Thursday, December 19, 2019

Risk Management

A few months ago, FedEx shares dropped by 12%, due to the company issuing a softer guidance. Just yesterday, FedEx dropped by 10% after issuing a softer earnings report. FedEx seemed to be blaming the trade tensions, and the challenging economy. By contract, competitor UPS seemed to be doing better in the current environment. Perhaps the integration of TNT Express is not doing as well, or perhaps there are other problems with the execution, which is why investors are punishing the stock price. Check my analysis of FedEx for more information about the company.

As a result, I wanted to share with you my risk management process, when it comes to investing.

As dividend investor, I do a lot of analysis to uncover quality companies and acquire them at the right price. However, once I do that, I know that things can change. No matter how much analysis you do, things can change in a way you didn’t expect. This is why I believe in the power of diversification. In my case, I own shares of FedEx (FDX).

I also own shares of UPS (UPS), which account for a similar portion of the portfolio. This is why I diversify. Check my analysis of United Parcel Service (UPS) for more information about the company.

Of course, I have exposure to other companies in the portfolio, which is why owning FedEx is not a big blow to the portfolio. In fact, FedEx can go to zero and the dividend could go to zero tomorrow. And the dividend investor portfolio will still grow in value and the dividends generated from the portfolio will still be growing.

Another risk management technique I have is that I build positions slowly, and over time. This slow allocation allows me to react to events that contradict my bullish thesis, and stop putting money if things are getting bad. I will end up with a smaller position in companies that do not work out, thus protecting capital. I could allocate capital elsewhere, for potentially better outcomes. In the case of FedEx, I have bought the position gradually and over time.

As an investor, my goal is not to micromanage the business or management. I cannot run FedEx. So my only take-away from this decline is whether I should buy more, hold or sell my shares.

The only reason I may sell a stock would be if it cuts dividends – I would do that in an effort to preserve capital and try to maintain a certain level of dividend income ( so that I do not lose too much dividend income). The other reason I may sell is if a company is acquired in cash. The third reason is if I sell for any other reason. I have found that selling shares for any reason other than one and two is usually a mistake. I did an analysis of stock sales I had done, and the subsequent investments made with the proceeds. I found out that I would have been better off in most circumstances by not doing anything. This makes sense, because by the time you sell, chances are that the investment may not have been performing as well. However, if everyone else saw that, chances are they would have sold out already, thus creating a low enough price that discounts most future negative events. Investing is never a slam dunk, but I have found that selling is usually a mistake. I analyzed the track records of a few dividend investors who publicly share their investments, and also found out that their sales are usually a mistake.

So in FedEx’s case, since the company is not cutting dividends, I will hold on to it.

The other question is whether I should add to FedEx, given the fact that the shares are down and valuation is slightly better. In my reviews, I tend to look for companies with a certain streak of annual dividend increases, a certain level of dividend and earnings growth, a decent valuation and a dependable dividend payout ratio. As part of my monitoring process, I review companies I own in order to see if my thesis is still intact. I will not sell if things are not going as planned, because all companies go through short-term issues. It is tough to say in advance which companies will resolve their issues, and which won’t. My analysis discussed above has shown me that it is better to stick to my investments.

As part of my review, I skim quarterly press releases and dividend news announcements. I have found that dividend announcements typically tell me what management expects the business conditions to be in the near term. If they keep raising dividends at a certain pace, and all of a sudden they stop growing it in a dramatic fashion, I know that something is going on. It makes sense that the dividend will be a good gauge of the company performance – a dividend is a capital allocation decision that fights for other capital allocation needs of the company. A dividend instills discipline on management. If management teams have a soft outlook for revenues and earnings, they will not increase dividends as much, because they do not want to grow it too quickly, only to cut it later.

In the case of FedEx, a few months ago their management team decided to keep the dividend unchanged for a fifth quarter in a row. This showed me that I something unexpected is going on with FedEx. This is why I discussed with you a few months ago that I will not be adding to my stake in FedEx. I will not be buying today either. If FedEx starts raising dividends in a quarter or so, I will reassess my opinion of the company.

After discussing my sale and buy requirements, I end up with the default answer to most questions – I will hold my shares of FedEx for the time being. I hold on to shares, and give management time to turn the ship around. Noone knows if FedEx will turn the ship around or end up a complete and utter failure. This is why I do not believe in acting on a single data point and just selling everything off. I know from experience that some companies need a few years to turn around. This is fine, because no matter the headlines, I receive cold hard cash in the form of dividends every quarter. This is what helps me stay invested.

This is the same decision I ended up with on CVS Health (CVS) after the company stopped growing the dividend.

What is your opinion on FedEx? Are you buying more, holding or selling? What is your risk management process?

I would love to hear from you at

Relevant Articles:

Dividend Investing Risks
Dividend Investing Is Not As Risky As It Is Portrayed Out To Be
How to define risk in dividend paying stocks?
What is dividend investment risk?
No Risk Stock Market Investing

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