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!

September 2019 Update

The market continued with its’ on-going roller coaster, triggered primarily by external factors in the political arena – basically trade and impeachment. Despite the turmoil, the S&P gained 2.46% and my portfolio rose 4.15%. For the year, I’m outperforming the benchmark by 4.96%.

Like DivHut, I try to make at least one buy per month although these purchases have become smaller as my sentiment has grown increasingly cautious. Therefore, my cash position via non-reinvested dividends (not reported) has grown. The lack of Y/Y dividend growth for September is a testament against hoarding cash – particularly when hit with dividend cuts earlier in the year. This month the grandkid was forced to liquidate her portfolio or face losing 25% of her college assistance (grants/scholarships, etc.). Reminder to self: Future topic possibility being the dark ugly underbelly of custodial accounts (529s are even worse …) Anyway, I decided to deploy part of my accumulated cash to build a replica of her portfolio that I will hold. Bottom line, just when I think I’m shrinking the number of companies owned I get thrown a curveball.

PORTFOLIO UPDATES

  • increased my JNJ position
  • increased my CL position
  • increased my CHD position
  • added GPN (lost TSS via merger)
  • increased my DIS position

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis.

  • September delivered a decrease of 3.4% Y/Y. This was my first decrease since December 2018 and is primarily a result of not staying ahead of the first quarter dividend cuts (e.g., cash position)
  • Dividend increases averaged 10.34% with 61.67% of the portfolio delivering at least one increase (including 4 cuts). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980.
  • 2019 Dividends received were 82.89% of 2018 total dividends putting me on target to exceed last year’s total in late October or early November. The YTD run rate is 108.08% of 2018, slightly under my 110.0% goal – but still recoverable – especially with the portfolio replication decision.

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

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which remains in progress.

MERGERS

XRX merger with Fujifilm cancelled (still being litigated). The expected settlement was disallowed by the judge September 13th.

PB to acquire LTXB for 0.528 shares and $6.28 cash for each LTXB share. I plan voted in favor of the transaction (on both sides), pocket the cash and sell the new shares – retaining the old PB shares post-merger. I will not add to my PB stake.

VLY to acquire ORIT for 1.6 sh VLY to 1 ORIT. This merger will result in a slight dividend cut November forward as the rate will be normalized to VLY’s current rate. In my view, the other positives outweigh this negative.

PBCT to aquire UBNK for .875 sh PBCT to 1 UBNK. I plan to hold this one as I wouldn’t be surprised if PBCT gets taken out at some point.

Spirit MTA REIT (SMTA) voted on Sept. 4th to approve the sale of most assets to HPT for cash. A second vote was held to liquidate the REIT. Awaiting final settlement payouts and still expecting to be a profitable outcome for one of my most speculative positions.

The three banks continue to validate my strategy of bank consolidations from a few years ago. The only flaw (so far) was the holding period required – but dividends were received while waiting.

SUMMARY

Overall, no complaints. It appears the pending mergers/liquidation might provide enough of a premium to improve my performance over the index, but I don’t want to get too far ahead of myself yet. I still see a little consolidation in my holdings through the last half of the year and am still migrating to a slightly risk off stance, offset slightly by companies with compelling stories. My cash position will hover close to zero while replicating the kids’ portfolio but expect the dividend growth to accelerate into the first half of 2020 with this strategy.

Here’s hoping your month was successful!

Buybacks (part 2)

To follow a theme outlined a couple of weeks ago, my going forward intent in my random musings segments is to view some of the issues of the 2020 presidential campaign under discussion.  My investing rationale has always been that to be successful, one has to understand all possible outcomes which means digging through a lot of crap to discern viable opportunities. It would appear at this early stage that much like 2016, 2020 will have plenty of that to wade through.  As an added bonus, I don’t want to disappoint my newest audience demographic by suppressing my irreverence. As always, these are only observations awaiting an investing opportunity that may never present itself.

The Pitchfork Economics series on buybacks continued on February 26th with Sen. Cory Booker (one of the multitude of Democratic presidential contenders) as a guest discussing his new bill, Workers Dividend Act.  Evidence cited to support his cause is twofold.

  1. American Airlines (AAL) wage increase was roundly panned by analysts.   Booker states the analyst opinions were misguided – which is true. To parlay these opinions into supporting rationale against buybacks is equally misguided as these were partially collectively bargained.  (i.e., benefit to unionized employees which is a goal of the bill.)
  2. His use of Walmart (WMT) as the proverbial case of buyback greed ignores some aspects that are detrimental to his position.  Walmart offers its’ employees matching 401K plans, stock ownership plans with a 15% discount and HSAs, of which some – if not all – allow employees to share proportionately in the “wealth” gained through buybacks.  The choice resides with the employee as to participation.

In an attempt to frame rhetoric with reality, I chose my oldest 15 holdings to identify what happened over the past three years.

Company201820172016
Comcast3.05% decline1.83% decline 3.18% decline
WEC Energy 0.09% decline .09% incr. 16.21% incr.
Chevron0.46% incr.1.33% incr.0.11% decline
Kimberly-Cl.1.77% decline 1.6% decline 1.26% decline
Norf. Southrn3.48% decline 1.93% decline 2.76% decline
Clorox1.19% decline 0.11% decline 0.8% decline
Prosperity B.0.51% incr. 0.28% decline 0.53% decline
Sysco0.5% decline5% decline 3.26% decline
Owens & Minor0.0% change 0.16% decline 0.16% decline
Walt Disney1.51% decline 3.72% decline 4.1% decline
Home Depot2.81% decline 3.82% decline 4.68% decline
PepsiCo0.9% decline 0.96% decline 2.22% decline
Kimco Realty0.62% decline 1.03% incr.1.66% incr.
Towne Bank0.13% incr.0.08% incr.1.05% incr.

Data from MacroTrends

In this scenario (excluding increases denoted bold/italic), the buybacks – as a percentage of the stock outstanding – actually decreased during each of Trump’s years as president despite the tax plan (from 2.1%/1.94%/1.45%).  Companies increasing their share count did so generally to use as currency in lieu of debt. In Chevron’s case this was to fund capital expenditures. Most of the others were for acquisitions.  It’s only slightly ironic that a merger cutting jobs and increasing capital concentration (banking sector) would be viewed more favorably due to an expanding share count

This discussion topic has also been picked up by Mr Tako Escapes who elaborates more skillfully than I.  I don’t dispute two points here, 1) Companies tend to have poor judgement in the timing of these transactions (buy high) and 2) the dollar amounts being expended.  But a dose of reality has to exist as well, I mean – realistically how many capex dollars should be spent to further the worldwide glut of steel (as one example)?

At least this exercise has been interesting but to draw any real conclusions requires a larger sample size.  More questions will also arise such as, ‘Are buybacks more prevalent in the overall S&P universe moreso than the DGI slice?’ or ‘Is my portfolio a large enough sample to be reflective of the stats bandied about by the Democratic candidates?’.  As usual in this blog, more questions than answers. I intend to complete this exercise for all of my holdings during the year

Other concepts will likely hit the garbage heap prior to getting much traction including a wealth tax (constitutional issues) and Modern Monetary Policy (hyperinflation).  As an aside, these concerns, per David McWilliams piece entitled Quantitative easing was the father of millennial socialism as presented by Ben Carlson makes for an interesting case. It certainly appears that the 2020 election season is off to a rousing start. Bottom line, I suspect some candidates will use this issue as a cry to rally the base with minimal substance to follow – similar in many ways to “Build the Wall” of yesteryear.  A reflection of what little has been learned over the last two years. In my mind not an investable theory.  

As always, opinions are welcome!

Week in Review

Blog Update

This week I finally decided to do a little housekeeping on the portfolio section of the site, getting rid of the XIRR column – which is probably meaningful only to me, and adding price (updated with roughly 20 minute delay), prior dividend, dividend frequency, ex-div date (which may or may not be retained) and cost basis.  The Div Wt column is updated when a dividend is credited and reflects the YTD weighting which is most accurate at the end of each quarter.  Basically I’m trying to reduce manual intervention.

Weather Updates

As Texas begins their recovery process from Harvey, Irma slams into Florida and Jose is lurking just behind.  One has to wonder as to the luck of Maersk (AMKBY) who diverted the Ohio from Houston (Harvey) to Freeport (Irma).   I’m also keeping an eye on Antigua and Barbuda where I’ve frequently vacationed and enjoyed their hospitality on my honeymoon years ago.  Impacted issues may include Disney (DIS) and Comcast (CMCSA) as well as the entire Florida tourism and orange businesses.

The End of the Year

As I was updating the site, I realized that two issues have already paid their final 2017 dividends.  Delving a little deeper shows all of my holdings are past the ex-dividend date for a September dividend leaving but one quarterly payment remaining.  This is only a reminder that time is running out on impacting 2017.  Generally I enter October with an eye on the strategy for the upcoming year as most of my moves will have a minimal impact on the current year.

More Dollar Weakness?

Deutsche Bank argues that more weakness is in store for the US dollar as a result of current monetary policy and a failure of the market to price in further 2017 rate hikes.  They may be onto something as hurricanes and a lack of rational policy agendas from Washington can also be added to the mix.  Now this could be good for exports but lousy for the typical consumer.

Hope your week was uneventful.

 

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.

Continue reading

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.

Continue reading

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.