July 2019 Update

The market continued to defy gravity this month as the only external turmoil was leveled at the Fed with encouragement to cut rates in excess of a quarter point. At month end, the Fed chose their own path and the market tailed off from the highs recently attained. Earnings season has been generally good to mixed with ongoing concern regarding Trump’s Tariff strategy the main issue. This month the S&P gained 1.3% while my portfolio gained 1.8%. For the year, I remain ahead of the benchmark by 1.0%.

PORTFOLIO UPDATES

  • finally sold out my OMI position (prior dividend cut) and used the proceeds to increase my RY position
  • Sold my UNIT (dividend cut/debt covenant issue) and LAMR (reporting discrepancies (my opinion)) positions using the proceeds to increase positions in ABM, ARD, BLL, CHCO, KOF, CCEP, CTBI, AKO.B, HOMB, IRM, NWFL, OCFC, OUT, PLD, QCOM, SRC, SMTA, BATRA and VALU as a rebalance
  • increased my CHD position
  • increased my JNJ position

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis. This month marks the removal of the quarterly comparison as this has proved to be steadily meaningless.

  • July delivered an increase of 4.64% Y/Y. This is off my typical run-rate due to two foreign pay cycles hitting in August this year, rather than the July of last year.
  • Dividend increases averaged 10.13% with 57.27% of the portfolio delivering at least one increase (including 4 cuts (two being OMI)). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980.
  • 2019 Dividends received were 64.31% of 2018 total dividends putting me on target to exceed last years’ total in late October. The YTD run rate is 107.66% of 2018, slightly under my 110.0% goal – but still recoverable.

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

XRX merger with Fujifilm cancelled (still being litigated). Pending settlement expected in September.

TSS to merge into GPN (all stock, .8101 sh GPN for each TSS sh) estimated to complete in October – Upon the announcement, I was prepared to sell my TSS position to book almost a triple in just over 4 years as GPN currently pays only a penny per share dividend per quarter. However, page 14 of their slideshow states: Dividend – maintain TSYS’ dividend yield. This would appear to indicate an increase in GPN’s dividend, so for now I’ll hold.

PB to acquire LTXB for 0.528 shares and $6.28 cash for each LTXB share. I plan to vote in favor of the transaction (on both sides), pocket the cash and sell the new shares – retaining the old and perhaps use some of the cash to purchase additional PB shares post-merger.

VLY to acquire ORIT for 1.6 sh VLY to 1 ORIT. This merger will result in a slight dividend cut November forward as the rate will be normalized to VLY’s current rate. In my view, the other positives outweigh this negative.

PBCT to aquire UBNK for .875 sh PBCT to 1 UBNK. I plan to hold this one as I wouldn’t be surprised if PBCT gets taken out at come point.

The last three continue to validate my strategy of bank consolidations from a few years ago. The only flaw (so far) was the holding period required – but dividends were received while waiting.

SUMMARY

Overall, no complaints. It appears the pending mergers might provide premium to improve my performance over the index, but I don’t want to get too far ahead of myself yet. I still see a little consolidation in my holdings through the last half by migrating to a slightly risk off stance, offset slightly by companies with compelling stories. My cash position does remain slightly above mean.

Here’s hoping your month was successful!

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 …)

March 2019 Update

With it being tax time in the US, closing out the first quarter and a yield curve inversion – this week’s installment has plenty to offer. With the market generally on the rise for the month I decided to maintain a cash heavy (for me) position while putting the finishing touches on my tax return. My general attitude has been one of caution for the past several months with the markets finally putting a yield curve inversion on display. Larry Kudlow was making the rounds this morning maintaining this is an aberration – and it very well could be. But it easily could be an omen of a looming recession – perhaps as early as late this year. Meanwhile, the S&P rose 1.76% while my portfolio rose 1.05%. For the year, I’m slightly behind the benchmark by -0.71%.

PORTFOLIO UPDATES

  • Increased my ETF position (CUT,VGK,EWA,EWW,JPMV)
  • added WSFS and lost BNCL (merger)

DIVIDENDS

While my primary focus resides on dividends with the goal being 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.

  • March delivered an increase of 8.34% Y/Y, the largest impacts being dividend cuts and a couple of cycle changes offset by increases.
  • March delivered a 23.3% increase over last quarter (Dec) – basically a return to normalcy.
  • Dividend increases averaged 6.19% with 34.55% of the portfolio delivering at least one increase (including 4 cuts (two being OMI)). This is off last years’ pace and I believe a new personal record for dividend cuts in a single year since about 1980. The most recent one being UNIT whose largest customer declared bankruptcy.
  • 2019 Dividends received were 27.12% of 2018 total dividends putting me on target to exceed last years’ total in late October.

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

NVS spin of Alcon (ALC) scheduled for April 9th, 1:5 ratio

On Oct 4,2018 MSG filed a confidential Form 10 to spin the sports business

MERGERS

XRX merger with Fujifilm cancelled (still being litigated).

BNCL merger into WSFS completed March 1st

BHBK to merge into INDB

TRUMP TAX PLAN IMPACT

This is a brief preview of the tax changes at a personal level. Headlines have previously reported that early filers were seeing lower average refunds – my guess is most of these did not adjust their withholding. Since then, the IRS has reported that the refunds have begun to ‘normalize’. As one who itemizes, my sense is that many filers are beginning to identify their own impact. In my case, I have a tax increase – not a cut – primarily due to being just below the new threshold for itemization. The standard deduction coupled with the tax brackets did a little number on me – which is what I was expecting so I wasn’t caught unaware. Adding salt to the wound was another change that disallows my minimal IRA contribution (as a non W-2 wage earner). On the bright side, my foreign taxes paid on dividends can still be applied as a tax credit. Bottom line – only in Trump World would the path to Making America Great Again run through the field of non-US stocks – assuming one wants as low a tax liability as possible.

SUMMARY

The blog data conversion to 2019 is almost complete still being worked on. The most significant error is my cost basis (dividend date screen) which doesn’t yet account for all DRIP additions or additional purchases. At this rate it may be 2020 before I finish this update.

Hope your month/quarter was a good one!

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!

Stock Buybacks?

As we round the corner coming into the final week of this month, the markets are showing a robustness that is probably more of a relief with abating trade tensions as the broader market was more a mixed bag with earnings reports. Case in point being my ongoing saga with Owens & Minor which announced their second dividend cut. At least they aren’t facing a SEC investigation à la Kraft Heinz. The common denominator in these two cases appear to be – at least in part – a laser focus on trimming costs with too much emphasis on the salary component.

Which leads to this week’s topic prompted by a private message which read in part: “… (I listen to) Pitchfork Economics with Nick Hanauer … (which) talked about stock buybacks and shareholder value maximization… I was hoping you could listen to it and let me know if everything they talk about holds up, or if there are pieces of the puzzle missing that might have been left out to steer a narrative. I don’t know what I don’t know and I don’t like thinking I might be getting misled.

First half the battle is acknowledging a gap in understanding. Most of us only begin to realize this too late in life choosing to muddle through as best we can. Second, keep in mind the quote, “99 percent of all statistics only tell 49 percent of the story.” Ron DeLegge II

For my uninitiated readers, this podcast is targeted to the rising generational groups such as Millennials, Gen-Z etc. with a slight Socialistic slant. The New Green Deal (which I’m currently researching) resides in this category as well – (but with a twist). Anyway, there are three schools of thought to stock buybacks; they are good, they are evil or they’re neither. The podcast presents them as generally bad, the current administration treats them as good (no choice here as they were spurred on as a by-product of the tax plan). My personal view is under current law – particularly when the Supreme Court of the United States has granted to corporations the notion of “corporate personhood” – they are generally neither. I’m more of a guy that tries to eke out a profit regardless of the rules, knowing they will likely change at a future date and adjustments will be required.

Major Issues with the Podcast

  • 11:44 – “Secondary offerings aren’t all that important”
    • Depends on the type – if the secondary creates more shares to fund a new production line for instance, why would there be a penalty for a return to the original share count?
  • 18:30 – 90% of corporate profits are returned to the richest people via dividends and stock buybacks.
    • Wells Fargo is 62% owned by institutions and the number is about 15% for Walmart. Generally this reflects ETFs and mutual funds which are largely owned by individuals.
  • 16:00 – shareowners are not investors.
    21:07 – … buying stock is speculating not investing .
    23:01 –  … if you think shareholders are investors … that contributes to the growing economic inequality
    • Only in the narrowest of definitions (buying an initial issuance or direct from a company’s secondary) is this true. Even as “traders” an economic interest with ownership rights is gained with the price (implied value) the speculation.
  • 26:49 – chartered corporations existed to better society and for a limited time.
    • These types of corporate structures were modified (initially in NC-1795) to circumvent perceived constitutional limitations on enforcement of multi-state investments (canals, railroads). They maintained a societal purpose including eminent domain rights (conversely, eminent domain is a New Green Deal issue as well).
  • 33:32    – Wells Fargo … laid off employees while (enriching owners through buybacks).
    • The layoffs were due primarily to exiting business lines in an effort to refocus on core operations reducing (in theory) the ongoing capability for malfeasance.  Also to reduce overlapping operations (footprint acquired through acquisitions). It was not related to buybacks. In fact, Warren Buffett, the largest shareholder is precluded from owning greater than 10%.  He is required to sell when buybacks are performed resulting in no short term enrichment.

The one point I hadn’t really considered in this debate was their point at 40:08 of a possible prohibition of buybacks if employees are receiving public assistance. I would add underfunded pensions and Sen. Marco Rubio’s (R-FL) position of taxing buybacks like dividends to the mix of potential areas to improve. One area requiring caution is the treatment of large private companies versus public ones. Examples that initially come to mind are Hobby Lobby, Cargill, Chick-fil-A and Koch Industries. None of the Democratic challengers has yet presented (in my opinion) a viable solution to improve the status quo without discriminating against any current stakeholder thereby cheapening their argument regarding equality.

So, while appreciating the question, my response is probably clear a mud as this issue is a tangled web with no clear right or wrong answer. Only that your instincts are correct in attempting to discern all the arguments to formulate your own opinion. My guess is this rebuttal does not fully address all the issues either – but my 2¢!

Any thoughts, opinions or other considerations that you have?

January 2019 Update

The new year began with a flourish shrugging off the December selloff and recovering most of the losses. With the month exhibiting minimal turbulence outside some earnings misses, my purchases were essentially toppers to existing holdings (except one) – all in the first week. The S&P rose 7.29% while my portfolio lagged a little rising 6.48%. In reality, I was probably even but my cash position was abnormally high as I failed to deploy the cash received from a merger (I exclude cash from my investing positions). I expect this will normalize during February.

PORTFOLIO UPDATES

  • Lost GBNK, GNBC and SHPG via mergers
  • Added TAK and regained IBTX via mergers
  • Added new position BDXA
  • Increased VGK, MSCI, SF, JPMV, HTH, GNTY, EBSB, EWA, DGX, CUT, CL, BNCL and BHBK positions

DIVIDENDS

While my primary focus resides on dividends with the goal being 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.

  • January delivered an increase of 19.63% Y/Y, the impacts being dividend increases, special dividends and reinvesting merger cash proceeds into the portfolio.
  • January delivered a 0.83% decrease over last quarter (Oct) – the impact of two dividend cuts.
  • Dividend increases averaged 8.84% with 20.81% of the portfolio delivering at least one increase (including 2 cuts (GE, OMI).
  • 2019 Dividends received were 9.33% of 2018 total dividends putting me on target to exceed last years’ total in October.

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.

2019 conversion remains pending

SPINOFFs

GE‘s rail unit to spin then merge with WEB. This was restructured in January to generate more cash for GE – end result being a taxable event for shareowners

GE to spin 80% of the health business

NVS proposed spin of Alcon scheduled for shareholder approval Feb 2019

On Oct 4,2018 MSG filed a confidential Form 10 to spin the sports business

MERGERS

XRX merger with Fujifilm cancelled (still being litigated).

BNCL to merge into WSFS

BHBK to merge into INDB

SUMMARY

To escape January’s dividend cuts relatively unscathed is monumental. Back in October my expectation was for the effects to linger through the first quarter. Now I can just put my head down and focus on the long game.

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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