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 …

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Uh-Oh …

In last weeks’ post I shared that effective January, my portfolio will experience two dividend cuts.  Based on how my holdings are structured, the overall impact will be a but a blip.  The greater hit is to my pride.  Other than M&A or spinoff activity, never have I experienced more than one cut in a year.  This, my friends, is with forty years of investing under my belt.  And now we have two announcements in the span of one week.  Also (and perhaps warranted), The Dividend Guy published a piece that essentially says that, “hey, I might have screwed up on OZK but at least I never invested in these dogs”.  Like yours truly.  Happy fifth year to you bud and let’s see if that record holds for another thirty.

Seriously though, the GE and OMI situations can’t be any more different.  The only commonality is the cut.  The Dividend Guy mentions a couple of others as well – which I don’t own.  I continue to be suspicious of the real strength of the overall economy as MAIN also announced a revision to their dividend policy (though not directly a cut).  As an investor looking toward dividends, if this is the beginning of a trend it may be time to pare some of the speculation and migrate towards a more conservative posture.

Meanwhile, in these types of circumstances I feel compelled to share my reasoning and anticipated reactions.

Owens & Minor (OMI)

I have to concur with Dividend Guy’s observation earlier this year that this was “dead money”.  I pretty much reached the same conclusion when I reduced my holdings by about 20% in 2015.  I was content with the minimal dividend growth due to their stellar track record.  The sea of change began in earnest in 2017 with fears of the Amazon effect.  Then a couple of losses to competitors (one being CAH).  Current pressure is hitting them on at least two fronts: the trend for hospitals to in-source and the ability to pass on increasing costs.

Being a patient investor I could accept all of the above and even a frozen dividend as they sort out the issues.  But an unexpected cut of this magnitude leads me to believe there is another shoe to drop.  Obviously I’m not alone in this concern on the earnings call, an analyst from Robert W. Baird & Co. asked the operative question, ” … And how comfortable are you with the covenants at this point on the debt position?”  Last time I saw this question was when Orchids Paper (TIS), another former DGI darling, was in their free fall.  I still like OMI’s logistics but they failed to capitalize on the head start they enjoyed prior to this advantage becoming a commodity. 

OMI accounted for 3.46% of my 2017 dividends received and through 3Q 2018 had been reduced further to 1.89%.  As this is an IRA holding I’m limited in the loss realization but intend to sell after ex-dividend and replace with a Canadian stock (with no tax withheld in IRAs).  I suspect my Q1 2019 numbers will see minor impact in the Y/Y growth.


General Electric (GE)

On GE, Dividend Guy’s analysis matches mine, hands down, purely from a DGI perspective.  GE, however (in my view) never regained their prior glory when the financial crisis exposed their warts.  There is but one reason to have GE in a portfolio and it’s not the dividend, it’s corporate actions – which include things like spinoffs (which were the subject of one of my muses).

As this type of approach is speculative in nature, it pays to be mindful of the weightings.  In my case, GE has ranged from 0.05% – 0.07% of total dividends for the past two years.  My self-imposed maximum for speculation is 1% per issue.  Therefore, I’m well within my targets.

So I consider this similarly to a currency trade where GE stock is the fiat.  The wild card is the exchange rate when the spins are finalized.  Best case is that GE is now fairly or under valued, in which case pending actions will be in my favor.  Worst case I get a unfavorable cost basis that reduces (under current law) my tax basis.  Therefore with minimal downside (unless GE goes belly-up) I intend to increase my GE holdings (once the price settles) to the nearest round lot and await the spins.


Therein lies my strategy for dealing with these events.  I’ll attempt to follow the adage: When life gives you lemons, make lemonade!

October 2018 Update

Octobers carry the weight of history on their shoulders and this year was true to form with some wild swings.  Though some sectors touched bear market territory (think housing), basically this month was a mere – but tumultuous – correction.  As we head towards this years’ finish line, there is no room for complacency as my fear is that storm clouds are forming heading into 2019 – basically a tale of two economies.  At the forefront of my mind are the two companies delivering notice of dividend cuts effective January.  I’ll dive into them in more detail next week but Owens & Minor  (OMI) a soon to be former Dividend Achiever which will probably be sold (-71.15% cut) and General Electric (GE) which will cut for the second year in a row this time by -91.67% to which I’ll probably add.  At least I have two months lead time to execute a strategy on my terms as the losses are already baked in.  October saw the S&P of drop 6.96% while my portfolio outperformed the index by decreasing 5.8%. YTD I’m ahead of the S&P by 1.36%.

Portfolio Updates:

  • lost COBZ, added additional BOKF as stock/cash merger completed
  • initiated new position: CL
  • initiated new position: BHBK
  • initiated new position: BNCL
  • initiated new position: HTH
  • initiated new position: SF
  • rebalanced and added to my ETF group (CUT, EWA, EWW, JPMV, VGK)
  • averaged down on OZK
  • added to CLX prior to ex-div

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.

  • October delivered an increase of 32.12% Y/Y, the impacts being dividend increases, special dividends and reinvesting merger cash proceeds into the portfolio.
  • October delivered a 10.52% increase over last quarter (Jul).
  • Dividend increases averaged 15.56% with 74.77% of the portfolio delivering at least one increase (including 2 cuts (GE, SRC).
  • 2018 Dividends received were 104.04% of 2017 total dividends exceeding last year’s on October 19th.

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

NVS proposed spin of Alcon scheduled for shareholder approval Feb 2019

On Oct 4, MSG filed a confidential Form 10 to spin the sports business

Mergers:

XRX merger with Fujifilm cancelled (still being litigated).

SHPG to merge into TKPYY

GBNK to merge into IBTX (shareholders approved)

GNBC to merge into VBTX (semi-reverse)

BNCL to merge into WSFS

BHBK to merge into INDB

Summary

My repositioning was completed and my 2018 dividends pretty much locked in.  I’ll  now focus on 2019 as it appears I need a head start with the dividend cuts looming.   🙂

Hope your October was equally as good – or better!

April Showers

Below the shifting landscape that debates the notion as to whether tariffs are a negotiating ploy or the real deal, some pig farmers are now operating at a loss of thousands of dollars per week (futures markets have priced in tariffs) and soybean growers are considering whether to reduce their plantings to avoid the same fate.  Meanwhile the impact on our NAFTA partners is also being considered across the borders.  Canada can increase their soybean and pork sales to China but the net impact will still be negative to them considering the magnitude of trade volumes.  Mexico is expanding ties to China in an effort to mitigate the ‘Trump’ effect.  All the while, the administration has to be aware that China holds the ultimate ‘trump’ card in the debt held.  Some bearish views posit US interest rates could rise to 14% if China ceases their bond purchases.

With these headlines staring at us, it would be excusable to have missed some of the underlying news – one being in healthcare.  Two of my companies made the news this past week with possible or rumored deals; Shire (SHPG) and Humana (HUM).  Takeda’s interest in Shire has all the appearances of industry consolidation, Wal-Mart and Humana’s discussions are more along the lines of being one of the last gorillas.

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November 2017 Update

The upward trend continued this month fueled by the progress on the tax plan.  If finalized, my guess is that the first half of 2018 will be good for corporations (i.e., dividends) with reality setting in later in the year that the average consumer received a raw deal and has less disposable income than advertised.  That is unless trickle down really works.  The wild card being the government (or lack thereof) as a second felony plea was accepted with individuals tied to the campaign or administration.  The S&P index increased by 2.81% while my portfolio increased by 3.22% largely fueled by Financials.  For the year I’m still ahead of the index by 3.12%.

Headlines impacting my portfolio (bold are owned):

  • 11/1 – OMI buys HYH‘s Surgical and Infection Prevention (S&IP) business
  • 11/2 – SBUX sells Tazo line to UL
  • 11/6 – AVGO bids to acquire QCOM at $60 cash & $10 stock per share
  • 11/6 – BCE acquiring ARFCF
  • 11/9 – AAPL acquires InVisage Technologies
  • 11/13 – GE cuts dividend by 50%
  • 11/13 – AMT buys Idea/VOD Cellular towers in India
  • 11/13 – VER selling Cole Capital to CIM Group
  • 11/14 – Baupost Group initiates 3,565,361 sh position (abt 6.25%) in AMC
  • 11/14 – MSG to sell WNBA team (Liberty)
  • 11/15 – SQ launches ability to buy and sell Bitcoin
  • 11/16 – PYPL sells $5.8B loan package to SYF
  • 11/16 – IRM buys China assets from SFG.CO
  • 11/20 – MSG acquires Obscura Digital
  • 11/27 – PNC acquires The Trout Group, LLC
  • 11/28 – BLK to acquire C‘s Mexican asset management business

Portfolio Updates:

  • increased position in existing DRE holding

Dividends:

  • November delivered an increase of 18.3% Y/Y with the about 60% of the increase being attributable dividend increases and the remainder purchases.
  • November delivered a 1.0% decrease over last quarter (August) due to two payouts being moved to December.
  • Declared dividend increases averaged 11.9% with 71.75% of the portfolio delivering at least one increase (including 2 cuts (XRX and YUM) and and 1 suspension (TIS)).  Note: GE’s announced cut is counted as 2018.
  • YTD dividends received were 109.86% of total 2016 dividends which exceeded last years’ total on October 25th.

Spinoffs:

Spirit Realty Capital (SRC) – Nov 21, Form 10 was filed confidentially with spin completion targeted for 1H 2018.

Mergers:

AGU/POT (Nutrien) remains pending with the US being the only approval pending.

Summary

My 2018 strategy is forming with the focus turning towards Consumer Staples and Utilities (existing holdings).  I expect to incorporate a side strategy on lower yielding but faster growing companies which I’ll publish in the next week or two.   Of course I will continue to also pursue opportunities as they arise.

And how was your month?