October 2018 Update

Octobers carry the weight of history on their shoulders and this year was true to form with some wild swings.  Though some sectors touched bear market territory (think housing), basically this month was a mere – but tumultuous – correction.  As we head towards this years’ finish line, there is no room for complacency as my fear is that storm clouds are forming heading into 2019 – basically a tale of two economies.  At the forefront of my mind are the two companies delivering notice of dividend cuts effective January.  I’ll dive into them in more detail next week but Owens & Minor  (OMI) a soon to be former Dividend Achiever which will probably be sold (-71.15% cut) and General Electric (GE) which will cut for the second year in a row this time by -91.67% to which I’ll probably add.  At least I have two months lead time to execute a strategy on my terms as the losses are already baked in.  October saw the S&P of drop 6.96% while my portfolio outperformed the index by decreasing 5.8%. YTD I’m ahead of the S&P by 1.36%.

Portfolio Updates:

  • lost COBZ, added additional BOKF as stock/cash merger completed
  • initiated new position: CL
  • initiated new position: BHBK
  • initiated new position: BNCL
  • initiated new position: HTH
  • initiated new position: SF
  • rebalanced and added to my ETF group (CUT, EWA, EWW, JPMV, VGK)
  • averaged down on OZK
  • added to CLX prior to ex-div

DIVIDENDS

My main focus resides on dividends.  Market gyrations are to be expected but my goal is to see a rising flow of dividends on an annual basis.  I’m placing less emphasis on the quarterly numbers as the number of semi-annual, interim/final and annual cycles have been steadily increasing in my portfolio.

  • October delivered an increase of 32.12% Y/Y, the impacts being dividend increases, special dividends and reinvesting merger cash proceeds into the portfolio.
  • October delivered a 10.52% increase over last quarter (Jul).
  • Dividend increases averaged 15.56% with 74.77% of the portfolio delivering at least one increase (including 2 cuts (GE, SRC).
  • 2018 Dividends received were 104.04% of 2017 total dividends exceeding last year’s on October 19th.

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

Spinoffs:

GE‘s rail unit to spin then merge with WEB

GE to spin 80% of the health business

NVS proposed spin of Alcon scheduled for shareholder approval Feb 2019

On Oct 4, MSG filed a confidential Form 10 to spin the sports business

Mergers:

XRX merger with Fujifilm cancelled (still being litigated).

SHPG to merge into TKPYY

GBNK to merge into IBTX (shareholders approved)

GNBC to merge into VBTX (semi-reverse)

BNCL to merge into WSFS

BHBK to merge into INDB

Summary

My repositioning was completed and my 2018 dividends pretty much locked in.  I’ll  now focus on 2019 as it appears I need a head start with the dividend cuts looming.   🙂

Hope your October was equally as good – or better!

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Gamblin’ Man

Lord, I was born a gamblin’ man

David Pratter (parody of Allman Brothers Ramblin’ Man)

I’m not sure what it is about October that causes some vicious swings in the market but this year remained true to form.   When viewed through the prism of percentages the two day drop was merely a blip,  for newer investors I’m sure it was gut wrenching all the same.  While the President was quick to cast blame on the Fed,  this is the same man  that was quick to criticize the Fed for keeping rates artificially low.  Others cast the net a little wider to include trade tensions with China.  Kind of like saying , “Look at the man in the mirror first!”  We don’t have to look any further than PPG’s pre-announcement to identify the culprits: Accelerating raw materials and transportation costs, slowing China demand, weakening auto paint demand and a stronger US dollar.  I wouldn’t be surprised if additional surprises are in store as more companies announce.

What does surprise me a little is the fact that costs like PPG is incurring has not yet worked into the CPI or PPI numbers yet.    One pundit mentioned inventories were being drained so the full increase will be felt in the future – unless a China agreement is on the short-term horizon.  Perhaps …

I was able to capitalize on the rout a little on Thursday by adding to seven positions – notably the foreign ETFs along with BOKF and CL.  Unless markets go haywire again, I have only one more purchase on tap for this month.

To come full circle to the title of this post, our friend Jim Cramer is in the process of releasing his selections for 2019.  He’s doing this in the format of Power Rankings which is a unique approach but one I wouldn’t touch with a ten foot pole.  The reason: there is already an embedded mindset of investing being a form of gambling.  Cramer says, “we’re rolling out power rankings for each sector of the stock market, just like how gamblers use power rankings to gauge the strength of football teams”.  Hmm … but I will keep an eye on these selections.  Mysteriously they stopped after three sectors were released, perhaps related to the market selloff?  All I can say is during week 1, 11 of his 15 selections were under water … so what was advertised as a one week rollout is now on hold?  Perhaps market conditions weren’t conducive for his track record?  Any way, more to come on this front I’m sure 🙂

My 3Rs – Revitalize

In the first two posts of this series, I highlighted my thought process in basically the recent past and present.  Today will attempt to bring the investment landscape of the future into focus.  I will be the first to admit that I have a jaded view of the present – i.e., not being aligned with the economic views espoused by the current administration.  The upcoming midterms have the ability to shuffle the deck even further.  The assumption set I used (which easily could be argued with) is:

  • The current administration will continue to be embattled by prior missteps – primarily in vetting – (resulting continuing indictments and guilty pleas)
  • This could be further hampered by loss of one – or both – chambers of Congress
  • I (currently) anticipate no major activity regarding impeachment, 25th amendment or resignation

Basically a recipe for gridlock – which will put the brakes on some of Trump’s more polarizing policies.  Without a Democratic landslide, I don’t see a major rollback but also don’t see further continuation on a partisan path.  Therefore my view is a continuation of trade tensions (notably Canada and China), rising deficits and interest rates resulting in a slowdown in the US economy.  While the economy is currently growing, the metrics I am watching are debt levels (student loan and state government), the inability of rising wages to keep pace with inflation and savings rate.  Though the concerns are endless, a greater domestic focus tends to mitigate much of the risk but bring me to one conclusion: Regular Americans’ disposable income may be in shorter supply next year.

With this theory outlined, it’s time to fit the remaining pieces into my puzzle of a portfolio which allows for roughly 1/3rd allocation to conservative speculation.  Frankly, my outlook is a bet that the US economy has been front-loaded into the midterm elections.  The downside if incorrect is that I’ve added some slower growth positions.  If correct I’ve generated a little alpha.

Tariff Myself

In the spirit of the times, I completed the move of my Johnson & Johnson (JNJ) and Church & Dwight (CHD) positions to M1 Finance.  I plan to add Colgate (CL) as a new position in the near future.  With M1 being a no-fee broker, my intention is to add new funds whenever I purchase toothpaste, mouthwash or deodorant throughout 2019 with the aim for these companies to attain about 2%, 3% and 1% of the portfolio respectively.

Corporate Actions

I intend to ride the M&A wave in addition to selected spinoffs.  I rarely participate in IPOs but do make an exception from time to time.  I continue to add to my banks that have completed two-step conversions.  This month has seen activity in this area as follows:

  • added to GBNK and sold IBTX locking in a total gain of 46.4% (16.3% annual return).  Assuming their merger with GBNK completes I’ll be assigned more shares of IBTX than I previously had.
  • added to SHPG as they received another approval in their merger.
  • Initiated a post-IPO position (from the 30 day over-allotment period) in Amalgamated Bank (AMAL).  This due to their intention to initiate a dividend next quarter.

Averaging Down

Yes, there are times when I’m underwater on some investments, most of these being holdings of less than 1%.  It would be a fair assessment that something was amiss in my initial analysis as several of these are foreign caught in the cross hairs of the strong US dollar.  One reason I tend to scale in to investments is to take advantage of opportunities to average down when my  original premise remains intact.  These tend to be intermittent purchases.

There, in three parts, is my strategy going into 2019.  As my dividend goals for 2018 are close to being met, I am now starting the realignment process so I’ll be hitting the new year with a running start.

I’d love to hear your thoughts the processes you use!