|Company||Symbol||Date Sold||Sell Price||Price Now||Today's Change||Gain/Loss Since Sale|
On May 31 I wrote http://jubakpicks.com/2013/05/31/sell-stock-pick-total-out-of-my-dividend-portfolio-but-not-quite-yet/ that I would sell shares of Total (TOT) out of my Dividend Income portfolio but not quite yet. (The sell decision was based... more
|Magellan Midstream Partners||MMP||06/07/2013||$52.04|
This is a tough one and I’d bet that many of you would disagree no matter what I decided.
The name in question is Magellan Midstream Partners (MMP), a member of... more
|Update April 13, 2012: Banco Santander (SAN) is an immensely profitable global bank. It has more customers in Brazil and Mexico (34 million at the end of 2011) than in Spain and Portugal (30... more Read Jim's Original Sell|
|Update September 12, 2012: Brazilian utility stocks are taking a pounding on new government policies that will end the practice of automatic extensions of 20-year, no-cost concessions to provide electric power, that will increase... more Read Jim's Original Sell|
When I posted my most recent update of my Dividend Income portfolio http://jubakpicks.com/2012/07/03/if-you-want-to-earn-more-dividend-income-youll-have-to-put-up-with-more-volatility-what-you-want-to-avoid-is-a-permanent-impairment-of-capital/ on July 3, I promised that I’d make the required changes to the online portfolio
I’ve collected my dividend so now it’s time to sell stock pick Total out of my dividend income portfolioJune 27th, 2013
On May 31 I wrote http://jubakpicks.com/2013/05/31/sell-stock-pick-total-out-of-my-dividend-portfolio-but-not-quite-yet/ that I would sell shares of Total (TOT) out of my Dividend Income portfolio but not quite yet. (The sell decision was based on the downward trend in oil prices and the fact that Total was in a capital spending phase that wouldn’t turn into cash flow until 2014. You can see more details on that argument in my post.) I decided to wait to sell until the company had paid its next dividend on June 24. (The stock went ex-dividend on June 24 and the dividend is scheduled to be paid today, June 27, to shareholders of record.)
I got a number of comments suggesting that I should sell now since the market seemed to be headed for a drop (absolutely right, as it turned out) and others noting that stock prices drop by the amount of the dividend payout after the payout so why hang around. For what is a dividend income portfolio I chose to hold on to collect my cash, however, since generating income is a big part of the goal of this portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/
So how did my decision to wait to sell until after the dividend payout work?
The shares closed at $49.85 on May 31 and after the bounce of the last few days they closed today, June 27, at $48.48 as of 3 p.m. New York time. The dividend payout today is .59 euros, or 77 cents at today’s exchange rate. By waiting to sell I lost 60 cents a share.
The gain on these shares was 3.24% from my purchase price on May 28, 2010. At the time of purchase the stock paid a yield of 6.5%.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Total as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
This is a tough one and I’d bet that many of you would disagree no matter what I decided.
The name in question is Magellan Midstream Partners (MMP), a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/
This master limited partnership has been a very, very good addition to the portfolio. At the time of the initial buy, these units paid a 7.3% distribution. Since I added the units to the portfolio on December 6, 2005, they’ve gained 60.3% (to the close on June 7, 2013.)
And that’s the problem.
The partnership has increased distributions every year. From $1.45 in 2010 to $1.56 in 2011 to $1.78 in 2012, but the increases in distributions haven’t kept up with the increase—27.4% in 2011 and 30.6% in 2012, for example, in the price of the units.
Consequently, the yield on this holding has come down every year—from 6.55% in 2009 to 5.15% in 2010 to 4.52% in 2011 to 4.13% in 2012 to 3.9% right now.
Why is that an issue? Because that falling yield is a sign that dividend stocks have gotten too popular. Especially recently.
Investors looking to stay in the markets but worried that the rally wasn’t sustainable have been flocking to dividend-paying stocks. To give you one indication of that the Vanguard Dividend Appreciation ETF (VIG) has attracted $2.2 billion so far in 2013. That’s almost equal to the $2.21 billion the ETF attracted in all of 2013.
And that has made dividend-paying ETFs, partnerships, and stocks more vulnerable than you might expect in the recent downturn. Magellan Midstream was down 4.14% from its May 22 high through the close on June 6. Vanguard Dividend was down 3.45% from its May 21 high. That’s surprisingly—to me anyway because I would have expected the investments with the higher dividends to have held up better —worse than the 2.79% decline in the Standard & Poor’s 500 stock index from May 21.
So a steadily declining yield—because of a very much appreciated increase in unit price—and more downside volatility than I would have expected.
The question is what do you do about that?
3.9% isn’t a terrible yield in the current market—although it is less attractive if interest rates are on the rise as they have been recently and look to be longer term as the market frets about the Federal Reserve tapering off its purchases of Treasuries and mortgage-backed assets.
The business model at Magellan Midstream Partners is a relatively low-risk one, too. More than 50% of the company’s revenue is tied to fee-based contracts that are linked to inflation. Looking at the appropriate inflation index, the Producer Price Index, Credit Suisse calculates that Magellan will see a 4.6% increase in these fees in July. If you add in new projects such as the reversal of flow direction and expansion in the Longhorn pipeline and the acquisition of refined products pipelines from Plains All American (PAA), then I think you’re looking at an annual average growth in distributions of 10% or so over the next three years.
A 10% annual growth rate for payouts certainly isn’t anything to sneeze at in this market or any other.
So do you hold on because this a low-risk, well-managed pipeline master limited partnership with a projected 10% annual increase in distributions or do you sell because you think the recent popularity of dividend paying stocks has pushed Magellan’s price to overvalued territory?
I think that answer depends on whether you think 1) you can find a better yielding dividend play and 2) how quickly you think interest rates might rise this year.
Me? I’m inclined to sell and see what research and time bring my way in terms of a higher yield. (I’m also trying to control a tendency for this portfolio to hold too much in the energy sector and in master limited partnerships.)
But I certainly respect the alternative decision.
With this post I’m selling Magellan Midstream Partners out of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares in Magellan Midstream Partners as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
April 13, 2012Banco Santander (SAN) is an immensely profitable global bank. It has more customers in Brazil and Mexico (34 million at the end of 2011) than in Spain and Portugal (30 million.) It’s Brazilian subsidiary is the fifth largest bank in Brazil. In Mexico it’s No. 3. In 2011 the bank got 54% of its profits from emerging economies. Unfortunately, Banco Santander is also a Spanish bank. It has big exposure to the Spanish economy. The bank’s overall non-performing loan ratio is a solid 3.9% but in Spain the ratio rises to 5.5%. (The average for Spain’s banking system is 7.5%.) In 2011 the bank took a 1.8 billion euro provision against losses on Spanish real estate. Including that provision, a write-down on good will in its Portuguese bank, and a regulatory charge in the United Kingdom, the bank’s 2011 return on equity was just 7.1%. That’s down from 11.8% in 2010. The tough problem confronting any investor in Banco Santander—and the stock is a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ --is how to balance the promise of the global bank with the threat of the Spanish bank. That’s especially hard to do because conditions in Spain are changing so quickly that the accounting in public documents is quickly outdated. (For more on the pain in Spain see my post http://jubakpicks.com/2012/04/13/the-spanish-debt-crisis-combines-the-worst-of-the-greek-and-irish-crises-in-a-too-big-to-fail-package/ ) In the case of Banco Santander, though, we’ve got detailed Spanish information that’s only as old as yesterday. That’s when Banesto, the publicly traded Spanish arm of Banco Santander and the fifth largest bank in Spain, reported first quarter earnings. Banesto, or to be formal Banco Espanol de Credito SA (BTO.MC in Madrid), reported a 90% drop in net profit from the first quarter of 2011 to just 20 million euros as a result of setting aside 475 million euros in provisions against bad real estate loans. Coverage of bad loans, as a consequence, rose to 50% from a previous 10%. Non-performing loans climbed to almost 5% of risk-weighted assets from 4.2% a year ago. The bank’s most recent quarterly report is unsettling reading for Spain and its struggling economy. In 2011 the bank reduced its lending to the private sector by 9.2%. In the 12 months ended on March 31, 2011, Banesto reduced its loan book by 8.3%. It sure won’t help a Spanish economy struggling for growth if the country’s banks are cutting back on lending. There’s also bad news for the Spanish economy in the way that Banesto has responded to new Spanish rules that force banks to increase their reserves against losses on real estate loans. One way to increase that reserve ratio, of course, is to raise capital and put it aside as reserves. That’s very expensive right now. The other way is to reduce the size of a bank’s loan book so that the reserve ratio rises without any addition to reserves. In the quarter Banesto increased its sales of real estate to 140 million euros in March from 30 million euros in January. You can imagine what the accelerated pace of selling does to housing prices. If you’ve been wondering how far the Spanish real estate market is from a bottom as a way to judge when this crisis might end, then Banesto had bad news to deliver. The bank said it continues to foreclose on roughly the same number of properties that it is selling. In other words, the backlog of real estate on the market at distressed prices isn’t shrinking. Okay, what answers does the Banesto quarterly report give investors in Banco Santander? First, on deposits. The bigger the pool of deposits a bank has, the less likely it is to need to raise money in the financial markets to fund its operations. Customer deposits at Banesto were down in the first quarter to $54 billion euros from $60.5 billion in the first quarter of 2011. But deposits in the first quarter were up by 3.2 billion euros from the fourth quarter of 2011. In Spain, certainly the most troubled part of the Banco Santander global franchise, the bank isn’t seeing the kind of massive withdrawals that would endanger the bank’s capital position. Overall, Banco Santander has been able to reduce its ratio of loans to deposits—thanks to reducing the size of its loan book—to 1.17 (loans to deposits) in 2011 from a 1.35 ratio in 2009. Second, on capital needs. How much capital a bank needs to raise is determined by the financial markets (what level gives the markets confidence), the credit rating houses (what level gives them confidence), and bank regulators. Bank regulators have, perhaps, the most influence since they get to decide that counts as capital. The evidence from Banesto’s quarterly report is that Spain’s regulators aren’t being sticklers. Banesto was able to reduce its need for capital and to avoid a loss for the quarter by producing 365 million euros of extraordinary gains from selling stakes in industrial companies and loans from its balance sheet. The attitude of regulators is a key to Banco Santander’s ability to meet its capital needs going forward by selling assets and indulging in some creative asset shifting. So far the evidence is that regulators will let this pass—if only because the alternatives are so unpalatable. Third, on cash flow. Banesto’s ability to generate even 20 million euros in profits during the first quarter of 2012 is critical to judging Banco Santander. Right now the dividend—up to 11.17% yesterday—is crucial to the share price of Banco Santander. If the dividend goes, the stock falls hard. Already the company has resorted to voluntary payments of dividends in stock as a way to preserve cash to meet the bank’s needs to retain earnings in order to raise capital. If that goes from voluntary to mandatory, wham, the stock takes a hit. If the dividend in cash and stock falls below the 0.6-euro dividend per share level targeted by the company, then, wham, the stock takes a hit. (The record date for the next dividend was April 12.) I know the deepening recession in Spain looks like the biggest threat to shares of Banco Santander, but my biggest worry is a slowdown in Brazil or Mexico, the two biggest sources of bank profits, that would endanger the dividend. So far that looks unlikely. Both economies are, in fact, seeing growth pick up. Banco Santander shares are a speculative investment right now—let’s not make any bones about that. You’re taking a risk now and taking a beating now in the belief that the bank can thread its way through the current crisis to a day when the market rewards the strengths of the global franchise. Any target price I can calculate now is based on so many assumptions that, depending on how I tweak those assumptions I can get an end of 2012 target price anywhere from $12 an ADR (American Depositary Receipt) to $8.85. That a difference of about 35%. I’m more comfortable with the assumptions behind that lower target price. The risks are pretty clear, I hope to all. The upside is about 38% from the $6.425 April 13 closing price in New York. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Banco Santander as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
September 12, 2012Brazilian utility stocks are taking a pounding on new government policies that will end the practice of automatic extensions of 20-year, no-cost concessions to provide electric power, that will increase the price of concessions to the point where inefficient utilities might not be able to make money, and that will pay very low prices for the replacement value of assets to utilities that lose their concessions. The goal of the new policies are to cut some of the world’s highest electricity rates in an effort to reduce inflation. The new rules are projected by the government to reduce electricity rates by as much as 28% The changes, announced yesterday September 11, whacked 5.3% today off the share price of a utility such as CPFL Energia (CPL). CPFL is a member of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ ) And that’s the good news in the sector. Shares of Cia. Energetica de Minas Gerais (CIG in New York), Brazil’s largest utility by market value, are down 20.8% today. Shares of Cia. de Transmissao de Energia Electrica Paulista (TRPL3.BZ in Sao Paulo or CTPZY in New York) are down 37.1% in Sao Paulo. What accounts for the big differences in the impact of these changes to companies in the sector? A utility’s mix of assets—in general the younger the assets, the more exposure the company has to renewable energy sources (a sector favored by government policy) and the les ownership of transmission lines, the less damage the new rules impose on a utility. CPFL scores well on these parameters. Estimates of the dimension of the write-downs in asset values for individual utilities as a result of the government’s very low estimates of residual values (after depreciation) at expiring concessions. Credit Suisse estimates that the government’s formula will result in a 10.3% reduction in fair value at CPFL. That’s in comparison to a 43.3% reduction at Transmissao de Energia Electrica Paulista. The write down in values for transmission lines is especially brutal. If, as this new policy seems to indicate, the Brazilian government is trying to prod the country’s utility sector toward greater efficiency and less reliance on profits guaranteed by the government, CPFL has more experience than most of its competitors in competing for customers. Even before the rule changes, about 25% of all regulated utility customers could move to competing suppliers when their contracts expired. CPFL’s commercialization unit has been focused on recapturing any of its customers who have left the world of regulated utility contracts and to compete for customers from other firms who have opted out of the decision. In short, I think CPFL is decently placed to compete in the emerging more competitive world of Brazil’s utilities. The company hasn't yet talked about the impact, if any, on the company’s dividend. So far, I don’t have any reason to think that the dividend is in danger. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of CPFL as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
When I posted my most recent update of my Dividend Income portfolio http://jubakpicks.com/2012/07/03/if-you-want-to-earn-more-dividend-income-youll-have-to-put-up-with-more-volatility-what-you-want-to-avoid-is-a-permanent-impairment-of-capital/ on July 3, I promised that I’d make the required changes to the online portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ within a couple of days.
Here it is early September and I’m just updating the portfolio now. My bad.
For those of you without perfect recall (or who have better things to stuff their brains with than changes in my portfolios) on July 3 I dropped AmBev (ABV), Brazil’s dominant beer company from that portfolio. The price on July 3 was $38.68 a share.
The biggest problem with AmBev as a dividend income investment now is its own success as a stock and as a company.
In the two years from July 2, 2010 to July 3, 2012, the stock was up 104%.
Unfortunately, the dividend hasn’t kept pace. The payout in 2011 it was $1.16 a share, and for the most recent trailing 12 months payouts add up to $1.08 a share. You can imagine what that has done to the yield on AmBev. Morningstar calculates the trailing 12-month yield at 2.04%.
The company’s extreme level of success also creates problems. AmBev so dominates Brazil’s beer market that it’s hard for the company to pick up significant market share. That leaves revenue and profit tied very closely to volumes and the cost of goods sold. In the last couple of quarters volume growth hasn’t been anything to write home about. In the second quarter, for example, organic volume grew by 2.4%. A favorable cost of goods sold in that quarter was offset by a big increase in the selling, general & administration expense as inflation and rising marketing costs took a bite.
This wouldn’t be much of an issue except that AmBev is everybody’s favorite emerging market beer stock and it trades at 23.4 times projected 2012 earnings. That’s not a recipe for a big decline in shares, but the already high valuation does make a tough for me to see rapid share price appreciation from current levels.
And it does leave the stock vulnerable to what is a very uncertain Brazilian economy.
For those reasons—a low dividend yield after a big run up in price and a relatively weak case for share price appreciation—I sold the stock out of my dividend income portfolio on July 3. The stock closed at $37.93 on September 6.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of AmBev as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/