Delivering Alpha – NOT!

Perhaps I was anticipating too much based on hype and previous editions, but this years CNBC Delivering Alpha conference failed to deliver.  Come on, aren’t there any new and exciting things on the horizon to capture an investor’s fancy? Obviously not, as the VP’s message of a booming economy was sandwiched between short ideas and negative interest rate survival.  All interlaced with the drizzle of ESG investing and streaming concepts – in theory new and improved versions. Sorry, all this is old news, making me think CNBC has lost the concept of Alpha.  ESG has largely turned political (which introduces uncertainty) and the window of opportunity for nice gains in streaming closed about a year ago (about the time I added to my Comcast position).

Investopedia defines Alpha as a term used in investing to describe a strategy’s ability to beat the market – what most of us aspire for.  DGI investing generally attempts to quantify (and reduce) said risk while serving up a theoretically predictable outcome. My portfolio is a modified DGI strategy in that I attempt to introduce some Alpha to maintain my streak of beating the market as defined by the S&P index. I do this by introducing an underlying theme that I meld a portion of my portfolio into.  Past examples include Community Bank consolidation and the Rise of Fintech.

One that delivered Alpha to my portfolio this week was within the theme Transaction Processing.  On Thursday, Total Systems Services (TSS) was lost from my portfolio and replaced by Global Payments, Inc. (GPN)  via the consummation of their merger. TSS was a company that I seriously doubt was held by many other DGI enthusiasts.  To identify why, let’s run it through the illustrious Dividend Diplomat stock screener which addresses most – if not all – the conventional metrics most individual investors would use in decision making.  

Metric #1 P/E Ratio Less than the S&P 500

At purchase, the ratio was 19.16 and the S&P was 20.12.  A technical pass, although the Diplomats prefer a greater margin.

Metric #2 Payout Ratio of Less than 60%

At purchase, the payout ratio was roughly 22.95% (FY2016).  A definite pass.

Metric #3 Increasing Dividends

Here lies the major failure, which probably would have caused the Diplomats and most DGI purists to pass on TSS.  Their record is pitiful with two raises in eight years and the yield rarely exceeded 1%.


My take has always been to consider Total Return as the primary metric with a significant emphasis on Dividend Growth/Safety.  Although TSS’s dividend has been wanting, since I owned it it has delivered 30% average annual price appreciation with an additional 49% since the merger was announced, bringing my total unrealized capital gain to 390% plus a miniscule, taxable dividend.

Rather than reward shareholders directly, they chose to reinvest in R&D and growing the business which probably provided a greater return – and tax-deferred to boot.  The arguments against this approach are consistency and dependability. Additionally, this requires a level of trust in management. Granted, in some cases this depends on being in the right place at the right time as well – and this example is an extreme success story.  Yes, I do have several that I’m waiting on to pan out which is why I categorize this approach as speculative with only a small portion of my portfolio looking for the next emerging brilliant idea or better mousetrap.

Don’t get me wrong, I love my dividends.  In general, DGI provides a stable, consistent foundation.  But a little dash of Alpha through total return could be the difference in beating your index. As always, your views are welcome!

Musings – June 22 version

Monday morning delivered the news of a merger announcement between two of my banks. It’s not often I get to play both sides of a deal, so I have to enjoy this one. PB was a hold in my portfolio representing about 1.7% where LTXB was a buy having risen to 1.8% on its’ way to a 3% maximum. My confidence was so bullish that LTXB was my one entrant in Roadmap 2 Retire‘s 2019 Contest. My confidence was inspired by Kevin Hanigan’s (LTXB President & CEO) response on the Q2 2018 Earnings call (July 18, 2018) response in the Q&A on the M&A topic, “We are trying to position the franchise to be the prettiest girl at the dance, whether we’re a buyer or a seller. And I think we’ll soon be a whole lot prettier, if not the prettiest girl at the dance.

Pretty they became as PB is paying 0.528 shares and $6.28 cash for each LTXB share. I plan to vote in favor of the transaction (on both sides), pocket the cash and sell the new shares – retaining the old. Moral to the story – you never know the gem you’ll find embedded in earnings calls.


My initial take with Facebook’s Libra Cryptocurrency is that it’s intriguing, plausible but comes with contradictions. Now – similar to the Mueller report – I’m still digesting the details, but the first two to jump out at me were:

  • Envisioned both as a Stablecoin (tied to a basket of fiat currencies) and a viable alternative to the unbanked masses, is to a degree, an oxymoron as I doubt the majority of the unbanked are versed in currency exchange fluctuations which could have either a positive or negative impact to their wealth.
  • The white paper addresses a goal of social goodness through ethical actors, yet a cursory review of the Founding Members reveals the following:
    • PayU (part of Naspers which had a controversial move from South Africa to the Netherlands – socially responsible?)
    • One founder is Thrive Capital – a VC firm run by Joshua Kushner (Jared’s brother), which would be a potential question mark worthy of further investigation

My interest lies more in the unnamed banks which will be holding all these low cost deposits, and I’m sure there will be more to follow …


The final point this week is on tariffs. Unless a country is self-sufficient, trade is not a zero sum game. There will be surpluses here and deficits there, the goal being all is basically even when viewed on a multilateral basis. My thinking is that the president has been one-upped in the trade war he started. If a measure of greatness is the wealth of a country, perhaps the campaign slogan should be “Making America Irrelevant Again“. China’s reaction (in the long game) to the tit-for-tat brinkmanship has been to reduce tariffs on other country’s goods when retaliating against US tariffs. Good luck getting these markets back …

May 2019 Update

It’s little wonder that a generally good earnings season was ignored due to rising questions about the economy for the remainder of the year. From the failed trade talks with China putting a damper on the beginning of the month, the president just couldn’t help himself and decided to intermix trade and policy issues on a second front, this time being tariffs on Mexico. End result was the DOW saw six straight weeks of losses and May was the longest losing streak since 2011. To this we can now add the uncertainty of the new NAFTA deal as it is trilateral as opposed to bilateral and the recipe is set for continued disruption. But of course, this could be simply a negotiating tactic in which the living standards of Americans are in play. This month the S&P lost 7.04% (almost erasing the gains for the year) while my portfolio lost 5.85%. For the year, I’m now ahead of the benchmark by 1.2%.

PORTFOLIO UPDATES

  • increased my BDX 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.

  • May delivered an increase of 19.57% Y/Y, the largest impacts – essentially getting back on track after the earlier dividend cuts.
  • May delivered a 13.02% increase over last quarter (Feb) – slightly above announced (net) dividend increases.
  • Dividend increases averaged 9.22% with 48.02% 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.
  • 2019 Dividends received were 43.17% of 2018 total dividends putting me on target to exceed last years’ total in late October. The YTD run rate is 105.64% of 2018 slightly under my 110.0% goal.

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

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

MERGERS

XRX merger with Fujifilm cancelled (still being litigated).

TSS to merge into GPN (all stock, .8101 sh GPN for each TSS sh) estimated to complete in October – Upon the announcement, I was prepared to sell my TSS position to book almost a triple in just over 4 years as GPN currently pays only a penny per share dividend per quarter. However, page 14 of their slideshow states: Dividend – maintain TSYS’ dividend yield. This would appear to indicate an increase in GPN’s dividend, so for now I’ll hold.

CORPORATE ACTIONS

  • FFIN declared a 2:1 stock split effective June 3rd

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 (so it is a minimal understatement – but I strive for accuracy). One more formula to construct to complete this effort.

Hope your month/quarter was a good one!

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!


 

 

Takeda/Shire Merger

This morning, the long-rumored merger between Takeda Pharmaceutical Company Ltd (TPKYY) and Shire plc (SHPG) has been approved by both companies boards for the consideration of $30.33 in cash and either .839 shares stock or 1.679 ADS for each Shire share.  (Takeda’s current NYSE listing is at a 2:1 ratio, hence the differential).  Shire shareholders will also be entitled to dividends paid or declared through the merger effective date.

The combination is expected to complete in the first half of 2019 and will result (I believe) in the eighth largest pharma company.  Takeda expects to maintain both its’ dividend policy and investment grade rating.

My investment came about via Baxter’s spin of Baxalta which was subsequently acquired by Shire.  The overall investment is currently a little under water but the cash portion of this deal should mitigate this to a degree.  Apparently a major concern is that some large holders don’t care to hold Japanese paper.  Although Japan’s monetary policy (and resulting exchange rate) is a potential issue, my belief is that the combined company will have enough of a worldwide footprint to offset this.

Therefore I favor this deal and expect to increase my Shire holdings enough to avoid a weird fractional allocation of shares based on the merger terms.

The ‘New’ Xerox

Nothing like trying to wrap your head around a convoluted deal before the first cup of morning coffee.  This one is likely tailored to provide an exit strategy for activists Carl Icahn and Darwin Deason.  The end result is that Fujifilm Holdings (FUJIY – 4901.TSE) will acquire majority ownership (50.1%) of Xerox (XRX).  This will be accomplished by Fuji Xerox first buying Fujifilm’s 75% stake in the current Fuji Xerox / Xerox joint venture followed by Fujifilm buying 50.1% of ‘new’ Xerox shares.

When completed (July/August 2018), the entity will retain the Fuji Xerox name, be traded on the NYSE (probably XRX) and shower existing Xerox shareholders with an estimated $9.80 special dividend in addition to a minority ownership stake.

Even though this combination is of two troubled companies, with cost cutting and synergies this could evolve into an interesting arrangement – particularly if R&D is applied more towards emerging technologies (think the AI/AR space).  The other question is the dividend scheme where Xerox pays quarterly (Jan/Apr/Jul/Oct) and Fujifilm pays on an interim/final (Jul/Dec) cycle.  The old Xerox annual dividend rate has been affirmed on a continuing basis.

While I already obtained what I was after in this investment with the prior Xerox spin of Conduent (CNDT), with the special dividend this moves from a slight loss on the books to a 5.3% gain.  I’ll continue to monitor this one as it progresses but my guess is this will be my first Japanese holding albeit gained through a back door approach.

Let The Spend Begin

Curious minds have pondered the meaning of the Great Tax Reform Act of 2017, properly known as the Tax Cuts and Jobs Act of 2017.  The debate has centered on whether repatriation or employee salaries or buybacks or dividend increases or debt repayment or capital investment.  Until Walmart, announcements have centered on bonuses or hiring pledges.  Not wages.  Not anything, really, that is a truly lasting benefit to the working stiff.

 

And this week is no different.  In a nod to the roughly 50% of population that own stock, Thursday, DST Systems announced they were being acquired by SS&C Technologies Holdings in an all cash deal valued at $84 per share.  While M&A activity is not an unexpected byproduct of the tax bill, there were two noteworthy items in the release.  The first being SSNC’s deal financing being a combination of debt and equity.  Current SSNC shareholders will be facing some level of dilution.  The second item is that the “significant leverage” will be attenuated through “cost synergies to stem from data center consolidation and reductions in corporate overhead”.    This sounds like code words for force and facility reductionAre there that many data centers on the company books?

Not being a SSNC shareholder (current or apparently future) appears to be a blessing in this merger.  As a DST shareholder I will be happy to tender my shares (and vote my proxy in favor of) the deal.  My only regrets are two: 1) Kansas City (for which I have a fondness) losing another company’s headquarters , and 2) that I didn’t own more shares.

My shares were purchased in four tranches with an average (post split) basis of $62.71.  Total gain will be $21.29 per share or 25.3% total gain (annualized average gain would be about 11.7% depending on when it closes).  Not too shabby a return and a good start towards equaling last years’ results.  The merger is expected to close in the third quarter.

The only other negative is the (new) tax impact with these gains likely locking me into the higher bracket I was attempting to avoid.  My philosophical observation being unless you’re extremely wealthy, the best way to avoid taxes is to make no money.  A theory to which I don’t subscribe!