April 2020 Update

The market staged a little recovery this month seemingly shaking off – or at least minimizing – any effects of the ongoing Covid-19 devastation, due in part to the partial ramp up of the economy in some states.  My state is one where a ‘phased’ approach is underway and there is uncertainty as to whether the peak has been attained (thereby ignoring the federal template).  While the economic malaise is running rampant through the states, it is doubly acute in the oil patch where state budgets (Texas) are dependent on a 4.6% tax on extraction (in a declining price environment) addition to an otherwise robust economy.  It will be an interesting social experiment as to how quick the average consumer will embrace the new reality (capacity limits in restaurants, for one), the ability for these businesses to turn a profit anew and if this throttling can move the needle on the economy (GDP, unemployment) without a corresponding spike in cases and/or mortality.   For one, I’m willing (and able) to wait at least two weeks and reassess at that time.

Due to the broker reshuffling caused by Motif shutting down, I can only provide a close estimate for the month.  Currently about $2,000 (cash, dividends, sells, buys) is in the ether migrating amongst accounts.  A full accounting is probably a week or two out.

Portfolio Value:  An estimated increase of 10.8% versus the 11.26% gain of the S&P.  For the year I’m up 2.06%.  All full share positions have been received by my primary broker with.

Dividends:  As previously acknowledged, my dividend increase run rate was not sustainable.  This came to bear in April with a 7.49% year-on-year actual increase.  I don’t think I lost any dividends with the timing of the transfer, but I may take a slight temporary hit as I await the cash to redeploy it.  Also some of the cycles will change as I exit some issues.

The pace of dividend cuts/suspensions continues to increase while any increases tend to be muted by 2019 standards.  Net increase for the portfolio stands at 5.75%, meaning my 10% dividend growth rate goal is in jeopardy.

Strategy Shift: In probably an overabundance of caution, I’ve decided to exit REITs that have a retail focus.  If the crisis is prolonged, rents, vacancy rates, property values and ability to refinance could come under pressure.  The ones retained are the four industrial and specialties in my portfolio.

I borrowed this illustration from one of my companies (BOKF) and modified it for my portfolio to begin to gauge potential impacts.  Currently PEP and KO’s biggest impact would reside in their fountain drinks (restaurants and venues).  I have yet to calculate a total …
Covid-19 Impact Areas

Entertainment & Recreation
Gambling Industries EPR
All Other CMCSA, DIS, T, AMC, PEP, KO, MSG, BATRA
Retail
Convenience Stores & Gas Stations CASY, VLO, CVX, RDS.B
Restaurants CBRL, YUM, YUMC, SBUX, MCD
Specialty OUT
All Other Retail KIM, SRC, WRE, VER
Hotels MTCPY
Churches & Religious Organizations CMPGY
Colleges & Universities SYY
Airlines LUV, SWRAY
Identified Businesses most impacted by Covid-19 mitigation efforts approximately xx.xx % of portfolio

I’m using this template strictly as a guide.  The retail facing REITs are all sold (with the exception of Kimco), Southwest Airlines has been reduced, the others on this list are cautious holds.  I continue the review of my portfolio with an eye on secondary impacts – like who really considered any impact to banks because church services weren’t being held?  I probably need to expand my thought process to include further knock-off effects.

Later in May I’ll update my posted portfolio – once the confirmations (and money) arrive.  What will be clearer is the shift to larger but fewer holdings.  While the portfolio remains sizable, I will retain  some speculative stocks and a few where I remain undecided.  By and large, banks with no dividend growth or ones where M&A prospects have dimmed will be pruned.  In June I expect to exit ETFs as well.  For the near term (12-24 months) I’m willing to accept a lower dividend yield if I gain quality – and limited Covid-19 exposure – in return.

Here’s hoping your month turned the corner!

January 2020 Update

What a way to start the new year.  Beginning with the reshuffling of my portfolio and continuing right into earnings season and the inevitable debate over the Coronavirus impact on the economy … all I can say is yep it’s a lot to digest – and it’s only January.  With the gyrations in the market, all but two of my low-ball limit orders executed, probably the most controversial being MTR Corporation – the Hong Kong high speed rail line recently at the forefront of the protests. Anyway, I added two Canadian companies (Fortis and TMX Group – (Toronto stock exchange)) and starting the long rumored whittling of some of the non-core holdings (XRX and MSGN).  Most of the other action was moving Canadian companies from my taxable accounts to the IRA – some of which were done as a rebalance to minimize fees (hence the slight additions to the other holdings). Also selling part of the PB stock (which went overweight due to a merger) to fund these movements. As I indicated last week, this is the first of a multi-month transition. Obviously my timing was decent (this time, anyway) as the S&P lost 0.16% for the month while my portfolio gained 1.81%.

PORTFOLIO UPDATES

DIVIDENDS

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

  • January delivered an increase of 22.73% Y/Y primarily the result of last years’ dividend cuts rolling off.
  • Dividend increases averaged 11.48% with 8.5% of the portfolio delivering an increase.
  • 2020 Dividends received were 1.86% of 2019 total dividends putting me on target to exceed last year’s total in November. The YTD run rate is under my 110.0% goal but I anticipate this will normalize as my portfolio movement becomes clearer and the current year begins to distinguish itself from the last. 

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.

AT A GLANCE

Inspired by Simple Dividend Growths reporting

The relationship between market action and purchase activity was roughly 95/5.  As I’m generally playing with ‘house money’ (proceeds from sales, M&A activity and dividends), I doubt there will be a significant variance until I fund my 2019 IRA contribution.  The Net Purchase Expense being less than 1 or 2% illustrates the ‘house money’ concept. Timing did play a part as I sold early in the month (before the drop) and most of the purchases were in the latter part of the month. 

SPINOFFs

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

MERGERS

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. The first payment was received and awaiting final settlement payout. Fully expecting a profitable outcome for one of my most speculative positions.

SCHW to acquire AMTD for 1.0837 sh SCHW to 1 AMTD.  My only surprise with AMTD being taken out was the suitor – I had expected TD.  Regardless, I have three concerns over this deal, 1) profit margin compression with the onset of $0 fee trades, 2) possible liquidation of a partial TD stake to reduce their ownership share from 13.4% to 9.9% (the same issue Buffet regularly faces) and 3) 10 year phase-out of AMTD/TD cash sweep account relationship.  The third one means TD has a low cost (albeit, decreasing) source of deposits for the foreseeable future. After the first of the year, I’ll probably cash in AMTD and increase TD a little further.  

SUMMARY

Overall, the only complaint is the sluggish start to the year. Minus the drag from last years’ dividend cuts I figure this will be short lived.  On my goals, progress was made as follows:

  • Scenario 1 – TD is now confirmed
  • Scenario 2 – Half complete, awaiting timing issues for the sell part
  • Scenario 3 – Determination of maximum contribution amount complete
  • Scenario 4 – 2020 RMD amounts identified

Here’s hoping your month was successful!

Tax Efficiency

I figured a little reflection was the order of the day as we recently completed tax season in the US, and yes, I had to pay for the first time in years. My initial take was Trump’s tax law did no favors to those of us on fixed incomes – rather tilting the scales to benefit the wealthy and to a lesser degree the working class – though there were winners and losers across the board. In preparation for next year’s fiasco, I’ve been attempting to ascertain some of the intricacies of the changes. Previously, I opined on the foreign tax credit remaining in place. Today’s revelation potentially turns conventional wisdom on REITs on its’ head.

Sage advice has typically been – with a few exceptions – REITs are best held in tax advantaged accounts, like IRAs. The new tax law adds a few wrinkles to this concept, which Justin Law outlines nicely. The essence of his piece is that Section 199A distributions now have a 20% deduction which may warrant a review how tax advantageous REITs are in ones tax deferred versus taxable portfolio. DGI darling Realty Income (O), recently reviewed by Tom at Dividends Diversify, could well be a poster child for this type of analysis as last year’s payouts were 77.1% Section 199A and the remainder Return of Capital. The delay in this week’s post was due to some difficulty in completing a review of the fourteen REITs in my portfolio.

Two of my REITs were excluded from this analysis as I have them classified as probable sales, Uniti as their dividend cut was likely a debt covenant issue and Lamar as their IRS reporting is not straightforward (the corporate filings differ from the filings on the shareholders’ behalf). As all of my REITs are in taxable accounts, using Justin’s generic template, they were first ranked by the new Section 199A exclusion.

  1. American Tower (AMT) 99.68%
  2. EPR Properties (EPR) 95.94%
  3. Washington RE (WRE) 91.89%
  4. Outfront Media (OUT) 86.10%
  5. Iron Mountain (IRM) 83.04%

The next tier combined Qualified dividends and Cap Gains as their tax treatment is similar (and not onerous):

  1. Duke Realty (DRE) 22.59%
  2. Kimco Realty (KIM) 18.29%
  3. Prologis (PLD) 17.33%

The one tier I need to keep an eye on is the Return on Capital with Vereit (VER) 86.17% and Crown Castle (CCI) 34.39%. This part of their distribution is tax deferred until sold or the cost basis reaches 0.

The ugly tier is the Section 1250 gains with a 25% tax rate.

  1. Spirit Realty (SRC) 49.2%
  2. Spirit MTA REIT (SMTA) 21.2%

I consider this to be a one-off due to the spin of SMTA from SRC. Kimco (26.94%) could fit in this category as well although my sense is that their portfolio repositioning is the culprit, but there are opposing views to mine.

Bottom line, I’m willing – even eager – to pay taxes. Yet the rules of the game reward those able to minimize the government’s share. While the key resides in understanding the nuances of the rules, I say, “Seek the rewards and let the games begin!”

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!

Dec 2018 Update and Year End Review

he fourth quarter swoon continued in earnest this month resulting in an annual loss for the markets.  While the final trading day closed higher (DJIA up 265, NASDAQ up 51 and the S&P up 21) it was nowhere near close enough to avoid the worst December since 1931.  Though surprised by the resiliency of the US dollar, last year’s intent to migrate further into foreign equities was largely preempted by tariff uncertainty. My other 2018 concern of rising federal deficits stifling the economy did not manifest itself as yet – though I remain skeptical of  administration claims that growth can outpace the deficit. For the month, the S&P index dropped by 9.18% while my portfolio dropped by ‘only’ 8.44%. For the year the S&P posted an unusual loss of 6.65% while my overall loss was 3.57%. In an otherwise ugly ending to the year, my primary goal of exceeding the S&P’s return was attained marking the 33rd year (of 38) that I’ve been able to make this claim.

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Where’s Santa?

What a start to the final month of the year.  At least there is a little something for everyone.  First the CME tripped the first wave of circuit breakers in the futures market.  Then the chartists found the S&P closed the week in a death cross.  Then there’s news of a possible yield curve inversion.  Lest we not forget, the most recent China issue which may or may not even be legal.  While the Huawei issue is unfolding, Lighthizer continues to stir the pot by saying he considers March 1 “a hard deadline” otherwise the delayed tariffs will be imposed.  Hmm … kind of like bringing a gun to a knife fight – or – perhaps the administration really believes that “free and fair trade” is an outgrowth of convoluted negotiations.

If week one is any indication, the traditional “Santa Claus Rally” will be delivering a lump of coal this year.  Being the eternal optimist, I’ll argue Christmas isn’t here yet so I had to take advantage of the sell-off to do a little buying:

  • First, I added to my ETF group.  I accomplished two things with this:
    • As the majority of these are foreign, they are underwater.  Therefore, an ‘average down’ scenario.
    • These all pay December dividends (one quarterly, three semi-annual and one annual) all yet undeclared.  All are now captured.
  • Second I executed a rebalance on a small portion of the portfolio.  I chose a ‘rebalance’ as the fees were lower than the alternatives.  End result being:
    • Sale of BOKF.  I had this issue in two accounts due to a merger, now it’s only in one, with the proceeds and accumulated dividends:
    • Added to ADP, MMM, KIM, FAF as these are underweight target holdings
    • Added to AVNS as they may have received a good price for the division sold to OMI
    • Added to LARK and CASS – missing the ex-date for the stock dividends
    • Added to BR, CNDT, CDK, FHN, JHG, KSU, PJT, WU, XRX – capturing WU’s December dividend

I still have another rebalance queued pending completion of a merger (might be into the new year) and then we return to normal operations.

I also will be selling my OMI – perhaps later in the month to see if Santa really exists!

Ho-Ho-Ho …

My 3Rs – Revamp

Last post in this series I highlighted my views from the rear view mirror.  Going into 2019 will see more changes than normal.  No I’m not selling any positions but changing the emphasis (allocation) on certain issues.  The game plan is for reinvested dividends and fresh money to gradually swing the portfolio into balance with the new targets.

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