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!

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!

May 2019 Update

It’s little wonder that a generally good earnings season was ignored due to rising questions about the economy for the remainder of the year. From the failed trade talks with China putting a damper on the beginning of the month, the president just couldn’t help himself and decided to intermix trade and policy issues on a second front, this time being tariffs on Mexico. End result was the DOW saw six straight weeks of losses and May was the longest losing streak since 2011. To this we can now add the uncertainty of the new NAFTA deal as it is trilateral as opposed to bilateral and the recipe is set for continued disruption. But of course, this could be simply a negotiating tactic in which the living standards of Americans are in play. This month the S&P lost 7.04% (almost erasing the gains for the year) while my portfolio lost 5.85%. For the year, I’m now ahead of the benchmark by 1.2%.

PORTFOLIO UPDATES

  • increased my BDX 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.

  • May delivered an increase of 19.57% Y/Y, the largest impacts – essentially getting back on track after the earlier dividend cuts.
  • May delivered a 13.02% increase over last quarter (Feb) – slightly above announced (net) dividend increases.
  • Dividend increases averaged 9.22% with 48.02% of the portfolio delivering at least one increase (including 4 cuts (two being OMI)). 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 43.17% of 2018 total dividends putting me on target to exceed last years’ total in late October. The YTD run rate is 105.64% of 2018 slightly under my 110.0% goal.

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

MERGERS

XRX merger with Fujifilm cancelled (still being litigated).

TSS to merge into GPN (all stock, .8101 sh GPN for each TSS sh) estimated to complete in October – Upon the announcement, I was prepared to sell my TSS position to book almost a triple in just over 4 years as GPN currently pays only a penny per share dividend per quarter. However, page 14 of their slideshow states: Dividend – maintain TSYS’ dividend yield. This would appear to indicate an increase in GPN’s dividend, so for now I’ll hold.

CORPORATE ACTIONS

  • FFIN declared a 2:1 stock split effective June 3rd

SUMMARY

The blog data conversion to 2019 is almost complete still being worked on. The most significant error is my cost basis (dividend date screen) which doesn’t yet account for all DRIP additions (so it is a minimal understatement – but I strive for accuracy). One more formula to construct to complete this effort.

Hope your month/quarter was a good one!