Random Thoughts: Sep 26

In the mail this week was a notification from Computershare dated September 18th that WEC Energy Group has decided to reduce the costs of administering the Dividend Reinvestment Plan effective October 19th.  Essentially, it’s a shifting of fees they’ve previously absorbed to the client.  In a nutshell, the main one impacts the next dividend payment with an attachment of a 5% fee ($5 maximum) service fee.  Needless to say, the transfer of shares to my primary broker is in progress where I’ll use their no-fee synthetic DRIP.  At least in the US, fractional shares are applied in synthetics unlike Canada (unless recently changed) where full shares only are delivered with the remainder being cash-in-lieu.

Coincidentally, Computershare’s Canadian competitor AST (Canada) (the former Canadian Stock Transfer) forged an agreement to be acquired by TMX Group on Friday.  Pacific Equity Partners, an Australian PE firm has been attempting to unload AST for awhile.  It’ll be interesting to see if and who they offload the American remainder to. 

Another oddity occurred in the delivery of one of my dividends.  Ottawa Bancorp is one of my smaller holdings, a remnant of my bank M&A strategy employed a few years back.  I’m still holding as they’re a former Mutual Holding Company conversion which category were acquisition targets by larger institutions.  Besides, they pay a quarterly dividend and an occasional special.

The story here is Ottawa decided to delist from the exchange, Nasdaq in this case, in a cost savings move.  Perfectly legitimate as they have less than 1000 shareholders.  Where the glitch occurred is in their failure to update the instruction set for dividend delivery to reflect the new status of OTC rather than Nasdaq.  Now I have to decide if the potential M&A reward is worth the risk.  Is this management misstep an outlier or a sign of other issues?

In a follow up to one aspect of last weeks’ piece, I figured it might be enlightening to share my thought process in regards one of the companies I still hold that have suspended their dividends.  Most of the holdings in this category are foreign, as such I treat them a little differently.   The two US companies are Disney and Cracker Barrel.  By virtue of the moat they’ve built, Disney gets a pass.  Cracker Barrel is another story.

Depending on the narrative, it could be a glass half full or glass half empty scenario.  Let’s start with bullet points of (a portion) of their earnings call:

  • We anticipate dealing with pandemic-related challenges for some time
  • Regarding the regular dividend, our board continues to evaluate the environment and intends to reinstate the dividend as soon as it’s prudent to do so
  • We anticipate capital expenditures of approximately $100 million for the fiscal year. Of this amount, approximately half will support strategic initiatives and new unit growth with the remaining amount supporting existing store maintenance.
  • We have a high degree of confidence in this brand (Maple Street), and we anticipate opening up to 15 new units this year.
  • we currently anticipate opening three Cracker Barrel stores

Basically they are choosing to ignore their write-off of Punch Bowl Social, proceed with opening 18 restaurants and continue with strategic initiatives (POS system) while acknowledging that the pandemic remains an overhang. Makes me think they can outrun this downturn.

The analysis performed by James Cherry is overly optimistic, in my view with a 1% y/y revenue drop.  Part of his theory is based on the company beating expectations (and we know I dislike expectations).  Comparable store restaurant sales decreased 39.2% in the quarter, improving from down 59% in May to down 28.2% in July. Yes, an improving trendline but getting back to even on revenue strains incredulity given the pandemic.   I  doubt the capex expenditures translate to a 12 month payback meaning the trendline for profits will trail revenues.

Cracker Barrel is now on my sell list as a tax loss harvesting candidate.  I’m only hoping for a little price improvement before pulling the trigger.

Maybe it was a full moon – but it seemed all sort of weirdness manifested itself this week. At least nothing major and all fixable. Plus it provided the opportunity to review the “why” in some of my holdings.

Here’s hoping you are on track as we enter the final week of the month/quarter.

Note: long WEC, CMSQY, TMXXF, OTTW, NDAQ, DIS, CBRL