Down, But Not Out

Another week, another round of mixed messages.  Sifting through earnings reports, Covid-19 spread, economic data and the resultant dividend suspensions and cuts is enough to make your head spin.  This week nailed me with two additional dividend cuts, both of which will be cut loose in short order.  Neither was much of a surprise and one would’ve been gone already save for a hold on one of my accounts which is being transferred to a different broker. (The hold should be lifted next week).

What has been a surprise is the number of companies pulling forward guidance.  It kind of reminds me of the days when analysts earned their keep with – well – thoughtful analysis.  Looks like we’ll find out which are the better ones that can prove their mettle in times like these.

Even more of a surprise was the interview CNBC did with Grant Sabatier (Millennial Money) where he claims that, “the concept of retiring early (FIRE) has already started to lose steam among younger generations. And the impact of the COVID-19 pandemic on the global economy and markets could be enough to eliminate the movement altogether.”  rings a little hollow.  I would surmise there will be greater emphasis on reserves and a heightened awareness of security but the dream of early retirement has endured through multiple generations.  I may be overly sensitive, but it struck me as , “Hey, I got mine and there’s none left for you.”

Let me assure you, there’s always an opportunity awaiting.  You may have to look a little harder or dig a little deeper – but it’s there.  It may also be camouflaged and lying in wait.  These are times when support and thoughtful reflection serves best.  Personal example:  I’m now on the cusp of exceeding last year’s dividend cuts – which was a personal record over roughly 38 years.  The average dividend raise (including cuts) stands at 6.59% and it will probably go lower which puts my goal of 10% year on year increase in jeopardy.  6.59% betters the inflation rate so I’m ahead there.  My current paid run rate on dividends is 19.95% over last year which was previously expected to taper based on some front running I did in the first quarter.  At least I’m operating with a head start.  Lastly, my portfolio balance has lost less value than the overall market which is little consolation, but at least a positive.  Look for what is working.

One of the Diplomats penned a piece published on Seeking Alpha reviewing 3M as a hedge against the pandemic.  In fact, one of their ways to boost income via side hustles.  Overall a good piece with a likely good conclusion – but for the wrong reasons.  The pandemic is a boon to only for their healthcare segment (roughly 20% of sales) their other segments (office, aerospace, automotive) are also in a ditch because of it.  Retooling their lines isn’t easy due to some sterile environment requirements.  Due to their status as an international conglomerate, I believe they will thrive only on the other side of this.  Survivability – either through an essential product line or fortress balance sheet are key.

I would be remiss if I failed to address the (probably) unwanted advertising inflicted by our President on at least two companies.

And I then I see the disinfectant, where it knocks it out in one minute, and is there a way you can do something like that by injection inside, or almost a cleaning. Because you see it gets in the lungs, and it does a tremendous number on the lungs. So it’d be interesting to check that.

While roundly rejected by the manufacturers:

“As a global leader in health and hygiene products, we must be clear that under no circumstance should our disinfectant products be administered into the human body (through injection, ingestion or any other route),” Reckitt Benckiser

“Bleach and other disinfectants are not suitable for consumption or injection under any circumstances. People should always read the label for proper usage instructions.” Clorox

This has to be classified as an item in the “It would be funny if not true” category.  But it did spur the creative genius in some corners (not to be confused with stable geniuses).  Just remember, due diligence should be performed in investing as well as ‘products’

Some memes making the social media rounds:

When There’s Lemons …

This week’s missive will get back to some of the basic block and tackling we face at times as investors.  Not to downplay the market madness, it seems everyone and their brother now has a view on the pandemic. Certainly not immune to the downdraft, in hindsight my decision to sell my taxable Canadian stocks on February 28th makes me look like a genius.  The reality is essentially sheer dumb luck. It did, however, provide the cash to nibble on subsequent down days.

The Canadian IRA Taxability Answer

I did receive my first dividend from TMX Group a couple of weeks ago and to my chagrin saw Canadian tax withheld even though it’s in my IRA.  Obviously one of the outliers I previously referenced. While my appeal failed, my broker did confirm two of my companies reside in this category, the other being Hydro One.   I did gain some insight which I figured I’d share.  

  1. To be processed as compliant with the tax treaty, companies have to use the DTC – which comes with a cost.  Most Canadian companies trading in the US absorb this fee as a cost of doing business.
  2. Canada has their own version of the DTC – CDS which is owned by none other than the TMX group, which uses (at least for US based stockholders) Citi for disbursement without treaty compliance review.
  3. Brokers have no recourse but to withhold Canadian taxes in IRAs for CDS processed dividends.  Meaning there is no tax benefit for US citizens holding non-DTC processed securities.

These two will be sold from the IRA when the markets recover a little.  Meanwhile both are also held in my taxable account where I can claim a tax deduction when taxes are filed.

De-risking Process

With the heightened level of uncertainty, more than a few bloggers have shared their approach towards increased safety.  Dividend Diplomats ran a piece on Debt to Equity Ratios and Chuck Carnavale reviewed a Debt to Capital analysis. While both metrics are fundamentally sound – and I’ll likely add to existing holdings that are on these lists – both share a flaw that is highlighted by the current black swan event.  Companies in unprecedented numbers are drawing down their credit lines or issuing new paper, both of which have an impact on the ratios. I mean, is Disney any less of an investment with $6B additional debt offset by $6B cash? Other than a slight increase in carrying expense, I would argue no but they do have other issues with the magnitude currently unknown.  My take is this is where the ratings agencies theoretically should be earning their keep.

My process is to essentially begin the process of reducing the speculative portion of the portfolio.  Eliminating my one BDC (MAIN – smaller business exposure), Entertainment Properties (high social distance exposure), Newell (a recipient of an SEC subpoena).  This is one time a dividend cut or suspension doesn’t necessarily mean a sell if the purpose is cash preservation. I did reduce – but not fully sell – Cracker Barrel on their delay and suspension.

Additionally, I keep abreast of the news to identify potential opportunities.  You’ve heard the mantra, Don’t Fight The Fed?  How about profiting from the economic stimulus they’re embarking on?  Blackrock is a (partial) proxy for this angle. I say partial as I doubt the fees will generate a meaningful profit to them.

In Parting

As no one knows when and how this will end and I doubt I have the time on my side to play the long game, the better part of valor is to strengthen the hand I have.  Someone younger can carry more risk but caution is warranted in my opinion. Either way, try to make some lemonade from these lemons.

DVK System Review

I’ve been noodling over a post published by FerdiS over at DivGro for awhile now, essentially weighing the pros and cons against my biases to figure the most appropriate rebuttal.  In a nutshell, the post first grabbing my attention was his Recent Sells.  Within this piece was the comment, “I … rank my … stocks by quality score and by CDN” and on this basis eliminated two holdings.  

I am a proponent of every investor having a defined methodology within their comfort zone to determine the quality of their portfolio and various bloggers regularly publish their screening mechanisms and processes.  Conversely, I don’t shy away from highlighting perceived frailties in these. A combination of Yield, Rising Payout Streak, PE Ratio and Payout Ratio are the most common attributes used by several bloggers while adding others to customize to their tastes.  One example being the Dividend Discount Model.  

Back in 2013, I’m not sure Simply Investing anticipated the record bull market coupled with inordinately low interest rates.  Using KO as an example, his method would have classified it as overvalued. A changing business – while looking backwards (bottler spinoff) – doesn’t neatly fit this model.  On the other hand, forward looking views, such as the DDM, have a basis in a series of assumptions. Even the Diplomat’s approach – which is arguably the most straightforward – has an assumption set within the metric, Dividend Growth Rate greater than the rate of inflation, allowing for management discretion (not a major issue in a low inflation environment).

FerdiS method – while thoughtful and elegant – has some limitations and could be viewed as an advertisement for premium services.  Value Line, S&P, Morningstar and Simply Safe Dividends are the source data. S&P data can be obtained free and Morningstar through some brokers (otherwise $199/year).  Simply Safe Dividends runs $399/year and Value Line $598/year.

Beyond the fees, the results are only as good as the dataset can generate.  Mindful that I only performed a spot check against my portfolio, it appears Morningstar applies no moat to financials and narrow to utilities.  As to the other providers – your stock has to be within the universe they cover. My assumption is the 80/20 rule applies here with limitations to small caps and foreign issues as these are not widely held by US investors.  

As my preference is to get the investing view from the rear view mirror (ala, what have you done for me lately), all the metrics this model uses are forward focused based on analysis by an individual or algorithm.  The final note being the use of the CDN (Chowder Rule) as Sure Dividend makes a compelling case of its unreliability.  

A comparison would be incomplete without peer review.  KO scores 23 of 25 on the modified DVK scale whereas the Diplomats and Dividends Diversify consider it overvalued.  For my part, KO is a small (<1%) position that I’m not adding to other than dividend reinvestment. Kind of makes me wonder …

Bottom line: I’m not sure of the value of this – at least to me.  But in my spare time I’ll continue plugging my portfolio into the model to ascertain whether this assessment is correct.  I do, however, like the jigsaw puzzle of his methodology but can’t help but wonder if this is a prelude to even further premium offerings being rolled out …

Disclosure: Long MORN, VALU, KO

Peeking Into The New Year

It’s that time of year when the pundits are outlining their 2020 top picks with assorted rationale to support their stance.  I find these exercises interesting at the very least and somewhat illuminating as well. I have to admit I am not immune to the siren song as I have participated in a few.  For instance, last year I participated in Roadmap2Retire’s and placed thirteenth. Not bad considering I was effectively out of the contest mid-year with my pick being acquired.

I also tracked sector picks of mine versus Kiplinger using SPDR as a baseline.  For grins I included Cramer’s Power Rankings and Catfish Wizard’s sector picks. Unfortunately, both of these didn’t complete the quest leaving myself and Kiplinger in a tie.

This year’s entrant was to the Dividends Diversify Investment Ideas for 2020 and Beyond panel.  One of my strengths (or weakness, if you prefer) is to view scenarios through a unique prism.  Of the 20 companies, 11 are already in my portfolio. Other than Visa, which generated one observation, these were ignored (why else would I own them?).  Tom grouped companies by segment (like ‘Energy and Oil’) where I chose sector as identified by Morningstar. The duplicate (Visa) was counted twice for my purposes.

  • Financials                  28.57% (6)
  • Technology                          19.05% (4)
  • Utilities                      19.05% (4)
  • Energy                9.52% (2)
  • Healthcare            4.76% (1)
  • REIT                4.76% (1)
  • Communication Services    4.76% (1)
  • Consumer Defensive        4.76% (1)
  • Industrials            4.76% (1)

Through this lens, a slightly different perspective emerged.  With volatility and stability key concerns, I found Financials being a “go-to” sector as interesting.  The following are my observations with the note they are strictly my perspectives. They should not be construed as a criticism of any of the individuals or selections.  Following is my typical, outside the box purview.

The observation on Visa is based on Tawcan’s rationale, “They also make money from users when they don’t pay the balance in full each month.”  The issuer absorbs both the risk and the reward on this aspect so no additional profits to Visa here.

One surprise was the Utility Sector.  

  • GenYMoney selected Fortis which has been on and off my watch list for awhile.  My issue with them has been their Caribbean dependence on diesel. I may need to review this with the advent of solar in the region.
  • Cheesy Finance selected Canadian Utilities.  My issue here is the ownership structure. CU operates as a subsidiary of ATCO (52% ownership) which in turn is controlled by Sentgraf (a Southern family company).  CU class A shares are also non-voting.
  • Brookfield Renewable Partners was the pick of My Own Advisor.  Most investors’ issue with them is that as a Limited Partnership they issue K-1s.  Although they have no UBTI history, some individual and corporate investors shy away from K-1s. 

Three selections were (in my opinion) a little contrarian.

  • The Rich Miser picked Ally.  This one I wouldn’t touch with a ten foot pole.  Yes they do pay a dividend, but only since July of 2016.  My guess is they were restricted by the TARP bailout. Now TARP in and of itself is not a show stopper for me but the fact that they were formerly known as GMAC – yes GM’s financing arm – gives me pause.  Now, ten years post bailout, they still derive 70% of their business through dealers – that is my issue.
  • MoneyMaaster chose  Artis REIT which recently cut their dividend knocking it off most DGI’s radars.  He does make a compelling case though.
  • Freddy Smidlap selected CDW which is a value added reseller.  The issue here is the possibility of margin compression in the event of an economic downturn.  Plus they have a limited track record since their second IPO.

The ones in my portfolio I’ll periodically add to during the year (except Power Corp which is already a little overweight).  One gets the nod to appear on my watch list, FTS.

And I have to commend Tom for the time and effort in putting this together so people like me can have some ammunition for alternative theories. Just for grins, I added these selections to a spreadsheet available on the main menu titled 2020 DivDiversity Panel. This should update automatically (as per Google standards).

Delivering Alpha – NOT!

Perhaps I was anticipating too much based on hype and previous editions, but this years CNBC Delivering Alpha conference failed to deliver.  Come on, aren’t there any new and exciting things on the horizon to capture an investor’s fancy? Obviously not, as the VP’s message of a booming economy was sandwiched between short ideas and negative interest rate survival.  All interlaced with the drizzle of ESG investing and streaming concepts – in theory new and improved versions. Sorry, all this is old news, making me think CNBC has lost the concept of Alpha.  ESG has largely turned political (which introduces uncertainty) and the window of opportunity for nice gains in streaming closed about a year ago (about the time I added to my Comcast position).

Investopedia defines Alpha as a term used in investing to describe a strategy’s ability to beat the market – what most of us aspire for.  DGI investing generally attempts to quantify (and reduce) said risk while serving up a theoretically predictable outcome. My portfolio is a modified DGI strategy in that I attempt to introduce some Alpha to maintain my streak of beating the market as defined by the S&P index. I do this by introducing an underlying theme that I meld a portion of my portfolio into.  Past examples include Community Bank consolidation and the Rise of Fintech.

One that delivered Alpha to my portfolio this week was within the theme Transaction Processing.  On Thursday, Total Systems Services (TSS) was lost from my portfolio and replaced by Global Payments, Inc. (GPN)  via the consummation of their merger. TSS was a company that I seriously doubt was held by many other DGI enthusiasts.  To identify why, let’s run it through the illustrious Dividend Diplomat stock screener which addresses most – if not all – the conventional metrics most individual investors would use in decision making.  

Metric #1 P/E Ratio Less than the S&P 500

At purchase, the ratio was 19.16 and the S&P was 20.12.  A technical pass, although the Diplomats prefer a greater margin.

Metric #2 Payout Ratio of Less than 60%

At purchase, the payout ratio was roughly 22.95% (FY2016).  A definite pass.

Metric #3 Increasing Dividends

Here lies the major failure, which probably would have caused the Diplomats and most DGI purists to pass on TSS.  Their record is pitiful with two raises in eight years and the yield rarely exceeded 1%.


My take has always been to consider Total Return as the primary metric with a significant emphasis on Dividend Growth/Safety.  Although TSS’s dividend has been wanting, since I owned it it has delivered 30% average annual price appreciation with an additional 49% since the merger was announced, bringing my total unrealized capital gain to 390% plus a miniscule, taxable dividend.

Rather than reward shareholders directly, they chose to reinvest in R&D and growing the business which probably provided a greater return – and tax-deferred to boot.  The arguments against this approach are consistency and dependability. Additionally, this requires a level of trust in management. Granted, in some cases this depends on being in the right place at the right time as well – and this example is an extreme success story.  Yes, I do have several that I’m waiting on to pan out which is why I categorize this approach as speculative with only a small portion of my portfolio looking for the next emerging brilliant idea or better mousetrap.

Don’t get me wrong, I love my dividends.  In general, DGI provides a stable, consistent foundation.  But a little dash of Alpha through total return could be the difference in beating your index. As always, your views are welcome!

Observations – r2019.4.7

Last weeks’ update mentioned the – at that time – inverted yield curve. The economists views on what this portends is all over the map from impending recession to this time is different. A couple of articles on Seeking Alpha address these concerns, with Christopher VanWert advocating a position in Consumer Staples and bonds and the self-professed contrarian Peter Schiff spinning a more ominous conclusion. My take? It’s always wise to be aware of all possibilities when setting a course. Banks – moreso the community banks – will bear the brunt of any prolonged inversion setting the stage for potential further consolidation. It might be too late for a meaningful increase in Staples as they’ve become rather pricey of late. Bonds may be an alternative but still carry a premium to what I’m willing to pay. Not mentioned are utilities as they have a perceived sensitivity to interest rates. What is often overlooked is that regulated utilities have the ability to pass this through to their customers, albeit with a delay. My action items will – first and foremost – address the speculative portion of my portfolio to de-risk to a degree.

It’s a little gratifying when other bloggers see a social issue in a similar vein, as in Bert’s piece on stock buybacks. Other issues gaining traction – outside my rants last month – found their way over to Dividend Ninja with his take on the low unemployment rate. As he is Canadian, the US centric version would also have to consider the acceleration of expensing as part of last year’s tax plan – the result being companies getting a tax break to increase automation to increase throughput (or reduce headcount). Also of note is his piece on dividend cuts. I’ll acknowledge cuts may be a sign of proactive management but it is easily a sign of mismanagement – especially when triggered by debt covenants. Most investors don’t have the time or energy to sort through the issues – hence the common rule of thumb, Sell on the news.

This week will be decision time – did I allow enough cash to accumulate to pay the tax man (or woman). I scaled my reinvestment back during the quarter so we’ll see if I have to sell a little or not. Interestingly, an analyst on CNBC last week attributed the slow-down in new car sales to the surprises in store with the tax plan. That has me wondering if that could translate into the housing market OR if that’s why the Trump team is so driven for the Fed to cut rates?

As always, comments are welcome and have a good week!

February 2019 Update

The markets continued the rise with major averages finishing higher now 3 of the last 4 months. I did deploy the excess cash from January but still remain a little cash heavy due to the GE sale. The S&P rose 2.89% while my portfolio rose 4.11%. For the year, I’m slightly ahead of the benchmark by 0.41%. Yes, it’s still early in the game but I choose to heed Warren Buffett’s advice in last week’s annual letter: Focus on the Forest – Forget the TreesYes I have a few trees that are diseased and a couple that could be pruned but in the main my forest remains healthy.

PORTFOLIO UPDATES

  • Increased WBS position
  • Sold entire GE position

DIVIDENDS

While my primary focus resides on dividends with the goal being 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. This month presents a great example of this rationale.

  • February delivered an increase of 22.7% Y/Y, the impacts being dividend increases, special dividends and reinvesting merger cash proceeds into the portfolio.
  • February delivered a 5.94% decrease over last quarter (Nov) – the impact being: Five of my companies pay in a March, May, Aug, Nov cycle in line with their AGMs (Mar), one changed to a Jun, Dec interim final cycle. This impact should be normalized next quarter.
  • Dividend increases averaged 8.59% with 32.27% of the portfolio delivering at least one increase (including 3 cuts (two being OMI)). This is somewhat off last years’ pace for the same reasons outlined by Bert.
  • 2019 Dividends received were 14.73% of 2018 total dividends putting me on target to exceed last years’ total in late October.

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

NVS proposed spin of Alcon scheduled for shareholder approval Feb 2019

On Oct 4,2018 MSG filed a confidential Form 10 to spin the sports business

MERGERS

XRX merger with Fujifilm cancelled (still being litigated).

BNCL to merge into WSFS

BHBK to merge into INDB

SUMMARY

The blog data conversion to 2019 is almost complete. The most significant error is my cost basis (dividend date screen) which doesn’t yet account for all DRIP additions or additional purchases.