When There’s Lemons …

This week’s missive will get back to some of the basic block and tackling we face at times as investors.  Not to downplay the market madness, it seems everyone and their brother now has a view on the pandemic. Certainly not immune to the downdraft, in hindsight my decision to sell my taxable Canadian stocks on February 28th makes me look like a genius.  The reality is essentially sheer dumb luck. It did, however, provide the cash to nibble on subsequent down days.

The Canadian IRA Taxability Answer

I did receive my first dividend from TMX Group a couple of weeks ago and to my chagrin saw Canadian tax withheld even though it’s in my IRA.  Obviously one of the outliers I previously referenced. While my appeal failed, my broker did confirm two of my companies reside in this category, the other being Hydro One.   I did gain some insight which I figured I’d share.  

  1. To be processed as compliant with the tax treaty, companies have to use the DTC – which comes with a cost.  Most Canadian companies trading in the US absorb this fee as a cost of doing business.
  2. Canada has their own version of the DTC – CDS which is owned by none other than the TMX group, which uses (at least for US based stockholders) Citi for disbursement without treaty compliance review.
  3. Brokers have no recourse but to withhold Canadian taxes in IRAs for CDS processed dividends.  Meaning there is no tax benefit for US citizens holding non-DTC processed securities.

These two will be sold from the IRA when the markets recover a little.  Meanwhile both are also held in my taxable account where I can claim a tax deduction when taxes are filed.

De-risking Process

With the heightened level of uncertainty, more than a few bloggers have shared their approach towards increased safety.  Dividend Diplomats ran a piece on Debt to Equity Ratios and Chuck Carnavale reviewed a Debt to Capital analysis. While both metrics are fundamentally sound – and I’ll likely add to existing holdings that are on these lists – both share a flaw that is highlighted by the current black swan event.  Companies in unprecedented numbers are drawing down their credit lines or issuing new paper, both of which have an impact on the ratios. I mean, is Disney any less of an investment with $6B additional debt offset by $6B cash? Other than a slight increase in carrying expense, I would argue no but they do have other issues with the magnitude currently unknown.  My take is this is where the ratings agencies theoretically should be earning their keep.

My process is to essentially begin the process of reducing the speculative portion of the portfolio.  Eliminating my one BDC (MAIN – smaller business exposure), Entertainment Properties (high social distance exposure), Newell (a recipient of an SEC subpoena).  This is one time a dividend cut or suspension doesn’t necessarily mean a sell if the purpose is cash preservation. I did reduce – but not fully sell – Cracker Barrel on their delay and suspension.

Additionally, I keep abreast of the news to identify potential opportunities.  You’ve heard the mantra, Don’t Fight The Fed?  How about profiting from the economic stimulus they’re embarking on?  Blackrock is a (partial) proxy for this angle. I say partial as I doubt the fees will generate a meaningful profit to them.

In Parting

As no one knows when and how this will end and I doubt I have the time on my side to play the long game, the better part of valor is to strengthen the hand I have.  Someone younger can carry more risk but caution is warranted in my opinion. Either way, try to make some lemonade from these lemons.

February 2019 Update

Given the Coronavirus impact on the market, my monthly review will be abbreviated with a planned return to normalcy next month.  That said, the portfolio was essentially flat with the S&P, both down – -9.18% for the index and -9.43% for me. The difference is an increased cash position which if I included would put me down 8.78%.  Dividends rose 26.71% year on year but this is misleading as I timed the moves (actually buy/sell transactions) of my Canadian stocks to my IRA post ex-dividend date as best I could to duplicate several of the dividends.  

Positions sold: TD Ameritrade (pending merger), Nutrien (a little leery of China’s ability to buy ag products per trade deal) and Invesco’s Timber ETF (is a slowdown looming?).

Positions Added: Vonage (a free one, so I’ll probably hold for a year) and Coca-Cola Japan (hoping the Olympics aren’t cancelled).


Now that we have a correction, what next?   First and foremost, ensure your investing plan accommodates this type of black swan event.  Next listen to multiple news sources to separate the hype from the reality. For instance, the World Health Organization upgraded the risk of spread on Friday.  Also on Friday, a somewhat flippant Mick Mulvaney said, “what I might do today [to] calm the markets is tell people turn their televisions off for 24 hours”. The President held a Saturday press conference where he “called for calm … and tried to reassure the nation that the threat was under control”.  Are you reassured?

I take my cues from warnings and conference calls.  On Friday I was presented with my first dividend cut of 2020 – AMC Theatres.  This is one I won’t sell on the cut for three reasons.

  1. I had suspected this when I bought my most recent tranche and I bought enough to pretty much offset the cut
  2. They are on the front lines of any potential virus impact
  3. They are doing it the ‘Warren Buffett’ way

The December drop (when I last bought), I did check the debt maturities first.  In their call they stated, “when there is real uncertainty in the world, we’re going to be conservative and keeping cash in our pockets to make sure that — what I think might be somewhat irrational fears the market has had over the past few days don’t turn out to be rational fears.”  In addition to the dividend cut, management is taking a pay cut replaced with out of the money options.  Their priorities have become deleveraging first and rewarding owners via buybacks – which are paid out of retained earnings.  

Frankly, I would not be surprised if others follow in AMC’s footsteps.  Many foreign companies currently pay dividends at rates fixed to an earnings range.  Should these times persist, perhaps earnings take a hit. How many US companies have retained earnings sufficient to weather more than a few quarters and still fund working capital, capital expenditures, acquisitions, research and development, marketing or debt reduction?  If not, do they have the financial strength to sustain accumulated deficits? (Consider the energy sector in this regard).

Another interesting tidbit from the call was the comment, “we do not have business interruption insurance for the coronavirus”.  It turns out that many insurance companies exclude viruses in a post-SARS world.  Those that did not modify their policies or underwriting may have an impact in today’s world. This aspect was not analyzed for purposes of this post.

If the President is correct in asserting the threat (is) under control, we probably don’t need to be concerned with the financial stability of other public facing companies, such as restaurants, travel and leisure or retail.  But that position, while projecting strength, belies the fact that supply chains are being stretched, production lines are at reduced capacity and the consumer’s capacity to spend is turning cautious.

While the WHO is urging calm, perhaps as a counter to Jim Cramer’s posturing, respected analysts, such as Mohamed El-Erian are weighing in on potential rate cuts being unable to stabilize the markets, arguing a medical solution is the only weapon.  I suspect he’s correct and perhaps a solution is available sooner rather than later.

I don’t pretend to know which way the will markets react – only that increased volatility is probably here for a while.  What I do is gather information and attempt to find flaws or weaknesses in possible outcomes to determine scenarios that might be profitable. Do your own due diligence, but my guess is medical solutions are priced into the stock price already.

Long: VG, AMC, CCOJY

July 2019 Update

The market continued to defy gravity this month as the only external turmoil was leveled at the Fed with encouragement to cut rates in excess of a quarter point. At month end, the Fed chose their own path and the market tailed off from the highs recently attained. Earnings season has been generally good to mixed with ongoing concern regarding Trump’s Tariff strategy the main issue. This month the S&P gained 1.3% while my portfolio gained 1.8%. For the year, I remain ahead of the benchmark by 1.0%.

PORTFOLIO UPDATES

  • finally sold out my OMI position (prior dividend cut) and used the proceeds to increase my RY position
  • Sold my UNIT (dividend cut/debt covenant issue) and LAMR (reporting discrepancies (my opinion)) positions using the proceeds to increase positions in ABM, ARD, BLL, CHCO, KOF, CCEP, CTBI, AKO.B, HOMB, IRM, NWFL, OCFC, OUT, PLD, QCOM, SRC, SMTA, BATRA and VALU as a rebalance
  • increased my CHD position
  • increased my JNJ position

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis. This month marks the removal of the quarterly comparison as this has proved to be steadily meaningless.

  • July delivered an increase of 4.64% Y/Y. This is off my typical run-rate due to two foreign pay cycles hitting in August this year, rather than the July of last year.
  • Dividend increases averaged 10.13% with 57.27% 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 64.31% of 2018 total dividends putting me on target to exceed last years’ total in late October. The YTD run rate is 107.66% of 2018, slightly under my 110.0% goal – but still recoverable.

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 which remains in progress.

MERGERS

XRX merger with Fujifilm cancelled (still being litigated). Pending settlement expected in September.

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.

PB to acquire LTXB for 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 and perhaps use some of the cash to purchase additional PB shares post-merger.

VLY to acquire ORIT for 1.6 sh VLY to 1 ORIT. This merger will result in a slight dividend cut November forward as the rate will be normalized to VLY’s current rate. In my view, the other positives outweigh this negative.

PBCT to aquire UBNK for .875 sh PBCT to 1 UBNK. I plan to hold this one as I wouldn’t be surprised if PBCT gets taken out at come point.

The last three continue to validate my strategy of bank consolidations from a few years ago. The only flaw (so far) was the holding period required – but dividends were received while waiting.

SUMMARY

Overall, no complaints. It appears the pending mergers might provide premium to improve my performance over the index, but I don’t want to get too far ahead of myself yet. I still see a little consolidation in my holdings through the last half by migrating to a slightly risk off stance, offset slightly by companies with compelling stories. My cash position does remain slightly above mean.

Here’s hoping your month was successful!

Razzle Dazzle

Give ’em the old flim flam flummox

Fool and fracture ’em

How can they hear the truth above the roar?

Richard Gere performing Razzle Dazzle in the movie Chicago, 2001

One of the many stanzas from the song with which could apply to the theme of this holiday special edition. I decided to present this weeks’ activity as a special post since the number of transactions is greater in three days than my normal 4-5 per month. Also included are three sales which I will elaborate on in some detail.

Roadmap 2 Retire presented another cautionary view reinforcing my approach. While I’m beginning to feel a little like Chicken Little, there are conundrums aplenty from which to choose when attempting to make sense of the economy. Perhaps the best illustration is the fact that Wisconsin farmers are going bankrupt in record numbers. This is a good part of Trump’s base in which their downturn has been accelerated by his policies. And the theory of ‘trickle down’ hasn’t made it to these rural enclaves yet he still carries a 42% approval rating there. It seems that every positive in the economy (low unemployment, low inflation, lower taxes (in theory) carries an equal negative (slowing GDP growth, low wage growth, increasing deficits).

Give ’em the old three ring circus

Stun and stagger ’em

When you’re in trouble, go into your dance

Since I’m no fortune teller I can’t provide any timing, but I dare say this juggling act will come to an end. Hopefully it’ll be a prettier end than any of his four bankruptcies. Like R2R, I’m perusing my portfolio and trimming a little of the speculation. Although I’ve been musing on this for awhile, it was time to begin the execution. Following are the first moves of mine in the pivot from macro to micro.

SELLS

  • Owens & Minor (OMI)
    • Following not one but two dividend cuts. I probably had a bit more patience with this one as it was an IRA holding, but enough already. Sold July 1st – net loss 74.2%.
  • Uniti Group (UNIT)
    • This one has been in the cross-hairs of the Windstream bankruptcy. As a result, they cut their dividend to preserve cash and satisfy their lenders. One lesson I previously learned (Orchids Paper (TIS), anyone?) is to bail when lenders force a dividend cut. Sold July 2nd, net loss 59.2%.
      • After market close, UNIT announced the issuance of 8.68m common shares in conjunction with a preferred redemption. UNIT closed down July 3rd 2% from my sale price.
  • Lamar Advertising (LAMR)
    • This one I groused about all year with the shenanigans they were playing with their 2017/2018 year end pay date. At tax time, I confirmed the forms sent to me and the corporate IRS filing were out of sync. Not being an accountant, I can’t say there’s any illegality – but this is one that has questions – therefore it was booted off the team on July 2nd with a gain of 46.6%.

The proceeds from the LAMR and UNIT sales were used to rebalance a portion of the portfolio across thirteen stocks. I have a pending limit order in place to deploy the OMI proceeds into RY.

With any luck this run will continue, however the pessimist within says it would be unlikely (check back around earnings season …)

Recent Sell – GE

I decided to publish this as my weekly post as time is of the essence for any of my readers contemplating a similar decision.

Since the most recent dividend cut, I’ve been holding my GE stock – and almost pulled the trigger to buy more – for one reason: the potential value of the proposed spinoffs. The healthcare unit being a crown jewel and the rail unit being an interesting one.

Word on the street is that the healthcare IPO may not be as lucrative to GE investors as previously thought as GE may monetize a greater share (probably good for the company, though). This I was willing to overlook until the terms were actually released.

My decision to sell was reached when the revised terms of the rail unit were released. Last week it was announced that GE would monetize more of the deal – basically to shore up the balance sheet a little with cash and by shifting the tax liability to shareholders. End result is each share of GE will receive approximately .005403 shares of WAB. You read that right – owners of 100 shares will receive about a half of a share of WAB. As no fractional shares are to be issued, cash in lieu of shares is to be expected.

I’m willing to take a slight loss (as I previously averaged down). What I am unwilling to take is a possible tax liability as well. Frankly, my faith in this company no longer extends that far.

The record date has been set for February 14th with the spin and merger occurring February 25th. If so inclined, I’ll buy WAB at a later date. I am willing to buy into the healthcare unit at (or post) IPO depending on the structure.

I have to acknowledge that the days of playing the contrarian are probably over for this stock. My prior strategy – which was profitable – had been to buy companies which had purchased units that GE was offloading. Under this CEO – and for the first time in many years – this plan is no longer viable.

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 …

My 3Rs – Revitalize

In the first two posts of this series, I highlighted my thought process in basically the recent past and present.  Today will attempt to bring the investment landscape of the future into focus.  I will be the first to admit that I have a jaded view of the present – i.e., not being aligned with the economic views espoused by the current administration.  The upcoming midterms have the ability to shuffle the deck even further.  The assumption set I used (which easily could be argued with) is:

  • The current administration will continue to be embattled by prior missteps – primarily in vetting – (resulting continuing indictments and guilty pleas)
  • This could be further hampered by loss of one – or both – chambers of Congress
  • I (currently) anticipate no major activity regarding impeachment, 25th amendment or resignation

Basically a recipe for gridlock – which will put the brakes on some of Trump’s more polarizing policies.  Without a Democratic landslide, I don’t see a major rollback but also don’t see further continuation on a partisan path.  Therefore my view is a continuation of trade tensions (notably Canada and China), rising deficits and interest rates resulting in a slowdown in the US economy.  While the economy is currently growing, the metrics I am watching are debt levels (student loan and state government), the inability of rising wages to keep pace with inflation and savings rate.  Though the concerns are endless, a greater domestic focus tends to mitigate much of the risk but bring me to one conclusion: Regular Americans’ disposable income may be in shorter supply next year.

With this theory outlined, it’s time to fit the remaining pieces into my puzzle of a portfolio which allows for roughly 1/3rd allocation to conservative speculation.  Frankly, my outlook is a bet that the US economy has been front-loaded into the midterm elections.  The downside if incorrect is that I’ve added some slower growth positions.  If correct I’ve generated a little alpha.

Tariff Myself

In the spirit of the times, I completed the move of my Johnson & Johnson (JNJ) and Church & Dwight (CHD) positions to M1 Finance.  I plan to add Colgate (CL) as a new position in the near future.  With M1 being a no-fee broker, my intention is to add new funds whenever I purchase toothpaste, mouthwash or deodorant throughout 2019 with the aim for these companies to attain about 2%, 3% and 1% of the portfolio respectively.

Corporate Actions

I intend to ride the M&A wave in addition to selected spinoffs.  I rarely participate in IPOs but do make an exception from time to time.  I continue to add to my banks that have completed two-step conversions.  This month has seen activity in this area as follows:

  • added to GBNK and sold IBTX locking in a total gain of 46.4% (16.3% annual return).  Assuming their merger with GBNK completes I’ll be assigned more shares of IBTX than I previously had.
  • added to SHPG as they received another approval in their merger.
  • Initiated a post-IPO position (from the 30 day over-allotment period) in Amalgamated Bank (AMAL).  This due to their intention to initiate a dividend next quarter.

Averaging Down

Yes, there are times when I’m underwater on some investments, most of these being holdings of less than 1%.  It would be a fair assessment that something was amiss in my initial analysis as several of these are foreign caught in the cross hairs of the strong US dollar.  One reason I tend to scale in to investments is to take advantage of opportunities to average down when my  original premise remains intact.  These tend to be intermittent purchases.

There, in three parts, is my strategy going into 2019.  As my dividend goals for 2018 are close to being met, I am now starting the realignment process so I’ll be hitting the new year with a running start.

I’d love to hear your thoughts the processes you use!