Tuesday, August 12, 2014

I bought this quality dividend paying stock last week

After purchasing shares in 14 companies in the previous week, I didn't expect to put any more money to work until sometime in September. However, sometimes, there are external factors that come up my way, which can cause me to act in a certain way.

First, I sold half of my position in Family Dollar (FDO) last week. I had forgotten that dividend growth stocks could be attractive takeover candidates. Those were the shares I hold in my taxable accounts. The company is going to be acquired by Dollar Tree (DLTR), and the transaction is expected to close in 2015. Unfortunately, approximately 80% of the purchase price will be in cash, while the remainder will be in Dollar Tree stock. Therefore I expected to receive mostly cash for my stake in Family Dollar. Thus, my options were to either recognize gain and pay tax in 2014 or recognize gain in 2015. If I held till the deal closed, this would have meant that I would have a taxable event in 2015. Given the fact that at the time I expected to pay taxes on inversions from Abbvie (ABBV), Medtronic (MDT) and potentially Walgreen (WAG), I wanted to sell my Family Dollar shares this year. There is a very high chance that I will likely be in a higher tax bracket in 2015, which could make it more expensive to sell stock and earn qualified dividend income. Besides the tax situation, I didn’t see much additional upside for Family Dollar stock.

What I forgot to account for however was that a competing bidder could come and chase after Family Dollar. The day after I sold, the stock went up, because there were rumors that Dollar General (DG) could make a competing bid for Family Dollar. So while a deal between two companies could be set, and no further upside is expected, if a third suitor comes along, the price could get higher. The downside of course is that the first bidder could walk away if it fails to obtain regulatory approvals or financing for example. Thankfully, I still plan on holding on to my Family Dollar stock in tax-deferred accounts, and if the deal is closed, I would use the cash to purchase other shares. I would likely keep the Dollar Tree shares I potentially receive.

I also received a free trade with one of my brokers, which I used to promptly sell my remaining shares in Con Edison (ED). I do not like the slow growth in dividends for this slow-moving utility. I know many hold it for the above average yield of 4.50%. The problem is that the annual dividend growth over the past 18 years has been consistently lower than inflation. This means that this juicy high yield is actually losing purchasing power every single year. Thus, I believed that my capital could be better served elsewhere. I had previously sold the majority of my exposure in 2012, but those legacy shares were left stranded in one of my brokerage accounts. They had been there for the past 5 years – 6 years.

Now I had cash to deploy. Thankfully, I noticed that shares of Walgreen (WAG) dropped by 15% on the news that it would acquire the stake in Swiss-based Alliance Boots it didn’t already own, but it won’t do a tax inversion. I thus allocated the cash proceeds from Family Dollar into Walgreen (WAG) at a 2.30% yield and 17.80 times forward earnings. In addition, Walgreen managed to increase dividends by 7.10% to 33.75 cents/share, which was the 39th consecutive dividend increase for this dividend champion.

I analyzed Walgreen, and still liked what I saw. I believe the acquisition will be accretive to earnings. I would also be open to adding on further weakness below $54/share.

Full Disclosure: Long WAG, FDO

Relevant Articles:

Twenty Dividend Stocks I Recently Purchased for my 401 (k) Rollover
Dividend Stocks make great acquisitions
Why I am replacing ConEdison (ED) with ONEOK Partners
Family Dollar Stores (FDO) Dividend Stock Analysis
14 Dividend Growth Stocks I Bought On the Dip Last Week

9 comments:

  1. Nice choice. I would have done the same thing (bought WAG) if capital allowed, but sadly, it didn't.

    ReplyDelete
    Replies
    1. DD,

      Hope WAG goes further down from here. I would like it below $54..

      DGI

      Delete
  2. DGI,

    WAG is very interesting after the drop. And I like the acquisition. I still don't think it's particularly cheap, even after the significant pullback...but it's not as expensive as it was before.

    Do you have any thoughts on management's comments about the payout ratio? Since it's already above the target, I would assume future dividend growth will be less than past, as was evidenced by the 7% raise.

    Keep up the great work!

    Best wishes.

    ReplyDelete
    Replies
    1. HI DM,

      I actually discuss that in the analysis I linked above in the article. The new payment is at 35% expected 2015 earnings. I am not worried about future of dividend growth for WAG as it has plenty of room left, assuming that EPS can grow. And I expect them to grow EPS over time. The increase next year could be closer to higher single digits or low double digits.

      I actually think WAG is attractive, but it could hopefully get cheaper. I built my position mostly in the 30s through early 2013. It would be nice if I can add when it drops more.

      Delete
  3. Nice. I once bought WAG at very low price but later sold it when its price raised. It's like selling a hen with golden eggs. Now since I am a dividend investor, and I hope I won't repeat that kind of mistake.

    ReplyDelete
    Replies
    1. I have made the mistake of buying onto a good dividend stock, only to sell too soon. As a result, I am trying to be as passive as possible in holding stocks. Money in stocks is made by sitting, not by thinking.

      Delete
  4. i´ll wait to 54 price...we see there...hi from argentine

    ReplyDelete
    Replies
    1. Hi Diego,

      I am hopeful for a dip below $54.

      Cheers from USA!

      DGI

      Delete
  5. I am beginning to understand these buyouts and cash you get back. With what I have this doesn't affect my taxes so much but if you had hundreds if not millions this would be a problem. I wonder as I get older if it wouldn't be wiser to move more money into large companies with good dividend payments. That way it reduces the risk of a takeover. Although as I type this I think of Comcast and Time Warner...

    ReplyDelete

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