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

Last Week in the Rear View

IMF growth forecasts for 2020 were released this week and were inclusive of the “momentous” and “remarkable” Phase 1 trade deal between the US and China.  It would appear the critics of the deal win the first round as China’s growth forecast for 2020 was revised higher by 0.2 percentage points to 6%, while that of the U.S. was marked down by 0.1 percentage points to 2.0%.  While I’m sure the diehard Trump supporters will discard this report as another in a long line of “deep state conspiracies”, one opinion worth reading is how China is retooling – whereas where are we? My thinking is the trade deal is at best a Pyrrhic victory for the US – tempered by a possible coronavirus black swan.

In a similar vein, is a recession in store for the trucking industry?  That is perhaps the implication of the 2H 2019 data. Trucking, shipping and freight are indicators I tend to keep an eye on and one possibility is recession – which I discount.  In my view, this slowdown is a return to normalization – coming off the sugar highs of the tax plan of 2017 followed by the tariff front loading of 2018. Others to watch in this space include CAT, CMI and NAV.  There are, however, opposing views, such as Larry Kudlow’s, “You’ve gone from 1.5% to 2% growth. We had it going at almost 4%, then the Fed tightened.” Oh yes, the infamous Fed tightening defense. Well sir, unless your boss can pull another rabbit from his hat, I doubt the ‘blame anyone else game’  has much longer to run.  There does come a point when your policies have to stand on their own merits.

In my inbox this image arrived.

Now, I own CLX, CL, PG, GIS, K, KHC, KO and PEP.  If you’re counting, that’s 8 of the 14 company owners of the 26 listed brands.  In an exchange telling of the times in which we live:

Me: So just because they sold themselves to a larger corporation now makes a product like Burt’s Bees less natural? Or am I missing your point?

Resp: They do tend to alter the original ingredients

Me: Well, I guess since there is no acknowledged standard, natural would be in the eye of the beholder.

Point is the definition of “Sold Out”.  My assumption being a merger or acquisition.  Obviously someone else saw this as a breaking of the “natural” covenant – of which there are no standards.  I cannot prove or disprove the “tend(ing) to alter ingredients” allegation. Another example of society’s ongoing inability to communicate.

The final act for the week was the Steve and Greta show.  In Davos, Mnuchin questioned her economic credentials in regards to climate change.  While he may have been technically correct, his flaws were to attack a school girl on an issue where the US has ceded any moral high ground.  He lost the round “bigly” on optics alone.

My opinion is that even if climate change could be denied, the planet and our environment would be better served by implementing many of the Paris Accord action items.  Greta’s zeal is both her charm and achilles heel. To blast the Paris accord as not being enough may well be correct, but at least it is a beginning.  My preference for the moment is to incentivize constant incremental improvement in the vein of Deming’s Law and to bring the ESG conversation to the forefront.  However, to ignore the realities of economics in this quest is begging for the Law of Unintended Consequences to bite you.  One example being a retooling of worldwide supply chains if plastic containers were outlawed.  Doable, yes – but at what cost and in what time frame. Another example is even more ghastly – Healthcare and Pharmaceuticals.  These two consume roughly 4% of petrochemical production although part of this could be attributed to packaging. Impacted products would currently include Aspirin, Heart valves, Hearing aids, Artificial limbs, Antihistamines, Rubbing alcohol, Cortisone, Anesthetics and more.  Two possible consequences emerge, 1) even greater increases in health care costs, and/or 2) Bringing back Sarah Palin’s (2009) death panel debate except the options today could be a heart valve for someones’ life today versus a possible future life. Oh, the conundrums we face.

As we swing into the final week of January, it’s time to break out the month end reports. For my part, my activity was abnormally high due in part to some initiatives previously discussed. Hoping your week is great!

2019 Year End Report

Looking back at last years’ End Of Year post, the concerns raised at that point all remain valid.  I have to admit that even with the evils of tariffs, rising deficits and US dollar strength the economy remained surprisingly strong.  I did nail one right – the administration’s claim that GDP growth can outpace the deficit was wrong. If it can’t be done when the economy is hitting on all cylinders – the question becomes ‘when can it?’

For the month, the S&P index rose 2.73% and my portfolio (excluding October and November purchases) rose 4.26%.  When those purchases are included, the monthly increase was 10.51%. Yes my gain would have been larger had I re-invested the dividends throughout the year but at least I was fully in the market during the last quarter run-up.  For the year the S&P rose 30.43% (depending on how it’s calculated) the best year since 2013. My Portfolio rose 34.54% allowing me to extend my claim of the 34th year (of 39) that I’ve beaten the index.

Dividend cuts were the big obstacle for the year as I endured five in total.  Frankly, it wasn’t until December that my Dividend Goal (10% annual increase) was in the bag.  This is typically attained in late October or early November. 

I have only three new companies on my watch list with limit orders in place on two.  All are foreign with Canada, Hong Kong and Japan tagged. I have a few I’m willing to shed with a couple more needing repositioning due to mergers.  For the first time in probably five years I’m in a position to reduce my holdings while beefing up my Anchor and Core positions.

Thirteen countries were represented in my portfolio (18.5% of my dividends), losing Ireland but gaining Japan via a merger.  The top countries were Canada (9.77%), UK (2.61%), Singapore (1.21%) and Sweden (1.02%). I’m continuing the migration of Canadian companies from my taxable accounts to my IRA to take advantage of the tax treaty (no Canadian tax withholding for most issues).

Continuing with the Monthly Recap in its newest iteration, I’m still finding pieces that require some elaboration in order to rationalize it.

For instance, the net purchase expense threshold is not a pure indicator of my cash position.  I’m thinking it’s in the 2-3% range as my cash position increased last month despite the purchases.  The Incr/Decr from the market — yes, 99.2% of the increase in portfolio value was due to the market.  A slight disappointment is the Dividend Raises. They weren’t enough to even round up to 0.01% (more a reflection of portfolio size than wimpy raises).

Dividends:

  • December delivered an increase of 40.87% Y/Y with most of the increase attributable to the Oct/Nov purchases, the OMI fiasco of last year aging off and a weaker US dollar (finally).
  • Dividend increases averaged 10.11% with 68.28% of the portfolio delivering at least one increase (including 5 cuts.  Basically a lackluster performance.
  • 2019 Dividends received were 13.78% greater than 2018 dividends and exceeded last years’ total on December 1st.  It would have been over 15% had there been no cuts.

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:

Spirit MTA REIT (SMTA) voted on Sept. 4th, 2019 to approve the liquidation of the REIT. I am awaiting the final settlement payout and as of December 31, this issue was delisted. I fully expect 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.  

Although XRX is officially off the list with their Fujifilm settlement, Icahn & Co. couldn’t wait for the ink to dry before stirring things up with HPQ.  As of now, I am considering exiting my XRX position.

Splits and Stock Dividends

Although splits are agnostic, I consider them a positive with reverse splits a negative.  Two of my companies split this year – PWOD and FFIN with no reverse splits to report.

Five companies showered me with shares of stock ranging from 3% to 5%.  I do love stock dividends and this year the benefactors were: CBSH (5%), HWBK (4%), LARK (5%), AROW (3%) and CVLY (5%).

Summary

As we slide into tax season, we’ll see if my readjustments panned out.  My goal was to achieve the 0-10% tax bracket by taking a one year tax hit.  The first part was completed so the results will be evident in the next month or so.  Overall, not one of my better years but I did attain (at least) my minimum objectives.   

Hopefully your year was great or at least in line with the market. 

2019: Year of Turnover

Going into the homestretch of 2019, it’s the time I begin the reflection process and assess the strategy going forward.  Last week presented a broad brush view of my expectations for the new year. This week addresses my portfolio turnover for 2019 and more importantly, the why.

In general, my philosophy is to buy and hold for the long run.  I tend to identify strategies and identify issues that have the potential to benefit.  As a strategy runs its course, rarely do I sell – choosing to stop accumulating instead.  This approach minimizes fees and taxable events.

Currently I hold 231 stocks and 4 ETFs.  During the past year, 13 were lost and 24 added.  Therefore my turnover rate was higher than I like so let’s dig in and see what happened.


ADDEDLOST
MERGER89
DIVIDEND CUT
3
MANAGEMENT
1
STRATEGY14

M&A is pretty straightforward with the differential being the one I held on both sides of the deal. Dividend cuts are pretty much slam dunks as well – although I did retain one of the cutters.  Management is an unusual one as I typically reserve this for activist actions. This case was tax forms being received that didn’t match SEC reporting. In my view, that deed is worse than cutting the dividend – therefore a sale.  The largest category being strategy. I added one to my 2017 KO bottler strategy, four as part of a new platform test and nine to replicate the cashed out portfolio.  

Mergers are always welcome as long as they arrive with a premium attached, Dividend cuts will always be assessed but will usually be fairly automatic sales.  Activism I dislike but generally hold my nose and ride along. Strategy – I thought ended in 2018 until I tested a new platform and also chose to replicate the granddaughter’s portfolio after having to liquidate it.  All reasonable reasons but all contributors to the action.

Currently I have three new companies on my watch list for 2020 which I’ll only buy at the right price point:

  • MTR Corporation Limited (MTCPY) – Hong Kong’s rail line constantly in the news
  • TMX Group Ltd (TMXXF) – Canada’s stock exchange
  • Coca-Cola Bottlers Japan (CCJOY)

This isn’t to say there won’t be more, only that my going forward inclination is that fewer is probably better.  Notable that US issues are absent although currently I expect only additions to existing positions.

In a nutshell, the majority of turnover was a result of M&A activity (a good thing) tempered by the breaking of the (I think) personal 38 year record for dividend cuts (5 total this year).  Unless there is more M&A on the horizon, my hope is to settle back into a 1-2% annual turnover rate. Even with the move towards $0 commission trades my ultimate goal is a set it and forget it type of portfolio which has served me well for many a year.

Hope your holidays are wonderful!

Blast From the Past

A little unsure as to what I was researching when I ran across this ancient nugget from 2012.  I don’t recall having read it when it was fresh, but has some similarities to my investing style outside the world of Coke – particularly with the international bent.  I’ll also point out this predates the 21st Century Beverage Partnership Model where Coke essentially attempted to become a marketing engine leaving the capital intensive bottling and distribution operations to a handful of larger (facilitated by mergers) bottlers.  For today, I’ll ignore the 32 (give or take a couple) family owned operations that are basically distributors – or bottlers in name only. These buy product from larger bottlers, warehouse it  and deliver to commercial customers. I suspect these little guys won’t be long for the world as they’ve lost any economies of scale.

The impetus for this piece came from the final comment from NeoContrarian where he asks (a year ago), “This is an excellent article:- What’s the current update 6 years on???” Given the author hasn’t published anything since 2016 and I now have a vested interest, I figured it apt to address this question – particularly with the change in the business model.

I have stakes in seven of these bottlers with a pending limit order for an eighth, so allow me to correct a mistake the author made.  The list of companies contains duplicates – either with a class of stock (AKO.A/B) or CCLAY/F. The former has greater economic interest (votes) but a lower dividend while the latter is the ADR versus in country OTC listing.  The ADR withholds taxes (net payout) while the F version is the gross payout leaving the investor having to deal with those details.

Subsequent to her piece, Coca-Cola Hellenic began trading on the LSE (not NYSE) and moved its’ HQ from Greece to Switzerland, Coca-Cola Enterprises ultimately morphed into Coca-Cola European Partners, HQ UK; and Mikuni Coca-Cola merged into Coca-Cola East, which merged with Coca-Cola West becoming Coca-Cola Japan.  Also, Coca-Cola İçecek.’s ADR program has been cancelled.

I tried to retain the structure she used but made a few modifications; removed dividend growth and comparison to KO’s and added % owned by KO.  Being primarily foreign companies, dividend growth is less telling than the US as the vast majority of payouts are based on a percentage of profits.  Perhaps a profitability growth rate should be included instead.

I will editorialize that it appears the results are mixed in KO’s move out of bottling.  They have succeeded, for the most part in the domestic market – at least in avoiding reporting consolidated results.  The failure has been in foreign markets as several remain owned – at least in the majority – by KO. These include Africa (68.3%), The Philippines and Bangladesh (100%).  KO also retains significant stakes of between 14 and 34% in nine of the publicly traded bottlers. This analysis excludes privately owned companies with the exception of Joint Ventures that include public companies.

a/o 8Dec2019

Yes it remains possible to muster a dividend yield piggybacking on KO’s marketing prowess.  There are risks, chiefly currency and political. For instance, Zimbabwe faces a hard currency shortage leaving Heineken unable to repatriate their profits.  The reason I have no intention of buying Hellenic or İçecek. Is their exposure to Russia and Turkey respectively. Future administrations may revert back to normal putting undue risk on the table.

The one aspect I didn’t anticipate was the consolidation of bottling operations into the larger operators leaving the smaller players as merely distributors.  That is one way to spread the capital intensiveness into manageable pieces and is probably one reason for their performance.

There are risks as well as potential rewards – perform your own due diligence.

Own: CCEP, KOF, AKO.B, CCLAY, SWRAY, KNBWY, COKE.  Open order: CCOJY

Randomness For July

Typically I gain inspiration from the news or other bloggers – or a combination thereof. When a thought – or concept – materializes my research kicks in to validate (or invalidate) the idea. Unlike others, my approach doesn’t follow a given model nor does it lend itself to a generic screening process. This isn’t to imply I ignore PE ratios, Dividend Growth Rates, Dividend Coverage, et.al., because I don’t. It’s just that outside the core 36 holdings I want to see a story, a compelling reason or something that makes me scratch my head and think.

Hidden in plain sight this week were a few that fit this category, so without further introduction, I present these for your consideration.

Bottling/Snacks Skirmish?

Pepsi announced the acquisition of South Africa’s Pioneer Food Group. I believe this intensifies the battle between the two giants and provides Pepsi a leg up in the snack segment, adds some bottling and expands their distribution capabilities. Conversely, Coke has pretty much divested their bottlers with the exception of Africa. So the question becomes, “What’s up with Africa?” and which one holds the answer to this riddle. Category: scratching my head

Watch List Addition

A friend of mine sent me a link to the Australian version of 60 minutes with an interesting (but non-standard) treatment for stroke victims. There are many more questions than answers with this treatment, most notably sustainability, yet the initial findings hold some promise. Ever the sucker for a speculative play in the realm of strokes (remember my Nexeon investment – (currently tardy in their filings)), perhaps a small investment may bear fruit. The drug in question is Etanercept and the company is Amgen. Bonus points for AMGN paying a dividend. Category: Good Story

Political Thought

We’ll delve into the political arena a little as the Democrats have initiated an opening salvo illustrating to the world they might be able to walk and chew gum simultaneously. This effort is in the form of a Senate bill provocatively titled, “Stop Wall Street Looting Act of 2019“. This bill aims to stem some of the more egregious acts of private equity firms when they take companies private. Assuming this gets through the proverbial roadblock in Mitch McConnell and the unrelenting lobbyists, I have a one minor concern (outside the name) that should be addressed in order for bipartisan support to be obtained. Section 309 is applicable to workers and places a higher priority on pension funding, which is well and good. The issue I have is in the charge to bankruptcy judges to consider job retention in a liquidation (sale) event. If I thought I could profit via productivity gains (technology) at the expense of labor, I would have no incentive to prevent full on bankruptcy – waiting to buy the pieces after the fact. Category: Compelling Reason (probable GOP inaction to avoid debate)

With these thoughts, I hope the week ahead is good for you!

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.

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