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
- 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
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