British based energy giant BP PLC (BP) cut dividends by 50% to 31.50 cents/share for each American Depository Receipt ( minus any ADR fees). This was the first dividend cut for BP since 2010, when it had a costly oil spill in the Gulf of Mexico.
This is the second oil major to cut dividends, after Royal Dutch Shell (RDS.B) cut dividends at the end of April 2020.
The turbulent global economy, the pandemic, and the low energy prices are the reasons for this move. This move would provide the company with more flexibility and strengthen its balance sheet. They are expecting to focus excess cashflows to share buybacks, which are easier and less newsworthy to scrap when things go sour. When you are not making enough profit to support a high dividend, that was set when the times were better, cutting it may be a logical step.
As is the case for each dividend cut, I automatically sell after the news is posted.
If a company later reinstates its dividend, and starts raising it again, I may reconsider it. I did this for BP in 2013 and 2014, but I don't think it was a wise move in hindsight. The same strategy was not a smart move for General Electric (GE) either. While I may need a few more data points, so far it looks like buying back after a dividend is reinstated may not be a good strategy. On the other hand, buying Pfizer after it cut dividends in 2009 would have worked very well ( I didn't buy it).
The oil and gas sector is unable to earn its dividends from earnings right now, based on low energy prices. As a result, there are few bargains to be found in the space.
The interesting fact is that when BP suspended dividends in June 2010, the stock fell as low at $26.75/share. The company resumed paying a dividend in March 2011, and it has distributed $21.53/share so far. By February 2011, the stock was selling at $46 - $48/share.
It definitely looks like for cyclical companies, the time to buy may be when things are gloomiest, rather than when they are on top of the world. That being said, you have to have a good timing twice- first to buy low and second to sell high. I am not good at timing the market, and I doubt many of you are either. Hence, it makes sense to invest in companies that do ok throughout the ups and downs of the economic cycle. This means that exposure to commodity companies may have to be kept low.
Exxon Mobil (XOM) is probably at a high risk to cut dividends over the foreseeable future, because it has been unable to cover the current distribution out of earnings per share. This is from their latest conference call:
Finally, we have a long history of providing a reliable and growing dividend. A large portion of our shareholder base has come to view that dividend as a source of stability in their income, and we take that very seriously. While we manage our capital allocation priorities over the long term, we also recognize the need to balance in the near term to respond to market conditions. In response to the unprecedented environment that we find ourselves in, we've taken decisive action in 2020.
To recap what we've done so far this year. We've reduced short-term capital spending by more than 30%. We're on pace to reduce cash operating expenses by more than 15%. We've increased debt to a level we feel as appropriate to provide liquidity, given market uncertainties, and we will hold it at that level. And we're continuing to pay a reliable dividend.
While it sounds reassuring, this is usually how management teams try to cheer shareholders up, before a dividend is cut.
To me it is fascinating that the oil crash began in 2014. Yet, we didn't really get the oil and gas majors to cut dividends until it intensified in 2020. Energy investors have lived through a brutal 6 year period of negative returns, which is in stark contrast with the situation in 2014, when energy was touted as the next big thing, valuations looked cheap, and energy was one of the best performing sectors over the preceding decade.
Relevant Articles:
- Is BP’s dividend safe?
- Dividend Growth: The Risk of Being Cocky
- Royal Dutch Shell Cuts Dividends For The First Time Since World War II
- Are Energy Stock Values Today a Once in a Lifetime Opportunity?
Showing posts with label dividend cut. Show all posts
Showing posts with label dividend cut. Show all posts
Tuesday, August 4, 2020
Tuesday, July 14, 2020
Wells Fargo Cuts Dividends by 80% to 10 cents/share
This morning Wells Fargo cut dividends by 80%, from 51 cents/share to 10 cents/share. This was not a surprise, since the bank stated that they would be cutting dividends on June 29th.
I shared this information on the blog on June 30th - "Simon Property Group (SPG) and Wells Fargo (WFC) to cut dividends"
While we didn't know at the time how big the dividend cut would be, we only knew that there would be a dividend cut.
Back at the end of June, the Federal Reserve initiated a new round of stress tests, which capped dividend payments at major financial institutions. I discussed this with you right when I posted an article: Expect Dividend Cuts and Dividend Freezes in the Banking Sector
"For the third quarter of this year, the Board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Board is also requiring banks to re-evaluate their longer-term capital plans.
All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty. The Board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.
During the third quarter, no share repurchases will be permitted. In recent years, share repurchases have represented approximately 70 percent of shareholder payouts from large banks. The Board is also capping dividend payments to the amount paid in the second quarter and is further limiting them to an amount based on recent earnings. As a result, a bank cannot increase its dividend and can pay dividends if it has earned sufficient income."
There were several banks that went through these stress tests, but almost all of them managed to keep their dividends unchanged.
The only bank to cut dividends was Wells Fargo (WFC). Again, the bank announced that on June 29th that they would be announcing a dividend cut when they reported their results on July 14th.
Our friends at Dripinvesting shared this chart comparing the average bank earnings to the dividend payouts. Wells Fargo looks like the only bank where the dividends exceeded its estimated average net income.
Source: Drip Investing/FactSet
Today, they reported their results, and cut dividends from 51 cents/share to 10 cents/share. The stock sold off, perhaps due to the poor quarterly results. In reality, the announcement of a dividend cut in advance, when everyone else is keeping their dividends should have been enough of a warning sign to prompt investors to re-evaluate their positions.
Chief Executive Officer Charlie Scharf said, “We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter. While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our
performance regardless of the operating environment.
“Though our income performance was weak, our capital and liquidity continues to be extremely strong with both our CET1 ratio and LCR increasing from the end of the prior quarter. However, it is critical in these uncertain times that our common stock dividend reflects current earnings capacity assuming a continued difficult operating environment, evolving regulatory guidance, and protects our capital position if economic conditions were to further deteriorate. Given this, we believe it is prudent to be extremely cautious until we see a clear path to broad economic improvement. We are confident that this eventual economic improvement combined with our actions to increase our margins will support a higher dividend in the future,” Scharf added. Source: Wells Fargo
Probably the reason for Wells Fargo's dividend cut can be traced to the current recession that we are in, caused by Covid-19 and related depressed economic activity. The other reason is the several scandals that ruined Wells Fargo's reputation, and limited the scope of its operations. As a result, the bank didn't prosper as much in the past couple of years, and is taking things worse than competitors.
One of Wells Fargo's largest shareholders is no other than Warren Buffett's Berkshire Hathaway. Berkshire's annual dividend income from Wells Fargo will decrease from $705 million to $138 million. Buffett has gone from praising Wells Fargo and its culture, to being largely silent about the problems that the bank is facing. Of course, when you are a famous investor, you need to be very careful what you say in public.
Back when I analyzed the bank in 2013, it didn't look like a very good idea, since revenues were not growing. Earnings per share were growing due to the reduction in reserves for bad loans. I still bought some, because Buffett was buying it. It remained a very small position. I managed to sell a large portion of my position a few years ago when I did some reshuffling of assets in tax-deferred accounts. This was luck, not skill.
It looks like the US banking sector is not a good place for long-term dividend growth investing. Wells Fargo had a 34 year track record of annual dividend increases, but it lost it in 2009 when it cut dividends. It is now losing its 10 year track record of annual dividend increases. If it's earnings per share are not sufficient, Wells Fargo may be required to cut dividends or even suspend them. The same is true for all the other major banks of course.
It would be interesting to watch how the current economic recession plays out. If the recession deepens, because the Covid-19 does not seem to be under control in the US, then Wells Fargo would seem like the first shoe to drop. Translation - we may get more dividend cuts from other banks. If you believe this scenario, selling Wells Fargo may be a good choice.
On the other hand, if we manage to contain the virus through a combination of factors such as better usage of masks, vaccines/better treatments, people taking this virus more seriously, and others, we may be able to overcome a lot, and even get a decent recovery soonish. That scenario would entail a lower likelihood of dividend cuts from other major US Banks. If you believe this scenario, buying Wells Fargo today may be a decent choice.
Relevant Articles:
- Expect Dividend Cuts and Dividend Freezes in the Banking Sector
- Simon Property Group (SPG) and Wells Fargo (WFC) to cut dividends
- Should you invest in Wells Fargo (WFC)?
- Why Warren Buffett Likes Investing in Bank Stocks
I shared this information on the blog on June 30th - "Simon Property Group (SPG) and Wells Fargo (WFC) to cut dividends"
While we didn't know at the time how big the dividend cut would be, we only knew that there would be a dividend cut.
Back at the end of June, the Federal Reserve initiated a new round of stress tests, which capped dividend payments at major financial institutions. I discussed this with you right when I posted an article: Expect Dividend Cuts and Dividend Freezes in the Banking Sector
"For the third quarter of this year, the Board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Board is also requiring banks to re-evaluate their longer-term capital plans.
All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty. The Board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.
During the third quarter, no share repurchases will be permitted. In recent years, share repurchases have represented approximately 70 percent of shareholder payouts from large banks. The Board is also capping dividend payments to the amount paid in the second quarter and is further limiting them to an amount based on recent earnings. As a result, a bank cannot increase its dividend and can pay dividends if it has earned sufficient income."
There were several banks that went through these stress tests, but almost all of them managed to keep their dividends unchanged.
The only bank to cut dividends was Wells Fargo (WFC). Again, the bank announced that on June 29th that they would be announcing a dividend cut when they reported their results on July 14th.
Our friends at Dripinvesting shared this chart comparing the average bank earnings to the dividend payouts. Wells Fargo looks like the only bank where the dividends exceeded its estimated average net income.
Source: Drip Investing/FactSet
Today, they reported their results, and cut dividends from 51 cents/share to 10 cents/share. The stock sold off, perhaps due to the poor quarterly results. In reality, the announcement of a dividend cut in advance, when everyone else is keeping their dividends should have been enough of a warning sign to prompt investors to re-evaluate their positions.
Chief Executive Officer Charlie Scharf said, “We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter. While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our
performance regardless of the operating environment.
“Though our income performance was weak, our capital and liquidity continues to be extremely strong with both our CET1 ratio and LCR increasing from the end of the prior quarter. However, it is critical in these uncertain times that our common stock dividend reflects current earnings capacity assuming a continued difficult operating environment, evolving regulatory guidance, and protects our capital position if economic conditions were to further deteriorate. Given this, we believe it is prudent to be extremely cautious until we see a clear path to broad economic improvement. We are confident that this eventual economic improvement combined with our actions to increase our margins will support a higher dividend in the future,” Scharf added. Source: Wells Fargo
Probably the reason for Wells Fargo's dividend cut can be traced to the current recession that we are in, caused by Covid-19 and related depressed economic activity. The other reason is the several scandals that ruined Wells Fargo's reputation, and limited the scope of its operations. As a result, the bank didn't prosper as much in the past couple of years, and is taking things worse than competitors.
One of Wells Fargo's largest shareholders is no other than Warren Buffett's Berkshire Hathaway. Berkshire's annual dividend income from Wells Fargo will decrease from $705 million to $138 million. Buffett has gone from praising Wells Fargo and its culture, to being largely silent about the problems that the bank is facing. Of course, when you are a famous investor, you need to be very careful what you say in public.
Back when I analyzed the bank in 2013, it didn't look like a very good idea, since revenues were not growing. Earnings per share were growing due to the reduction in reserves for bad loans. I still bought some, because Buffett was buying it. It remained a very small position. I managed to sell a large portion of my position a few years ago when I did some reshuffling of assets in tax-deferred accounts. This was luck, not skill.
It looks like the US banking sector is not a good place for long-term dividend growth investing. Wells Fargo had a 34 year track record of annual dividend increases, but it lost it in 2009 when it cut dividends. It is now losing its 10 year track record of annual dividend increases. If it's earnings per share are not sufficient, Wells Fargo may be required to cut dividends or even suspend them. The same is true for all the other major banks of course.
It would be interesting to watch how the current economic recession plays out. If the recession deepens, because the Covid-19 does not seem to be under control in the US, then Wells Fargo would seem like the first shoe to drop. Translation - we may get more dividend cuts from other banks. If you believe this scenario, selling Wells Fargo may be a good choice.
On the other hand, if we manage to contain the virus through a combination of factors such as better usage of masks, vaccines/better treatments, people taking this virus more seriously, and others, we may be able to overcome a lot, and even get a decent recovery soonish. That scenario would entail a lower likelihood of dividend cuts from other major US Banks. If you believe this scenario, buying Wells Fargo today may be a decent choice.
Relevant Articles:
- Expect Dividend Cuts and Dividend Freezes in the Banking Sector
- Simon Property Group (SPG) and Wells Fargo (WFC) to cut dividends
- Should you invest in Wells Fargo (WFC)?
- Why Warren Buffett Likes Investing in Bank Stocks
Tuesday, June 30, 2020
Simon Property Group (SPG) and Wells Fargo (WFC) to cut dividends
Right after the market closed on Monday, June 29, I learned that Simon Property Group (SPG) is cutting dividends per share. Simon is a real estate investment trust engaged in the ownership of premier shopping, dining, entertainment and mixed-use destinations. Check my analysis of Simon for more details about the REIT.
The company declared a dividend of $1.30/share, which is 38.10% decrease over the dividend paid during the first quarter of 2020. The Company expects to pay at least $6.00 per share in common stock dividends for 2020, in cash, subject to Board of Directors approval. Since Simon already paid $2.10 in February, this means that it plans to distribute two more payments of $1.30/share through the end of 2020. That's fine, since the REIT essentially skipped its dividend for the second quarter of 2020.
Back in May 2020, the company ended up being ambiguous on its dividend, as it failed to declare a payment for the second quarter. There were several things happening, namely the acquisition of Taubman (TCO), the Covid-19 shutdown of its properties, and the difficulty in collecting rent from tenants. Since then we have had no visibility on the amount of rent that is collected, but judging by other peers it is likely low. Hence why Simon is in the news for trying to sue tenants such as The GAP for not paying rent.
Simon is also trying to cancel the merger with Taubman, citing the Covid-19 situation and using the deterioration in business as a cause to walk away from this transaction. While it may have to pay a steep fine to walk away, Simon may actually be bluffing its way to bring Taubman to the negotiating table, and lower the entry price for the deal. We could only speculate of course.
I had a very small position in Simon, which I just sold today. That dividend cut ended a 10 year streak of annual dividend increases. Ironically, buying Simon when it last cut dividends in April-May 2009 would have turned out to be a smart decision through 2018. If we look at prices today however, the returns are not as high since early 2009.
I also wanted to add to my article from Friday, about expectations for dividend increases and dividend cuts in the banking sector.
It turns out that the results for the initial stress tests are out. It turns out that the following banks are going to keep dividends unchanged in the third quarter:
- Goldman Sachs (GS)
- Bank of America (BAC)
- Citigroup (C)
- Ally (ALLY)
- State Street (STT)
- U.S. Bank (USB)
- BNY Mellon (BK)
- Discover Financial Services (DFS)
- Fifth Third Bancorp (FITB)
- PNC Financial (PNC)
- American Express (AXP)
- J.P. Morgan (JPM)
Jamie Dimon, Chairman and CEO of JPMorgan Chase said: “At this time, using both JPMorgan Chase’s and the Federal Reserve’s base case economic outlook, the Firm can continue to pay its dividend in future quarters while maintaining healthy capital and liquidity positons. If there is a significant deterioration in the future outlook, the Firm will, of course, consider reducing dividends.
The only major bank that won't be keeping dividends unchanged is Wells Fargo (WFC). (Source)
"The company expects its common stock dividend in third quarter 2020 will be reduced from the current level of $0.51 per share. The company expects that the level of the third quarter dividend will be announced when it releases second quarter financial results on July 14, 2020."
On July 14th, Wells Fargo cut its quarterly dividend by 80% to 10 cents/share. Source: Press Release
This would be the first dividend cut for Wells Fargo since the Global Financial Crisis. Back in March 2009, the bank cut dividends as part of the TARP program. Incidentally, that was a great time to buy Wells Fargo below $10/share. The stock rebounded and went as high as $65 by early 2018, but has slowly gone downhill from there. Buffett is one of the largest holders of Wells Fargo, and is likely not very happy with the outcome. The bank was one of the strongest a decade ago, but its been mired in scandals related to fictitious account openings, and its size of operations has been capped.
I had a very small position in Wells Fargo. I built it in 2013, but stopped adding after raising some concerns that noone else paid attention to at the time. After all, if Buffett was buying, it was good enough. The nice part of my risk management procedures is that I usually build positions slowly, always doubt myseld and if the story changes, I stop buying more. When I am wrong, I like to keep losses low. I believe in keeping losses low, while trying to maximize future dividends and capital gains.
Relevant Articles:
- Wells Fargo Joins the Crowd of Dividend Cutters
- Should you invest in Wells Fargo (WFC)?
- Why Warren Buffett Likes Investing in Bank Stocks
- Simon Property Group (SPG): A High Yield and High Risk REIT
- Expect Dividend Cuts and Dividend Freezes in the Banking Sector
The company declared a dividend of $1.30/share, which is 38.10% decrease over the dividend paid during the first quarter of 2020. The Company expects to pay at least $6.00 per share in common stock dividends for 2020, in cash, subject to Board of Directors approval. Since Simon already paid $2.10 in February, this means that it plans to distribute two more payments of $1.30/share through the end of 2020. That's fine, since the REIT essentially skipped its dividend for the second quarter of 2020.
Back in May 2020, the company ended up being ambiguous on its dividend, as it failed to declare a payment for the second quarter. There were several things happening, namely the acquisition of Taubman (TCO), the Covid-19 shutdown of its properties, and the difficulty in collecting rent from tenants. Since then we have had no visibility on the amount of rent that is collected, but judging by other peers it is likely low. Hence why Simon is in the news for trying to sue tenants such as The GAP for not paying rent.
Simon is also trying to cancel the merger with Taubman, citing the Covid-19 situation and using the deterioration in business as a cause to walk away from this transaction. While it may have to pay a steep fine to walk away, Simon may actually be bluffing its way to bring Taubman to the negotiating table, and lower the entry price for the deal. We could only speculate of course.
I had a very small position in Simon, which I just sold today. That dividend cut ended a 10 year streak of annual dividend increases. Ironically, buying Simon when it last cut dividends in April-May 2009 would have turned out to be a smart decision through 2018. If we look at prices today however, the returns are not as high since early 2009.
I also wanted to add to my article from Friday, about expectations for dividend increases and dividend cuts in the banking sector.
It turns out that the results for the initial stress tests are out. It turns out that the following banks are going to keep dividends unchanged in the third quarter:
- Goldman Sachs (GS)
- Bank of America (BAC)
- Citigroup (C)
- Ally (ALLY)
- State Street (STT)
- U.S. Bank (USB)
- BNY Mellon (BK)
- Discover Financial Services (DFS)
- Fifth Third Bancorp (FITB)
- PNC Financial (PNC)
- American Express (AXP)
- J.P. Morgan (JPM)
Jamie Dimon, Chairman and CEO of JPMorgan Chase said: “At this time, using both JPMorgan Chase’s and the Federal Reserve’s base case economic outlook, the Firm can continue to pay its dividend in future quarters while maintaining healthy capital and liquidity positons. If there is a significant deterioration in the future outlook, the Firm will, of course, consider reducing dividends.
The only major bank that won't be keeping dividends unchanged is Wells Fargo (WFC). (Source)
"The company expects its common stock dividend in third quarter 2020 will be reduced from the current level of $0.51 per share. The company expects that the level of the third quarter dividend will be announced when it releases second quarter financial results on July 14, 2020."
On July 14th, Wells Fargo cut its quarterly dividend by 80% to 10 cents/share. Source: Press Release
This would be the first dividend cut for Wells Fargo since the Global Financial Crisis. Back in March 2009, the bank cut dividends as part of the TARP program. Incidentally, that was a great time to buy Wells Fargo below $10/share. The stock rebounded and went as high as $65 by early 2018, but has slowly gone downhill from there. Buffett is one of the largest holders of Wells Fargo, and is likely not very happy with the outcome. The bank was one of the strongest a decade ago, but its been mired in scandals related to fictitious account openings, and its size of operations has been capped.
I had a very small position in Wells Fargo. I built it in 2013, but stopped adding after raising some concerns that noone else paid attention to at the time. After all, if Buffett was buying, it was good enough. The nice part of my risk management procedures is that I usually build positions slowly, always doubt myseld and if the story changes, I stop buying more. When I am wrong, I like to keep losses low. I believe in keeping losses low, while trying to maximize future dividends and capital gains.
Relevant Articles:
- Wells Fargo Joins the Crowd of Dividend Cutters
- Should you invest in Wells Fargo (WFC)?
- Why Warren Buffett Likes Investing in Bank Stocks
- Simon Property Group (SPG): A High Yield and High Risk REIT
- Expect Dividend Cuts and Dividend Freezes in the Banking Sector
Tuesday, May 5, 2020
Walt Disney Companies (DIS) Suspends Dividends
Walt Disney Companies would not be eligible for inclusion in the dividend achievers list until some time in 2030.
This was a surprise for me. The company had kept dividends unchanged in December, which was a surprising move. The other surprising move was when Iger decided to step down all of a sudden. After the company stopped raising dividends, I stopped adding to the stock per my risk management guidelines.
I will stick to my plan, and sell the stock tomorrow, after the market opens. This is per my risk management rules. I am going to think about what to do with the cash from the sale. Apparently the moat was not wide enough to get Disney through a global pandemic.
Check my analysis of Walt Disney Companies (DIS) for more information about the company. I last analyzed this former dividend achiever in 2018.
This was my second dividend suspension this year, after TJX Companies (TJX) suspended dividends. I also had a dividend cut this week, when Royal Dutch Shell (RDS.B) decided to cut dividends. All other oil majors are keeping theirs unchanged ( so far).
So far, the number of dividend increases surpasses the number of dividend cuts and suspensions by a large factor. However, the companies cutting or suspending dividends are no longer just those that are cyclical, and usually cut in a recession.
I will consider Disney again, at the right valuation, once it re-establishes dividends and starts growing them.
Relevant Articles:
- Disney (DIS) Dividend Stock Analysis
- Risk Management
- Disney: A Wide-Moat Stock To Hold Forever
- Warren Buffett’s Eight Billion Dollar Mistake
Thursday, May 16, 2019
Vodafone Cuts Dividends to Shareholders
On Tuesday of this week, British Company Vodafone (VOD) cut its dividend by 40%. Not surprisingly, this dividend cut occurred several months after its Chief Financial Officer had stated that the dividend will not be cut. The dividend is cut due to several factors such as the need for cash to invest in 5G, and to acquire Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania
Vodafone (VOD) had been an international dividend achiever, with an almost 30-year history of annual dividend increases. The last five years saw dividend growth slow down to 2%/year. This was a decrease from the 7% annual growth in the preceding five years.
I own a few shares of Vodafone, because of investments I made in 2013. Because of the low amount of shares I own, it would not be cost effective to sell. If I owned a more material amount of shares however, valued around $1000 or more, I would likely sell and reinvest the proceeds elsewhere. Verizon may be a decent option.
You may enjoy the dividend stock analysis of Vodafone from the time I was considering the investment.
The major reason I invested in Vodafone was because of the value opportunity at play. Vodafone distributed shares of Verizon it had acquired as a result of the sale of its stake in Verizon Wireless to the parent company. What was a value play initially, turned out to be a slightly longer term investment.
I have not been a big fan of telecom companies in general throughout the years. This has somewhat been influenced by the fact that I have spent quite a few years working in the sector. This means that it made little sense to also load up my portfolio with telecom stocks. I have not been very enthusiastic about the sector in general too, but I have had exposure to it through my investment in Verizon (VZ), Vodafone and even AT&T (T) from time to time ( I used to follow an options strategy, which I stopped due to hassle factor, despite consistent profitability). I also view technological changes as a negative for the telecom sector.
However, I had sold most of my Vodafone shares throughout the years, for one reason or another. The main reason is the fact that I consolidated a lot of my retirement plans, and ended up buying funds with the proceeds. I ultimately kept only a small position from a legacy retirement account.
I thought of walking you through my history with this company. I like to discuss and share my mistakes, because I view them as learning opportunities. I believe that embracing mistakes and learning from them is ultimately what separates the people who are able to succeed in long-term investing from those who do not stick with it.
It turns out that I invested $200 in Vodafone on October 7, 2013. I used Sharebuilder – I believe that I paid $1/investment back then, but for some reason the broker states that it was a free trade. I ended up buying 5.70 shares of the telecom giant.
After a dividend reinvestment, I received shares of Verizon, which were spun off from Vodafone, or 1.5227 to be exact. Following this distribution, Vodafone enacted a 6:11 reverse split in its shares. The reverse split reduced the number of Vodafone shares from 5.79 to 3.16. I then kept reinvesting Verizon and Vodafone distributions until 2018. This was the time when Etrade decided to buy the brokerage business of Sharebuilder (now Capital One). As a result, there was a time when dividends were received in cash and fractional shares had to be sold before the transition.
I had 3.88 shares of Vodafone at the time, which meant I ended up selling 0.88 shares at $24.22/share or a total of $21.31. I also received a dividend of $4.56 in August 2018, prior to the remaining 3 shares being sent to Etrade. After February’s dividend I am left with 3.0898 shares, with a grand total value of $49.62 as of 5/15/2019.
I had 1.85 shares of Verizon, which meant I ended up selling 0.85 shares at $51.59/share for a total of 43.85. I also received $1.69 in dividends until the one share of Verizon was transferred out to Etrade. After May’s dividend I am left with 1.02161 shares worth a grand total of $58.04.
Overall, that $200 investment from October 2013 is now worth a whopping $179.07. If Sharebuilder hadn’t moved the assets over to Etrade and I didn’t have to sell fractional shares or receive dividends in cash, I would assume I would have still had a small loss on this investment. The largest point is that from an opportunity cost of view, I missed out on gain in some of the US Dividend Champions or Aristocrats over these five years. I did learn (or reiterate in a way) a few lessons on my portfolio building and strategy process.
Some random reader might laugh at these comically low dollar amounts I am discussing here. It makes it seem like my portfolio is an amateurish endeavor. Yet, they would be missing the forest for the trees with this comment. I am discussing low dollar amounts, because I ended up owning only a small amount in the company relative to total portfolio size. I bought a stock where I was ultimately wrong. I minimized the impact of the error by having a very small amount invested in the future dividend cutter Vodafone. When I build a position, I scale in slowly. If the story changes, or I lose confidence in management or there are better opportunities, I divert my capital elsewhere. This is how I end up with a lot of small holdings, which is a great way to monitor investments.
I think that the lesson for me is to invest small amounts regularly in a collection of dividend paying stocks, which meet my criteria. This way, I am able to diversify my exposure and not be exposed to the fortunes or lack thereof of a single company. In addition, by investing regularly, I am building my position slowly and over time. As a result, I am able to view negative changes and deteriorating conditions as I go through my leisurely accumulation of the position. As I view these conditions, and I see that the stock no longer meets my entry criteria, I stop accumulating. This is why I have so many small positions scattered around – they looked good at a time, but due to changes in the environment, I stopped adding to them. Therefore, I limited that amount of capital at risk. I rarely sell, which is a good thing, because on the flip side, I never know which of my investments will be my best one.
On the other hand, building positions slowly also exposes me to the risk that I identify a great company, but by the time I am able to accumulate the target position amount the stock price is too overvalued. As a result, I am stuck with a small position relative to what I would want it to be.
I also tend to accumulate dividends in cash, and pool them together with new cash deposited into my brokerage account, in order to make investments in the best values at the moment. This further helps me to diversify investments per sector, geography and over time. If I had simply let dividends accumulate in cash from Vodafone and Verizon, I would have been left with 3.10 Vodafone shares worth $49.80 and 1.50 shares of Verizon worth $85.20. I would have received $27.07 in cash dividends from Vodafone and $17.20 in cash dividends from Verizon for a total of $179.30. This is very close to what my investments ended being worth after all as well. But in reality, the change is that these funds would have been invested elsewhere and hopefully compounded at a better rate that Vodafone.
So to summarize:
• Keep investing mistakes small
• Spread risk by diversifying in many companies and over time
• Stop investing when story changes
• Keep Spin-offs
• Use dividends elsewhere by reinvesting them selectively in best values of the moment
• Review investing mistakes regularly, in order to learn from them and become a better investor
Relevant Articles:
- Should I invest in AT&T and Verizon for high dividend income?
- Are these high yield dividends sustainable?
- Maintaining Moats in times of Technological Changes
- Nine Dividend Paying Stocks I Accumulated in the Past Month
Vodafone (VOD) had been an international dividend achiever, with an almost 30-year history of annual dividend increases. The last five years saw dividend growth slow down to 2%/year. This was a decrease from the 7% annual growth in the preceding five years.
I own a few shares of Vodafone, because of investments I made in 2013. Because of the low amount of shares I own, it would not be cost effective to sell. If I owned a more material amount of shares however, valued around $1000 or more, I would likely sell and reinvest the proceeds elsewhere. Verizon may be a decent option.
You may enjoy the dividend stock analysis of Vodafone from the time I was considering the investment.
The major reason I invested in Vodafone was because of the value opportunity at play. Vodafone distributed shares of Verizon it had acquired as a result of the sale of its stake in Verizon Wireless to the parent company. What was a value play initially, turned out to be a slightly longer term investment.
I have not been a big fan of telecom companies in general throughout the years. This has somewhat been influenced by the fact that I have spent quite a few years working in the sector. This means that it made little sense to also load up my portfolio with telecom stocks. I have not been very enthusiastic about the sector in general too, but I have had exposure to it through my investment in Verizon (VZ), Vodafone and even AT&T (T) from time to time ( I used to follow an options strategy, which I stopped due to hassle factor, despite consistent profitability). I also view technological changes as a negative for the telecom sector.
However, I had sold most of my Vodafone shares throughout the years, for one reason or another. The main reason is the fact that I consolidated a lot of my retirement plans, and ended up buying funds with the proceeds. I ultimately kept only a small position from a legacy retirement account.
I thought of walking you through my history with this company. I like to discuss and share my mistakes, because I view them as learning opportunities. I believe that embracing mistakes and learning from them is ultimately what separates the people who are able to succeed in long-term investing from those who do not stick with it.
It turns out that I invested $200 in Vodafone on October 7, 2013. I used Sharebuilder – I believe that I paid $1/investment back then, but for some reason the broker states that it was a free trade. I ended up buying 5.70 shares of the telecom giant.
After a dividend reinvestment, I received shares of Verizon, which were spun off from Vodafone, or 1.5227 to be exact. Following this distribution, Vodafone enacted a 6:11 reverse split in its shares. The reverse split reduced the number of Vodafone shares from 5.79 to 3.16. I then kept reinvesting Verizon and Vodafone distributions until 2018. This was the time when Etrade decided to buy the brokerage business of Sharebuilder (now Capital One). As a result, there was a time when dividends were received in cash and fractional shares had to be sold before the transition.
I had 3.88 shares of Vodafone at the time, which meant I ended up selling 0.88 shares at $24.22/share or a total of $21.31. I also received a dividend of $4.56 in August 2018, prior to the remaining 3 shares being sent to Etrade. After February’s dividend I am left with 3.0898 shares, with a grand total value of $49.62 as of 5/15/2019.
I had 1.85 shares of Verizon, which meant I ended up selling 0.85 shares at $51.59/share for a total of 43.85. I also received $1.69 in dividends until the one share of Verizon was transferred out to Etrade. After May’s dividend I am left with 1.02161 shares worth a grand total of $58.04.
Overall, that $200 investment from October 2013 is now worth a whopping $179.07. If Sharebuilder hadn’t moved the assets over to Etrade and I didn’t have to sell fractional shares or receive dividends in cash, I would assume I would have still had a small loss on this investment. The largest point is that from an opportunity cost of view, I missed out on gain in some of the US Dividend Champions or Aristocrats over these five years. I did learn (or reiterate in a way) a few lessons on my portfolio building and strategy process.
Some random reader might laugh at these comically low dollar amounts I am discussing here. It makes it seem like my portfolio is an amateurish endeavor. Yet, they would be missing the forest for the trees with this comment. I am discussing low dollar amounts, because I ended up owning only a small amount in the company relative to total portfolio size. I bought a stock where I was ultimately wrong. I minimized the impact of the error by having a very small amount invested in the future dividend cutter Vodafone. When I build a position, I scale in slowly. If the story changes, or I lose confidence in management or there are better opportunities, I divert my capital elsewhere. This is how I end up with a lot of small holdings, which is a great way to monitor investments.
I think that the lesson for me is to invest small amounts regularly in a collection of dividend paying stocks, which meet my criteria. This way, I am able to diversify my exposure and not be exposed to the fortunes or lack thereof of a single company. In addition, by investing regularly, I am building my position slowly and over time. As a result, I am able to view negative changes and deteriorating conditions as I go through my leisurely accumulation of the position. As I view these conditions, and I see that the stock no longer meets my entry criteria, I stop accumulating. This is why I have so many small positions scattered around – they looked good at a time, but due to changes in the environment, I stopped adding to them. Therefore, I limited that amount of capital at risk. I rarely sell, which is a good thing, because on the flip side, I never know which of my investments will be my best one.
On the other hand, building positions slowly also exposes me to the risk that I identify a great company, but by the time I am able to accumulate the target position amount the stock price is too overvalued. As a result, I am stuck with a small position relative to what I would want it to be.
I also tend to accumulate dividends in cash, and pool them together with new cash deposited into my brokerage account, in order to make investments in the best values at the moment. This further helps me to diversify investments per sector, geography and over time. If I had simply let dividends accumulate in cash from Vodafone and Verizon, I would have been left with 3.10 Vodafone shares worth $49.80 and 1.50 shares of Verizon worth $85.20. I would have received $27.07 in cash dividends from Vodafone and $17.20 in cash dividends from Verizon for a total of $179.30. This is very close to what my investments ended being worth after all as well. But in reality, the change is that these funds would have been invested elsewhere and hopefully compounded at a better rate that Vodafone.
So to summarize:
• Keep investing mistakes small
• Spread risk by diversifying in many companies and over time
• Stop investing when story changes
• Keep Spin-offs
• Use dividends elsewhere by reinvesting them selectively in best values of the moment
• Review investing mistakes regularly, in order to learn from them and become a better investor
Relevant Articles:
- Should I invest in AT&T and Verizon for high dividend income?
- Are these high yield dividends sustainable?
- Maintaining Moats in times of Technological Changes
- Nine Dividend Paying Stocks I Accumulated in the Past Month
Tuesday, November 8, 2016
My take on HCP’s Dividend Cut
HCP, Inc. (HCP) is a real estate investment trust that invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing.
HCP (HCP) spun-off Quality Care Properties (QCP) unit on October 31. Shareholders received a share of QCP for every five shares of HCP they owned. After the spin-off, the company announced its new dividend of 35 cents/share, which was a decrease from 35.70% from the prior dividend of 57.50 cents/share. This ended the 30 year streak of annual dividend increases for this dividend champion. Of course, we do not know whether QCP will be paying a dividend, and what their dividend rate is going to be. If the new dividend was decreased by 20%, I would have viewed it as a dividend freeze, which is fine as the level of income generating assets is decreasing by 20% due to the spin off. Since the dividend decrease was not proportional to the amount of shares that were spun-off, I view it as a dividend cut.
HCP (HCP) spun-off Quality Care Properties (QCP) unit on October 31. Shareholders received a share of QCP for every five shares of HCP they owned. After the spin-off, the company announced its new dividend of 35 cents/share, which was a decrease from 35.70% from the prior dividend of 57.50 cents/share. This ended the 30 year streak of annual dividend increases for this dividend champion. Of course, we do not know whether QCP will be paying a dividend, and what their dividend rate is going to be. If the new dividend was decreased by 20%, I would have viewed it as a dividend freeze, which is fine as the level of income generating assets is decreasing by 20% due to the spin off. Since the dividend decrease was not proportional to the amount of shares that were spun-off, I view it as a dividend cut.
Monday, December 14, 2015
Where to invest the money from the sale of Kinder Morgan stock?
Last week was particularly busy for me on the investing front. I ended up selling almost my entire position in Kinder Morgan (KMI) at approximately $16/share after the company cut dividends by 75%. The surprising part was that the company went from forecasting 6% - 10% annual dividend growth to a 75% dividend cut within the span of one month. I decided that rather than hope for the best, I should cut my losses and reevaluate the situation with a clear head. This decision would also allow me to claim all losses on my 2015 tax return.
My average cost basis on Kinder Morgan stock that I bought outright was about $30/share. I started buying the shares after the IPO in 2011, and bought more until 2013. The company was one of my best ideas. I didn’t buy new stock outright since late in 2013. I have received several years worth of dividends. From a tax perspective, I get to reduce my income by the amount of the loss (technically I reduce any capital gains first, and then I get to deduct up to $3,000 and roll-forward any losses for future tax returns). The reduction in tax liability is helpful to soften the losses. Since the last time I made an investment in Kinder Morgan in late 2013, I have collected approximately $4/share in dividend income. I did hold a small portion of my Kinder Morgan position ( approximately 7% - 8% of my shares) in tax-deferred accounts such as an IRA, where the tax basis was in the mid-30s. I reinvested of my dividends there, and I won't get any deduction on the loss. A portion of those shares will likely be forever stuck in a tax-deferred account since the position is so small, that it would not be cost effective to sell the shares and then buy something else with the proceeds.
A large portion of Kinder Morgan stock came from my investment in Kinder Morgan Management (KMR) however. I received cash dividends of a little less than $2/share for only 1 year – before that I had received shares in lieu of distributions. This was a tax-free way of receiving distributions in stock at a discount, which made compounding easier and a no brainer decision. Either way, I came up only slightly behind on those investments from this legacy position from Kinder Morgan Management (KMR), despite what it looks like a low tax basis of approximately $20/share.
My average cost basis on Kinder Morgan stock that I bought outright was about $30/share. I started buying the shares after the IPO in 2011, and bought more until 2013. The company was one of my best ideas. I didn’t buy new stock outright since late in 2013. I have received several years worth of dividends. From a tax perspective, I get to reduce my income by the amount of the loss (technically I reduce any capital gains first, and then I get to deduct up to $3,000 and roll-forward any losses for future tax returns). The reduction in tax liability is helpful to soften the losses. Since the last time I made an investment in Kinder Morgan in late 2013, I have collected approximately $4/share in dividend income. I did hold a small portion of my Kinder Morgan position ( approximately 7% - 8% of my shares) in tax-deferred accounts such as an IRA, where the tax basis was in the mid-30s. I reinvested of my dividends there, and I won't get any deduction on the loss. A portion of those shares will likely be forever stuck in a tax-deferred account since the position is so small, that it would not be cost effective to sell the shares and then buy something else with the proceeds.
A large portion of Kinder Morgan stock came from my investment in Kinder Morgan Management (KMR) however. I received cash dividends of a little less than $2/share for only 1 year – before that I had received shares in lieu of distributions. This was a tax-free way of receiving distributions in stock at a discount, which made compounding easier and a no brainer decision. Either way, I came up only slightly behind on those investments from this legacy position from Kinder Morgan Management (KMR), despite what it looks like a low tax basis of approximately $20/share.
Tuesday, December 8, 2015
Kinder Morgan Cuts Dividends
This just in, Kinder Morgan (KMI) announced it was cutting its quarterly dividend by 75% to 12.50 cents/share ( 50 cents/year). Source: Press Release
I have changed my mind from my article from last week. I believe that Kinder Morgan will be a good long-term holding. However, after the ambivalent announcement on Friday, I concluded that a dividend cut was likely. As a result, I made a decision that is somewhat in line with how I approach dividend cuts.
I sold most of my shares today, and bought an equivalent amount of calls. When I say that I sold shares, I mean that I performed some tax-loss harvesting as described before. For each 100 shares I owned, I sold one call to lock in the sale price and bought one put to protect from further downside. When those contracts expire in a little over 1 month, I will close the call, the put and sell the shares. Instead of buying more shares however to maintain my position, I bought calls.
For example, for every 100 shares that I held originally, I bought 1 call. This was meant as a way to limit risk. I will reconsider holding the stock when the dividend starts growing again. Until then I will hold on to those options.
I have changed my mind from my article from last week. I believe that Kinder Morgan will be a good long-term holding. However, after the ambivalent announcement on Friday, I concluded that a dividend cut was likely. As a result, I made a decision that is somewhat in line with how I approach dividend cuts.
I sold most of my shares today, and bought an equivalent amount of calls. When I say that I sold shares, I mean that I performed some tax-loss harvesting as described before. For each 100 shares I owned, I sold one call to lock in the sale price and bought one put to protect from further downside. When those contracts expire in a little over 1 month, I will close the call, the put and sell the shares. Instead of buying more shares however to maintain my position, I bought calls.
For example, for every 100 shares that I held originally, I bought 1 call. This was meant as a way to limit risk. I will reconsider holding the stock when the dividend starts growing again. Until then I will hold on to those options.
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