August 2017 Update

The markets ended the month generally flat while whip-sawing in between on geo-political news (North Korea), domestic disturbance (Charlottesville) and natural disaster (Harvey) taking center stage.  I did deploy a minimal amount of new capital along with dividends received in some positioning moves.  The S&P ended the month up .05% while my portfolio lagged by dropping -0.34%.  The differential can be explained by two events, 1) higher exposure to Texas (e.g., hurricane), and 2) the month-end rise in the US dollar causing my foreign issues to drop a little.  For the year, I remain ahead of the index by 4.47%.

Headlines impacting my portfolio (bold are owned):

  • 8/3 – IVZ in talks to buy Guggenheim Ptnrs ETF business
  • 8/3 – VLO agrees to export refined fuels to Mexico through iEnova (SRE subsidiary)
  • 8/3 – SRC announces spinoff of Shopko properties
  • 8/4 – Ackman requests delay in ADP brd nomination deadline as “8% owner”
  • 8/4 – LAMR acquires Philadelphia market billboards from Steen Outdoor
  • 8/8 – ONB acquires Anchor Bank (MN)
  • 8/10 – PYPL acquires Swift Capital (Del.)
  • 8/10 – INVH and SFR agree to merge (BX stake to be abt 41%)
  • 8/15 – KEY acquires Cain Brothers (pvt)
  • 8/16 – TU acquires Voxpro (pvt)
  • 8/16 – PLD buys out CCP (CYRLY) JV
  • 8/20 – GS approved for Saudi Arabian stock trading license
  • 8/22 – PAYX acquires HR Outsourcing Inc. (a Clarion Capital portfolio company)
  • 8/22 – CLX sells Aplicare line to Medline (pvt)
  • 8/22 – BX considering an IPO/sale of Gates Global
  • 8/30 – KSU forms JV with Bulkmatic for bulk fuel terminal in Mexico
  • 8/31 – BNS confirms discussions to acquire Chile operations from BBVA Spain

Portfolio Updates:

  • Added to VLO
  • Added to LARK
  • Added to AROW

LARK and AROW were positioning moves ahead of anticipated stock dividends (3% announced by AROW post purchase)

Dividends:

  • August delivered an increase of 22.24% Y/Y with the about half of the increase being attributable dividend increases and the other half purchases.
  • August delivered a decrease of 12.99% over last quarter (May).  Semi-annual payers, a date change due to a merger, and normal BX dividend being the culprits.  Also a Singapore dividend paid in August (locally) has yet to be paid via Citi’s ADR (now likely Sept.), so I expect September to be firing on all cylinders.
  • Declared dividend increases averaged 10.92% with 62.71% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension)
  • YTD dividends received were 75.91% of total 2016 dividends which if the current run rate is maintained would exceed last years’ total in early November

Spinoffs:

Brighthouse Financial (BHF) (MET spin) has been received.

Mergers:

AGU/POT (Nutrien) remains pending, SGBK/HOMB received regulatory approval and is expected to close late September.

Summary

Overall another positive month with the only disappointment being the Q/Q dividend decline – which was unexpected.  The primary metric (annual dividend increase) remains on target and well ahead of inflation.

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Harvey

Hurricane

Mother Nature certainly is a beast at times.  Watching her ongoing treachery on the television is heartbreaking to say the least.  Looking out the window, I see sporadic rain – which will continue for a few days – but nothing of the magnitude being experienced just a couple hundred miles away.

As my mind wanders a little due to the same images being replayed over and over, I can’t help but thinking of the economic impact of Harvey.  Being resident in Texas, my portfolio has a little bias towards my home state.  In a similar vein, which companies stand to lose – or gain – from this tragedy?  I figured I’d lay out my thoughts – which probably are incomplete – as a basis for determining whether my portfolio can weather (pun intended) a storm of this severity.

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Insider Dealing?

The news cycle appears to be churning ever faster.  Whether as a reaction to events, an attempt to manage the narrative or obscure the message is a debate that will occur for some time with the real answer becoming apparent in the hindsight of history.  Not to minimize the Charlottesville tragedy or the headline grabbing Bannon ouster, but these stories are playing out in several flavors depending on the source.  As one who attempts to discern the impact of issues on my investments, two (possible) financial headlines crossed my desk amid the other events that intrigued me.

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Weekly Musings – 13 Aug

Periodically, I post my thoughts on current news or recent postings adding my slightly irreverent take on the events and a sometimes offer a slightly contrarian view.  So follows the current installment.

Observation #1 – MET

This week, my allocation from MET’s spin of BHF arrived.  In layman’s terms, Brighthouse is a domestic play while MET has both domestic and international operations.  Personally, I viewed the logic as being a way to strengthen their hand (MET) in the ongoing court battle with the US regarding the SIFI designation -a view not presented in any interviews I saw.  Once trading began, it was widely panned as a lackluster performance.  Now this was a spin not an IPO, my take was it was aggressively valued – meaning (in theory) greater value was retained by the mother ship.  What garnered my wrath was the incompetence MET exhibited with the spin.

First the costs associated with the spin were underestimated.  This requires consent from bondholders to modify debt covenants (for a fee) with the alternative being selling common stock to attain appropriate debt ratios (dilution).  Secondly, a special meeting has been called (more costs) to vote on dividend payment tests included in the corporate charter.  The press release states:

These changes would avoid potential dividend and common stock repurchase restrictions which could occur as a result of the August 4, 2017 spin-off of Brighthouse Financial, Inc.

Why was this issue only identified post spin?  This gross mismanagement has placed MET into my Penalty Box and one has to wonder whether a meeting should be called to replace the CEO and Board?

Observation #2 – NUE

Sure Dividend analyzed Nucor recently, but his usual precision was (in my opinion) lacking.  Invoking “Trump” in the headline was bound to get visits and his ‘Take a pass’ recommendation hit the mark but the review missed in a few areas:

  1.  The claim of dumping is certainly an allegation yet no part of his analysis was to drill down on the validity of this claim.  Such as a strong US dollar.  Or the findings of the WTO.
  2. He does address electricity as being a significant cost component to the manufacturing process but fails to note that they entered into a 20+ year contract with Encana (ECA) for natural gas in 2012.  Any failure to perform (deliver) could be detrimental to NUE’s margins.
  3. Lastly in a dent to NUE’s dumping claims, their 2016 JV with JFE (JFEEF) to build a Mexican factory to supply the auto industry has a hollow ring to it.  As in, Who’s really doing the dumping?

Observation #3 – DIS

While roaming the channels this morning I came across a segment on Fox (FOX) about how to invest despite the troubles in North Korea.  One talking head said Disney citing their theme park exposure was insulated from it.  Really?  Perhaps he ignores the fact that 18-20% of US Disney visitors are foreign.  How would this be impacted?  What would the traffic count (or currency repatriation) be like in China?  What about travel to Paris or Tokyo?  Just one more reason why Fox is not my choice for news.

Hope you enjoyed this segment … until next time.

Recent Buy – VLO

Right out of the gates with the new month, I added to my Valero position.  It wasn’t an average down scenario, but rather a reaction to geopolitical events.  Since May the stock has been on an upward trend.  At month end it dropped to $66.69 – which I missed, but  wound up adding on August 1st at $69.64 which locks in a yield of 4.02% on my new shares.  By adding prior to the record date, they are also eligible for the September dividend.

The news cycle last week was on the Venezuela election – or notably any US reaction (sanctions) to it.  The reason for my hesitation in purchasing was to understand the impact of possible oil import sanctions on Gulf Coast refineries.  It turns out only one of Valero’s refineries has significant exposure to oil from Venezuela, basically on par with Phillips 66 (PSX).  Subsequently – contrary to Trump’s earlier pronouncements – the actual response has been relatively muted thus far.  Perhaps the administration recognizes potential impacts to the economy (refinery jobs in Trumpland or higher gas prices nationally) with a more bombastic approach.  The day following my purchase, VLO announced an agreement to export refined fuels to Mexico through iEnova (SRE subsidiary) with an option to attain 50% stake in storage facilities in Vera Cruz, Mexico City and Puebla.

Last week The Dividend Guy also published an an analysis on Seeking Alpha that reinforced my conclusions – albeit via differing metrics.  Although in concurrence with his findings, I would add that Valero also spawned Nustar Energy (NS – 2006) in addition to his mention of CST (now ANCTF) and Valero Partners (VLP).

Therein lies my rationale for my first August purchase.

July 2017 Update

The general upward trend continued in July with major indices again hitting new highs.  With my strategy shift in place, I did deploy new capital but only in a positioning move ahead of a spin. The S&P ended the month up 1.93% while my portfolio trailed with a gain of 1.77% largely due to the financial sector lagging the market.  For the year, I’m ahead of the index by 4.86%.

Headlines impacting my portfolio (bold are owned):

  • 7/5 – YUMC indicates reviewing possible dividend payout
  • 7/7 – MET acquires FIG’s asset management business
  • 7/10 – CM acquires Geneva Advisors
  • 7/11 –BR acquires Spence Johnson Ltd
  • 7/12 – ABM acquires GCA Services
  • 7/12 – AAPL adds PYPL as appstore pymt option
  • 7/13 – MFC reportedly reviewing sale or IPO of John Hancock
  • 7/17 – CHD to buy waterpik
  • 7/17 – China places restrictions on loans to Wanda (AMC)
  • 7/18 – MKC to buy RBGPF’s food business
  • 7/18 – CCI acquires Lightower
  • 7/19 – HRNNF (H.TO) to acquire AVA
  • 7/20 – SRC considering spinoff of Shopko properties
  • 7/21 – BX and CVC Capital offer $3.7B for Paysafe (PAYS.L)
  • 7/26 – SHPG rumored to be takeover target
  • 7/27 – Ackman discloses stake in ADP
  • 7/28 – IRM acquires Mag Datacenters LLC
  • 7/31 – BX (w/ ETP 50.1%) buys 49.9% of holding co. that owns 65% of Rover pipeline

 Note: my comment of July 21st on AMC (Dividend Diplomats) remains prescient in light of their warning on August 1st.  I believe now is a viable entry point if cognizant of possible risk to the dividend particularly as related to lender covenants.  EPR may have a slight risk as well.

Portfolio Updates:

  • Added to MET (spinoff positioning)

Dividends:

  • July delivered an increase of 2.14% Y/Y with the vast majority of the increase being attributable dividend increases.
  • July delivered a decrease of 8.85% over last quarter (Apr) with TIS (dividend suspension) and foreign cycles (interim/final) being the culprits.
  • Declared dividend increases averaged 10.81% with 61.02% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension)
  • YTD dividends received were 69.81% of total 2016 dividends which if the current run rate is maintained would exceed last years’ total in early November

Spinoffs:

MET has declared their spinoff – Brighthouse Financial (BHF) – effective August 4th.  Holders as of July 19th will be entitled to 1 share for each 11 MET shares owned.

Mergers:

AGU/POT (Nutrien), SGBK/HOMB remain pending

Summary

Overall another positive month with the only disappointment being the Q/Q dividend decline – which was expected.  The primary metric (annual dividend increase) remains on target and well ahead of inflation.

Musings (Jul 2017)

This is the time of the month that results in added scrutiny on various levels.  Not so much on the strategy, but on events that have the ability to impact my investments.  With July going to the wire with seven dividends being paid Monday.  It will likely be Wednesday when I get the final results and my performance will probably hinge on the exchange rate.  Which triggered my random thought process – which at times is scary.

Observation #1

  • The USD has been weakening as I reflected on in a prior post.  Japan faced a mini-crisis vis-à-vis North Korea on Friday.  Previously, in such times, the dollar would strengthen while the Yen weakened.  This time, it was the Euro that strengthened versus the Yen.  

Observation #2

  • With a weaker USD, gas prices have pretty much increased in inverse tandem as world oil is priced in USD (reserve currency, etc.)  Although the weaker dollar should be good for exports, how long until inflation begins its’ ascent?

Observation #3

  • Several companies have reported earnings that missed on revenue forecasts yet beat on profits.  While I don’t place significant value on analyst’s opinions, it’s telling that if this trend continues, profits will be next to suffer.
  • This I expected from regional banks which was why I anticipated a pickup in M&A activity going into the last half of the year.

Observation #4

  • The Swiss observed that the Franc may be overvalued.  Could this be a precursor to another devaluation?  If so, to what impact on the USD?

These are some of the reasons why I chose to modify my strategy earlier this month.  Not to mention the potential political impacts – or lack thereof.  Perhaps a clear US direction will be established enabling us little guys to try to navigate choppy waters.