Work Freedom Day

Once per year – assuming a static or growing portfolio – the day arrives where current year dividends paid exceed the prior years’ total dividends.  For me, yesterday (October 19th) was the day.  Now the term, coined by Dividend Life in 2014, is a little bit of a misnomer as I don’t work but the concept is applicable.  This compares favorably with last year (October 25th) but still shy of my all time best (in retirement) of October 4th in 2016.  The improvement this year is largely attributable to Tax Cuts and Jobs Act which resulted in increased regular and special dividends.  Whether this is a one-off or sustainable remains to be seen but as my mother was fond of saying, “Don’t look a gift-horse in the mouth.”


I’ve been noodling over an article for awhile – one of those that need to be absorbed in doses.  I see bits and pieces of me across all levels, but probably a three – maybe a four.  The relevance?  In a recent post (9 Sep) I stated:

Bank OZK (OZK) has had some curious moves of late with a costly name change and repositioning from federal to state oversight. These, along with their increasing exposure to high value CRE gives me pause.

Obviously the esteemed Jason Fieber is not among my handful of readers as he initiated a position on 1 October citing:

There are some concerns over its loan portfolio (when are there not concerns about a business?), especially seeing as how the bank has aggressively moved into construction lending in recent years. This tiny bank is behind some of the biggest projects in some of the biggest markets in the US.

But these concerns seem to be more than priced in. It’s almost as if the last four years of growth are worth nothing. Of course, growth could, and likely will, slow in the new construction market. And sticking to strict lending standards means opportunities might dry up.

The market’s (and my) concerns were that “strict lending standards” weren’t consistently followed.  Fast forward to Thursday’s earnings report:

On July 16, 2018, the Bank changed its name to Bank OZK, changed its ticker symbol to “OZK,” and adopted a new logo and signage, all as part of a strategic rebranding. As a result of this name change and strategic rebranding, the Bank incurred pretax expenses of $10.8 million during the third quarter and $11.4 million for the first nine months of 2018.

During the third quarter of 2018, the Bank incurred combined charge-offs of $45.5 million on two Real Estate Specialties Group (“RESG”) credits. These two unrelated projects are in South Carolina and North Carolina, have been in the Bank’s portfolio since 2007 and 2008, and were previously classified as substandard. The combined balance of these credits, after the charge-offs, is $20.6 million.

The CRE issues are centered on two projects in the Carolinas, one a mall with Sears exposure.  I have no conviction that these are one-time issues.  Much depends on the economy and the hurricane related recovery in this area.  Yet I couldn’t resist the the opportunity to average down yesterday on the 26% price drop.  So yes my crystal ball worked this time, but no I didn’t sell in September, nor did I short.  Which is why I may not be a Level 4.


Inspired by Catfish Wizard and Jim Cramer’s Power Rankings, this weekend I’ll add the 2019 DGI Picks by Sector as a Menu Item (fun and games only!).  If you’d like to be included, submit your top pick for each sector.  I’ll probably recalibrate the results around Thanksgiving to provide a level playing field.  🙂

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Recent Sell – TIS

It appears to be a busier month than normal.  Today I exited a position that I’ve held since 2013.  Orchids Paper announced this week the suspension of their dividend.  I can’t say this was a total surprise as I’ve had them in my penalty box for a while.  In fact, the comment I made when Investment Hunting sold his position seems eerily prescient:

Yes I still own it but it has never been a DG stock. With a
stagnant dividend, a high payout ratio, previous management’s penchant
for diluting current owners and the frequent misses on earnings I’m at
about break even on this one. This one is a gamble on current
management, their strategy (expansion), and their execution of their
plan with the wild card being stable pulp pricing.
(June 12, 2016)

Since then, the South Carolina expansion has encountered delays, their Mexican venture has had difficulties, they’ve decided to spend money moving the headquarters to Tennessee and finally go hat in hand to their lenders (led by US Bank) for waivers to their loan covenants (which was the likely cause of the suspension).  As this holding was in my IRA, I have no room for a non-dividend payer in that account.

In searching my database, it appears in addition to IH, Broke Dividend Investor sold in September and I think Dividend Pursuit sold around year end.   Meanwhile, Weekly Investment, Passive Income Mavericks, Mr Free at 33 and A Frugal Family’s Journey are contemplating their options.

So an $80 loss is booked which includes the offset by dividends received.

The ‘Ole Ball Game

Take Me Out to the Ball Game

Jack Norworth – 1908

As a result of the Canadian Radio-Television and Telecommunications Commission decision to classify broadband as “a basic telecommunications service for all Canadians” I figured an update was in order for Part 3 of Methods to My Madness  post of last year.  Previously I had postulated that the Carriers were a viable segment in order to capitalize on Cord Cutting.   This segment over the past year proven to be more a commodity with streaming essentially the same regardless of carrier.  With limited pricing power, I now feel  this segment is more likely an indirect beneficiary rather than a driving force of Cord Cutting and am dropping this segment as a viable candidate going forward.

The other two segments, Creators and Providers, in my initial thesis remain intact.  In fact, AT&T’s (T) overtures with Time Warner (TWX) enhance the argument.  Casting about for a replacement segment, I ran across Mr Free At 33‘s post on “Experiencism”.  Although I can quibble with his choice of wording (I think the word he was looking for is Experientialism), the heart of his message is sound being a cautionary tale on falling under the spell of excess.

While I doubt many have the will, means or gumption to head to Thailand on a whim, many are seeking  “Experiencism” locally or with family and friends – and there lies my replacement!   I’ve written before on my interest in business interrelationships.  Localized Experientialism melds nicely into this strategy.  A family visit to the circus or an outing to a sports event are just a couple of examples.

Assume you experience a Flyers game in Philadelphia.  The Wells Fargo Center and Flyers are owned by Comcast (CMCSA), Spectracor (also CMCSA) manages it, Aramark (ARMK) has the food service contract and Comcast SportsNet (CMCSA yet again) the broadcast rights.  So the primary lines of business are the Content Owners/Creators (Teams/Studios), Aggregators and the Experience.  In sports, this model is pretty much followed across all leagues with only the companies involved changing.  In this definition, The Experience includes the cleaners, concessionaires and venue managers.

Many of these companies and teams are privately held with associated interrelationships managed or owned by an entity controlled by the owner .  Others, while public, pay a minimal – if any – dividend.  But there are a few that do pay a healthy – and growing – dividend.  Generally, to invest in this manner requires patience and a willingness to await a change in control of the team while being satisfied with bragging rights of ownership.  In fact, I have to agree with Christopher Lackey in his assessment: “The sports properties, which include the suddenly not laughable Toronto Maple Leafs and Toronto Blue Jays, are doing well and increasing in value, but investing on this basis alone is not sound because if the teams achieve success they require significant reinvestment to sustain it.

During the past year, Comcast (CMCSA) became sole owner of the Philadelphia Flyers and Liberty Media created a tracking stock (BATRA) based on the financials of the Atlanta Braves, new ballpark and nearby real estate.  I also uncovered two additional teams that have – at least in part – public ownership, the Chicago Cubs (TRNC which I believe retained ownership with the Tribune changes) and Seattle Mariners (NTDOY).

With content being the driving force in landing eyeballs – which in turn lands revenue, providers and the groups providing the eperience are the more direct beneficiaries.  Point in fact is Dustin Blitchok‘s article, “Which Streaming Providers Are Winning The Content War?”  This was also confirmed in series of interviews by AT&T employees aired on CNBC last week.  The following table presents my current take on this strategy which, as always, is subject to change.

OWNERS/CREATORS

COMPANY YIELD SEGMENT
Disney/DIS 1.41% C,E
Comcast/CMCSA 1.57% C,A,E,O – Philadelphia Flyers
Time Warner/TWX 1.67% C,A
Fox/FOXA 1.19% C,A
BCE/BCE 4.96% O,A,E,C – Toronto Maple Leafs, Toronto Raptors, Montreal Canadians
Rogers Comm./RCI 3.42% O,E,A – Toronto Maple Leafs, Toronto Raptors, Toronto Blue Jays
Madison Sq Gdn/MSG n/a O/E – New York Knicks, New York Rangers
Netflix/NFLX n/a C,A
Amazon/AMZN n/a C,A
Liberty Media/BATRA n/a O/E – Atlanta Braves
Nintendo/NTDOY 0.42% O – Seattle Mariners
Tribune Co./TRNC (susp) O – Chicago Cubs
NOTE: Nintendo also includes the Pokémon GO experience

AGGREGATORS

COMPANY YIELD SEGMENT
AMC Networks/AMCX n/a A
Discovery Communications/DISCA n/a A
Cox/(pvt) n/a A
MSG Network/MSGN n/a A
Charter/CHTR n/a A

THE EXPERIENCE

COMPANY YIELD SEGMENT
Aramark/ARMK 1.16% E
ABM/ABM 1.69% E
Compass Group/CMPGY 2.05% E
Sodexo/SDXAY 2.31% E
SMG/* n/a E
NOTE: SMG was an ACAS portfolio company as of June 3, 2014. ARCC does not include in their portfolio a/o 3 Jan 2017 merger. Both Bloomberg and Wikipedia classifies them as a private company.
NOTES: C-Creator, O – Owner, A – Aggregator, E – Experience.
Yields as of 14 Feb 2017.