December Purchases

Despite the ongoing record setting pace of the market this month, two purchases of note were made. There are in addition to the DRIP and FRIP purchases which are generally reported in bulk at month end.

This one is allocated to the granddaughter’s future holdings, continuing the tradition of a stock for Christmas. The only rationale given for these purchases is that it is meaningful for her – forget PE ratios, valuation, etc. In this case, she and her friends spend a good part of their off-campus lunches at McDonald’s (MCD) – end of story. I had considered Toyo Suisan Kaisha Ltd (TSUKY) the maker of ramen noodles but decided that one might be a better choice for her first year of college.

——————–

An outstanding limit order executed more than doubling my holding. That said, assuming the dividend remains intact it will account for maybe 1% of my forward dividends. I suspect capex spending has peaked and their attention can turn to the balance sheet. So – I essentially reduced my cost basis although I remain underwater on this one.

Two things I be keeping an eye on as 2020 begins – 1) their expansion (via JV) in Saudi Arabia, and 2) their version (and traction) on streaming.


Unless there is a major retraction over the next day or two, this will close the curtain on my 2019 activity. Here’s hoping your 2020 is great!

2019: Year of Turnover

Going into the homestretch of 2019, it’s the time I begin the reflection process and assess the strategy going forward.  Last week presented a broad brush view of my expectations for the new year. This week addresses my portfolio turnover for 2019 and more importantly, the why.

In general, my philosophy is to buy and hold for the long run.  I tend to identify strategies and identify issues that have the potential to benefit.  As a strategy runs its course, rarely do I sell – choosing to stop accumulating instead.  This approach minimizes fees and taxable events.

Currently I hold 231 stocks and 4 ETFs.  During the past year, 13 were lost and 24 added.  Therefore my turnover rate was higher than I like so let’s dig in and see what happened.


ADDEDLOST
MERGER89
DIVIDEND CUT
3
MANAGEMENT
1
STRATEGY14

M&A is pretty straightforward with the differential being the one I held on both sides of the deal. Dividend cuts are pretty much slam dunks as well – although I did retain one of the cutters.  Management is an unusual one as I typically reserve this for activist actions. This case was tax forms being received that didn’t match SEC reporting. In my view, that deed is worse than cutting the dividend – therefore a sale.  The largest category being strategy. I added one to my 2017 KO bottler strategy, four as part of a new platform test and nine to replicate the cashed out portfolio.  

Mergers are always welcome as long as they arrive with a premium attached, Dividend cuts will always be assessed but will usually be fairly automatic sales.  Activism I dislike but generally hold my nose and ride along. Strategy – I thought ended in 2018 until I tested a new platform and also chose to replicate the granddaughter’s portfolio after having to liquidate it.  All reasonable reasons but all contributors to the action.

Currently I have three new companies on my watch list for 2020 which I’ll only buy at the right price point:

  • MTR Corporation Limited (MTCPY) – Hong Kong’s rail line constantly in the news
  • TMX Group Ltd (TMXXF) – Canada’s stock exchange
  • Coca-Cola Bottlers Japan (CCJOY)

This isn’t to say there won’t be more, only that my going forward inclination is that fewer is probably better.  Notable that US issues are absent although currently I expect only additions to existing positions.

In a nutshell, the majority of turnover was a result of M&A activity (a good thing) tempered by the breaking of the (I think) personal 38 year record for dividend cuts (5 total this year).  Unless there is more M&A on the horizon, my hope is to settle back into a 1-2% annual turnover rate. Even with the move towards $0 commission trades my ultimate goal is a set it and forget it type of portfolio which has served me well for many a year.

Hope your holidays are wonderful!

2020 Crystal Ball

A gentle reminder was provided by the market last week as to its unsettled nature.  Essentially, headline risk is at the forefront tossing the market based on the sentiment of the day – oft times lubricated (or diverted) by a Presidential tweet. Granted, this is little changed from the past but we do have an increasing clarity to use as a guide.

What is unchanged is that US valuations remain elevated.  Sure, there were some stumbles during the recent earnings season and some cautionary guidance presented.  Barring a black swan event it does appear the next recession (US version) has been punted into the future – at a time post election.   There are – and will continue to be – pockets where value can be had, but I see this opportunity being readily available only to individual stock pickers willing to accept a slightly higher risk factor.

Headlines have also illustrated a measured success that Presidential bashing of the Fed failed to accomplish.  The dollar weakened – a little. On the heels of the results from the UK election, Sterling strengthened. My opinion being this is a relief rally at seeing an end to the Brexit saga as the real work now can now begin in earnest.  These negotiations may get bogged down a little – particularly trade – which could provide a reentry point for Labour and their agenda of nationalization. I see the UK as a viable alternative but with risk associated in telecoms, energy, utilities, rail and mail.  Perhaps a mid-term view is required with an entry point sometime after the first of the year.

Much the same boat for China as the renminbi strengthened against the dollar as the news of a “phase 1” agreement on trade crossed the wires.  What this means probably remains debatable, but if a truce is effective going into the new year it is a likely positive for US equities, tempered by the fact that their currency is a daily peg rather than free-float.  The risk here is twofold – on and off again tariffs and US involvement in their political affairs (Uyghur Human Rights Policy Act and Hong Kong Human Rights and Democracy Act). The bills appear to be more show than substance but could flare tensions. The investment thesis should note the alleged Human Rights abuses along with the minimal sanction levels.  If these pitfalls are successfully navigated, opportunities do exist.

Then there are the fintech darlings, the newest variant being the so-called ‘Challenger Banks” or neobanks.  Though awash with cash from private funding rounds, they all have one glaring defect – they aren’t really banks.  They are apps – generally mobile – with a compelling interface and a few niche benefits targeting the millennial audience.  A couple have started the process to really become banks but most are content to partner with real banks – sweeping funds into accounts that have FDIC insurance.  My research remains incomplete but with three exceptions, the partner banks pay no dividend or are private. I currently own the exceptions, GS, JPM and WSFS but don’t expect the challenger funds to be a significant revenue driver.

Perhaps the largest driver of ‘hot air’ time in the new year will be the election.  The obvious beneficiaries being media companies who are able to capitalize on both sides of an argument.  However fragmentation, targeting and scope make it more difficult to call any winners unless any campaign goes on a deep targeting offensive which would benefit social.  From a messaging position, only health care moves the needle much where companies like UNH, HUM and CVS stand to benefit as the attacks subside.

The commonality between these issues?  None are long term. Yet the nature of capitalism is its’ cyclical nature.  There is always a correction to drain the excesses. The timing and severity are always debatable, but rest assured one will arrive.  My approach to the new year will be to take some marbles off the table by pruning some non-core positions and reassessing some strategic plays. To place this in context, I have three new positions on my watchlist and ten to fifteen under review which if fully implemented would be roughly a 5% churn rate.  My comfort zone is now squarely with Staples and Utilities … items necessary for consumer consumption regardless of the overall economy. Yes, the upside is muted with these companies, but more importantly the downside risk is mitigated. A rising dividend stream exceeding the rate of inflation is the core goal in these times in spite of politics or political persuasion.

And so goes my crystal ball for 2020 …

Blast From the Past

A little unsure as to what I was researching when I ran across this ancient nugget from 2012.  I don’t recall having read it when it was fresh, but has some similarities to my investing style outside the world of Coke – particularly with the international bent.  I’ll also point out this predates the 21st Century Beverage Partnership Model where Coke essentially attempted to become a marketing engine leaving the capital intensive bottling and distribution operations to a handful of larger (facilitated by mergers) bottlers.  For today, I’ll ignore the 32 (give or take a couple) family owned operations that are basically distributors – or bottlers in name only. These buy product from larger bottlers, warehouse it  and deliver to commercial customers. I suspect these little guys won’t be long for the world as they’ve lost any economies of scale.

The impetus for this piece came from the final comment from NeoContrarian where he asks (a year ago), “This is an excellent article:- What’s the current update 6 years on???” Given the author hasn’t published anything since 2016 and I now have a vested interest, I figured it apt to address this question – particularly with the change in the business model.

I have stakes in seven of these bottlers with a pending limit order for an eighth, so allow me to correct a mistake the author made.  The list of companies contains duplicates – either with a class of stock (AKO.A/B) or CCLAY/F. The former has greater economic interest (votes) but a lower dividend while the latter is the ADR versus in country OTC listing.  The ADR withholds taxes (net payout) while the F version is the gross payout leaving the investor having to deal with those details.

Subsequent to her piece, Coca-Cola Hellenic began trading on the LSE (not NYSE) and moved its’ HQ from Greece to Switzerland, Coca-Cola Enterprises ultimately morphed into Coca-Cola European Partners, HQ UK; and Mikuni Coca-Cola merged into Coca-Cola East, which merged with Coca-Cola West becoming Coca-Cola Japan.  Also, Coca-Cola İçecek.’s ADR program has been cancelled.

I tried to retain the structure she used but made a few modifications; removed dividend growth and comparison to KO’s and added % owned by KO.  Being primarily foreign companies, dividend growth is less telling than the US as the vast majority of payouts are based on a percentage of profits.  Perhaps a profitability growth rate should be included instead.

I will editorialize that it appears the results are mixed in KO’s move out of bottling.  They have succeeded, for the most part in the domestic market – at least in avoiding reporting consolidated results.  The failure has been in foreign markets as several remain owned – at least in the majority – by KO. These include Africa (68.3%), The Philippines and Bangladesh (100%).  KO also retains significant stakes of between 14 and 34% in nine of the publicly traded bottlers. This analysis excludes privately owned companies with the exception of Joint Ventures that include public companies.

a/o 8Dec2019

Yes it remains possible to muster a dividend yield piggybacking on KO’s marketing prowess.  There are risks, chiefly currency and political. For instance, Zimbabwe faces a hard currency shortage leaving Heineken unable to repatriate their profits.  The reason I have no intention of buying Hellenic or İçecek. Is their exposure to Russia and Turkey respectively. Future administrations may revert back to normal putting undue risk on the table.

The one aspect I didn’t anticipate was the consolidation of bottling operations into the larger operators leaving the smaller players as merely distributors.  That is one way to spread the capital intensiveness into manageable pieces and is probably one reason for their performance.

There are risks as well as potential rewards – perform your own due diligence.

Own: CCEP, KOF, AKO.B, CCLAY, SWRAY, KNBWY, COKE.  Open order: CCOJY