Razzle Dazzle

Give ’em the old flim flam flummox

Fool and fracture ’em

How can they hear the truth above the roar?

Richard Gere performing Razzle Dazzle in the movie Chicago, 2001

One of the many stanzas from the song with which could apply to the theme of this holiday special edition. I decided to present this weeks’ activity as a special post since the number of transactions is greater in three days than my normal 4-5 per month. Also included are three sales which I will elaborate on in some detail.

Roadmap 2 Retire presented another cautionary view reinforcing my approach. While I’m beginning to feel a little like Chicken Little, there are conundrums aplenty from which to choose when attempting to make sense of the economy. Perhaps the best illustration is the fact that Wisconsin farmers are going bankrupt in record numbers. This is a good part of Trump’s base in which their downturn has been accelerated by his policies. And the theory of ‘trickle down’ hasn’t made it to these rural enclaves yet he still carries a 42% approval rating there. It seems that every positive in the economy (low unemployment, low inflation, lower taxes (in theory) carries an equal negative (slowing GDP growth, low wage growth, increasing deficits).

Give ’em the old three ring circus

Stun and stagger ’em

When you’re in trouble, go into your dance

Since I’m no fortune teller I can’t provide any timing, but I dare say this juggling act will come to an end. Hopefully it’ll be a prettier end than any of his four bankruptcies. Like R2R, I’m perusing my portfolio and trimming a little of the speculation. Although I’ve been musing on this for awhile, it was time to begin the execution. Following are the first moves of mine in the pivot from macro to micro.

SELLS

  • Owens & Minor (OMI)
    • Following not one but two dividend cuts. I probably had a bit more patience with this one as it was an IRA holding, but enough already. Sold July 1st – net loss 74.2%.
  • Uniti Group (UNIT)
    • This one has been in the cross-hairs of the Windstream bankruptcy. As a result, they cut their dividend to preserve cash and satisfy their lenders. One lesson I previously learned (Orchids Paper (TIS), anyone?) is to bail when lenders force a dividend cut. Sold July 2nd, net loss 59.2%.
      • After market close, UNIT announced the issuance of 8.68m common shares in conjunction with a preferred redemption. UNIT closed down July 3rd 2% from my sale price.
  • Lamar Advertising (LAMR)
    • This one I groused about all year with the shenanigans they were playing with their 2017/2018 year end pay date. At tax time, I confirmed the forms sent to me and the corporate IRS filing were out of sync. Not being an accountant, I can’t say there’s any illegality – but this is one that has questions – therefore it was booted off the team on July 2nd with a gain of 46.6%.

The proceeds from the LAMR and UNIT sales were used to rebalance a portion of the portfolio across thirteen stocks. I have a pending limit order in place to deploy the OMI proceeds into RY.

With any luck this run will continue, however the pessimist within says it would be unlikely (check back around earnings season …)

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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!”

July 2018 Update

The markets generally shook off potential tariff impacts, choosing instead to focus on earnings and GDP.  Any future concerns being tabled by investors to essentially celebrate the present.   Being a contrarian by nature brings out the caution signs when the market ignores some warning signals.  Tariff advocates Alcoa and Whirlpool took hits when they acknowledged the benefits anticipated were not materializing as expected.  Signs of profiteering are beginning to emerge.  The list of companies indirectly impacted continues to grow.  Technology had issues due in part to China exposure.  Perhaps I can be forgiven for seeing the glass half empty rather than half full.  This month had me on the sidelines with only one transaction to report.  July saw a rise in the S&P of 3.6% while my portfolio outperformed by registering an increase of 5.36%.  YTD I’m now ahead of the S&P by 1.06%.

Portfolio Updates:

Performed a rebalance on a portion of the portfolio.  I reduced the overage in DGX created in May and added shares to the others in this group (ABM, AMT, ARD, BLL, CASY, CHCO, KOF, CCE, CTBI, CCI, AKO.B, HOMB, IRM, LAMR, OUT, NWFL, OCFC, ONB, PLD, QCOM, SRC, SMTA, BATRA, UNIT, VALU, VER).  My DGX holdings remain higher than they were in May and the increase in dividends on this rebalance is negligible.

DIVIDENDS

My main focus resides on dividends.  Market gyrations are to be expected but my goal is to see 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.

  • July delivered an increase of 29.76% Y/Y, the biggest impact being a June dividend paid in July.   Pro-forma was 19%.
  • July delivered a 3.29% decrease over last quarter (April) due to an interim/final cycle (and would’ve been greater without the dividend move).
  • Dividend increases averaged 14.39% with 66.51% of the portfolio delivering at least one increase (including 1 cut (GE).
  • 2018 Dividends received were 70.19% of 2017 total dividends putting us on pace to exceed last year in early November.

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:

GE‘s rail unit to spin then merge with WEB

GE to spin 80% of the health business

Mergers:

XRX merger with Fujifilm cancelled (now being litigated).

SHPG to merge into TKPYY

GBNK to merge into IBTX

COBZ to merge into BOKF

GNBC to merge into VBTX (semi-reverse)

Summary

All in all a good month but it appears my continuing financial overweight is literally reaping dividends.  This probably needs to be addressed in 2019.

Hope all of you had a good month as well.

Ringing In The New Year

As I wait for the last three dividends of 2017 to post to my account, my final accounting report will delayed into next week.  Sure I could just accrue said dividends and release the report but where would the fun in that be?  Especially since I can lay claim to being the first official victim of the new tax plan, aka the Tax Cuts and Jobs Act of 2017.  As it’s not even effective yet, I guess this is the first – of probably many – unintended consequences to emanate from this bill.  This week I’ll also cover my last minute 2017 moves and my first 2018 activity.  But first …

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August 2017 Update

The markets ended the month generally flat while whip-sawing in between on geo-political news (North Korea), domestic disturbance (Charlottesville) and natural disaster (Harvey) taking center stage.  I did deploy a minimal amount of new capital along with dividends received in some positioning moves.  The S&P ended the month up .05% while my portfolio lagged by dropping -0.34%.  The differential can be explained by two events, 1) higher exposure to Texas (e.g., hurricane), and 2) the month-end rise in the US dollar causing my foreign issues to drop a little.  For the year, I remain ahead of the index by 4.47%.

Headlines impacting my portfolio (bold are owned):

  • 8/3 – IVZ in talks to buy Guggenheim Ptnrs ETF business
  • 8/3 – VLO agrees to export refined fuels to Mexico through iEnova (SRE subsidiary)
  • 8/3 – SRC announces spinoff of Shopko properties
  • 8/4 – Ackman requests delay in ADP brd nomination deadline as “8% owner”
  • 8/4 – LAMR acquires Philadelphia market billboards from Steen Outdoor
  • 8/8 – ONB acquires Anchor Bank (MN)
  • 8/10 – PYPL acquires Swift Capital (Del.)
  • 8/10 – INVH and SFR agree to merge (BX stake to be abt 41%)
  • 8/15 – KEY acquires Cain Brothers (pvt)
  • 8/16 – TU acquires Voxpro (pvt)
  • 8/16 – PLD buys out CCP (CYRLY) JV
  • 8/20 – GS approved for Saudi Arabian stock trading license
  • 8/22 – PAYX acquires HR Outsourcing Inc. (a Clarion Capital portfolio company)
  • 8/22 – CLX sells Aplicare line to Medline (pvt)
  • 8/22 – BX considering an IPO/sale of Gates Global
  • 8/30 – KSU forms JV with Bulkmatic for bulk fuel terminal in Mexico
  • 8/31 – BNS confirms discussions to acquire Chile operations from BBVA Spain

Portfolio Updates:

  • Added to VLO
  • Added to LARK
  • Added to AROW

LARK and AROW were positioning moves ahead of anticipated stock dividends (3% announced by AROW post purchase)

Dividends:

  • August delivered an increase of 22.24% Y/Y with the about half of the increase being attributable dividend increases and the other half purchases.
  • August delivered a decrease of 12.99% over last quarter (May).  Semi-annual payers, a date change due to a merger, and normal BX dividend being the culprits.  Also a Singapore dividend paid in August (locally) has yet to be paid via Citi’s ADR (now likely Sept.), so I expect September to be firing on all cylinders.
  • Declared dividend increases averaged 10.92% with 62.71% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension)
  • YTD dividends received were 75.91% of total 2016 dividends which if the current run rate is maintained would exceed last years’ total in early November

Spinoffs:

Brighthouse Financial (BHF) (MET spin) has been received.

Mergers:

AGU/POT (Nutrien) remains pending, SGBK/HOMB received regulatory approval and is expected to close late September.

Summary

Overall another positive month with the only disappointment being the Q/Q dividend decline – which was unexpected.  The primary metric (annual dividend increase) remains on target and well ahead of inflation.

Prepping for ’17

In my inbox I found a message inspired (?) by my last post.  In a nutshell, it was a request for further insight into my October purchases.  I have to admit that, on the surface, the appearance is that I was throwing stuff against the wall to see what would stick.  I would like to think I’m slightly more calculating.  To set the scenario, I had an oversized cash position due to a merger, the markets had started their pre-election downward drift and the FBI just breathed new life into Candidate Trump’s aspirations.

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Oct 2016 Update

October was basically a quiet month with OPEC failing – once again – to shore up their hold on the oil markets.  Chevron announced a small increase in their dividend maintaining their status as a Champion.  Several small positions were added at month end as the market began a pullback (continuing into November) enabling me to start redeploying funds received from PNY’s merger with DUK.  This month The S&P dropped 1.94%.  My portfolio was basically flat, ending down 0.1%.  Note: I normalized these numbers to consider the impact of cash infusion from the merger.  My ‘pure’ equity positions decreased by 4.15%.  The need for this normalization should end as my excess cash is used.  This increases my lead for the year to 11.5% with two months to go.

Headlines impacting my portfolio:

  • 10/3 – JNS to merge w/ Henderson
  • 10/11 – SRCE gains FRB approval for Sarasota, FL branch
  • 10/19 – C finalist to be designated as clearing firm for Renminbi trades

Blog Updates:

I’m a little behind again this month but the portfolio data has been compiled and will be posted in the next couple of days with the goals update later in the week.  The Unabridged portfolio should be next week as per normal.

Portfolio Updates:

  • Closed PNY due to merger
  • Added to BMO
  • Added to CVLY prior to ex-div for the stock dividend
  • Added to JNS (weakness on currency exposure)
  • New position – ABM
  • New position – AMT (Jan)
  • New position -BLL
  • New position -CASY
  • New position -CHCO
  • New position -KOF (Mex. peso exposure)
  • New position -COKE
  • New position -CCE (UK exposure)
  • New position -CSAL
  • New position -CTBI (Jan)
  • New position -CCI
  • New position -HUM (Jan)
  • New position -LAMR
  • New position -NWFL
  • New position -OCFC
  • New position -ONB
  • New position -OUT
  • New position -PLD
  • New position -QCOM
  • New position -DGX (Jan)
  • New position -SRC (Jan)
  • New position – SGBK (Cuba exosure)
  • New position – BATRA
  • New position – VALU
  • New position  – VER (Jan)
  • New position  – YUMC (YUM spin-off)

Dividends:

  • October delivered an increase of 28.9% over October 2015.  This was due about evenly between dividend increases (Y/Y) and late 2015 funding.
  • October was down 10.68% from the prior quarter due to special and semi-annual payments in July.
  • Announced dividend increases currently average 12.59% with 67.11% of my portfolio having at least one raise so far this year.
  • Through October, dividends received exceeded total 2015 dividends by 7.2%.

Roughly half of the PNY/DUK proceeds have been redeployed with an additional 3 orders pending for January payers.   I’ve filled some of the hole I’ll face in January, so I plan on maintaining a small cash position through the election before making further decisions.

Spinoffs:

The XRX spin (Conduent) is on track to complete by year end.  MetLife has filed for a spin of their Brighthouse Financial unit under the ticker BHF.

Mergers:

Proxies were received and voted for both the LSBG/BHB and AGU/POT mergers.