Small Banking Revisited

Periodically I encounter an article that hits at the core of one of my strategies.  As many of  you know, I’m currently a little overweight financials with an emphasis on regional banks.  This was not always the case as I (fortunately) exited the sector in late 2007  reentering only in early 2013.  My five year pause was bookended by what Richard J. Parsons refers to as the Great Panic of 2008-2009.  His article, Finding Alpha In Reliable Dividend Banks(14 June 2017) struck a chord with me and illustrated some of the style I came to embrace for a time. Though I’m not selling my banks, other than special situations, I’m currently not a buyer either.  If you are a bank investor (or considering being one) I’d recommend reading his article.

His article highlights 30 regionals that actually raised dividends during the Panic.  By comparison, my hypothesis was segmented into three ‘buckets’ which were:
1.Good dividend payers
2.Stock dividend payers
3.Acquisition candidates

Although he includes some stock payers (CMBH, AROW, SBSI, and FLIC (roundups on splits)) this is not his article’s focus.  I’ve written on these before so I’ll exclude them.

His article also points out that only one of the original 30 was acquired which is a slight disappointment when one of my goals is to obtain a merger premium.  Several on his list were acquirers which kind of proves my rationale to expand the universe to include potential acquisition targets in my bank holdings a couple of years ago.

Leaving us with his list.  One notable point is his geographic analysis.  “Certain states are more likely to be home to these reliable dividend banks: Indiana, Texas, California, Kentucky, Missouri, and upper state New York.”  This melds with my findings though I attributed this to state regulatory agencies as certain states had disproportionate numbers of bank failures.  Therefore I excluded western (California) and southern US banks.  To his mix, I found Pennsylvania to be a viable candidate as well.  This difference could be that mutual conversions (notably preeminent in PA, NY, NJ, VA and MA) were identified as likely targets by my study.

Another note on his analysis, “…a few critical factors influence long-term success in banking: hands-on expert management…”  In fact he elaborates a little on this in the comment stream.  A tidbit is both Missouri banks on his list were established by the Kemper family.

So the actual question is how do my portfolio holdings stack up against his list?  Half of the thirty are owned.  Of the nine owned by Richard, seven are owned (one obtained via a merger).  One being in California was excluded by geographic screening.  I’m not sure offhand though, why I excluded CBU out of New York.  My primary takeaway from his article was a validation of my strategy and I need to further investigate a few.

His complete list follows:

Access National ANCX 1.4B VA
Arrow Financial Corp. AROW 2.7B NY
Auburn National Bancorp AUBN .8B AL
BancFirst Corp.   BANF 7.2B OK
Bar Harbor Bankshares  BHB 3.4B ME
Bank of Marin Bancorp BMRC 2.0B CA
Bryn Mawr Bank Corp. BMTC 3.3B PA
Bank of Oklahoma   BOKF 32.6B OK
Commerce Bancshares   CBSH 25.3B MO
Community Bank System CBU 8.9B NY
Cullen/Frost Bankers CFR 30.5B TX
Community Trust Bancorp CTBI 4.0B KY
First Capital  FCAP .8B IN
First of Long Island Corp.  FLIC 3.6B NY
Farmers & Merchants Bancorp  FMCB 3.0B CA
Horizon Bancorp   HBNC 3.2B IN
National Bankshares NKSH 1.2B VA
Norwood Financial Corp.  NWFL 1.1B PA
Bank of the Ozarks OZRK 19.2B AR
Prosperity Bancshares  PB 22.5B TX
People’s United Financial, Inc.   PBCT 40.2B CT
Stock Yards Bancorp  SYBT 3.0B KY
Tompkins Financial Corp.  TMP 6.3B NY
United Bankshares UBSI 14.8B WV
UMB Financial Corp.  UMBF 20.6B MO
Westamerica   WABC 5.4B CA
Washington Trust  WASH 4.4B RI
First Source  SRCE 5.5B IN
First Financial THFF 3.0B IN
Southside Bancshares SBSI 5.7B TX
Bold-owned by Richard, Italics-owned by me

Federal Budget and Investing Impacts

Trump’s first budget was unveiled this week and in its wake left much to dislike.  The talking heads are parsing the details and if enacted as is (which is certainly debatable) will result in probably the largest transfer of wealth between classes that I have ever seen.  The obvious campaign promises (wall, security, etc.), the social welfare programs (which are garnering the headlines) and calculation errors (double counting on both sides of the ledger) will be the news.  But as I prefer the more obscure, my questions are more aligned to the question of impact on investments.  To this end, my focus is on two areas – farmland and healthcare REITs.

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Portfolio Breakdown by Geography

I’m always intrigued by how investors position themselves in providing a measure of protection against market downturns.  Most common is sector diversification where the theory is a downturn in one area of the economy is offset by outperformance – or at least stability – in other areas.  DivHut recently posted his quarterly sector review which – as he indicated – is reasonably aligned with his risk tolerance and goals.  The weakness in this approach is his low exposure to Technology or in my case an overexposure to Financials.  So long as potential weaknesses are identified, this approach does allow a portfolio to be tilted towards sectors which the investor believes will outperform the broader market.

Another approach was presented by Roadmap2Retire last March where the attempt was made to isolate the geographic revenue diversification of the companies he owned.  A daunting effort to be sure, but I’m not sure the data he obtained was complete.  As an example, he reports BCE’s revenue as 100% Canadian.  That is likely as reported in filings.  Not reported is their 37.5% stake in Maple Leaf Sports which owns the Maple Leafs (NHL) and Raptors (NBA).  The NBA pays revenue sharing in US dollars (not Canadian).  Basically any minority stake, investments or joint ventures with other companies are likely to be excluded from any of the companies he owns.  The question becomes – is this revenue identifiable and negligible?

The approach I take is – first sector and secondly the country where the company is headquartered.  Dividends paid are recorded post exchange to US currency which does result in some fluctuation based on the relative strength (or weakness) of the dollar.  The following table illustrates the non-US source for roughly 15% of my dividends.

8.98% Canada
0.53% United Kingdom
0.04% Bahamas
2.44% Australia
0.13% Ireland
0.32% Mexico
0.00% China*
1.29% Hong Kong
0.20% Chile
0.26% Luxembourg
1.47% Singapore

* no dividend paid at this time

The UK dividends are set to increase once a merger involving one of my US companies is complete.  I may be forced to slow foreign purchases as recent political events have resulted in the US dollar weakening and the Yen and Swiss Franc strengthening.  If so, I’m sure I can find a few US companies to put my money into!

 

 

No more Loyal3

Every now and again you wind up getting what you pay for and there’s no such thing as a free lunch.  I probably came to this realization last summer when I ensured that even my smallest holding on the Loyal3 platform had greater than a fractional share.  So the news this week of their migration to FolioFirst was no big surprise.  The issue I have with FolioFirst is the $5 monthly fee.  So transferring my holdings becomes priority one.  In fact Dividend Growth Investor lays out the options fairly succinctly in his post.

Early on, my strategy with Loyal3 was twofold:

  1. Move three horses to the platform to generate enough dividends to play with.  This was accomplished with PEP, AAPL and SBUX.
  2.  Build a group of speculative holdings (less than 1% portfolio weighting) via dividends generated by the first goal.

The free trades with Loyal3 accelerated this process.  Today I’m faced with a (slight) strategy shift.

Sells

An order was placed this morning to sell Unilever (UL) and L Brands (LB).  Unilever due to taking profits off the table and for a sense of protection from a potential single headquarter  location and the possible corresponding tax implications.  L Brands due to uncertainty with their ability to maintain comps while the malls where their stores are located appear to be imploding.  I’ll use this as a tax loss against UL and the required fractional share sales.

Transfer

My remaining Loyal3 full share holdings (YUM, YUMC, AAPL, K, SBUX, HAS, DIS, SQ, PEP, KO and AMC) will be moved … Loyal3 will not move fractionals which will need to be sold.  My goal is to have the transfer complete prior to May 1st which is the ex-div date for the next payer, Hasbro.  I can then sell any remaining fractionals, wait for YUM’s dividend to post (May 5th, went ex-div April 14th), then move any cash into my bank.

My default approach will be to consolidate the holdings into my existing brokerage account which provides the alternative to reinvest dividends.  I will, however, meet with TD Ameritrade today as they (via phone conversations) have indicated they perform OTC ‘grey market’ trades with no surcharge.  As Schwab charges a $50 surcharge, this may clinch the deal for AMTD.

So any Loyal3 strategy shifts in your future?

Update: 20 Apr 2017 – UL and LB sold, decision finalized on move of remaining to existing Schwab account.  AMTD has no set ‘grey market’ policy but will normally adjust the fee.  Lack of certainty killed this option.

My 2017 Strategy (Coca-Cola)

Usually during the third quarter of each year I analyze my portfolio’s performance, do a little tweaking and cast about for an underlying strategy for the new year.  2016 was especially difficult due to a couple of mergers wreaking havoc on my portfolio structure as well as the uncertainty caused by the election.  The easy fix is to add to my anchor, core and satellite holdings at reasonable price points to get them to their target weightings.  This is illustrated by my recent purchases of KMB, CLX and SBUX with more to come.  The more difficult issue was identifying potential value plays for an ancillary portion of the portfolio.

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Moral Investing?

When visiting friends and acquaintances, some topics are generally held as taboo for discussion with financial status, politics and religion usually top of the list.  It’s not due to political correctness but more along the lines of common courtesy.  Unless invited, why would I discuss the success I’ve enjoyed with someone who’s filed for multiple bankruptcies?

There are investors that choose to invest in faith based, moral or social causes that fit their beliefs.  Some choose to avoid tobacco, liquor, coal or oil issues in their portfolios for personal reasons.  Others have no issues or concerns whatsoever.  I believe Lawrence Meyers presents this view nicely in The Myth of Socially Responsible Investing.

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The ‘Ole Ball Game

Take Me Out to the Ball Game

Jack Norworth – 1908

As a result of the Canadian Radio-Television and Telecommunications Commission decision to classify broadband as “a basic telecommunications service for all Canadians” I figured an update was in order for Part 3 of Methods to My Madness  post of last year.  Previously I had postulated that the Carriers were a viable segment in order to capitalize on Cord Cutting.   This segment over the past year proven to be more a commodity with streaming essentially the same regardless of carrier.  With limited pricing power, I now feel  this segment is more likely an indirect beneficiary rather than a driving force of Cord Cutting and am dropping this segment as a viable candidate going forward.

The other two segments, Creators and Providers, in my initial thesis remain intact.  In fact, AT&T’s (T) overtures with Time Warner (TWX) enhance the argument.  Casting about for a replacement segment, I ran across Mr Free At 33‘s post on “Experiencism”.  Although I can quibble with his choice of wording (I think the word he was looking for is Experientialism), the heart of his message is sound being a cautionary tale on falling under the spell of excess.

While I doubt many have the will, means or gumption to head to Thailand on a whim, many are seeking  “Experiencism” locally or with family and friends – and there lies my replacement!   I’ve written before on my interest in business interrelationships.  Localized Experientialism melds nicely into this strategy.  A family visit to the circus or an outing to a sports event are just a couple of examples.

Assume you experience a Flyers game in Philadelphia.  The Wells Fargo Center and Flyers are owned by Comcast (CMCSA), Spectracor (also CMCSA) manages it, Aramark (ARMK) has the food service contract and Comcast SportsNet (CMCSA yet again) the broadcast rights.  So the primary lines of business are the Content Owners/Creators (Teams/Studios), Aggregators and the Experience.  In sports, this model is pretty much followed across all leagues with only the companies involved changing.  In this definition, The Experience includes the cleaners, concessionaires and venue managers.

Many of these companies and teams are privately held with associated interrelationships managed or owned by an entity controlled by the owner .  Others, while public, pay a minimal – if any – dividend.  But there are a few that do pay a healthy – and growing – dividend.  Generally, to invest in this manner requires patience and a willingness to await a change in control of the team while being satisfied with bragging rights of ownership.  In fact, I have to agree with Christopher Lackey in his assessment: “The sports properties, which include the suddenly not laughable Toronto Maple Leafs and Toronto Blue Jays, are doing well and increasing in value, but investing on this basis alone is not sound because if the teams achieve success they require significant reinvestment to sustain it.

During the past year, Comcast (CMCSA) became sole owner of the Philadelphia Flyers and Liberty Media created a tracking stock (BATRA) based on the financials of the Atlanta Braves, new ballpark and nearby real estate.  I also uncovered two additional teams that have – at least in part – public ownership, the Chicago Cubs (TRNC which I believe retained ownership with the Tribune changes) and Seattle Mariners (NTDOY).

With content being the driving force in landing eyeballs – which in turn lands revenue, providers and the groups providing the eperience are the more direct beneficiaries.  Point in fact is Dustin Blitchok‘s article, “Which Streaming Providers Are Winning The Content War?”  This was also confirmed in series of interviews by AT&T employees aired on CNBC last week.  The following table presents my current take on this strategy which, as always, is subject to change.

OWNERS/CREATORS

COMPANY YIELD SEGMENT
Disney/DIS 1.41% C,E
Comcast/CMCSA 1.57% C,A,E,O – Philadelphia Flyers
Time Warner/TWX 1.67% C,A
Fox/FOXA 1.19% C,A
BCE/BCE 4.96% O,A,E,C – Toronto Maple Leafs, Toronto Raptors, Montreal Canadians
Rogers Comm./RCI 3.42% O,E,A – Toronto Maple Leafs, Toronto Raptors, Toronto Blue Jays
Madison Sq Gdn/MSG n/a O/E – New York Knicks, New York Rangers
Netflix/NFLX n/a C,A
Amazon/AMZN n/a C,A
Liberty Media/BATRA n/a O/E – Atlanta Braves
Nintendo/NTDOY 0.42% O – Seattle Mariners
Tribune Co./TRNC (susp) O – Chicago Cubs
NOTE: Nintendo also includes the Pokémon GO experience

AGGREGATORS

COMPANY YIELD SEGMENT
AMC Networks/AMCX n/a A
Discovery Communications/DISCA n/a A
Cox/(pvt) n/a A
MSG Network/MSGN n/a A
Charter/CHTR n/a A

THE EXPERIENCE

COMPANY YIELD SEGMENT
Aramark/ARMK 1.16% E
ABM/ABM 1.69% E
Compass Group/CMPGY 2.05% E
Sodexo/SDXAY 2.31% E
SMG/* n/a E
NOTE: SMG was an ACAS portfolio company as of June 3, 2014. ARCC does not include in their portfolio a/o 3 Jan 2017 merger. Both Bloomberg and Wikipedia classifies them as a private company.
NOTES: C-Creator, O – Owner, A – Aggregator, E – Experience.
Yields as of 14 Feb 2017.