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.
The upward trend continued this month with catalysts being the tax plan and holiday sales. My guess remains that the first half of 2018 will be good for corporations (i.e., dividends and buybacks) with a shift in focus later with deficits and mid-term elections playing a leading role. I remain convinced the yearlong weakness in the US Dollar will continue and expect to allocate more cash into foreign equities during the first half 2018. I will review this plan as my personal tax implications become clearer. For the month, the S&P index increased by .98% while my portfolio increased by 3.29% largely fueled by Financials (again). For the year the S&P increased by a stellar 16.26% while I came in at +20.58%! The S&P return with all dividends reinvested adds about 2.41% which my hybrid approach still beat.
Each year I establish a basic plan to govern my investing activity based on sectors, segments or locales able to deliver a little alpha to my portfolio. The past couple of years had a focus on the Financial industry with the outcome being rewarded with mergers (small banks) and outsized dividend increases (money center banks). I also began increasing my Canadian allocation in 2015 from 2.5% of my dividends to the current 8.6%. Since the election, I was accelerating the increase in my other foreign holdings to the current 13.6% on two theories, 1) gridlock in Congress would persist as the Republican majority would be too narrow to push through sweeping changes, and 2) this inaction would result in a weaker dollar. It appears I was correct on both counts as the US dollar is now at an eight month low.
With my alpha agendas now too pricey (at least for slam dunk results), a re-prioritization is in order. With the Fed Chairs’ testimony this week indicating that GDP growth of 3% would be difficult, the Trump agenda which projects a higher growth rate is likely in peril – even ignoring the self-inflicted wounds. Without an improvement in the GDP, deficit hawks will be circling. It is likely the last half of the year will present some opportunities, but my view these will be predicated on external events. My eyes will remain open to the USD exchange rate – on strength I may buy foreign issues.
My portfolio allocation between holdings labeled Anchor, Core and Satellite have been imbalanced for a year or two primarily due to merger activity and the acceleration of adding foreign issues. Now that the major mergers have completed, the last this past January, and other alternatives are slim, I figure it’s time to get back to basics.
My going forward strategy can be summarized as follows:
- Non-US equities when secured at a favorable exchange rate
a)I have 2 Japanese, 2 Swiss, 1 UK and 1 Swedish company on my watch list in the event an attractive price presents itself
- Assess corporate actions (spins, splits, mergers) for opportunities
a) Generally I’m agnostic to splits except when the result would be a weird fractional. I can easily manage tenths or hundredths of shares. Smaller sizes are troublesome so I avoid when possible.
b) Spins (and mergers) are assessed to prevent (if possible) weird fractionals. For instance, I added to my MET position earlier this month as their spin will be at a ratio of 11:1 which would have otherwise delivered a weird fractional.
- Assess portfolio for average down and other opportunities
a) An example of this was last months’ purchase of KSU. To this end, I recently updated my Dividends (Div Dates) Google sheet to flag when the current price is lower than my cost basis.
b) An example of “Other Opportunities” would be BCBP which is resident in my Penalty Box due to dilution. The dilution (secondary) might be explained (now) with their announced acquisition of the troubled IA Bancorp. If the regulators provide their seal of approval, it may be time to remove BCBP from Penalty status and perhaps add to this 3.5% yielder.
- Add to holdings that are below target weighting
a) This is where I expect most of my second half activity to reside.
Of my 26 stocks labeled Anchor, Core or Satellite; 5 can be considered at their target weight (within .5% of the target) and 4 I consider to be overweight. The remaining 17 will receive most of my attention. As most of these rarely go on sale, I’ll likely ignore price and place a higher priority on yield and events – at least until I’ve exceeded last years’ total dividends.
The following table highlights this portion of my portfolio:
|First of Long Island/FLIC||C-(3%)||0.85%|
|Bank of the Ozarks/OZRK||C-(3%)||0.67%|
|NOTE: Not all payment schedules coincide completely|
|PNC Financial Services/PNC||C-(3%)||0.30%|
|Legacy Texas Financial/LTXB||C-(3%)||1.48%|
|NOTE: Not all payment schedules coincide completely|
|Flushing Financial Corp/FFIC||S-(1.5%)||0.99%|
|NOTE: Not all payment schedules coincide completely|
I will provide the caveat that this plan is subject to not only the whims of the market but of my own as well. In addition, this plan may be changed if/when a better idea comes along.
June was an interesting month in that the Tech sector hit a rough patch, some IPOs had trouble getting out the door and financials had a second wind. Frankly I think a lot of the action had more to do with repositioning as some funds/traders’ positions didn’t perform as anticipated and are now playing ‘catch up’ during the last half of the year. The S&P ended the month up 0.48% while my portfolio recorded a gain of 1.44% largely on the heels of the bank CCAR results. For the first half of the year, I’m ahead of the index by 5.02%.
Headlines impacting my portfolio (bold are owned):
- 6/12 – HYH explores sale of surgical line (infection prevention)
- 6/12 – SBSI acquires Diboll Bancshares
- 6/14 – OUT acquires Dynamic Outdoor
- 6/23 – IBTX sells 9 Colorado branches to TBK
- 6/23 – CM completes PVTB merger
- 6/23 – Upon merger, POT/AGU to be renamed Nutrien
- 6/27 – V takes stake in Klarna
- 6/27 – XRX sells France research center to NHNCF
- 6/29 – MET spin finalized
- 6/30 – OCFC to acquire SNBC
- Added to KSU
- Added to CLX
- June delivered an increase of 31.84% Y/Y with, once again, the vast majority of the increase being attributable to foreign dividend cycles (larger, although less frequent). With one exception this should now be normalized.
- June delivered an increase of 12.4% over last quarter (Mar). The breakdown of the increase is:
- 37.4% replacement for TIS (which paid in April (late) and suspended the div)
- 36.2% April purchase for tax reduction
- 14.8% foreign cycle
- 11.3% purchases from dividends/dividend increases
- For the second month in a row, no new cash invested
- Declared dividend increases averaged 10.82% with 56.5% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension)
- YTD dividends received were 59.58% of total 2016 dividends which if the current run rate is maintained would exceed last years’ total in early November
Note: My portfolio additions have begun migrating back to US equities as the weakness in the US dollar has been faster than I forecast. Unless geopolitical events occur to reverse this trend I suspect fewer foreign issues will be acquired.
MET has declared their spinoff – Brighthouse Financial (BHF) – effective August 4th. Holders as of July 19th will be entitled to 1 share for each 11 MET shares owned.
AGU/POT (Nutrien), SGBK/HOMB remain pending
Periodically I encounter an article that hits at the core of one of my strategies. As many of you know, I’m currently a little overweight financials with an emphasis on regional banks. This was not always the case as I (fortunately) exited the sector in late 2007 reentering only in early 2013. My five year pause was bookended by what Richard J. Parsons refers to as the Great Panic of 2008-2009. His article, Finding Alpha In Reliable Dividend Banks(14 June 2017) struck a chord with me and illustrated some of the style I came to embrace for a time. Though I’m not selling my banks, other than special situations, I’m currently not a buyer either. If you are a bank investor (or considering being one) I’d recommend reading his article.
His article highlights 30 regionals that actually raised dividends during the Panic. By comparison, my hypothesis was segmented into three ‘buckets’ which were:
1.Good dividend payers
2.Stock dividend payers
Although he includes some stock payers (CMBH, AROW, SBSI, and FLIC (roundups on splits)) this is not his article’s focus. I’ve written on these before so I’ll exclude them.
His article also points out that only one of the original 30 was acquired which is a slight disappointment when one of my goals is to obtain a merger premium. Several on his list were acquirers which kind of proves my rationale to expand the universe to include potential acquisition targets in my bank holdings a couple of years ago.
Leaving us with his list. One notable point is his geographic analysis. “Certain states are more likely to be home to these reliable dividend banks: Indiana, Texas, California, Kentucky, Missouri, and upper state New York.” This melds with my findings though I attributed this to state regulatory agencies as certain states had disproportionate numbers of bank failures. Therefore I excluded western (California) and southern US banks. To his mix, I found Pennsylvania to be a viable candidate as well. This difference could be that mutual conversions (notably preeminent in PA, NY, NJ, VA and MA) were identified as likely targets by my study.
Another note on his analysis, “…a few critical factors influence long-term success in banking: hands-on expert management…” In fact he elaborates a little on this in the comment stream. A tidbit is both Missouri banks on his list were established by the Kemper family.
So the actual question is how do my portfolio holdings stack up against his list? Half of the thirty are owned. Of the nine owned by Richard, seven are owned (one obtained via a merger). One being in California was excluded by geographic screening. I’m not sure offhand though, why I excluded CBU out of New York. My primary takeaway from his article was a validation of my strategy and I need to further investigate a few.
His complete list follows:
|Arrow Financial Corp.||AROW||2.7B||NY|
|Auburn National Bancorp||AUBN||.8B||AL|
|Bar Harbor Bankshares||BHB||3.4B||ME|
|Bank of Marin Bancorp||BMRC||2.0B||CA|
|Bryn Mawr Bank Corp.||BMTC||3.3B||PA|
|Bank of Oklahoma||BOKF||32.6B||OK|
|Community Bank System||CBU||8.9B||NY|
|Community Trust Bancorp||CTBI||4.0B||KY|
|First of Long Island Corp.||FLIC||3.6B||NY|
|Farmers & Merchants Bancorp||FMCB||3.0B||CA|
|Norwood Financial Corp.||NWFL||1.1B||PA|
|Bank of the Ozarks||OZRK||19.2B||AR|
|People’s United Financial, Inc.||PBCT||40.2B||CT|
|Stock Yards Bancorp||SYBT||3.0B||KY|
|Tompkins Financial Corp.||TMP||6.3B||NY|
|UMB Financial Corp.||UMBF||20.6B||MO|
|Bold-owned by Richard, Italics-owned by me|
June was a roller coaster month starting with lackluster jobs numbers and ending with Brexit. In between was the Fed leaving rates unchanged yet again. The sleeper story being the CCAR results being released (partial results here). Notably, Citi received approval to increase their dividend by 220%. Although the DOW lost 871 points over two days, it recovered at month end while the S&P was flat for the month.
Investment Hunting just started a Blogger Interview series with an interesting interview with Roadmap2Retire a few days ago (June 21). One question in particular caught my attention, If you could only use one metric to evaluate a stock, which one would you choose? Sabeel’s answer was spot on in my book (I don’t think there is one metric that can be used to evaluate stock. If everything could be boiled down to one single number, investing would be easy. The reality is that investing in a company is a multifaceted aspect and there a hundreds of things to consider – both from a qualitative and quantitative standpoint.), but led me to ponder the proverbial what if: If there were only one which would it be?