The upward trend continued this month with catalysts being the tax plan and holiday sales. My guess remains that the first half of 2018 will be good for corporations (i.e., dividends and buybacks) with a shift in focus later with deficits and mid-term elections playing a leading role. I remain convinced the yearlong weakness in the US Dollar will continue and expect to allocate more cash into foreign equities during the first half 2018. I will review this plan as my personal tax implications become clearer. For the month, the S&P index increased by .98% while my portfolio increased by 3.29% largely fueled by Financials (again). For the year the S&P increased by a stellar 16.26% while I came in at +20.58%! The S&P return with all dividends reinvested adds about 2.41% which my hybrid approach still beat.
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
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:
|Arrow Financial Corp.||AROW||2.7B||NY|
|Auburn National Bancorp||AUBN||.8B||AL|
|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|
|Community Bank System||CBU||8.9B||NY|
|Community Trust Bancorp||CTBI||4.0B||KY|
|First of Long Island Corp.||FLIC||3.6B||NY|
|Farmers & Merchants Bancorp||FMCB||3.0B||CA|
|Norwood Financial Corp.||NWFL||1.1B||PA|
|Bank of the Ozarks||OZRK||19.2B||AR|
|People’s United Financial, Inc.||PBCT||40.2B||CT|
|Stock Yards Bancorp||SYBT||3.0B||KY|
|Tompkins Financial Corp.||TMP||6.3B||NY|
|UMB Financial Corp.||UMBF||20.6B||MO|
|Bold-owned by Richard, Italics-owned by me|
December was a continuation of the Trump effect with significant reassessment underway in many portfolios. The DOW continued its march to 20,000 before failing and pulling back at month end. While consumer optimism is at multiyear highs, this has not resulted in holiday sales records probably due to the inability of a President-Elect’s posturing to translate into tangible policy change. This month The S&P gained 1.82%. My portfolio recorded a gain of 3.92% largely reflecting my overweight position in the Financial sector which has been a beneficiary of election sentiment. This increases my lead over the S&P for the year to 19.83% achieving one of my 2016 goals of besting the S&P index.
Headlines impacting my portfolio:
- 12/7 – CIBC/PVTB merger vote postponed
- 12/13 – WFC fails ‘Living Will’, BAC passes
- 12/14 – Fed raises .25%
- 12/20 – BAC sells UK MBNA assets to Lloyd’s
- 12/20 – AMC receives last approval for CKEC merger
- 12/21 – KO buys BUD African, El Salvador and Honduras bottlers
- 12/21 – MET financing for spin secured (BHF)
Basically chose to be a slug through the holidays
- Added to HAS
- Added to HWBK
- New position – CNDT (XRX spin)
- Added to CVLY (stock dividend)
- Added to LARK (stock dividend)
- Added to CBSH (stock dividend)
- December delivered an increase of 24.0% over December 2015. This was due about evenly between dividend increases (Y/Y) and October purchases from merger proceeds.
- December had a 5.4% increase over the prior quarter.
- Dividend increases averaged 12.3% with 74.5% of my portfolio delivering at least one raise.
- Dividends received exceeded total 2015 dividends by 29.3%.
The MET spin (Brighthouse Financial – BHF) secured financing.
LSBG/BHB expected to close in January 2017.
There are companies that as a normal course of operation pay a portion of their dividends in stock (sometimes referred to as script). I’m not referring to companies that lack the cash to pay the dividend either, as a number of these companies are resident on the CCC list maintained by David Fish. Some of these pay a stock dividend irregularly while others pay a stock dividend annually. So the ultimate question is which is better for the investor? Let’s dive into a real example to get the answer.