March 2019 Update

With it being tax time in the US, closing out the first quarter and a yield curve inversion – this week’s installment has plenty to offer. With the market generally on the rise for the month I decided to maintain a cash heavy (for me) position while putting the finishing touches on my tax return. My general attitude has been one of caution for the past several months with the markets finally putting a yield curve inversion on display. Larry Kudlow was making the rounds this morning maintaining this is an aberration – and it very well could be. But it easily could be an omen of a looming recession – perhaps as early as late this year. Meanwhile, the S&P rose 1.76% while my portfolio rose 1.05%. For the year, I’m slightly behind the benchmark by -0.71%.

PORTFOLIO UPDATES

  • Increased my ETF position (CUT,VGK,EWA,EWW,JPMV)
  • added WSFS and lost BNCL (merger)

DIVIDENDS

While my primary focus resides on dividends with the goal being a rising flow of dividends on an annual basis, I’m placing less emphasis on the quarterly numbers as the number of semi-annual, interim/final and annual cycles have been steadily increasing in my portfolio.

  • March delivered an increase of 8.34% Y/Y, the largest impacts being dividend cuts and a couple of cycle changes offset by increases.
  • March delivered a 23.3% increase over last quarter (Dec) – basically a return to normalcy.
  • Dividend increases averaged 6.19% with 34.55% of the portfolio delivering at least one increase (including 4 cuts (two being OMI)). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980. The most recent one being UNIT whose largest customer declared bankruptcy.
  • 2019 Dividends received were 27.12% of 2018 total dividends putting me on target to exceed last years’ total in late October.

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

SPINOFFs

NVS spin of Alcon (ALC) scheduled for April 9th, 1:5 ratio

On Oct 4,2018 MSG filed a confidential Form 10 to spin the sports business

MERGERS

XRX merger with Fujifilm cancelled (still being litigated).

BNCL merger into WSFS completed March 1st

BHBK to merge into INDB

TRUMP TAX PLAN IMPACT

This is a brief preview of the tax changes at a personal level. Headlines have previously reported that early filers were seeing lower average refunds – my guess is most of these did not adjust their withholding. Since then, the IRS has reported that the refunds have begun to ‘normalize’. As one who itemizes, my sense is that many filers are beginning to identify their own impact. In my case, I have a tax increase – not a cut – primarily due to being just below the new threshold for itemization. The standard deduction coupled with the tax brackets did a little number on me – which is what I was expecting so I wasn’t caught unaware. Adding salt to the wound was another change that disallows my minimal IRA contribution (as a non W-2 wage earner). On the bright side, my foreign taxes paid on dividends can still be applied as a tax credit. Bottom line – only in Trump World would the path to Making America Great Again run through the field of non-US stocks – assuming one wants as low a tax liability as possible.

SUMMARY

The blog data conversion to 2019 is almost complete still being worked on. The most significant error is my cost basis (dividend date screen) which doesn’t yet account for all DRIP additions or additional purchases. At this rate it may be 2020 before I finish this update.

Hope your month/quarter was a good one!

One More on Ecology

The past couple of weeks have dealt on topics that are front and center in the current news cycle with the one commonality being that barring significant personal convictions there is no mainstream investing approach to capitalize on these trends. This isn’t to imply there won’t be or that some investors in these spaces aren’t at the bleeding edge. It’s just the current risk reward potential is skewed more towards the speculative side.

I’m not immune to a degree of speculation so long as I can see a viable (personal opinion) business model and a path towards profit while – at the very least – making at least an incremental improvement to a problem facing society. One such conundrum hit my inbox this week in the form of a Greenpeace (Netherlands) video on plastic waste. I will first stipulate that there is a real (and growing) problem with plastic waste. I will further stipulate that one of the Greenpeace success stories has been to raise public awareness. But their pitfall, in my opinion, has been their dogged determination to play the all or nothing game. Their inability to claim a partial win to use as a steppingstone on the path towards proactive engagement in accomplishing even greater things can just as easily backfire.

  • Solid waste management plans have a typical hierarchy of:
    1. Reduce
    2. Reuse
    3. Recycle
    4. Waste minimization and WTE
    5. Landfilling

The fourth item is one that I identified last year as a viable investment candidate, particularly the WTE space. With incineration, the biggest drawbacks have been air quality (dioxin release) and ash disposal. While further advances in anaerobic digestion hold promise, Covanta (for one) is commercializing today’s technology to at least make one step forward in improving the quality of life.

So, no my approach is not a wholesale change agent, but more like W. Edward Deming’s theory of small incremental changes. Next week we return to the markets with end of quarter results and my inability to sidestep yet another dividend cut 😦

The Green New Deal

Momentum has been gaining over the past several years over Environmental, Social and Governance (ESG) investing considerations.  Initially reserved for ‘sin’ stocks (tobacco, alcohol and gambling), this movement has evolved to encompass a wide array of ethically questionable, albeit legal, activities including guns and ammunition, farming practices and corporate benefits to name a few.  Notably with the release of the release of the United Nations’ Global Warming of 1.5°C report on October 8, 2018, a renewed emphasis has been heard from some parts of the community, particularly as related to environmental issues.

I first touched on the issue of moral investing last June in concert with the border issues and Paul Tudor Jones’ initiation of the JUST ETF.  Other than a cursory acknowledgement, only one purchase (and no divestments) were performed with ESG in mind. The sole activity being the purchase of Amalgamated Bank (AMAL).  Further deconstruction questioned whether the JUST approach was only a ‘Greenwash’.

Over on the other side of the pond, there has been more angst and soul-searching, my guess as to the cause – a greater formalization of constructive movement towards some of the goals, such as Germany’s coal phase out.  To this end, one of the better posts explaining investing issues and alternatives surrounding ESG is Mindy’s as she performs her due diligence. With the dizzying array of options available, especially when ala carte choices are included, no wonder her “… brain tends to fog over when thinking about investments.

Then again, there’s always the well-reasoned do-nothing approach proposed by Ditch the Cave.  His reasoning follows a similar vein to that of Pitchfork Economics in that the basis of ownership is an event providing no direct benefit to the corporation.  While this is true, I would further add that any ownership stake that most of us could amass would be so minuscule as to be less than a rounding error on the corporate books.

Another school of thought – and more the focus of this piece – comes from DIY Investor (UK) who is currently repositioning his portfolio, in theory, to one less damaging to the climate.  At the very least, it provides comfort that his efforts are doing a small part in contributing to the betterment of society. I have minimal or no debate with his conclusions as we’re dealing with probabilities rather than certainties.  My quibble is with a portion of his analysis – primarily due to the emotional level of the debate on these issues. In my opinion, to present a case inclusive of incorrect – or incomplete – data provides an opportunity for detractors to seize upon and raise questions concerning the legitimacy of the remaining thesis.

Perhaps I was mistaken for a ‘detractor’ when we engaged last week as my comment of:

I applaud your research and investing convictions.  However some conclusions you arrive at may be somewhat flawed.

1) The ‘Green New Deal’ has climate change as only one element. It is too broad an endeavor to gain much traction. A better play would’ve been to select one or two of the contained issues to focus on.

2) The PG&E bankruptcy filing had ‘probable’ equipment malfunction as a cause of the deadly forest fire. Climate change was not listed as a factor, although I would suspect it was a contributor. The article referenced was an editorial (opinion) – not necessarily a factual piece.

3) To take asset managers to task is misguided, I believe. Their growth is largely due to the rise in passive investing (ETFs). Although they are listed as ‘registered owners’ it is on behalf of ‘beneficial owners’, i.e., the vast majority of individual investors with ETFs in their portfolio

The response provided was:

Thanks for your observations Charlie. I may be misguided but I would err on the side of caution with fossil fuel investments. You may have read about the decision by the worlds largest sovereign wealth fund to divest out of 134 of its oil exploration holdings.  The writing is clearly on the wall for everyone to see (or ignore).

So let’s break apart my objections.

  1. The Green New Deal can best be described as aspirational at best and is highly unlikely to be passed in any manner close to its’ current form. The essence of the resolution is to re-engage in the Paris Accord, ensure existing laws (particularly Labor and EPA) are strengthened or adhered to, strengthen laws pertaining to collective bargaining and improve the economy with a focus on infrastructure.  The one piece with any short term chance of passing is infrastructure as it melds with Trump’s economic priorities. Regardless, it remains too lacking in focus to be a viable basis for investment decisions.
  2. The PG&E filing was based on California law that holds a company liable for claims even when fault is not proven (one of the reasons I rarely invest in California).  It appears the direct cause was ‘equipment malfunction’ predicating the filing. His claim that the filing was due to global warming may be partially true but is based on an op-ed (opinion) piece in the LA Times.
  3. His quest against asset managers is akin to tilting at windmills for two reasons.  The majority of ETFs are rules based and merely a reflection of the base rule or index.  If the index is MSCI managed the determination would need to be made by MSCI – not the asset manager.  If the index was based on the S&P 500, the questionable company would need to be removed from the S&P before it would be reflected in the underlying index.  A more jermain reason is that asset managers based in the US (like Blackrock, Vanguard, Fidelity, et.al.) are required to adhere to a higher, government mandated, standard as related to shareholder engagement activities (activism).  To do otherwise would jeopardize their business model.

If engagement were to be considered, who would be the target?  Would it be a broad-brush approach or be laser focused? I mentioned MSCI earlier.  Would they get a pass as they create and manage indexes addressing both investing styles?  Or would their inclusion of questionable companies in some indexes place a target squarely on their backs?  I alluded to this type of inequity in my final sentence to DIY, “The quandary I encounter in my research are undefined secondary impacts. One example being solar. A by-product of manufacturing is silicon tetra-chloride. Therefore, is solar really green?”  The answer is a resounding yes, but, maybe ….

To make the implication that I’m a non-believer reinforces my contention that DIY Investor (UK) has a tendency to mold a conclusion based on opinions rather than facts.  The reality is that I have been looking at this type of strategy since at least 2015. One doesn’t have to look any further than the comment stream of one of Roadmap2Retire’s oldies but goodies on the renewable topic.  Today, the investing landscape in this space remains as muddled as ever and additional elements, perhaps brought into the spotlight by the Green New Deal, are being included. My concern is that this broadness will be result in its failure.  Call me a pragmatist, but current iterations include everything but the kitchen sink. You may also call me overly cautious, but not a naysayer.

The one investment on my watchlist that appears to meet much of the criteria is Brookfield Renewable Partners (BEP) with my core issues being valuation, debt and the K-1.  Therefore, on my watchlist it remains.

The one certainty continues to be each and every investor has their own core sets of values and beliefs – meaning that arriving at a consensus approach is unlikely at this time. I do have to applaud the energy and research being applied by newer investors coupled with their desire to invest in a manner matching their ideals.  For that is what will ultimately result in the world being a better place.

With that, I’ll get down off my soapbox and let you all have your turn 🙂

Buybacks (part 2)

To follow a theme outlined a couple of weeks ago, my going forward intent in my random musings segments is to view some of the issues of the 2020 presidential campaign under discussion.  My investing rationale has always been that to be successful, one has to understand all possible outcomes which means digging through a lot of crap to discern viable opportunities. It would appear at this early stage that much like 2016, 2020 will have plenty of that to wade through.  As an added bonus, I don’t want to disappoint my newest audience demographic by suppressing my irreverence. As always, these are only observations awaiting an investing opportunity that may never present itself.

The Pitchfork Economics series on buybacks continued on February 26th with Sen. Cory Booker (one of the multitude of Democratic presidential contenders) as a guest discussing his new bill, Workers Dividend Act.  Evidence cited to support his cause is twofold.

  1. American Airlines (AAL) wage increase was roundly panned by analysts.   Booker states the analyst opinions were misguided – which is true. To parlay these opinions into supporting rationale against buybacks is equally misguided as these were partially collectively bargained.  (i.e., benefit to unionized employees which is a goal of the bill.)
  2. His use of Walmart (WMT) as the proverbial case of buyback greed ignores some aspects that are detrimental to his position.  Walmart offers its’ employees matching 401K plans, stock ownership plans with a 15% discount and HSAs, of which some – if not all – allow employees to share proportionately in the “wealth” gained through buybacks.  The choice resides with the employee as to participation.

In an attempt to frame rhetoric with reality, I chose my oldest 15 holdings to identify what happened over the past three years.

Company201820172016
Comcast3.05% decline1.83% decline 3.18% decline
WEC Energy 0.09% decline .09% incr. 16.21% incr.
Chevron0.46% incr.1.33% incr.0.11% decline
Kimberly-Cl.1.77% decline 1.6% decline 1.26% decline
Norf. Southrn3.48% decline 1.93% decline 2.76% decline
Clorox1.19% decline 0.11% decline 0.8% decline
Prosperity B.0.51% incr. 0.28% decline 0.53% decline
Sysco0.5% decline5% decline 3.26% decline
Owens & Minor0.0% change 0.16% decline 0.16% decline
Walt Disney1.51% decline 3.72% decline 4.1% decline
Home Depot2.81% decline 3.82% decline 4.68% decline
PepsiCo0.9% decline 0.96% decline 2.22% decline
Kimco Realty0.62% decline 1.03% incr.1.66% incr.
Towne Bank0.13% incr.0.08% incr.1.05% incr.

Data from MacroTrends

In this scenario (excluding increases denoted bold/italic), the buybacks – as a percentage of the stock outstanding – actually decreased during each of Trump’s years as president despite the tax plan (from 2.1%/1.94%/1.45%).  Companies increasing their share count did so generally to use as currency in lieu of debt. In Chevron’s case this was to fund capital expenditures. Most of the others were for acquisitions.  It’s only slightly ironic that a merger cutting jobs and increasing capital concentration (banking sector) would be viewed more favorably due to an expanding share count

This discussion topic has also been picked up by Mr Tako Escapes who elaborates more skillfully than I.  I don’t dispute two points here, 1) Companies tend to have poor judgement in the timing of these transactions (buy high) and 2) the dollar amounts being expended.  But a dose of reality has to exist as well, I mean – realistically how many capex dollars should be spent to further the worldwide glut of steel (as one example)?

At least this exercise has been interesting but to draw any real conclusions requires a larger sample size.  More questions will also arise such as, ‘Are buybacks more prevalent in the overall S&P universe moreso than the DGI slice?’ or ‘Is my portfolio a large enough sample to be reflective of the stats bandied about by the Democratic candidates?’.  As usual in this blog, more questions than answers. I intend to complete this exercise for all of my holdings during the year

Other concepts will likely hit the garbage heap prior to getting much traction including a wealth tax (constitutional issues) and Modern Monetary Policy (hyperinflation).  As an aside, these concerns, per David McWilliams piece entitled Quantitative easing was the father of millennial socialism as presented by Ben Carlson makes for an interesting case. It certainly appears that the 2020 election season is off to a rousing start. Bottom line, I suspect some candidates will use this issue as a cry to rally the base with minimal substance to follow – similar in many ways to “Build the Wall” of yesteryear.  A reflection of what little has been learned over the last two years. In my mind not an investable theory.  

As always, opinions are welcome!

February 2019 Update

The markets continued the rise with major averages finishing higher now 3 of the last 4 months. I did deploy the excess cash from January but still remain a little cash heavy due to the GE sale. The S&P rose 2.89% while my portfolio rose 4.11%. For the year, I’m slightly ahead of the benchmark by 0.41%. Yes, it’s still early in the game but I choose to heed Warren Buffett’s advice in last week’s annual letter: Focus on the Forest – Forget the TreesYes I have a few trees that are diseased and a couple that could be pruned but in the main my forest remains healthy.

PORTFOLIO UPDATES

  • Increased WBS position
  • Sold entire GE position

DIVIDENDS

While my primary focus resides on dividends with the goal being a rising flow of dividends on an annual basis, I’m placing less emphasis on the quarterly numbers as the number of semi-annual, interim/final and annual cycles have been steadily increasing in my portfolio. This month presents a great example of this rationale.

  • February delivered an increase of 22.7% Y/Y, the impacts being dividend increases, special dividends and reinvesting merger cash proceeds into the portfolio.
  • February delivered a 5.94% decrease over last quarter (Nov) – the impact being: Five of my companies pay in a March, May, Aug, Nov cycle in line with their AGMs (Mar), one changed to a Jun, Dec interim final cycle. This impact should be normalized next quarter.
  • Dividend increases averaged 8.59% with 32.27% of the portfolio delivering at least one increase (including 3 cuts (two being OMI)). This is somewhat off last years’ pace for the same reasons outlined by Bert.
  • 2019 Dividends received were 14.73% of 2018 total dividends putting me on target to exceed last years’ total in late October.

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

SPINOFFs

NVS proposed spin of Alcon scheduled for shareholder approval Feb 2019

On Oct 4,2018 MSG filed a confidential Form 10 to spin the sports business

MERGERS

XRX merger with Fujifilm cancelled (still being litigated).

BNCL to merge into WSFS

BHBK to merge into INDB

SUMMARY

The blog data conversion to 2019 is almost complete. The most significant error is my cost basis (dividend date screen) which doesn’t yet account for all DRIP additions or additional purchases.