The Defunct Kid Portfolio

This week saw the completion of the rebuild of my granddaughter’s portfolio.  Basically an effort that spanned six weeks and navigated some tricky waters – earnings season, trade news, Fed meeting … Yep, we had them all.  So, I figured it was only fitting to share the whys and wherefores of this little expedition since it pertains to the market.

Background

Since coming to live with us, the kid has been given an annual present of a stock holding and as such has accumulated a nice – but not quite fully diversified portfolio.  Over the years she has been proud of this and one year participated in a ‘mock’ stock contest at school which was (I believe) sponsored by FinViz taking eighth place in the state.  So it was a sad day for her when she was advised that the majority of college aid programs (Grants, Scholarships, etc.) would be discounted by 25% of her net worth. This includes savings, portfolio …  There goes the incentive for planning ahead. End result being upon graduation, her nest egg would be 0. My wife and I are not her parents – the legal status is guardian – so at least our net worth is not considered. So the game plan evolved to maximizing the available assistance.

Liquidation

The rules are similar between 529 plans and custodial accounts, except when liquidated.  With 529s, there is a penalty and possible tax restatements. With Custodial accounts there is the obligation of the custodian to prove the liquidation benefit was on behalf of the minor.  As these accounts were Custodial, I’m now tracking application fees, ACT/SAT testing fees and much more, so if necessary I can respond to an IRS audit.

My Decision

She’s aware that I chose to replicate her portfolio as a slice of one of my M1 pies.  So I laid the groundwork to ensure no dividends were lost in this migration. Fortunately I’d been holding much of my previously paid dividends in cash just waiting for an opportunity to present itself.  As the checks arrived, I moved an equivalent sum to M1. What I haven’t shared is my intention to gift it back to her upon graduation from college.

The Process

I created a spreadsheet with the sale price and the repurchase price to determine if I made or lost money (outside of fees).  I will say that I don’t have the nerve to try to time the market for a living. On the subject of fees, company plans managed by Computershare, Broadridge and Equiniti downright suck on fees when transferring or cashing out.  To be fair, that’s an aspect that’s not at the forefront of most DGIs who buy and hold for the long term. The fees ranged from a little over $25 (BR, CMSQY) to $0 (SCHW) with EQN.L in between at $15 and change. With today’s free trading schemes, the incentive for using traditional DRIPs will likely wane as I noted in one of my infrequent comments on Seeking Alpha.

Once started, I was blindsided by some events.  WFC named a new CEO, TXN provided weak earnings guidance and KHC had an earnings beat.  For the most part, I was able to better her sale price when I did my purchase as illustrated below.

Cur price as of November 8, 2019

Takeaways

While I didn’t enjoy this exercise, had I realized in 2010 what rules would be in place in2019 I’m not sure I would have done anything differently as the kid gained an appreciation for investing and the power of compounding.  Besides, Administrations come and go, rules and policies are ever changing. The key is adjusting to whatever is most beneficial at a point in time.

Going Forward

I will be hoarding most of my dividends once again until tax time as my wife took a part time job this year.  For the first time in a couple of years I’ll be able to make an IRA contribution. 2020 portfolio reporting will likely be a little strange – at least from my view of normalcy, as I tend to like consistency rather than one-off events.  (I know … first world problems …) My concerns lie more in highlighting dividend growth performance rather than portfolio growth via cash infusions – regardless of whether it’s new cash or self generated by reported dividends. This I’m sure will become clear as we progress into the new year.

As always, thoughts and comments are welcome!

October 2019 Update

On the 1.9% Q3 GDP growth rate, “The Greatest Economy in American History!” as contrasted with the 1.9% Q1 2012 growth rate under the prior administration, “Q1 GDP has just been revised down to 1.9%. The economy is in deep trouble.

As tweeted Oct 30, 2019 and May 31, 2012 by the now president, Donald Trump

With renewed optimism for a China trade deal (again), generally good earnings reports (though there were a few snags) and additional rate cuts in this Great Economy – perhaps to spur growth to the promised sustained 4%+ envisioned with the tax cuts (doubtful) – the markets did achieve new records. In spite of all this noise, the S&P rose 2.0% and my portfolio – sans purchases – rose 2.0%. I did deploy funds that were previously generated by the portfolio, accounted for in my reports , but then stashed in an interest bearing account. When incorporating these funds (repeat – no fresh money was used), the portfolio value rose by 8.65%. So, yes, purchases can have an impact on the portfolio. Imagine the potential results if it was “new money” and I had some years to let it run.

PORTFOLIO UPDATES

  • increased my LTXB position going into the PB merger
  • increased my JNJ position on weakness
  • Performed a partial rebalance resulting in slight increases to AROW, BANF, BKSC, BRKL, CVLY, FMBH, LSBK, NWBI, TMP, UMBF and WFC
  • New Position – GIS
  • New Position – WMT
  • New Position – UNP
  • New Position – RDS.B
  • New Position – HSY
  • New Position – TXN
  • New Position – ATO
  • New Position – T

DIVIDENDS

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

  • October delivered an increase of 7.49% Y/Y.
  • Dividend increases averaged 10.27% with 66.52% of the portfolio delivering at least one increase (including 4 cuts). 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 93.01% of 2018 total dividends putting me on target to exceed last year’s total in mid-November. The YTD run rate is 108.77% of 2018, slightly under my 110.0% goal – but still recoverable. Point of reference, this the first time since starting this blog that I didn’t exceed the prior year dividends before the end of 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

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). The expected settlement was disallowed by the judge September 13th.

PB acquired LTXB for 0.528 shares and $6.28 cash for each LTXB share which completed November 1st. I plan to pocket the cash and sell the old shares – retaining the new PB shares.

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 acquired UBNK for .875 sh PBCT to 1 UBNK – completed November 1st. I plan to hold this one as I wouldn’t be surprised if PBCT gets taken out at some point.

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 am awaiting final settlement payout. Fully expecting a profitable outcome for one of my most speculative positions.

SUMMARY

Overall, no complaints. The initial quote can also bear reference to the growth rate of my portfolio this month – which is why I presented the results in two ways. Although accurate, I do not care to be viewed as tilting the scales in favor of one narrative over another. My cash position will hover close to zero while replicating the kids’ portfolio but expect the dividend growth to accelerate into the first half of 2020 with this strategy.

Here’s hoping your month was successful!

Proxy Time!

It’s the time of year when winter is but a memory (for most of us), taxes have been filed and proxies are filling our mailboxes.  As I review the filings and determine how to cast my votes, I’m struck with one of these off-the-wall thoughts that hit me every now and again.  I wondered how much was earned – and the margins derived – via the annual proxy season. I didn’t delve into the number of trees sacrificed though I’ll wager it’s fewer than before electronic transmissions.

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‘Tis The Season

It’s getting to be that time of the year and since I don’t think the grandkid reads this thing, I figured I’d share one of the presents she’ll be getting.  Just to review, each year since she came to live with us she has received shares in a company as a gift. This gift has been purchased in a company DRIP, established as a Custodial Account of which I’m the custodian. Generally, the company is one in which she can relate, i.e., Trix was her favorite cereal as a kid hence the General Mills stock.

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The ‘Ole Ball Game

Take Me Out to the Ball Game

Jack Norworth – 1908

As a result of the Canadian Radio-Television and Telecommunications Commission decision to classify broadband as “a basic telecommunications service for all Canadians” I figured an update was in order for Part 3 of Methods to My Madness  post of last year.  Previously I had postulated that the Carriers were a viable segment in order to capitalize on Cord Cutting.   This segment over the past year proven to be more a commodity with streaming essentially the same regardless of carrier.  With limited pricing power, I now feel  this segment is more likely an indirect beneficiary rather than a driving force of Cord Cutting and am dropping this segment as a viable candidate going forward.

The other two segments, Creators and Providers, in my initial thesis remain intact.  In fact, AT&T’s (T) overtures with Time Warner (TWX) enhance the argument.  Casting about for a replacement segment, I ran across Mr Free At 33‘s post on “Experiencism”.  Although I can quibble with his choice of wording (I think the word he was looking for is Experientialism), the heart of his message is sound being a cautionary tale on falling under the spell of excess.

While I doubt many have the will, means or gumption to head to Thailand on a whim, many are seeking  “Experiencism” locally or with family and friends – and there lies my replacement!   I’ve written before on my interest in business interrelationships.  Localized Experientialism melds nicely into this strategy.  A family visit to the circus or an outing to a sports event are just a couple of examples.

Assume you experience a Flyers game in Philadelphia.  The Wells Fargo Center and Flyers are owned by Comcast (CMCSA), Spectracor (also CMCSA) manages it, Aramark (ARMK) has the food service contract and Comcast SportsNet (CMCSA yet again) the broadcast rights.  So the primary lines of business are the Content Owners/Creators (Teams/Studios), Aggregators and the Experience.  In sports, this model is pretty much followed across all leagues with only the companies involved changing.  In this definition, The Experience includes the cleaners, concessionaires and venue managers.

Many of these companies and teams are privately held with associated interrelationships managed or owned by an entity controlled by the owner .  Others, while public, pay a minimal – if any – dividend.  But there are a few that do pay a healthy – and growing – dividend.  Generally, to invest in this manner requires patience and a willingness to await a change in control of the team while being satisfied with bragging rights of ownership.  In fact, I have to agree with Christopher Lackey in his assessment: “The sports properties, which include the suddenly not laughable Toronto Maple Leafs and Toronto Blue Jays, are doing well and increasing in value, but investing on this basis alone is not sound because if the teams achieve success they require significant reinvestment to sustain it.

During the past year, Comcast (CMCSA) became sole owner of the Philadelphia Flyers and Liberty Media created a tracking stock (BATRA) based on the financials of the Atlanta Braves, new ballpark and nearby real estate.  I also uncovered two additional teams that have – at least in part – public ownership, the Chicago Cubs (TRNC which I believe retained ownership with the Tribune changes) and Seattle Mariners (NTDOY).

With content being the driving force in landing eyeballs – which in turn lands revenue, providers and the groups providing the eperience are the more direct beneficiaries.  Point in fact is Dustin Blitchok‘s article, “Which Streaming Providers Are Winning The Content War?”  This was also confirmed in series of interviews by AT&T employees aired on CNBC last week.  The following table presents my current take on this strategy which, as always, is subject to change.

OWNERS/CREATORS

COMPANY YIELD SEGMENT
Disney/DIS 1.41% C,E
Comcast/CMCSA 1.57% C,A,E,O – Philadelphia Flyers
Time Warner/TWX 1.67% C,A
Fox/FOXA 1.19% C,A
BCE/BCE 4.96% O,A,E,C – Toronto Maple Leafs, Toronto Raptors, Montreal Canadians
Rogers Comm./RCI 3.42% O,E,A – Toronto Maple Leafs, Toronto Raptors, Toronto Blue Jays
Madison Sq Gdn/MSG n/a O/E – New York Knicks, New York Rangers
Netflix/NFLX n/a C,A
Amazon/AMZN n/a C,A
Liberty Media/BATRA n/a O/E – Atlanta Braves
Nintendo/NTDOY 0.42% O – Seattle Mariners
Tribune Co./TRNC (susp) O – Chicago Cubs
NOTE: Nintendo also includes the Pokémon GO experience

AGGREGATORS

COMPANY YIELD SEGMENT
AMC Networks/AMCX n/a A
Discovery Communications/DISCA n/a A
Cox/(pvt) n/a A
MSG Network/MSGN n/a A
Charter/CHTR n/a A

THE EXPERIENCE

COMPANY YIELD SEGMENT
Aramark/ARMK 1.16% E
ABM/ABM 1.69% E
Compass Group/CMPGY 2.05% E
Sodexo/SDXAY 2.31% E
SMG/* n/a E
NOTE: SMG was an ACAS portfolio company as of June 3, 2014. ARCC does not include in their portfolio a/o 3 Jan 2017 merger. Both Bloomberg and Wikipedia classifies them as a private company.
NOTES: C-Creator, O – Owner, A – Aggregator, E – Experience.
Yields as of 14 Feb 2017.

Summer Days

Oh the joys of summer and relearning the teenage life through the eyes of my grand daughter.  An introduction to the world of Rattatas and Pinsirs as a player for Team Mystic.  Unless you’ve had your head in the sand, these are characters in the latest craze (fad) to rule the planet.  In case you’ve missed it, the newest ‘hot thing’ is none other than Pokémon Go.

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Methods To My Madness Pt 3

My final post to this series is probably the least defined and most speculative post I’ve composed.  Many have attempted before and I’m sure many will follow, but the topic Cord Cutting and how to profit from it is filled with politics, regulation, evolutionary technology, disruptive practices and good old fashioned corporate greed coming together to create a minefield to negotiate for those seeking answers.

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