Analyst BullS#!T!

My friend Frankie posted an aptly titled piece (Beware the Broker BullS#!T!) on analyst’s actions awhile ago (along with a followup) which struck a nerve as my early investing career had several of the pitfalls mentioned.  While I did evolve to settle primarily on a modified DGI strategy, I have to wonder as to the due diligence exercised by some of the broker’s clients. In the US, there are some shops that are essentially pay for play schemes, meaning pay us money and we’ll cover your business.  One of these is Taglich Brothers (which has a clearing business relationship with Pershing, LLC in which I am a shareholder (BK)).  Taglich, through it’s press release with NXNN (a spec holding of mine) disclosed, “In October 2017, the company paid Taglich Brothers a monetary fee of $4,500 (USD) representing payment for the creation and dissemination of research reports for three months.  After the first three months, the company will begin paying Taglich Brothers a monthly monetary fee of $1,500 (USD) for the creation and dissemination of research reports.”  Unbiased?  Unlikely. Another take on them was provided by D/M/O.  Point of reference, Orchids Paper (TIS), mentioned in the article was formerly in my portfolio and subsequently filed for bankruptcy protection (I had sold prior to the filing).

Another angle on alternative strategies was brought front and center this week with the publication of Spruce Point’s analysis on Church & Dwight (CHD).  Spruce Point is a small, short focused firm similar to Muddy Waters Capital or Kerrisdale Capital that use Seeking Alpha, Twitter and other social media to broadcast their research.  Spruce Point takes a short position, runs a campaign and determines the traction being gained. In the words of the founder Ben Axler, “Because I run a small business, we don’t have a lot of time to waste going down rabbit holes where there’s a dead end,” he says. “I can generally sniff out a company pretty quickly.”  OK, then.  

I admit that CHD is richly valued and perhaps they overpaid for some acquisitions.  I also submit that Spruce Point is highly vocal for their smallish size. They have, however, been building a little bit of a track record in this bull market.  On first blush, it appears the Spruce Point results have been stellar thus far in 2019 with a by moving the market in their intended direction 77% of the time on the day their report is released – translating into an average market loss of their targets of 3.78%.  I would posit their gain is even greater as I suspect their investors and subscribers get a first look at the reports. My guess would be a 5-10% short term gain.  

As of Sept 7, 2019

In the shorting game, the real money is to be had by riding a target down, but to do so requires conviction, stamina and staying power.  Based on Ben’s comment, I doubt they are riding the targets down other than a select few high conviction ones. My reasoning being that they would be booking a loss for 2019 as their targets, in aggregate, are 2.88% higher post call.  The three that would have rocketed their results lost 49%, 26% and 25%. Conversely the three they should have exited quickly gained 86%, 51% and 12% for the longs.

Over the weekend Spruce Point has continued their campaign against CHD using Twitter to gleefully proclaim success as CHD has not chosen to engage in their antics.  Although some of Spruce Point’s issues have some validity, in large I feel they are overstated – essentially a headline grabber.  

One issue they raise is the use of factoring to manipulate results.  Possible, but it depends on whether it is recourse or non-recourse. Spruce Point also takes issue with an undisclosed UK acquisition.  My take is with sales in the £764,000 range this is negligible. The current year “slowing dividend growth” could be explained by prudence in digesting its last two acquisitions.  I suspect this dividend trend may be the new normal for a period of time if management executes on their goal of expanding their “power brands” to twenty.

In summary, they could very well be right. They could also be playing a manipulation game. If weakness intensifies my thoughts are that a buying opportunity may be at hand. Then again – I may be wrong 🙂

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Uh-Oh …

In last weeks’ post I shared that effective January, my portfolio will experience two dividend cuts.  Based on how my holdings are structured, the overall impact will be a but a blip.  The greater hit is to my pride.  Other than M&A or spinoff activity, never have I experienced more than one cut in a year.  This, my friends, is with forty years of investing under my belt.  And now we have two announcements in the span of one week.  Also (and perhaps warranted), The Dividend Guy published a piece that essentially says that, “hey, I might have screwed up on OZK but at least I never invested in these dogs”.  Like yours truly.  Happy fifth year to you bud and let’s see if that record holds for another thirty.

Seriously though, the GE and OMI situations can’t be any more different.  The only commonality is the cut.  The Dividend Guy mentions a couple of others as well – which I don’t own.  I continue to be suspicious of the real strength of the overall economy as MAIN also announced a revision to their dividend policy (though not directly a cut).  As an investor looking toward dividends, if this is the beginning of a trend it may be time to pare some of the speculation and migrate towards a more conservative posture.

Meanwhile, in these types of circumstances I feel compelled to share my reasoning and anticipated reactions.

Owens & Minor (OMI)

I have to concur with Dividend Guy’s observation earlier this year that this was “dead money”.  I pretty much reached the same conclusion when I reduced my holdings by about 20% in 2015.  I was content with the minimal dividend growth due to their stellar track record.  The sea of change began in earnest in 2017 with fears of the Amazon effect.  Then a couple of losses to competitors (one being CAH).  Current pressure is hitting them on at least two fronts: the trend for hospitals to in-source and the ability to pass on increasing costs.

Being a patient investor I could accept all of the above and even a frozen dividend as they sort out the issues.  But an unexpected cut of this magnitude leads me to believe there is another shoe to drop.  Obviously I’m not alone in this concern on the earnings call, an analyst from Robert W. Baird & Co. asked the operative question, ” … And how comfortable are you with the covenants at this point on the debt position?”  Last time I saw this question was when Orchids Paper (TIS), another former DGI darling, was in their free fall.  I still like OMI’s logistics but they failed to capitalize on the head start they enjoyed prior to this advantage becoming a commodity. 

OMI accounted for 3.46% of my 2017 dividends received and through 3Q 2018 had been reduced further to 1.89%.  As this is an IRA holding I’m limited in the loss realization but intend to sell after ex-dividend and replace with a Canadian stock (with no tax withheld in IRAs).  I suspect my Q1 2019 numbers will see minor impact in the Y/Y growth.


General Electric (GE)

On GE, Dividend Guy’s analysis matches mine, hands down, purely from a DGI perspective.  GE, however (in my view) never regained their prior glory when the financial crisis exposed their warts.  There is but one reason to have GE in a portfolio and it’s not the dividend, it’s corporate actions – which include things like spinoffs (which were the subject of one of my muses).

As this type of approach is speculative in nature, it pays to be mindful of the weightings.  In my case, GE has ranged from 0.05% – 0.07% of total dividends for the past two years.  My self-imposed maximum for speculation is 1% per issue.  Therefore, I’m well within my targets.

So I consider this similarly to a currency trade where GE stock is the fiat.  The wild card is the exchange rate when the spins are finalized.  Best case is that GE is now fairly or under valued, in which case pending actions will be in my favor.  Worst case I get a unfavorable cost basis that reduces (under current law) my tax basis.  Therefore with minimal downside (unless GE goes belly-up) I intend to increase my GE holdings (once the price settles) to the nearest round lot and await the spins.


Therein lies my strategy for dealing with these events.  I’ll attempt to follow the adage: When life gives you lemons, make lemonade!

Dec 2017 Update and Year End Review

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.

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November 2017 Update

The upward trend continued this month fueled by the progress on the tax plan.  If finalized, my guess is that the first half of 2018 will be good for corporations (i.e., dividends) with reality setting in later in the year that the average consumer received a raw deal and has less disposable income than advertised.  That is unless trickle down really works.  The wild card being the government (or lack thereof) as a second felony plea was accepted with individuals tied to the campaign or administration.  The S&P index increased by 2.81% while my portfolio increased by 3.22% largely fueled by Financials.  For the year I’m still ahead of the index by 3.12%.

Headlines impacting my portfolio (bold are owned):

  • 11/1 – OMI buys HYH‘s Surgical and Infection Prevention (S&IP) business
  • 11/2 – SBUX sells Tazo line to UL
  • 11/6 – AVGO bids to acquire QCOM at $60 cash & $10 stock per share
  • 11/6 – BCE acquiring ARFCF
  • 11/9 – AAPL acquires InVisage Technologies
  • 11/13 – GE cuts dividend by 50%
  • 11/13 – AMT buys Idea/VOD Cellular towers in India
  • 11/13 – VER selling Cole Capital to CIM Group
  • 11/14 – Baupost Group initiates 3,565,361 sh position (abt 6.25%) in AMC
  • 11/14 – MSG to sell WNBA team (Liberty)
  • 11/15 – SQ launches ability to buy and sell Bitcoin
  • 11/16 – PYPL sells $5.8B loan package to SYF
  • 11/16 – IRM buys China assets from SFG.CO
  • 11/20 – MSG acquires Obscura Digital
  • 11/27 – PNC acquires The Trout Group, LLC
  • 11/28 – BLK to acquire C‘s Mexican asset management business

Portfolio Updates:

  • increased position in existing DRE holding

Dividends:

  • November delivered an increase of 18.3% Y/Y with the about 60% of the increase being attributable dividend increases and the remainder purchases.
  • November delivered a 1.0% decrease over last quarter (August) due to two payouts being moved to December.
  • Declared dividend increases averaged 11.9% with 71.75% of the portfolio delivering at least one increase (including 2 cuts (XRX and YUM) and and 1 suspension (TIS)).  Note: GE’s announced cut is counted as 2018.
  • YTD dividends received were 109.86% of total 2016 dividends which exceeded last years’ total on October 25th.

Spinoffs:

Spirit Realty Capital (SRC) – Nov 21, Form 10 was filed confidentially with spin completion targeted for 1H 2018.

Mergers:

AGU/POT (Nutrien) remains pending with the US being the only approval pending.

Summary

My 2018 strategy is forming with the focus turning towards Consumer Staples and Utilities (existing holdings).  I expect to incorporate a side strategy on lower yielding but faster growing companies which I’ll publish in the next week or two.   Of course I will continue to also pursue opportunities as they arise.

And how was your month?

July 2017 Update

The general upward trend continued in July with major indices again hitting new highs.  With my strategy shift in place, I did deploy new capital but only in a positioning move ahead of a spin. The S&P ended the month up 1.93% while my portfolio trailed with a gain of 1.77% largely due to the financial sector lagging the market.  For the year, I’m ahead of the index by 4.86%.

Headlines impacting my portfolio (bold are owned):

  • 7/5 – YUMC indicates reviewing possible dividend payout
  • 7/7 – MET acquires FIG’s asset management business
  • 7/10 – CM acquires Geneva Advisors
  • 7/11 –BR acquires Spence Johnson Ltd
  • 7/12 – ABM acquires GCA Services
  • 7/12 – AAPL adds PYPL as appstore pymt option
  • 7/13 – MFC reportedly reviewing sale or IPO of John Hancock
  • 7/17 – CHD to buy waterpik
  • 7/17 – China places restrictions on loans to Wanda (AMC)
  • 7/18 – MKC to buy RBGPF’s food business
  • 7/18 – CCI acquires Lightower
  • 7/19 – HRNNF (H.TO) to acquire AVA
  • 7/20 – SRC considering spinoff of Shopko properties
  • 7/21 – BX and CVC Capital offer $3.7B for Paysafe (PAYS.L)
  • 7/26 – SHPG rumored to be takeover target
  • 7/27 – Ackman discloses stake in ADP
  • 7/28 – IRM acquires Mag Datacenters LLC
  • 7/31 – BX (w/ ETP 50.1%) buys 49.9% of holding co. that owns 65% of Rover pipeline

 Note: my comment of July 21st on AMC (Dividend Diplomats) remains prescient in light of their warning on August 1st.  I believe now is a viable entry point if cognizant of possible risk to the dividend particularly as related to lender covenants.  EPR may have a slight risk as well.

Portfolio Updates:

  • Added to MET (spinoff positioning)

Dividends:

  • July delivered an increase of 2.14% Y/Y with the vast majority of the increase being attributable dividend increases.
  • July delivered a decrease of 8.85% over last quarter (Apr) with TIS (dividend suspension) and foreign cycles (interim/final) being the culprits.
  • Declared dividend increases averaged 10.81% with 61.02% of the portfolio delivering at least one increase (including 2 cuts and 1 suspension)
  • YTD dividends received were 69.81% of total 2016 dividends which if the current run rate is maintained would exceed last years’ total in early November

Spinoffs:

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.

Mergers:

AGU/POT (Nutrien), SGBK/HOMB remain pending

Summary

Overall another positive month with the only disappointment being the Q/Q dividend decline – which was expected.  The primary metric (annual dividend increase) remains on target and well ahead of inflation.

May 2017 Update

May was generally quiet with the market trending generally higher.  With few pullback opportunities, I barely deployed new dividends so my cash position increased again.  At least the turmoil I experienced moving from Loyal3 subsided and I could resume a more moderate pace.  An upcoming election in the UK may present a buying opportunity on weakness in the GBP versus the US dollar.  The S&P ended the month up 1.16% while my portfolio recorded a gain of 1.37%.  For the year (so far), I’m ahead of the index by 4.07%

Headlines impacting my portfolio (bold are owned):

  • 5/1 – DRE sells medical office portfolio to HTA
  • 5/1 – TIS suspends dividend
  • 5/4 – FHN to acquire CBF
  • 5/30 – JNS/HGG.L merger completed (becoming JHG)
  • 5/31 – KEY acquires HelloWallet from MORN

Portfolio Updates:

  • Initiated position in SGAPY
  • Added to IVZ
  • Added to PWCDF (proceeds from sale of TIS)
  • Added to DST
  • Added to PLD

Dividends:

  • May delivered an increase of 51.44% over May 2016 with the vast majority of this attributable to foreign dividend cycles not held last year.
  • May delivered an increase of 38.94% over last quarter (Feb) for the same reason.
  • Declared dividend increases averaged 8.89% with 48.02% of my portfolio delivering at least one increase (2 cuts – XRX and YUM; 1 suspension – TIS)
  • YTD dividends received were 47.11% of total 2016 dividends which if the current run rate is maintained would exceed last year’s total in early November.

Note: with 14.6% of current dividends paid by foreign sources, the weakening US dollar is providing a tailwind with exchange rates i.e., increasing my return.

Spinoffs:

The MET spin (Brighthouse Financial – BHF) remains in regulatory review.

Mergers:

Agrium/POT, SGBK/HOMB remain pending

Recent Sell – TIS

It appears to be a busier month than normal.  Today I exited a position that I’ve held since 2013.  Orchids Paper announced this week the suspension of their dividend.  I can’t say this was a total surprise as I’ve had them in my penalty box for a while.  In fact, the comment I made when Investment Hunting sold his position seems eerily prescient:

Yes I still own it but it has never been a DG stock. With a
stagnant dividend, a high payout ratio, previous management’s penchant
for diluting current owners and the frequent misses on earnings I’m at
about break even on this one. This one is a gamble on current
management, their strategy (expansion), and their execution of their
plan with the wild card being stable pulp pricing.
(June 12, 2016)

Since then, the South Carolina expansion has encountered delays, their Mexican venture has had difficulties, they’ve decided to spend money moving the headquarters to Tennessee and finally go hat in hand to their lenders (led by US Bank) for waivers to their loan covenants (which was the likely cause of the suspension).  As this holding was in my IRA, I have no room for a non-dividend payer in that account.

In searching my database, it appears in addition to IH, Broke Dividend Investor sold in September and I think Dividend Pursuit sold around year end.   Meanwhile, Weekly Investment, Passive Income Mavericks, Mr Free at 33 and A Frugal Family’s Journey are contemplating their options.

So an $80 loss is booked which includes the offset by dividends received.