Sunday, March 31, 2019

Ten Dividend Failures over 8 years

Thinking as an income investor, would you be happy if ninety percent of your stocks increased their dividend since you bought them?

I have the luxury of being able to go through the stock picks I published  over the past 8 years and report on their dividend growth.

  • Dividend Growth is critical to income investors who no longer work
  • We expect 90% of our stock picks to deliver safe dividends and dividends that grow
  • Overall portfolio performance is positive when using dividend machine criteria to select dividend stocks


The rule of 90 and 10 is similar to the my rule of threes.

*Rule of threes: When two similar, unexpected  events happen, look out for the third.   I just went through this scenario with the sprinkler system in my condo building.    Rule of 90/10: I always believed in picking stocks that meet my dividend machine criteria and over all, 90 to 10, I will be able to count on a safe and increasing income.  You can find the criteria I used to pick stocks by clicking here:   www.themoneymadam.com/p/dividend-stock-criteria.html

BUY and HOLD


I started publishing my annual portfolios after I retired from managing other people's money.  These portfolios are buy and hold only portfolios.  If a stock is bought out, we took the money. If there was a merger, that is reflected as are spin offs.

Cash from buyouts is held in the portfolio as cash.  One could think of it as an emergency fund.    Retirees who bought these stocks in a qualified retirement plan, could use this cash as a cushion or to fund part of the required minimum distribution.   The savvy investor will buy short term rolling certificates of deposit.

DIVIDEND INCREASES


The table below presents the dividend increase data from my 2011 - 2018 portfolios.  Note that in 2016 I published only a covered call portfolio which I sold in February 2017; that portfolio is not included in this analysis.



2014 was the worst portfolio, on every level.  Not only did 4 of 18 stocks reduce their dividend, 2014 stocks have not appreciated as much as the other portfolios.  When you look at all seven portfolios, you can see in 5 of the 7 years, less than 10% of stocks picked reduced their dividend.  If you consider all the stocks which number nearly 100 names, you will see only 9 have reduced the dividend, pretty close to 90 and 10.

DIVIDEND REDUCTIONS


One stock, Conoco Phillips, symbol COP, affected four portfolios.  In COP's defense, in the 2011 and 2012 portfolios investors received 50 shares of Phillips 66, symbol PSX, when combined the dividend stayed about the same until COP made a huge dividend cut in 2016.  Since then, the dividend increases have resumed but are not yet back up to the pre split amount.  The PSX spin off has been very good with dividend increases averaging 23% per year.

MHLD, Maiden Holdings, is a re-insurer that got pummeled with the natural disasters of recent years and with their alliance with another insurer with questionable fundamentals.  MHLD reduced the dividend in September, 2018 and have since suspended the dividend.  Moreover, I fear that MHLD will be the first stock of these portfolios to go "belly up."

WPZ, Williams Partners, was a master limited partnership bought by its master.  Holders of WPZ stock received 1.494 shares of WMB for each share of WPZ.  Fractional shares were paid in cash.  Even with that increase in shares the dividend reduction is about 33%.

PBI, a stock with a good history when it was purchased just could not keep up with modern technology.  A bad pick on my part which shows you might want to use more than just my minimal criteria when picking a stock.

NTR, Nutrien, is the new company made from the merger of Agrium and Potash.  The dividend increase since the merger is a substantial 72% over the past 6 quarters but still not up the dividend paid by POT (Potash.)

JCS is a very small ethernet and communications equipment company with no debt but declining and revenues and negative earnings per share, ARLP, a coal provider split the stock early but could not keep up with the pressure of reducing coal production.  Then there is SJR, a communications company who pays their dividend every month rather than quarterly, but the dividend is down slightly recently.  DBD, Diebold is now Diebold Nixdof , it still trades under DBD, has negative earnings.  The last dividend DBD paid was February of 2018.  Finally WDR, Waddell and Reed, has suffered mightily due to the competition from low cost wealth managers.  Their mutual funds just do not cut it anymore.

10 stocks out of the 100 symbols picked over time is a pretty good track record.   We don't yet know what will happen to the 2017 and 2018 portfolios over time.  Hopefully, I learned how to pick better than earlier and these stocks will do even better than 90/10.

OVER ALL PORTFOLIO PERFORMANCE


Over all, these portfolios all are doing pretty well.  Again, 2014 is a relative laggard.  Duration of time is important with the early portfolios 2011 and 2012 doing better than the others.  That could be that the market was low when I started publishing my picks.


You can click to go to the portfolios tab to see the holdings of each portfolio.   http://www.themoneymadam.com/p/blog-page_11.html    The table below is a summary of these portfolios.   If you were building up to retirement and invested regularly over time, you would probably reinvest the dividend and you might have been tempted to sell some of the dividend losers as I did.   For the sake of ease of reporting.  These portfolios are long only with no active management.


REVENUES

Over time, I added a review of revenues to my stock picking screen.  I thought that perhaps if I paid a little more attention to revenue growth, I would have a better chance of avoiding the stocks with shaky dividends.    I took a look back at these ten stock and see their revenue trends are revealing.



The final table shows the change in revenue over the past three years.  Provided that a stock meets all the other criteria for a quality dividend stocks, this metric will determine what to do with the stock.

Symbol Current Rev Revenue 3 years ago Change from 3 years ago
DBD $4,578 $2,419 89.25%
COP $36,417 $29,456 23.63%
WPZ/WB $8,686 $7,360 18.02%
PBI $3,522 $3,578 -1.57%
SJR $5,239 $5,488 -4.54%
ARLP $2,002 $2,273 -11.92%
WDR $1,153 $1,516 -23.94%
JCS $65,762 $107,669 -38.92%
MHLD $2,164 $5,488 -60.57%

In reality, what did I do:  what should we do?  In summary, I have one buy, and one hold, and the rest avoid.

In my personal portfolio I can move in and out of stocks.  Listed below are the actions I took with these losers as well as my current recommendation.

Conoco Phillips, symbol COP - Buy

I sold COP but bought it back and continue to sell calls against my position.  I like the revenue growth and I like the return of dividend growth.  But, because the yield is so low, I don't care if my shares are assigned to a call buyer.  I can find someplace else to put the money.

I call this a Buy - except for the puny yield, their dividend machine fundamentals are solid.

3/29/2019
COP E.P.S. Dividend Yield 3 Yr Div Growth D/E Ratio
$66.74 $5.32 $1.22 1.83% 7.33% 0.47

WIlliams Companies WPZ/WMB - Hold

I sold when the merger occurred.  Looking at recent revenue growth and a yield of 5.4% makes WMB a hold for sure and with more investigation perhaps a buy.  However, E.P.S. is less than the dividend.

3/29/2019
WMB E.P.S. Dividend Yield 3 Yr Div Growth D/E Ratio
$28.72 -$0.16 $1.52 5.29% 8.89% 1.53

Pitney Bowes PBI

Dividend cuts are hard to take and when they reduced the dividend I sold.  Revenue is holding its own lately but not worth the effort to own this company that is trying to get up to date

JCS Communications

Sold when dividend was cut.  Not worth the effort.

ARLP Partnership

Sold when dividend was cut.  Only for non qualified money as the tax complications make holding in an IRA not recommended.

Nutrien NTR

I suffered through the Potash merger and did not like having my income reduced.  I was able to sell calls on all shares and sold through being assigned at a profit.   Too much drama for a conservative investor's portfolio.  

Shaw Communications SJR

The monthly payout was nice but once they cut the dividend, the weakness of their business was exposed.  Stick with larger, solid stocks.

Maiden Holdings MHLD

Most painful buy here. I chased yield and got hurt.  I did sell after cashing their juicy dividend and selling some calls.  All in all I am even.  They still have a business but their entire structure is a mess.  Stay away.

Waddell and Reed WDR

My very first investment was in a WDR fund that my collage roommate's dad sold me.  They are no longer relevant.  Again I chased yield.  Sold. In that field, I still like Westwood Holdings which has been hammered but is solid.

Diebold/Nixdorf

This is the strangest stock of the group.  Diebold is into security and one would think that would have been a foolproof area of business.  Through partnerships Diebold is international.  I sold this shortly after I bought it because it seemed to have little direction.  They no longer pay a dividend, but among these stocks it is only one of three with dividend growth over the past 3 years.


SUMMARY


My conclusion is I remain comfortable picking stocks using the dividend machine basic criteria. I will stick with larger stocks to provide income from dividends.  I will stick with a mix of higher yielding stocks and those with more modest yields but on which covered call income is available. 

Readers of my blog know I do more active managing of my money.  These portfolios are buy and hold so I could measure the results easily and quickly.  In my own portfolios, I tend to sell calls on stocks with price momentum and therefore, have some stocks called away.  I use those gains to buy other dividend stocks.  This works out for me.

I hope the analysis of the past 8 years will help you become a better income investor.  You can use a disciplined income investing approach and expect 90% of your picks to continue to pay and grow your dividend income.

M* MoneyMadam

*Rule of Threes is a writing principle

Disclosure:  Long XOM, T, NHI, CM, MO, ETN, LVS,WDC, WY, MIC, HCI, CVS, WHG, INTC, BBT, CAT, COP, CVX, MHLD, QCOM, XEL, AXN, BCE, PG

Tuesday, March 26, 2019

Income investor view of five stocks buying back shares

I am always interested to learn how stocks  use their cash. When I saw this article on stock buy backs, I decided to look at the stocks mentioned through the eye of an income investor.

  •  Stock buy backs reduce the number of shares for ordinary investors which could lead to stock price inflation
  • Income investors prefer dividend increases to stock buy backs
  • Stock buy backs can cause stock ownership to be concentrated among a small group of investors 
  • Solid dividend machine fundamentals remain the best metrics for successful income investing.

Stock buy backs strong in fourth quarter 2018.  The full Reuters report can be viewed here:  http://pdf.reuters.com/htmlnews/htmlnews.asp?i=43059c3bf0e37541&u=urn:newsml:reuters.com:20190325:nPn8NsQkTa

Issues:

The five issues with the highest total buybacks for Q4 2018 are:

  • Apple (AAPL) led in buybacks, spending $10.1 billion in Q4 2018, down from $19.4 billion spent for Q3 2018. Its Q4 2018 expenditure ranked 19th highest historically; for the year, Apple spent $74.2 billion on buybacks, up from 2017's $34.4 billion; over the five-year period the company spent $229.0 billion, and $260.4 billion over the 10-year period.
  • Oracle (ORCL): $10.0 billion for Q4 2018, down from $10.3 billion for Q3 2018; 2018 was $29.3 billion, up $4.0 billion in 2017.  
  • Wells Fargo (WFC): $7.3 billion for Q4 2018, slightly down from the $7.4 billion spent in Q3 2018; 2018 was $21.0 billion, up from $10.3 billion in 2017.
  • Microsoft (MSFT): $6.4 billion for Q4 2018, up from $3.7 billion for Q3 2018; 2018 was $16.3 billion, up from $8.4 billion in 2017.
  • Merck (MRK): $5.9 billion for Q4 2018, up from $1.0 billion for Q3 2018; 2018 was $9.1 billion, up from $4.0 billion in 2017.
Buy backs are an interesting aspect of the market.  Buy backs are touted as benefiting the stock owner.  With fewer shares in the open market, your shares should be worth more money.

As an income investor, I would prefer the company pay or increase my dividend.  Some companies use a lot of debt to buy back shares such as Home Depot, symbol HD. Is it worth it to leverage the balance sheet to run up the value of the stock?

Stock Buybacks and Stock Market Inflation


For ordinary investors, stock buy backs are more problematic on a macro scale.  When you have too much money chasing too few goods which in this case we are talking about stocks, the price of the goods goes up.

The income investor class is growing as baby boomers retire and look to live off the income their money makes instead of living off the income their jobs provide.  Lots of money chasing only a few investments that pay income makes for price inflation.

We have price inflation on dividend stocks and price inflation on fixed income such as municipal and corporate bonds.   We are faced with price inflation on every income option. 

In a healthy economy we want ordinary investors to be able to own stock in the companies that affect their lives.  We don't want ownership concentrated in just a few hands even if that is the teachers pension plan.

An income investors view of these five stocks


Let's look at these five stocks and see if despite fewer shares being available they are still good investment options.

We income investors start with how these five stocks compare on dividend machine fundamentals.  You can find my Dividend Machine criteria here:  http://www.themoneymadam.com/p/dividend-stock-criteria.html




As you can see, Oracle is a bit high on debt and low on yield but once they decided to share some money with their investors, the dividend growth is very good.  All stocks except Merck have a very safe payout ratio which means the dividend and the dividend growth rate is safe.


Of the five stocks noted above, only Oracle, has piled on debt recently.  Yet their debt to equity ratio is not even close to HD.    See the graph below.  The other stocks have very reasonable debt levels so balance sheet quality is not an issue with them.  They could pay us a dividend just as easily as buying back stock.  All stocks provided very good dividend growth over the past three years with Oracle being the best dividend growth stock of this group.

In this case, perhaps Oracle's debt increase funded dividend growth rather than stock price appreciation.  We will look at other metrics later in this post.

Oracle's increasing debt load.























Let's now look at how their stock prices have performed during the time they were paying out dividends and buying back stock.





Microsoft, MSFT, is the winner on price appreciation with Wells Fargo the laggard.  Eighty percent is a pretty good average for picking growth stocks no matter what the reason for the price increase.


Let's look at the earnings growth over the same period of time.  Perhaps earnings are the catalyst for growth in stock price.



Notice that EPS and price increases are the common element for the leader of this group which is Microsoft.

My conclusion is that while stock buy backs may not be the best for the ordinary investor on a macro scale, I don't think stock buy backs are any reason to buy a stock or to avoid a stock.

Good fundamentals including solid balance sheet, increasing earnings per share, a dividend and dividend growth are still the income investor's best metrics for successful investing.

M* MoneyMadam

Disclosure:  Long MSFT, AAPL,