Mergers & a Buy

The first full week of 2019 was busier than usual with three mergers completed – and I still haven’t completed the year end conversion on my blog data.  I’m getting there though – although one unexpected item was the decision of three of my companies to change their names exacerbating the conversion even further.  I figured this week we would dive a little deeper into the mergers and the subsequent purchase.

Guaranty Bancorp

This one was straightforward with Independent Bank Group (IBTX) shares swapped for GBNK shares on January 1st.  On September 13th I had sold my IBTX shares at $66.15 which was prescient in that the 4th quarter selloff hit Financials particularly hard.  I now have more IBTX shares than I previously had with a cost basis of $48.67.  So my arbitrage angle worked out nicely on this one.

Green Bancorp

The next one was Veritex (VBTX) shares swapped for GNBC shares, also on January 1st.  Holding both sides to completion was a losing proposition as both were impacted with the 4th quarter swoon.  Making matters worse was the forced sale of the new shares (computer glitch on the broker side) locking in a loss on the transaction.  I still retain the old shares so my booked loss is $6.54 per share.  At least the prior one was a nice offset.

Shire Plc

As with a number of investors, I incurred a paper loss on the Baxalta spinoff from Baxter on July 1, 2015 along with the subsequent acquisition by Shire on June 3, 2016.  While this loss was offset to a degree by the cash component of the Shire merger, a loss was carried forward.  On January 8th, the Takeda Pharmaceuticals (TAK) acquisition of Shire was completed.  While the shares have arrived, the cash component is expected next week.  Citi (the ADS sponsor) has provided initial indications that this merger is a fully taxable event (cash and stock) under the new tax law.  Chalk another unintended consequence onto the Trump plan as the intent of the IRS ruling was to increase revenues, I’ll finally be able to book my remaining loss on next years’ taxes decreasing their take (if the ruling holds).

Becton Dickinson

Tom at Dividends Diversify recently performed a Deep Dive on BDX, which I won’t go into here, but I had been researching preferred issues of which they had made the cut.  In general terms preferred stock pays a fixed dividend, has less (or no) voting power, but has a higher standing in the event of bankruptcy.  Each issue is different so it is wise to review the prospectus.

This is my first foray back into preferreds since 1978.  Becton’s pfd A (BDXA) is not callable, yields 5.34% (at my purchase price) and matures May 1, 2020 when it converts to .2361 shares of BDX stock.  The proceeds were used in financing the CR Bard acquisition.  I bought on the 8th making me eligible for the February 1st dividend.  I suspect we’ll see a little dilution in BDX when these mature.


So there we are with my ‘week in review’ and hope you had a good start to your year!


 

 

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Dec 2018 Update and Year End Review

he fourth quarter swoon continued in earnest this month resulting in an annual loss for the markets.  While the final trading day closed higher (DJIA up 265, NASDAQ up 51 and the S&P up 21) it was nowhere near close enough to avoid the worst December since 1931.  Though surprised by the resiliency of the US dollar, last year’s intent to migrate further into foreign equities was largely preempted by tariff uncertainty. My other 2018 concern of rising federal deficits stifling the economy did not manifest itself as yet – though I remain skeptical of  administration claims that growth can outpace the deficit. For the month, the S&P index dropped by 9.18% while my portfolio dropped by ‘only’ 8.44%. For the year the S&P posted an unusual loss of 6.65% while my overall loss was 3.57%. In an otherwise ugly ending to the year, my primary goal of exceeding the S&P’s return was attained marking the 33rd year (of 38) that I’ve been able to make this claim.

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Black Swan?

A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict. Black swan events are typically random and unexpected.
Investopedia

With the market jittery of late, my sense is it’s waiting for another shoe to drop.  If only we knew when and why.  With a decelerating economy looming, greater uncertainty present and anticipated struggles with earnings comps it doesn’t stretch the imagination much to envision additional – or greater – turmoil.

The question becomes: what is the catalyst?  For purposes of this post we can ignore politics.  Having survived the past two years gives us that luxury.  The usual suspects; oil, interest rates or political upheaval are in check.  The economy, if not robust, is no slouch.  If I concur with pundits that postulate we can bounce along at these levels for awhile then I still must make the attempt to identify a black swan.  For this posts’ purpose some economic thing.  One example being 1997’s Asian Contagion.  In the absence of such a trigger I suspect Michael Pento’s analysis is a little dire, but with minimal tailwinds I could make a case for stagnation.

In my spare time  I’ve been performing a cursory analysis on the ETFs I added this year.  Only from the aspect of understanding each company and ending with a determination as to whether I would choose to own the component outright.  The process is a little laborious but results in more detailed knowledge on my part.  Australia and Mexico were a breeze.  Europe is last.  Japan was painful with the keiretsu overlaying business relationships (formal and informal) coupled with subsidiary relationships and interlocking ownership structures.  While my research remains incomplete, I may have found a lurking black swan.

With much of the analytical commentary in the US centered on corporate debt in a rising rate environment, in this vein, how about a growing Japanese banking scandal that, by comparison, makes the Wells Fargo scandal pale in comparison.  In essence, in April Japan’s Suruga Bank (a roughly $3.5B regional bank) came under investigation for fraudulent lending practices, falsified documentation and a laundry list of assorted unscrupulous business dealings.  In September, an independent investigation revealed at least 795 cases of fraud.  Garnering my attention was a fear that some “analysts have warned (this) could generate risks for the entire Japanese banking sector“.  All this has come to a head with the filing of a lawsuit against the founding family this week.

One could speculate this issue is confined to this bank – and the answer could well be yes.  However one of the issues with the Japanese corporate system is the propensity to delay remedial action – basically a holdover from the glory days of the keiretsu.  The Suruga scandal has the potential to spread into Shinzo Abe’s government and the BOJ.  Not as direct participants but as a negative reflection of their policies.

My eyes will remain on this as we enter the new year as if Japan stumbles the ramifications on interest rates in the US could be interesting as an inflow of currency to one of the world’s remaining ‘safe-havens’ could result in some artificial – and likely temporary – swings in yield curve.

Have a Happy New Year!

 

 

Are Trump-Towns Next?

“let me assert my firm belief that the only thing we have to fear is fear itself”

Franklin D. Roosevelt, March 4, 1933

With all the news coverage this month of the stock market slump there is a rising comparison with historical events.  Notable are the comparisons with 1931 which was when we were in the midst of the Great Depression.  Current events certainly lend themselves to shocking headlines with fearmongers like Jim Cramer piling on the bandwagon with comments like, “It’s not a safe market. It’s a treacherous market. This is the most treacherous market I’ve seen in a many a year.”  While probably true, this narrative is more ‘click-bate’ than substance.  Sad are the masses feeding from Facebook feeds with nary a thought towards deeper analysis.

After all these years historians remain at loggerheads as to the cause of the Great Depression, however to equate current events with history is misguided at best.  The common denominator is only that Hoover, Bush and Trump represent the Republican party.

Sivaram Velauthapillai penned a great thesis in 2009 laying out a case as to the differences between the Great Recession and the Great Depression.  In my view, the key points pertaining to the markets in the Great Depression were:

  • During the Depression there were two 100% market rallies
  • Dollar cost averaging mitigated losses for some investors
  • Currency liquidity was not increased
  • Maintaining the Gold Standard tightened money supply

The first two notes are only points of interest, the third point was not repeated in the Great Recession (TARP) and fourth, Nixon (another Republican) removed us from the Gold Standard in 1971.

Another Great Depression issue was Hoover remaining steadfast in cutting spending to maintain a balanced federal budget which (combined with a tightened money supply) contributed to his current day image as an uncaring soul and a lasting legacy of “Hooverville” shanty towns.

Fast forward to 2018 – while there are a few similarities with past crises these (my opinion) do not yet rise to levels where alarm bells are ringing.  Caution is warranted particularly on the trade and political fronts.  Uncertainty is the bane for business and commerce and this has been presented in abundance.  The market, being a reflection, has responded in kind ignoring some basic fundamentals while emotion – and fear – run amok.  Trump-towns aren’t a blip on my radar – yet.

The S&P has lost 12.45% of its value so far this month.  Even with an overweight in regional banks my portfolio lost 10.87% so far in December.  These are only paper losses and the strength I see are dividend increases announced thus far for 2019 outweigh the few decreases.  Yes, Virginia, there are some positives lurking in the shadows.

Have a Merry Christmas and a Happy Holiday Season!

Selective Updates

Crypto Update

What a difference a year makes.  Last year I penned My Views on CryptoSince hitting its peak of $19,783 last December (17th) the drop has been breathtaking to say the least.  The -84% haircut (through today) makes even GE (-63% this past year) look like a great investment.  Though enthusiasts maintain the theory that a need exists for an alternative to fiat currency, the reality is that other than some emerging and frontier markets the real world has yet to embrace this concept.  The continuing requirement to classify many ICOs as securities may be a contributing factor to the malaise.  Yes, the wild west is being tamed.

I think it may go a little deeper though.  Consider this:

  • the majority of ICOs require Bitcoin to purchase
  • If the US market is limited until SEC compliance is obtained the supply/demand ratio is impacted
  • As the price drops, mining becomes unprofitable
  • With pricing pressure, the speculation component becomes riskier

In a nutshell, my belief is that the ICO aspect is artificially drawing down the cryptocurrency space but remain doubtful that the glory days will return anytime soon.


Yield On Cost Update

In September, I mused on the YOC metric.  A current, real-time example of a valid potential use is probably worthy of discussion.  The view presented by YOC is generally framed by initial yield and dividend growth compounded by the time held.  Over the past two years I’ve had a stagnant YOC for two primary reasons:

  1. Some of my longer term holdings were lost via mergers for cash, and
  2. My current focus on M&A action – which tends to initially be more of a short-term view – for a third of my portfolio.

My portfolio’s average YOC today sits at 3.54%.  When compared against treasuries (with their increasing yields) my view is the risk premium associated with equities, coupled with the tax benefits with treasuries are beginning to converge.  My cross-over point is about a 1% differential and when attained, I’ll reenter the bond market following a 10-15 year absence.  Catfish Wizard recently wrote on his particular strategy.


‘Tis The Season Update

The annual addition to the trust has been completed with the first foreign issue.  With Friday’s market swoon, Royal Dutch Shell (B shares) was added to this portfolio.  The other change during the year was the loss of WGL via merger for cash in July.  This cash was redeployed in August into Atmos Energy (ATO).  Incidentally the acquirer, AltaGas (ALA.TO,ATGFF) was subsequently forced to cut their dividend by 56%).  Kind of like taking the money and running on that one!


There it is – akin to a Greatest Hits release.  In all seriousness though, I think it’s fair to share some of the thoughts that play a role in the direction my actions take me.

Until next week …

Where’s Santa?

What a start to the final month of the year.  At least there is a little something for everyone.  First the CME tripped the first wave of circuit breakers in the futures market.  Then the chartists found the S&P closed the week in a death cross.  Then there’s news of a possible yield curve inversion.  Lest we not forget, the most recent China issue which may or may not even be legal.  While the Huawei issue is unfolding, Lighthizer continues to stir the pot by saying he considers March 1 “a hard deadline” otherwise the delayed tariffs will be imposed.  Hmm … kind of like bringing a gun to a knife fight – or – perhaps the administration really believes that “free and fair trade” is an outgrowth of convoluted negotiations.

If week one is any indication, the traditional “Santa Claus Rally” will be delivering a lump of coal this year.  Being the eternal optimist, I’ll argue Christmas isn’t here yet so I had to take advantage of the sell-off to do a little buying:

  • First, I added to my ETF group.  I accomplished two things with this:
    • As the majority of these are foreign, they are underwater.  Therefore, an ‘average down’ scenario.
    • These all pay December dividends (one quarterly, three semi-annual and one annual) all yet undeclared.  All are now captured.
  • Second I executed a rebalance on a small portion of the portfolio.  I chose a ‘rebalance’ as the fees were lower than the alternatives.  End result being:
    • Sale of BOKF.  I had this issue in two accounts due to a merger, now it’s only in one, with the proceeds and accumulated dividends:
    • Added to ADP, MMM, KIM, FAF as these are underweight target holdings
    • Added to AVNS as they may have received a good price for the division sold to OMI
    • Added to LARK and CASS – missing the ex-date for the stock dividends
    • Added to BR, CNDT, CDK, FHN, JHG, KSU, PJT, WU, XRX – capturing WU’s December dividend

I still have another rebalance queued pending completion of a merger (might be into the new year) and then we return to normal operations.

I also will be selling my OMI – perhaps later in the month to see if Santa really exists!

Ho-Ho-Ho …

November 2018 Update

To my surprise, the S&P shrugged off the headlines last weekend finishing the month positive.  While I agree with  Joseph Calhoun’s assessment:

There have been a litany of one-off events over the last year that made GDP growth look better than the underlying trend. We should call the last year – with rebuilding from four hurricanes, front running of tariffs and a federal budget blowout – the Potemkin economy. It looks okay on the surface but there isn’t any depth to it. And I think we’re about to find out what it really looks like behind the facade as those three big artificial stimuli wear off.

We will probably have to wait until the first quarter to be able to get a peek behind that curtain.  So November was kind to the index, allowing it to recover a little from October’s nasty drop – settling up 1.8%.  Meanwhile my portfolio outperformed the index again, registering a gain of 2.54%.  YTD I’m ahead of the S&P by 2.1%.

Portfolio Updates:

  • initiated new position: AFG (in time to collect the special dividend)
  • added to WEC (missed to ex-div)

DIVIDENDS

My main focus resides on dividends.  Market gyrations are to be expected but my goal is to see 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.

  • November delivered an increase of 46.72% Y/Y, the impacts being dividend increases and especially special and merger dividends.
  • November delivered a 5.13% decrease over last quarter (Aug) attributable to semiannual cycles.
  • Dividend increases averaged 15.38% with 77.58% of the portfolio delivering at least one increase (including 2 cuts (GE, SRC).
  • 2018 Dividends received were 111.48% of 2017 total dividends exceeding last year’s on October 19th.

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:

GE‘s rail unit to spin then merge with WEB

GE to spin 80% of the health business (maybe)

NVS proposed spin of Alcon scheduled for shareholder approval Feb 2019

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

Mergers:

XRX merger with Fujifilm cancelled (still being litigated).

SHPG to merge into TKPYY (regulatory approvals received, pending shareholder vote)

GBNK to merge into IBTX (shareholders approved)

GNBC to merge into VBTX (semi-reverse)

BNCL to merge into WSFS

BHBK to merge into INDB

Summary

This month should be fairly benign on activity with a couple of rebalances planned on about 5% (perhaps less) of the portfolio.  End result will be an increase in some holdings – and perhaps one new – as part of my excess cash will be deployed.

Hope your November was equally as good – or better!