Coronavirus – Pt 3

Another week has elapsed with the coronavirus headlines still front and center.  Politically in the US little has changed with the President doing his utmost to slant the narrative, including leaving an infected cruise liner offshore stating, “I like the numbers being where they are,” … (appearing) to be explicitly acknowledging his political concerns about the outbreak: “I don’t need to have the numbers double because of one ship that wasn’t our fault.”

On the state of the markets, as anticipated there was volatility this past week – despite an emergency Fed rate cut – and the DOW eked out a slight gain.  The one piece of good news at the end of the week was the announcement on test kits for the virus. Many details have yet to be released but will initially benefit two companies – Labcorp (LH) and Quest Diagnostics (DGX).  I suspect it will be provided on a minimal cost-plus basis due to the optics and several insurers already stating existing policies will cover said tests.

 It’s becoming increasingly clear that pundits (probably including yours truly) have disparate ideas as to what’s next.   What is known is travel is being disrupted – Amtrak, airlines and ships. Conventions, including the iconic SXSW, have been cancelled or postponed with a direct economic impact already exceeding $1B – with more to come.  Many companies are issuing earnings warnings, enacting travel restrictions and enabling work from home regimens. Schools in some areas – including the US – are temporarily closing.  Each of these comes with a yet to be identified economic cost, both direct and indirect.  As the US is primarily a service economy, much of this output will not be recovered in future quarter GDP numbers.

Playing on this theme, Jim Cramer began touting his “stay-at-home economy index”.  While (hopefully) being a thought stimulus for his followers, the most blatant issue I have is how well these companies can profit from this paradigm shift.  For example, will new subscribers flock to Netflix? Will companies continue their unfettered advertising on Facebook? How many buildings does Prologis have vacant to accommodate Amazon?  Does Amazon have spare robots up their sleeve to ramp up? This ‘index’ might have legs if the virus is more than a one or two quarter blip.  

Besides the test kits, my inclination is to look at the perceived necessities – the stuff flying off the shelves – even though demand may be based in fear rather than reality – and determine if the stock price reflects a value proposition.  These would include (public companies only):

  • N95 Face Masks (CDC approved
    • Honeywell (HON)
    • 3M (MMM)
    • Kimberly-Clark (KMB)
    • Alpha Pro Tech (APT)
  • Disinfectant Products (EPA approved)
    • Ecolab Inc (ECL)
    • Stepan Company (SCL)
    • Lonza Group AG (LZAGY – caution – possible spinoff)
    • Clorox (CLX)
    • Reckitt Benckiser (RBGLY)

In store for the week ahead will probably be a battle for the headlines between Coronavirus and oil.  No deal in Vienna is good news for US consumers other than the Texans dependent on the oil industry. Prudence dictates I review my oil patch banks’ relative exposure in a declining price environment.
Long: DGX, NVDA, AAPL, PLD, PEP, MKC, MMM, KMB, CLX

DVK System Review

I’ve been noodling over a post published by FerdiS over at DivGro for awhile now, essentially weighing the pros and cons against my biases to figure the most appropriate rebuttal.  In a nutshell, the post first grabbing my attention was his Recent Sells.  Within this piece was the comment, “I … rank my … stocks by quality score and by CDN” and on this basis eliminated two holdings.  

I am a proponent of every investor having a defined methodology within their comfort zone to determine the quality of their portfolio and various bloggers regularly publish their screening mechanisms and processes.  Conversely, I don’t shy away from highlighting perceived frailties in these. A combination of Yield, Rising Payout Streak, PE Ratio and Payout Ratio are the most common attributes used by several bloggers while adding others to customize to their tastes.  One example being the Dividend Discount Model.  

Back in 2013, I’m not sure Simply Investing anticipated the record bull market coupled with inordinately low interest rates.  Using KO as an example, his method would have classified it as overvalued. A changing business – while looking backwards (bottler spinoff) – doesn’t neatly fit this model.  On the other hand, forward looking views, such as the DDM, have a basis in a series of assumptions. Even the Diplomat’s approach – which is arguably the most straightforward – has an assumption set within the metric, Dividend Growth Rate greater than the rate of inflation, allowing for management discretion (not a major issue in a low inflation environment).

FerdiS method – while thoughtful and elegant – has some limitations and could be viewed as an advertisement for premium services.  Value Line, S&P, Morningstar and Simply Safe Dividends are the source data. S&P data can be obtained free and Morningstar through some brokers (otherwise $199/year).  Simply Safe Dividends runs $399/year and Value Line $598/year.

Beyond the fees, the results are only as good as the dataset can generate.  Mindful that I only performed a spot check against my portfolio, it appears Morningstar applies no moat to financials and narrow to utilities.  As to the other providers – your stock has to be within the universe they cover. My assumption is the 80/20 rule applies here with limitations to small caps and foreign issues as these are not widely held by US investors.  

As my preference is to get the investing view from the rear view mirror (ala, what have you done for me lately), all the metrics this model uses are forward focused based on analysis by an individual or algorithm.  The final note being the use of the CDN (Chowder Rule) as Sure Dividend makes a compelling case of its unreliability.  

A comparison would be incomplete without peer review.  KO scores 23 of 25 on the modified DVK scale whereas the Diplomats and Dividends Diversify consider it overvalued.  For my part, KO is a small (<1%) position that I’m not adding to other than dividend reinvestment. Kind of makes me wonder …

Bottom line: I’m not sure of the value of this – at least to me.  But in my spare time I’ll continue plugging my portfolio into the model to ascertain whether this assessment is correct.  I do, however, like the jigsaw puzzle of his methodology but can’t help but wonder if this is a prelude to even further premium offerings being rolled out …

Disclosure: Long MORN, VALU, KO

My Lazy*** Goals

Actual book cover, JoeKarbo.com

In my younger days, I was fascinated with the notion of becoming wealthy with a minimal amount of effort.  To that end I scraped and saved enough pennies to become the proud owner of a copy of the late Joe Karbo’s best seller, The Lazy Man’s Way to Riches.  Imagine my disappointment when I realized that significant effort was still required, albeit in a different manner.  If the book were updated today, I would think it would gloss over the time and coding required to attain website SEO success and focus on the rewards – while ignoring the fact that only a few will reach that level.

My quest for the laziest way to make money was not in vain as I stumbled onto dividend oriented investing forty years ago.  Essentially one can spend as much – or little – time and effort as they want in this regard. One person can use a set-it and forget-it strategy while another can be actively involved.  Or in my case, I’ve used both. While I recovered from my strokes, my portfolio was on auto-pilot accumulating dividends awaiting my return. For over a year – and it didn’t miss a beat. 

The complaint I’ve most often heard is that it takes too long to see results and this endeavor does require patience to get the snowball rolling – probably five to seven years.  But once it gains momentum it is a force to be reckoned with.

This is a meandering way to get to this weeks’ point. I’m really not that much into goals at this stage, but since I’m basically a let the portfolio do its own thing type of guy, there are times when adjustments just have to be made and framing them as goals could be beneficial.  For this year, perhaps you can refer to me as an active manager. The broader theme was my desire to reduce the number of holdings and so far I’ve dropped two (XRX and MSGN) but added two (FTS and TMXXF). Currently, this is a wash. On my monthly reports – with the exception of the new and sold positions – all of the activity nets out with an increase in the value of the stocks retained – which will probably be the case throughout the year.  

Scenario #1

Goal – consolidate all Canadian stocks across multiple accounts into the IRA

Rationale – the tax treaty between the countries allows most holdings to be exempt from the 15% Canadian tax withholding

Funding Source – the sale of PB from my IRA (leaving a slightly larger position in a taxable account)

Actions Required – 

  1. Ensure all have no Canadian taxed dividends
    1. RY, PWCDF are confirms
    2. BCE, CM, BNS, CP, CNI, TRP, TD, BMO, ENB, TMXXF, MFC, SLF, HRNNF, TU, RCI, FTS are pending confirmation
  2. If any are taxed, file appeals
  3. If appeal denied, review for possible sale
  4. If confirmed, add to TRP, TD, BMO, MFC, HRNNF positions
  5. Close out remaining taxable Canadian positions including NTR and AMTD (US)

Over the years I’ve received conflicting answers on the taxability issue.  With free trades I can get the real answer with the next dividend payment. I have 20 current Canadian positions plus AMTD (American, but I grouped it with the Canadians due to TD’s ownership stake).  NTR and AMTD (merger) will be closed positions – probably in April. End result will be more room for foreign dividends to stay under the Form 1116 filing cap.

———

Scenario #2

Goal – Migrate a few issues from Motif to Webull

Rationale – Webull has a promotion too good to pass

Funding Source – petty cash to be replenished by the sale of the same issues in Motif (timed to avoid wash rule issues – if applicable)

My issue with Motif is that they are late to the party on free trades, so I’m beginning to take some money off their table.  Although not fond of Webull (they are in the same camp as Schwab with paying stock dividends as cash-in-lieu rather than fractionals), getting three free stocks is a return equivalent to an immediate 5% (or more).  As my moniker implies, I seek returns where I find them.

——–

Scenario #3

Goal – Add cash to spousal IRA

Rationale – Reduce tax liability

Funding Source – emergency cash to be replenished by the anticipated tax refund

For the first time in years, we have some earned income which enables us to contribute.  This will be done into the spousal one which is not subject to RMDs (yet).

Scenario #4

——

Goal – Address RMDs without liquidating stock

Rationale – Keep the snowball alive

Funding Source – accrued surplus dividends

Our planning for this event was done a few years ago when we reduced the holdings in two IRAs.  One contains all SBUX (cost basis of $6) and the other all AAPL. 2019’s RMDs were addressed by surplus accrued dividends.  In 2020 we may have to journal transfer a few shares of each to the joint account which happens to already have these issues in place.  RMD slam dunk – except for the wife who’d like the cash – hence the alternate funding source.

——

So there are this lazy man’s goals for 2020 and it sure looks like more work than I’ve seen in awhile.  In my spare time I can see how my diverse and weird ideas panned out (or not) to determine the further portfolio reductions so I can return to being a future lazy man! As always, comments, thoughts and criticisms are always welcome.

Peeking Into The New Year

It’s that time of year when the pundits are outlining their 2020 top picks with assorted rationale to support their stance.  I find these exercises interesting at the very least and somewhat illuminating as well. I have to admit I am not immune to the siren song as I have participated in a few.  For instance, last year I participated in Roadmap2Retire’s and placed thirteenth. Not bad considering I was effectively out of the contest mid-year with my pick being acquired.

I also tracked sector picks of mine versus Kiplinger using SPDR as a baseline.  For grins I included Cramer’s Power Rankings and Catfish Wizard’s sector picks. Unfortunately, both of these didn’t complete the quest leaving myself and Kiplinger in a tie.

This year’s entrant was to the Dividends Diversify Investment Ideas for 2020 and Beyond panel.  One of my strengths (or weakness, if you prefer) is to view scenarios through a unique prism.  Of the 20 companies, 11 are already in my portfolio. Other than Visa, which generated one observation, these were ignored (why else would I own them?).  Tom grouped companies by segment (like ‘Energy and Oil’) where I chose sector as identified by Morningstar. The duplicate (Visa) was counted twice for my purposes.

  • Financials                  28.57% (6)
  • Technology                          19.05% (4)
  • Utilities                      19.05% (4)
  • Energy                9.52% (2)
  • Healthcare            4.76% (1)
  • REIT                4.76% (1)
  • Communication Services    4.76% (1)
  • Consumer Defensive        4.76% (1)
  • Industrials            4.76% (1)

Through this lens, a slightly different perspective emerged.  With volatility and stability key concerns, I found Financials being a “go-to” sector as interesting.  The following are my observations with the note they are strictly my perspectives. They should not be construed as a criticism of any of the individuals or selections.  Following is my typical, outside the box purview.

The observation on Visa is based on Tawcan’s rationale, “They also make money from users when they don’t pay the balance in full each month.”  The issuer absorbs both the risk and the reward on this aspect so no additional profits to Visa here.

One surprise was the Utility Sector.  

  • GenYMoney selected Fortis which has been on and off my watch list for awhile.  My issue with them has been their Caribbean dependence on diesel. I may need to review this with the advent of solar in the region.
  • Cheesy Finance selected Canadian Utilities.  My issue here is the ownership structure. CU operates as a subsidiary of ATCO (52% ownership) which in turn is controlled by Sentgraf (a Southern family company).  CU class A shares are also non-voting.
  • Brookfield Renewable Partners was the pick of My Own Advisor.  Most investors’ issue with them is that as a Limited Partnership they issue K-1s.  Although they have no UBTI history, some individual and corporate investors shy away from K-1s. 

Three selections were (in my opinion) a little contrarian.

  • The Rich Miser picked Ally.  This one I wouldn’t touch with a ten foot pole.  Yes they do pay a dividend, but only since July of 2016.  My guess is they were restricted by the TARP bailout. Now TARP in and of itself is not a show stopper for me but the fact that they were formerly known as GMAC – yes GM’s financing arm – gives me pause.  Now, ten years post bailout, they still derive 70% of their business through dealers – that is my issue.
  • MoneyMaaster chose  Artis REIT which recently cut their dividend knocking it off most DGI’s radars.  He does make a compelling case though.
  • Freddy Smidlap selected CDW which is a value added reseller.  The issue here is the possibility of margin compression in the event of an economic downturn.  Plus they have a limited track record since their second IPO.

The ones in my portfolio I’ll periodically add to during the year (except Power Corp which is already a little overweight).  One gets the nod to appear on my watch list, FTS.

And I have to commend Tom for the time and effort in putting this together so people like me can have some ammunition for alternative theories. Just for grins, I added these selections to a spreadsheet available on the main menu titled 2020 DivDiversity Panel. This should update automatically (as per Google standards).

Blast From the Past

A little unsure as to what I was researching when I ran across this ancient nugget from 2012.  I don’t recall having read it when it was fresh, but has some similarities to my investing style outside the world of Coke – particularly with the international bent.  I’ll also point out this predates the 21st Century Beverage Partnership Model where Coke essentially attempted to become a marketing engine leaving the capital intensive bottling and distribution operations to a handful of larger (facilitated by mergers) bottlers.  For today, I’ll ignore the 32 (give or take a couple) family owned operations that are basically distributors – or bottlers in name only. These buy product from larger bottlers, warehouse it  and deliver to commercial customers. I suspect these little guys won’t be long for the world as they’ve lost any economies of scale.

The impetus for this piece came from the final comment from NeoContrarian where he asks (a year ago), “This is an excellent article:- What’s the current update 6 years on???” Given the author hasn’t published anything since 2016 and I now have a vested interest, I figured it apt to address this question – particularly with the change in the business model.

I have stakes in seven of these bottlers with a pending limit order for an eighth, so allow me to correct a mistake the author made.  The list of companies contains duplicates – either with a class of stock (AKO.A/B) or CCLAY/F. The former has greater economic interest (votes) but a lower dividend while the latter is the ADR versus in country OTC listing.  The ADR withholds taxes (net payout) while the F version is the gross payout leaving the investor having to deal with those details.

Subsequent to her piece, Coca-Cola Hellenic began trading on the LSE (not NYSE) and moved its’ HQ from Greece to Switzerland, Coca-Cola Enterprises ultimately morphed into Coca-Cola European Partners, HQ UK; and Mikuni Coca-Cola merged into Coca-Cola East, which merged with Coca-Cola West becoming Coca-Cola Japan.  Also, Coca-Cola İçecek.’s ADR program has been cancelled.

I tried to retain the structure she used but made a few modifications; removed dividend growth and comparison to KO’s and added % owned by KO.  Being primarily foreign companies, dividend growth is less telling than the US as the vast majority of payouts are based on a percentage of profits.  Perhaps a profitability growth rate should be included instead.

I will editorialize that it appears the results are mixed in KO’s move out of bottling.  They have succeeded, for the most part in the domestic market – at least in avoiding reporting consolidated results.  The failure has been in foreign markets as several remain owned – at least in the majority – by KO. These include Africa (68.3%), The Philippines and Bangladesh (100%).  KO also retains significant stakes of between 14 and 34% in nine of the publicly traded bottlers. This analysis excludes privately owned companies with the exception of Joint Ventures that include public companies.

a/o 8Dec2019

Yes it remains possible to muster a dividend yield piggybacking on KO’s marketing prowess.  There are risks, chiefly currency and political. For instance, Zimbabwe faces a hard currency shortage leaving Heineken unable to repatriate their profits.  The reason I have no intention of buying Hellenic or İçecek. Is their exposure to Russia and Turkey respectively. Future administrations may revert back to normal putting undue risk on the table.

The one aspect I didn’t anticipate was the consolidation of bottling operations into the larger operators leaving the smaller players as merely distributors.  That is one way to spread the capital intensiveness into manageable pieces and is probably one reason for their performance.

There are risks as well as potential rewards – perform your own due diligence.

Own: CCEP, KOF, AKO.B, CCLAY, SWRAY, KNBWY, COKE.  Open order: CCOJY

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!