Reporting Style Update

On my “to-do” list was to refine my monthly results presentation to make it more relevant – particularly in light of the significant movements in my portfolio of late.  In search of ideas, I stumbled across the Simple Dividend Growth methodology. While not exactly what I had in mind, it covered probably 80% of which I could mix, match and modify to my hearts’ content.

His presentation covers Weekly actual and Forward Annual views, illustrated below.

XXX is text, $$$ currency

The largest differences are that I report monthly (as opposed to weekly), I convert actuals to percentages and I don’t use forward anything (except announced cuts) preferring to use trailing actuals.

The more subtle differences are twofold, I embrace stock dividends and M&A activity (one of his sell signals is a merger announcement).  So I’ve enhanced this template to serve my purposes as follows:

Actual as of 16 Nov 2019

The left column contains all ticker symbols – essentially a point of reference for portfolio activity.  The right column is the activity – as a percentage of portfolio value. The exception being the Dividends which are percentages of dividend activity.

I’ve segmented my new buys between the source of funds – the default being dividends accrued from prior months.  I don’t show my available cash as I reserve the right to spend it on my tax bill (like last April), take a trip or – in this case – replicate the granddaughter’s portfolio.  I may add a “new cash” line item in the event I hit the lottery or my living expenses decrease, otherwise I expect to continue funding purchases via excess funds generated by the portfolio.

I’m not sure how relevant the separate itemization of increases will be, but I’ll let it run for now.  In this example, BX increased their dividend but it doesn’t register as it amounts to 0.001962% – thereby rounding to 0.00%.  This becomes even more negligible when ORIT’s dividend cut is added. Likewise, the increase from stock dividends and DRIPs may also be too small to be meaningful.

The key point I wanted to visualize was the delta between market fluctuations and dividend growth.  Since my purchases are (generally) self funded by the portfolio, the fields: Increase from New Buys, Less Dividends, Less M&A cash and Incr/Decr from Market Action should equal 100%. 

The selfish reason?  After the four dividend cuts I experienced to start 2019, my assumption was the market was in for a rough year and I went into a little of a retrenchment mode.  My cash position rose and my purchases decreased. Now my dividend run rate is below normal – I might exceed 2018 dividends by month end which would be a month later than usual.  I’m used to coasting into the fourth quarter starting some positioning moves to get a head start for the new year. 

I’m thinking dividends deployed for purchases should be in the 3-5% range.  If I had used this method earlier in the year I probably would have realized faster how far I was lagging behind.

The term M&A Cash may be a little bit of a misnomer as a merger may be the trigger for multiple portfolio transactions which can be illustrated through this example.  The PB/LTXB merger was a cash and stock transaction and I owned both sides – PB in my IRA and LTXB in a taxable account. The cash was received this month.  I will sell PB in the IRA replacing it with TD and finally selling the TD in the taxable account. Excess cash in the IRA was used to create a TD starter position there. However, this daisy chain of events will occur over roughly two months to maximize the dividend payments.  The sales of the (current) overweight PB position and the soon to be overweight TD position will be classified as Positions Reduced.

Others present their results in a manner I found interesting including Dividend Driven and Wallet Squirrel.  Tom at Dividends Diversify had suggested creating an index. This solution is less complex but equally illustrative (I think).  I will probably track (perhaps on the side) the Buys to Dividends ratio as a correlation to market value (think “be greedy when others are fearful”) as this presentation may reflect increased buys when the market drops (or failure to do so).

So I’ll lay it out here for ideas, thoughts and discussion and intend to use it starting with my November review.

The Defunct Kid Portfolio

This week saw the completion of the rebuild of my granddaughter’s portfolio.  Basically an effort that spanned six weeks and navigated some tricky waters – earnings season, trade news, Fed meeting … Yep, we had them all.  So, I figured it was only fitting to share the whys and wherefores of this little expedition since it pertains to the market.

Background

Since coming to live with us, the kid has been given an annual present of a stock holding and as such has accumulated a nice – but not quite fully diversified portfolio.  Over the years she has been proud of this and one year participated in a ‘mock’ stock contest at school which was (I believe) sponsored by FinViz taking eighth place in the state.  So it was a sad day for her when she was advised that the majority of college aid programs (Grants, Scholarships, etc.) would be discounted by 25% of her net worth. This includes savings, portfolio …  There goes the incentive for planning ahead. End result being upon graduation, her nest egg would be 0. My wife and I are not her parents – the legal status is guardian – so at least our net worth is not considered. So the game plan evolved to maximizing the available assistance.

Liquidation

The rules are similar between 529 plans and custodial accounts, except when liquidated.  With 529s, there is a penalty and possible tax restatements. With Custodial accounts there is the obligation of the custodian to prove the liquidation benefit was on behalf of the minor.  As these accounts were Custodial, I’m now tracking application fees, ACT/SAT testing fees and much more, so if necessary I can respond to an IRS audit.

My Decision

She’s aware that I chose to replicate her portfolio as a slice of one of my M1 pies.  So I laid the groundwork to ensure no dividends were lost in this migration. Fortunately I’d been holding much of my previously paid dividends in cash just waiting for an opportunity to present itself.  As the checks arrived, I moved an equivalent sum to M1. What I haven’t shared is my intention to gift it back to her upon graduation from college.

The Process

I created a spreadsheet with the sale price and the repurchase price to determine if I made or lost money (outside of fees).  I will say that I don’t have the nerve to try to time the market for a living. On the subject of fees, company plans managed by Computershare, Broadridge and Equiniti downright suck on fees when transferring or cashing out.  To be fair, that’s an aspect that’s not at the forefront of most DGIs who buy and hold for the long term. The fees ranged from a little over $25 (BR, CMSQY) to $0 (SCHW) with EQN.L in between at $15 and change. With today’s free trading schemes, the incentive for using traditional DRIPs will likely wane as I noted in one of my infrequent comments on Seeking Alpha.

Once started, I was blindsided by some events.  WFC named a new CEO, TXN provided weak earnings guidance and KHC had an earnings beat.  For the most part, I was able to better her sale price when I did my purchase as illustrated below.

Cur price as of November 8, 2019

Takeaways

While I didn’t enjoy this exercise, had I realized in 2010 what rules would be in place in2019 I’m not sure I would have done anything differently as the kid gained an appreciation for investing and the power of compounding.  Besides, Administrations come and go, rules and policies are ever changing. The key is adjusting to whatever is most beneficial at a point in time.

Going Forward

I will be hoarding most of my dividends once again until tax time as my wife took a part time job this year.  For the first time in a couple of years I’ll be able to make an IRA contribution. 2020 portfolio reporting will likely be a little strange – at least from my view of normalcy, as I tend to like consistency rather than one-off events.  (I know … first world problems …) My concerns lie more in highlighting dividend growth performance rather than portfolio growth via cash infusions – regardless of whether it’s new cash or self generated by reported dividends. This I’m sure will become clear as we progress into the new year.

As always, thoughts and comments are welcome!

Just a Few Dribs and Drabs

To review this week’s market action is to basically yawn for a change.  Earnings season began but was tempered to a degree by economic news that questioned the robustness of the US consumer.  While the economy is still growing, the rate is slowing. My view remains that without a ‘real’ deal – skinny or otherwise – on the table between the US and China, both countries will continue to hobble along.

Meanwhile I did make one purchase this week that was a little unanticipated, but not totally unexpected.  I topped up my Legacy Texas (LTXB) holdings in preparation for the completion of the merger into Prosperity Bank (PB) which has received regulatory approval.  Currently I hold both sides of this merger, LTXB in a taxable account and PB in my IRA. Essentially I wanted to avoid assignment of an odd fractional share that I could do nothing with as the ratio is 0.875:1 (plus $6.28 cash). Assuming shareholder approval October 29th, the expectation is for the deal to close November 1st.  My current thinking is the new PB shares (and cash component) will be assigned to the taxable account. Subsequently, I intend to sell the old PB in my IRA replacing it with TD (to take advantage of the tax treaty).  After the dust settles, I will sell the TD in my taxable account. End result being more shares (slightly) of both PB and TD, no shares of LTXB and some excess cash.

I did hit the halfway point on my endeavor to replicate the grandkid’s trust (now liquidated, save one stock).  After I complete the transactions I’ll post regarding the rhyme and reason, but for now let’s say it’s to preserve all options regarding financial assistance as she begins the college application process. 

The strategy I’ve employed is to gauge the futures market for weakness prior to entering an order for market open as I decided to use M1 finance for the bulk of this replication.  For the most part, this has been a viable approach except of late there have been some wild swings going into the open. I’m unsure as to the why, but perhaps someone has identified the secret sauce regarding presidential tweets?

The effort remains ongoing regarding the directory update – primarily removing dormant entries.  It turns out I wind up spending more time than usual as my attention gets diverted by an interesting presentation or difference of opinion or a concept worthy of further review.  Examples of some of these include:

  • Dividends Diversify – in his review of the book Dividends Still Don’t Lie, the comment, “I did some searching on the internet for free services. But didn’t come up with anything that looked useful … Dividends Still Don’t Lie goes through how the calculations are done.  So it is certainly possible for a do it yourself investor to develop the calculations on their own.” garnered my attention.  Now the strategy discussed may be an anathema to a Buy and Hold type (my concern would be tax implications), the “tool” became the curiosity.  The best I could come up with was the Charles Schwab screener that could only analyze three of the book’s eleven metrics yielding fifteen possibilities for further manual research.
  • Finance Journey – the comments, “As a dividend investor, my full focus is on income than capital gain. Thus, capital gains or losses in my investments do not make any sense to me at least for now.” and “I do not convert dividends received from U.S stocks to Canadian dollar, and I use a 1 to 1 currency rate approach to keep the math simple and avoid fluctuations in my dividend income reports due to changes in the exchange rate.” were the culprits.  I trust the “full focus” does not exclude possible warning signals. For instance, many dividend cuts (income) are preceded by a falling stock price (capital gain (loss)). Likewise, the use of a 1:1 exchange ratio for simplicity sake risks masking the true portfolio performance. Personally, I (like ETFs) translate income from my thirteen foreign holdings to home currency prior to publishing results. Besides, if the full focus is income why distort currency exchange (which is a direct income factor)?
  • Finance Pondering is a relatively new blog from the UK that is in the process of ramping up in a thoughtful manner.  The insightful questions raised in this rollout carry the promise of one day being one of the standouts. Yet there is already one nagging question that I hope will be answered in the future – “Why Trainline?”.  To enlighten my audience, Trainline is a ticket booking company that charges a premium in exchange for convenience in what is basically a mobile app. My issues are, 1) it was a 2019 IPO (albeit one of the better ones), 2) KKR was involved (can you say monetize and exit strategy), 3) I question the nature of Brits to embrace premium services given the uncertainty of Brexit and recent demise of Thomas Cook.  

This weeks’ final thought is a potential black swan.  My concern is the expanding pockets of unrest appearing from Hong Kong to Chile to Spain.  Ignoring Turkey/Syria for now, just something I’m keeping my eyes on …

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!

Analyst BullS#!T!

My friend Frankie posted an aptly titled piece (Beware the Broker BullS#!T!) on analyst’s actions awhile ago (along with a followup) which struck a nerve as my early investing career had several of the pitfalls mentioned.  While I did evolve to settle primarily on a modified DGI strategy, I have to wonder as to the due diligence exercised by some of the broker’s clients. In the US, there are some shops that are essentially pay for play schemes, meaning pay us money and we’ll cover your business.  One of these is Taglich Brothers (which has a clearing business relationship with Pershing, LLC in which I am a shareholder (BK)).  Taglich, through it’s press release with NXNN (a spec holding of mine) disclosed, “In October 2017, the company paid Taglich Brothers a monetary fee of $4,500 (USD) representing payment for the creation and dissemination of research reports for three months.  After the first three months, the company will begin paying Taglich Brothers a monthly monetary fee of $1,500 (USD) for the creation and dissemination of research reports.”  Unbiased?  Unlikely. Another take on them was provided by D/M/O.  Point of reference, Orchids Paper (TIS), mentioned in the article was formerly in my portfolio and subsequently filed for bankruptcy protection (I had sold prior to the filing).

Another angle on alternative strategies was brought front and center this week with the publication of Spruce Point’s analysis on Church & Dwight (CHD).  Spruce Point is a small, short focused firm similar to Muddy Waters Capital or Kerrisdale Capital that use Seeking Alpha, Twitter and other social media to broadcast their research.  Spruce Point takes a short position, runs a campaign and determines the traction being gained. In the words of the founder Ben Axler, “Because I run a small business, we don’t have a lot of time to waste going down rabbit holes where there’s a dead end,” he says. “I can generally sniff out a company pretty quickly.”  OK, then.  

I admit that CHD is richly valued and perhaps they overpaid for some acquisitions.  I also submit that Spruce Point is highly vocal for their smallish size. They have, however, been building a little bit of a track record in this bull market.  On first blush, it appears the Spruce Point results have been stellar thus far in 2019 with a by moving the market in their intended direction 77% of the time on the day their report is released – translating into an average market loss of their targets of 3.78%.  I would posit their gain is even greater as I suspect their investors and subscribers get a first look at the reports. My guess would be a 5-10% short term gain.  

As of Sept 7, 2019

In the shorting game, the real money is to be had by riding a target down, but to do so requires conviction, stamina and staying power.  Based on Ben’s comment, I doubt they are riding the targets down other than a select few high conviction ones. My reasoning being that they would be booking a loss for 2019 as their targets, in aggregate, are 2.88% higher post call.  The three that would have rocketed their results lost 49%, 26% and 25%. Conversely the three they should have exited quickly gained 86%, 51% and 12% for the longs.

Over the weekend Spruce Point has continued their campaign against CHD using Twitter to gleefully proclaim success as CHD has not chosen to engage in their antics.  Although some of Spruce Point’s issues have some validity, in large I feel they are overstated – essentially a headline grabber.  

One issue they raise is the use of factoring to manipulate results.  Possible, but it depends on whether it is recourse or non-recourse. Spruce Point also takes issue with an undisclosed UK acquisition.  My take is with sales in the £764,000 range this is negligible. The current year “slowing dividend growth” could be explained by prudence in digesting its last two acquisitions.  I suspect this dividend trend may be the new normal for a period of time if management executes on their goal of expanding their “power brands” to twenty.

In summary, they could very well be right. They could also be playing a manipulation game. If weakness intensifies my thoughts are that a buying opportunity may be at hand. Then again – I may be wrong 🙂

Investing in CBD

Subsequent to the passage of the Agricultural Improvement Act of 2018, signed into law December 21st, there has been a significant amount of speculation as to the rise of the market for CBD oils, edibles, supplements and derivatives. Migrating across the country are calls to create a system – or infrastructure – if you will, to enable this budding (pun intended) industry to grow and thrive. This bill clarified two gaps in prior legislation related to industrial hemp, namely removing hemp from the definition of marijuana and and creates an exception to the THC in hemp – essentially declassifying it as a Schedule I narcotic, as long as it has no more than 0.3 percent. Then the state has to enact processes – subject to USDA approval – before being legal. The most onerous of which is mandatory testing of the THC threshold.

In a role reversal of sorts, the new reality is that CBD is legal at a federal level with a hodge-podge of regulations at the state level with a degree of federal oversight. For the time being, one can assume differing laws depending on the state. This is also subject to change regularly. For purposes of this discussion, we’ll assume Texas is moderate – neither at the bleeding edge nor trailing the pack – as HB1325 was signed into law last month and retailers are already making an appearance – pending registration. Many – including myself – are attempting to identify ways to profit from these endeavors with no clear answers. DivHut (via a guest post) tackled this question and laid out a great foundation before withering away at the end. I do have to concur there may well be room to run in this space, the key being in what way – which we’ll explore a little further.

Retail is the obvious starting point with CVS and Walgreen are dipping their toes in the water while Amazon is marketing CBD-less hemp oil. The bad news, if any, is that any sales made by these giants would be negligible to earnings. This isn’t to ignore the mom-and-pop shops or franchise operations appearing, only that as a passive investor the options currently limited.

Manufacturing is the second area for research but winds up being the most convoluted depending on your interest, e.g., topical, edible, oil, prescription drug, THC or CBD, et.al. My approach is to categorize into two segments: Consumer and Cultivation. The consumer side being a product supplier to a retailer or consumer direct. Cultivation is a little trickier in that the Texas bill legalizes hemp farming and the sale and possession of hemp-derived CBD oil containing less than .3% of THC. Meanwhile growing hemp is not yet legal until the USDA provides guidelines and approves state applications. This could be considered a quagmire of sorts, but of a temporary nature.

Extraction and Testing is the final area to watch as this is where the heavy investment will take place. One piece of the Texas Law is, ” the laboratory must be accredited under ISO/IEC 17025 or other comparable standard. License holders may not use their own laboratories for state testing unless the license holder has no ownership in the laboratory or less than a ten (10) percent ownership interest if the laboratory is a publicly traded company.” Consider that most – if not all – of the law enforcement labs require upgrades to differentiate between now legal and still illegal products. Xabis, an independent lab, has forged a deal with Westleaf that includes equity based compensation.

So who currently has my eye?

  • Retail – Elixinol Global (ELLXF). Assuming this Aussie company can navigate through the FDA regs unscathed.
  • Manufacturing – Canopy Growth (CGC) – pursuing a license to process hemp in New York state
  • Testing – Eurofins Scientific (ERFSF)

All of which are highly speculative – so tread lightly and do your due diligence. Is this a space you too are looking at (additional suggestions are always welcome)!

Update 4 Aug 2019: On Aug 1 I initiated a position in Innovative Industrial Properties Inc. (IIPR), a REIT in the medical space.

Mexican Standoff

A confrontation in which no strategy exists that allows any party to achieve victory. As a result, all participants need to maintain the strategic tension, which remains unresolved until some outside event makes it possible to resolve it.

https://en.wikipedia.org/wiki/Mexican_standoff

On May 30th, the Trump administration announced stepped tariffs on Mexican imports under cover of the International Emergency Economic Powers Act. Once again it appears to have been a bargaining ploy using the American consumer and farmers as pawns in a game of Chicken as these were “indefinitely suspended” on June 7th – perhaps realizing the signature USMTA was now at risk by this action or the push back by the business community or the fact that Republican Senators realized they did indeed have a backbone (albeit, small).

While I’ve never been a huge fan of ETFs as my view is that an investor is consigning themselves to the average, my preference being to develop a thesis and buy individual companies in support of the idea – with the expectation being the return will be outside the norm (hopefully in a positive manner). That said, I realize ETFs can – and do – serve a purpose and as such I have five in my portfolio, one being iShares MSCI Mexico Capped ETF (EWW). This issue peaked at $44.54 on May 30th before bottoming at $42.64 on June 3rd which is precisely where my order to add executed. Yes, it was luck calling a bottom but it was also a validation of the Headline Risk concept.

One of the first analyses published was that of a short-seller, BOOX research. He does present a decent argument on all counts, save one. This was followed by Liumin Chen’s analysis which missed the same issue. To be fair, I’m now operating in hindsight – post Trump’s reversal, but I did spend most of last weekend forming my conclusion which was the negative tariff impact to EWW was overblown due to one factor. One where you can’t just look at the forest without reviewing the respective trees.

One uncertainty I have with BOOX is his view of a pending peso devaluation as that would likely torpedo any trade agreement and give rise to currency manipulator status. More important is the view that the Consumer Staples exposure is a negative. While it is true that this sector comprises 30.5% of the ETF, only one of the top ten (Walmart de Mexico) has significant Mexican domestic consumer exposure where US imports (tariffs) could be in play. The other two Staples either don’t interact with the US (Fomento Economico Mexicano) or has significant US operations in their own right (Grupo Bimbo with 22,000 US employees). My take is tariffs would slow – but not cripple – the Mexican economy.

Indeed there could be a silver lining for Mexican multinationals that do not import US products. Some brands at the forefront are Tracfone (America Movil), Groupo Mexico (Southern Copper) and the aforementioned Bimbo (Thomas, Entenmann’s, Mrs. Baird’s). Basically these entities could be repatriating US gained profits in inflated USD to Mexico as artificially depressed MXN. A possible spread play that is typically the province of banks and insurers – and an untended consequence that probably escaped the purview of the experts running this show. The icing on the cake? Cemex with 11 plants and 50 quarries in the US. What’s a good border wall without cement and concrete from a Mexican owned company paid for by US taxpayers?

So this is a contrarian play which – so far – is in the money. I believe the real pain would have been felt in the auto and produce industries which do have significant numbers of US workers. Hopefully this is a fire drill that won’t be reenacted any time soon.