Minor (OMI)

I have to concur with Dividend Guy’s observation earlier this year that this was “dead money”.  I pretty much reached the same conclusion when I reduced my holdings by about 20% in 2015.  I was content with the minimal dividend growth due to their stellar track record.  The sea of change began in earnest in 2017 with fears of the Amazon effect.  Then a couple of losses to competitors (one being CAH).  Current pressure is hitting them on at least two fronts: the trend for hospitals to in-source and the ability to pass on increasing costs.

Being a patient investor I could accept all of the above and even a frozen dividend as they sort out the issues.  But an unexpected cut of this magnitude leads me to believe there is another shoe to drop.  Obviously I’m not alone in this concern on the earnings call, an analyst from Robert W. Baird & Co. asked the operative question, ” … And how comfortable are you with the covenants at this point on the debt position?”  Last time I saw this question was when Orchids Paper (TIS), another former DGI darling, was in their free fall.  I still like OMI’s logistics but they failed to capitalize on the head start they enjoyed prior to this advantage becoming a commodity. 

OMI accounted for 3.46% of my 2017 dividends received and through 3Q 2018 had been reduced further to 1.89%.  As this is an IRA holding I’m limited in the loss realization but intend to sell after ex-dividend and replace with a Canadian stock (with no tax withheld in IRAs).  I suspect my Q1 2019 numbers will see minor impact in the Y/Y growth.

General Electric (GE)

On GE, Dividend Guy’s analysis matches mine, hands down, purely from a DGI perspective.  GE, however (in my view) never regained their prior glory when the financial crisis exposed their warts.  There is but one reason to have GE in a portfolio and it’s not the dividend, it’s corporate actions – which include things like spinoffs (which were the subject of one of my muses).

As this type of approach is speculative in nature, it pays to be mindful of the weightings.  In my case, GE has ranged from 0.05% – 0.07% of total dividends for the past two years.  My self-imposed maximum for speculation is 1% per issue.  Therefore, I’m well within my targets.

So I consider this similarly to a currency trade where GE stock is the fiat.  The wild card is the exchange rate when the spins are finalized.  Best case is that GE is now fairly or under valued, in which case pending actions will be in my favor.  Worst case I get a unfavorable cost basis that reduces (under current law) my tax basis.  Therefore with minimal downside (unless GE goes belly-up) I intend to increase my GE holdings (once the price settles) to the nearest round lot and await the spins.

Therein lies my strategy for dealing with these events.  I’ll attempt to follow the adage: When life gives you lemons, make lemonade!

4 thoughts on “Uh-Oh …

  1. I saw the dividend cut on GE and that was exactly my thought “uh oh” hah! Even this is a side way year for stock, I see my personally controlled account goes down. I’m wondering if I feel “lucky” to decide on saving the cash to pay off my student loan instead of investing in dividend paying stock this year. As for my 401k, it’s slightly down. Tech stocks that belongs to the s&p like apple abd facevook don’t do well and housing don’t do well.banking was up now down significantly. With exception of consumer banking/credit American Express, square, ma,

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  2. I know what you mean. I reviewed some of my expectations for 2018 for this post and found they were eerily on target EXCEPT for the continued strength of the US dollar. That one factor changes the outcome of virtually everything – starting with real estate. My opinion is that the only good debt is no or low cost debt. I used to (when I worked) max my 401K to the match and use the FSA, HSA and IRA to my advantage.

    With interest rates increasing I’m contemplating dipping my toes back into Treasuries which I’ve been out of for over ten years. I do believe 2019 will be a weird year for sure meaning Staples and Utilities will carry increasing weight in my portfolio. TCEHY might be looking good at this level … depending on how the G20 goes …

    Appreciate the comment!


  3. We all have those “Uh-Oh” moments being dividend growth investors. By definition going the DGI route means you have a looooong term horizon. With a long term horizon you are bound to hold a stinker or two along the way. That’s why we diversify. I went through two GE cuts, a WFC cut and IR cut since going the DGI route. It sucks, but my annual dividends have only grown year after year after year despite these cuts. Fresh capital, reinvestment and staying diversified keep my passive income stream on one trajectory, up and mitigates any stinkers that come along.

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  4. You are 100% correct! My recovery approach has been to add enough to my core holdings (KMB, CLX and WEC) to offset the reduction. Waiting for the WAB special meeting results (today) before finalizing a GE approach. I will say I would rather play with a special situation issue (GE) rather than one where debt coverage is being questioned (OMI).

    Appreciate your sharing 🙂


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