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!

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For Your Reading Pleasure

Every so often I update my directory omitting inactive or defunct blogs and generally get a feel for what the temperature is in the worlds I frequent less often.  This exercise was all the more telling in the general mood within the community.  One example being Young Dividend‘s monthly recap in which he notes, “Although the portfolio value fell, it is interesting to see that the dividend growth graph of my portfolio continues to climb upwards.“.  In a nutshell that is the reason we choose DGI.  Another analysis on staying the course comes from Time In The Market.  Points I like to keep in mind when the markets are volatile.  My friend Tom over at Dividends Diversify scooped my original thought for the week with his Can You Save Money at a Farmer’s Market piece.  My focus was on the Community Kitchens used by many of these vendors.  That concept will be fleshed out  further and arrive at some future point in time.

All good reads which I encourage you to partake.


Not to beat a dead horse, but I’ll  touch a bit more on Bank OZK which was one of last week’s topics.  Turns out The Dividend Guy featured this stock on his podcast the day before its precipitous drop.  To his credit he published a mea culpa on which the Seeking Alpha version received mixed reviews.  In my view, his laser focus on the dividend growth blinded his peripheral vision.  Not looking a little harder under the hood, so to speak.  Wolf Richter‘s  piece on the potential asset bubble in Commercial Real Estate (CRE) can highlight reasons a broader view is warranted at times.


Since I mentioned Wolf Street, a couple of additional articles grabbing my attention (including the comments) were, Why I think the Ugly October in Stocks Is Just a Preamble with a compelling argument and What Truckers & Railroads Are Saying About the US Economy.

Full disclosure: Long CASS whose data is the basis for his article.

As we come into the final week of the month, though my portfolio is down my dividends are up for the month, quarter and year.  The only suspense being the magnitude of increase!

 

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.  🙂

My 3Rs – Revamp

Last post in this series I highlighted my views from the rear view mirror.  Going into 2019 will see more changes than normal.  No I’m not selling any positions but changing the emphasis (allocation) on certain issues.  The game plan is for reinvested dividends and fresh money to gradually swing the portfolio into balance with the new targets.

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