April 2020 Update

The market staged a little recovery this month seemingly shaking off – or at least minimizing – any effects of the ongoing Covid-19 devastation, due in part to the partial ramp up of the economy in some states.  My state is one where a ‘phased’ approach is underway and there is uncertainty as to whether the peak has been attained (thereby ignoring the federal template).  While the economic malaise is running rampant through the states, it is doubly acute in the oil patch where state budgets (Texas) are dependent on a 4.6% tax on extraction (in a declining price environment) addition to an otherwise robust economy.  It will be an interesting social experiment as to how quick the average consumer will embrace the new reality (capacity limits in restaurants, for one), the ability for these businesses to turn a profit anew and if this throttling can move the needle on the economy (GDP, unemployment) without a corresponding spike in cases and/or mortality.   For one, I’m willing (and able) to wait at least two weeks and reassess at that time.

Due to the broker reshuffling caused by Motif shutting down, I can only provide a close estimate for the month.  Currently about $2,000 (cash, dividends, sells, buys) is in the ether migrating amongst accounts.  A full accounting is probably a week or two out.

Portfolio Value:  An estimated increase of 10.8% versus the 11.26% gain of the S&P.  For the year I’m up 2.06%.  All full share positions have been received by my primary broker with.

Dividends:  As previously acknowledged, my dividend increase run rate was not sustainable.  This came to bear in April with a 7.49% year-on-year actual increase.  I don’t think I lost any dividends with the timing of the transfer, but I may take a slight temporary hit as I await the cash to redeploy it.  Also some of the cycles will change as I exit some issues.

The pace of dividend cuts/suspensions continues to increase while any increases tend to be muted by 2019 standards.  Net increase for the portfolio stands at 5.75%, meaning my 10% dividend growth rate goal is in jeopardy.

Strategy Shift: In probably an overabundance of caution, I’ve decided to exit REITs that have a retail focus.  If the crisis is prolonged, rents, vacancy rates, property values and ability to refinance could come under pressure.  The ones retained are the four industrial and specialties in my portfolio.

I borrowed this illustration from one of my companies (BOKF) and modified it for my portfolio to begin to gauge potential impacts.  Currently PEP and KO’s biggest impact would reside in their fountain drinks (restaurants and venues).  I have yet to calculate a total …
Covid-19 Impact Areas

Entertainment & Recreation
Gambling Industries EPR
All Other CMCSA, DIS, T, AMC, PEP, KO, MSG, BATRA
Retail
Convenience Stores & Gas Stations CASY, VLO, CVX, RDS.B
Restaurants CBRL, YUM, YUMC, SBUX, MCD
Specialty OUT
All Other Retail KIM, SRC, WRE, VER
Hotels MTCPY
Churches & Religious Organizations CMPGY
Colleges & Universities SYY
Airlines LUV, SWRAY
Identified Businesses most impacted by Covid-19 mitigation efforts approximately xx.xx % of portfolio

I’m using this template strictly as a guide.  The retail facing REITs are all sold (with the exception of Kimco), Southwest Airlines has been reduced, the others on this list are cautious holds.  I continue the review of my portfolio with an eye on secondary impacts – like who really considered any impact to banks because church services weren’t being held?  I probably need to expand my thought process to include further knock-off effects.

Later in May I’ll update my posted portfolio – once the confirmations (and money) arrive.  What will be clearer is the shift to larger but fewer holdings.  While the portfolio remains sizable, I will retain  some speculative stocks and a few where I remain undecided.  By and large, banks with no dividend growth or ones where M&A prospects have dimmed will be pruned.  In June I expect to exit ETFs as well.  For the near term (12-24 months) I’m willing to accept a lower dividend yield if I gain quality – and limited Covid-19 exposure – in return.

Here’s hoping your month turned the corner!

The Bull Is Dead

Another brutal week in the markets at large as the long running bull market officially died.  It is perhaps fitting it came to an end under the watch of the only president that I can recall that used the stock market as a barometer of his economic prowess.  Perhaps had his team treated the outbreak seriously a little sooner he could have been viewed as managing the outbreak’s severity on the economy as opposed to now being managed by the situation.

The world as we knew it has – at least temporarily – come to an end.  Sports, leisure activities, schools and large gatherings are suspended and working from home is back in vogue.  While the House passed a bill for an initial stop gap measure, Trump finally did declare a national emergency – perhaps bruised by the bad press.  Not helping matters was the meme tweeted by his own staff.

The pace of news related to local and corporate responses to the virus  has been fast moving, one example being the NCAA tournament being changed to an event without fans to outright cancellation.  My initial thought for this week’s topic was how the economic impact of this one event’s lack of fans would impact local economies.  Scratch that research line – but I will share that the play-in game had an average impact to the Dayton economy of roughly $4.7 million, including ticket sales, lodging, restaurants and air travel.  Concession sales benefited Pepsi (PEP), Kroger (KR) and Anheuser-Busch (BUD) as well as a local charity. Airlines serving Dayton are Allegiant Air (ALGT), American (AA), Delta (DAL) and United (UAL).  Arena sponsors (priceless advertising) include Fifth Third Bank (FITB) and Cincinnati Bell (CBB).  Extrapolate that across the other thirteen, larger, multi-day sites and the picture becomes uglier.  Extrapolate further across the overall US economy and all of the events, services and venues potentially impacted and one can easily see why recession worries are on the rise.

One aspect I find troubling in this evolving situation is the confirmation by Treasury Secretary Steven Mnuchin that the administration was considering emergency assistance for affected industries. “This is not a bailout. This is considering providing certain things for certain industries. Airlines, hotels, cruise lines”.  Ignoring the semantics over the ‘bailout’ definition, airlines are perhaps understandable. Hotels, less so due to their existing leverage. But taxpayer money going to cruise lines? Methinks the administration has yet another unforced error looming on the horizon.  

Consider the optics:Royal Caribbean (RCL), Norwegian (NCLH) and MSC are incorporated in Liberia, Bermuda and Switzerland respectively, making them foriegn companies.  Even Carnival (CCL) is not immune having a dual US and UK corporate structure. Adding insult to injury: Only one ship (Norwegian’s MS Pride of America) is US flagged.  All others are flagged Bahamas, Panama or Malta.  While the Jones Act can be cited as the cause – thereby itself needing revisions, my belief, perhaps unfounded, is that these companies use this as an excuse to lawfully circumvent US Labor laws.  Cha-ching!

Another item easily overlooked last week was the Fed’s injection of liquidity into the system.  The rumor mill has been working overtime on this one but the general consensus is that hedge funds and private equity firms have been urging their portfolio companies to draw down their lines of credit – proving once again that cash is king especially in uncertain times.  In the event that the epidemic is little more than an economic blip, this could be considered prudent – essentially, no harm, no foul while generating some income for the banks. The problem I see is if the perception of a bungled operation is allowed to become a reality resulting in greater harm to the economy.

The general investing blogging community has finally awakened to the fact that there’s more than just noise as I’m seeing more posts on the Coronavirus topic.  Other than the drop in portfolio value all else is normal on this front. The dividends keep coming. Overall they are growing with only one cut to report. I was watching with unusual attention the results from my two Hong Kong companies as the virus is literally on their doorstep.  Both cited Coronavirus and the protests as headwinds being dealt with. One (Swire Pacific – SWRAY) maintained last year’s dividend rate while the other (MTR Corp – MTCPY) surprised me with a 2.5% increase. The common denominator being both had retained earnings and lines of credit as a backstop.  Over the next quarter, I believe the number of US companies drawing down their LOCs could be a leading indicator of the direction that this is going, i.e., is the worst behind us or yet to come? Meanwhile, I am selectively averaging down – last week was Australia’s Computershare (CMSQY) and Canada’s Toronto-Dominion Bank (TD).

As always, thoughts/comments are welcome!

Coronavirus – Pt 3

Another week has elapsed with the coronavirus headlines still front and center.  Politically in the US little has changed with the President doing his utmost to slant the narrative, including leaving an infected cruise liner offshore stating, “I like the numbers being where they are,” … (appearing) to be explicitly acknowledging his political concerns about the outbreak: “I don’t need to have the numbers double because of one ship that wasn’t our fault.”

On the state of the markets, as anticipated there was volatility this past week – despite an emergency Fed rate cut – and the DOW eked out a slight gain.  The one piece of good news at the end of the week was the announcement on test kits for the virus. Many details have yet to be released but will initially benefit two companies – Labcorp (LH) and Quest Diagnostics (DGX).  I suspect it will be provided on a minimal cost-plus basis due to the optics and several insurers already stating existing policies will cover said tests.

 It’s becoming increasingly clear that pundits (probably including yours truly) have disparate ideas as to what’s next.   What is known is travel is being disrupted – Amtrak, airlines and ships. Conventions, including the iconic SXSW, have been cancelled or postponed with a direct economic impact already exceeding $1B – with more to come.  Many companies are issuing earnings warnings, enacting travel restrictions and enabling work from home regimens. Schools in some areas – including the US – are temporarily closing.  Each of these comes with a yet to be identified economic cost, both direct and indirect.  As the US is primarily a service economy, much of this output will not be recovered in future quarter GDP numbers.

Playing on this theme, Jim Cramer began touting his “stay-at-home economy index”.  While (hopefully) being a thought stimulus for his followers, the most blatant issue I have is how well these companies can profit from this paradigm shift.  For example, will new subscribers flock to Netflix? Will companies continue their unfettered advertising on Facebook? How many buildings does Prologis have vacant to accommodate Amazon?  Does Amazon have spare robots up their sleeve to ramp up? This ‘index’ might have legs if the virus is more than a one or two quarter blip.  

Besides the test kits, my inclination is to look at the perceived necessities – the stuff flying off the shelves – even though demand may be based in fear rather than reality – and determine if the stock price reflects a value proposition.  These would include (public companies only):

  • N95 Face Masks (CDC approved
    • Honeywell (HON)
    • 3M (MMM)
    • Kimberly-Clark (KMB)
    • Alpha Pro Tech (APT)
  • Disinfectant Products (EPA approved)
    • Ecolab Inc (ECL)
    • Stepan Company (SCL)
    • Lonza Group AG (LZAGY – caution – possible spinoff)
    • Clorox (CLX)
    • Reckitt Benckiser (RBGLY)

In store for the week ahead will probably be a battle for the headlines between Coronavirus and oil.  No deal in Vienna is good news for US consumers other than the Texans dependent on the oil industry. Prudence dictates I review my oil patch banks’ relative exposure in a declining price environment.
Long: DGX, NVDA, AAPL, PLD, PEP, MKC, MMM, KMB, CLX

January 2020 Update

What a way to start the new year.  Beginning with the reshuffling of my portfolio and continuing right into earnings season and the inevitable debate over the Coronavirus impact on the economy … all I can say is yep it’s a lot to digest – and it’s only January.  With the gyrations in the market, all but two of my low-ball limit orders executed, probably the most controversial being MTR Corporation – the Hong Kong high speed rail line recently at the forefront of the protests. Anyway, I added two Canadian companies (Fortis and TMX Group – (Toronto stock exchange)) and starting the long rumored whittling of some of the non-core holdings (XRX and MSGN).  Most of the other action was moving Canadian companies from my taxable accounts to the IRA – some of which were done as a rebalance to minimize fees (hence the slight additions to the other holdings). Also selling part of the PB stock (which went overweight due to a merger) to fund these movements. As I indicated last week, this is the first of a multi-month transition. Obviously my timing was decent (this time, anyway) as the S&P lost 0.16% for the month while my portfolio gained 1.81%.

PORTFOLIO UPDATES

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis.

  • January delivered an increase of 22.73% Y/Y primarily the result of last years’ dividend cuts rolling off.
  • Dividend increases averaged 11.48% with 8.5% of the portfolio delivering an increase.
  • 2020 Dividends received were 1.86% of 2019 total dividends putting me on target to exceed last year’s total in November. The YTD run rate is under my 110.0% goal but I anticipate this will normalize as my portfolio movement becomes clearer and the current year begins to distinguish itself from the last. 

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.

AT A GLANCE

Inspired by Simple Dividend Growths reporting

The relationship between market action and purchase activity was roughly 95/5.  As I’m generally playing with ‘house money’ (proceeds from sales, M&A activity and dividends), I doubt there will be a significant variance until I fund my 2019 IRA contribution.  The Net Purchase Expense being less than 1 or 2% illustrates the ‘house money’ concept. Timing did play a part as I sold early in the month (before the drop) and most of the purchases were in the latter part of the month. 

SPINOFFs

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which remains in progress.

MERGERS

Spirit MTA REIT (SMTA) voted on Sept. 4th to approve the sale of most assets to HPT for cash. A second vote was held to liquidate the REIT. The first payment was received and awaiting final settlement payout. Fully expecting a profitable outcome for one of my most speculative positions.

SCHW to acquire AMTD for 1.0837 sh SCHW to 1 AMTD.  My only surprise with AMTD being taken out was the suitor – I had expected TD.  Regardless, I have three concerns over this deal, 1) profit margin compression with the onset of $0 fee trades, 2) possible liquidation of a partial TD stake to reduce their ownership share from 13.4% to 9.9% (the same issue Buffet regularly faces) and 3) 10 year phase-out of AMTD/TD cash sweep account relationship.  The third one means TD has a low cost (albeit, decreasing) source of deposits for the foreseeable future. After the first of the year, I’ll probably cash in AMTD and increase TD a little further.  

SUMMARY

Overall, the only complaint is the sluggish start to the year. Minus the drag from last years’ dividend cuts I figure this will be short lived.  On my goals, progress was made as follows:

  • Scenario 1 – TD is now confirmed
  • Scenario 2 – Half complete, awaiting timing issues for the sell part
  • Scenario 3 – Determination of maximum contribution amount complete
  • Scenario 4 – 2020 RMD amounts identified

Here’s hoping your month was successful!

Last Week in the Rear View

IMF growth forecasts for 2020 were released this week and were inclusive of the “momentous” and “remarkable” Phase 1 trade deal between the US and China.  It would appear the critics of the deal win the first round as China’s growth forecast for 2020 was revised higher by 0.2 percentage points to 6%, while that of the U.S. was marked down by 0.1 percentage points to 2.0%.  While I’m sure the diehard Trump supporters will discard this report as another in a long line of “deep state conspiracies”, one opinion worth reading is how China is retooling – whereas where are we? My thinking is the trade deal is at best a Pyrrhic victory for the US – tempered by a possible coronavirus black swan.

In a similar vein, is a recession in store for the trucking industry?  That is perhaps the implication of the 2H 2019 data. Trucking, shipping and freight are indicators I tend to keep an eye on and one possibility is recession – which I discount.  In my view, this slowdown is a return to normalization – coming off the sugar highs of the tax plan of 2017 followed by the tariff front loading of 2018. Others to watch in this space include CAT, CMI and NAV.  There are, however, opposing views, such as Larry Kudlow’s, “You’ve gone from 1.5% to 2% growth. We had it going at almost 4%, then the Fed tightened.” Oh yes, the infamous Fed tightening defense. Well sir, unless your boss can pull another rabbit from his hat, I doubt the ‘blame anyone else game’  has much longer to run.  There does come a point when your policies have to stand on their own merits.

In my inbox this image arrived.

Now, I own CLX, CL, PG, GIS, K, KHC, KO and PEP.  If you’re counting, that’s 8 of the 14 company owners of the 26 listed brands.  In an exchange telling of the times in which we live:

Me: So just because they sold themselves to a larger corporation now makes a product like Burt’s Bees less natural? Or am I missing your point?

Resp: They do tend to alter the original ingredients

Me: Well, I guess since there is no acknowledged standard, natural would be in the eye of the beholder.

Point is the definition of “Sold Out”.  My assumption being a merger or acquisition.  Obviously someone else saw this as a breaking of the “natural” covenant – of which there are no standards.  I cannot prove or disprove the “tend(ing) to alter ingredients” allegation. Another example of society’s ongoing inability to communicate.

The final act for the week was the Steve and Greta show.  In Davos, Mnuchin questioned her economic credentials in regards to climate change.  While he may have been technically correct, his flaws were to attack a school girl on an issue where the US has ceded any moral high ground.  He lost the round “bigly” on optics alone.

My opinion is that even if climate change could be denied, the planet and our environment would be better served by implementing many of the Paris Accord action items.  Greta’s zeal is both her charm and achilles heel. To blast the Paris accord as not being enough may well be correct, but at least it is a beginning.  My preference for the moment is to incentivize constant incremental improvement in the vein of Deming’s Law and to bring the ESG conversation to the forefront.  However, to ignore the realities of economics in this quest is begging for the Law of Unintended Consequences to bite you.  One example being a retooling of worldwide supply chains if plastic containers were outlawed.  Doable, yes – but at what cost and in what time frame. Another example is even more ghastly – Healthcare and Pharmaceuticals.  These two consume roughly 4% of petrochemical production although part of this could be attributed to packaging. Impacted products would currently include Aspirin, Heart valves, Hearing aids, Artificial limbs, Antihistamines, Rubbing alcohol, Cortisone, Anesthetics and more.  Two possible consequences emerge, 1) even greater increases in health care costs, and/or 2) Bringing back Sarah Palin’s (2009) death panel debate except the options today could be a heart valve for someones’ life today versus a possible future life. Oh, the conundrums we face.

As we swing into the final week of January, it’s time to break out the month end reports. For my part, my activity was abnormally high due in part to some initiatives previously discussed. Hoping your week is great!

Randomness For July

Typically I gain inspiration from the news or other bloggers – or a combination thereof. When a thought – or concept – materializes my research kicks in to validate (or invalidate) the idea. Unlike others, my approach doesn’t follow a given model nor does it lend itself to a generic screening process. This isn’t to imply I ignore PE ratios, Dividend Growth Rates, Dividend Coverage, et.al., because I don’t. It’s just that outside the core 36 holdings I want to see a story, a compelling reason or something that makes me scratch my head and think.

Hidden in plain sight this week were a few that fit this category, so without further introduction, I present these for your consideration.

Bottling/Snacks Skirmish?

Pepsi announced the acquisition of South Africa’s Pioneer Food Group. I believe this intensifies the battle between the two giants and provides Pepsi a leg up in the snack segment, adds some bottling and expands their distribution capabilities. Conversely, Coke has pretty much divested their bottlers with the exception of Africa. So the question becomes, “What’s up with Africa?” and which one holds the answer to this riddle. Category: scratching my head

Watch List Addition

A friend of mine sent me a link to the Australian version of 60 minutes with an interesting (but non-standard) treatment for stroke victims. There are many more questions than answers with this treatment, most notably sustainability, yet the initial findings hold some promise. Ever the sucker for a speculative play in the realm of strokes (remember my Nexeon investment – (currently tardy in their filings)), perhaps a small investment may bear fruit. The drug in question is Etanercept and the company is Amgen. Bonus points for AMGN paying a dividend. Category: Good Story

Political Thought

We’ll delve into the political arena a little as the Democrats have initiated an opening salvo illustrating to the world they might be able to walk and chew gum simultaneously. This effort is in the form of a Senate bill provocatively titled, “Stop Wall Street Looting Act of 2019“. This bill aims to stem some of the more egregious acts of private equity firms when they take companies private. Assuming this gets through the proverbial roadblock in Mitch McConnell and the unrelenting lobbyists, I have a one minor concern (outside the name) that should be addressed in order for bipartisan support to be obtained. Section 309 is applicable to workers and places a higher priority on pension funding, which is well and good. The issue I have is in the charge to bankruptcy judges to consider job retention in a liquidation (sale) event. If I thought I could profit via productivity gains (technology) at the expense of labor, I would have no incentive to prevent full on bankruptcy – waiting to buy the pieces after the fact. Category: Compelling Reason (probable GOP inaction to avoid debate)

With these thoughts, I hope the week ahead is good for you!

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!