As previously noted, FINRA changed the link information to individual bond information and none of my links made in this blog prior to November 2013 work as a result. I included some links in the Disclaimer section to the right that will allow you to find FINRA information about a particular bond.
For novice bond investors, FINRA has a general tutorial about bond investing that starts at this page: Smart Bond Investing—Introduction - FINRA
A more advanced discussion can be found in this McGraw Hill publication: pdf
Big Picture Synopsis
For novice bond investors, FINRA has a general tutorial about bond investing that starts at this page: Smart Bond Investing—Introduction - FINRA
A more advanced discussion can be found in this McGraw Hill publication: pdf
Big Picture Synopsis
Stocks:
Stable Vix Pattern (bullish)
Short Term: Hoping for a 10%+ Correction
Intermediate and Long Term: Bullish
Bonds:
Short: Neutral to Slightly Negative
Intermediate and Long Term: Slightly Bearish Based on Interest Rate Normalization
Intermediate and Long Term: Slightly Bearish Based on Interest Rate Normalization
The bond forecasts assume an average annual CPI rate of 2% to 2.25% over the next ten years. The current breakeven rate is close to the top of that range. 10 Year TIPS Breakeven Rate (YCharts)
The ten year broke out of its recent trading range and crossed the 3% yield barrier last Friday. Daily Treasury Yield Curve Rates; Standard Chart - WSJ.com That caused me to change my short term outlook to neutral leaning toward slightly bearish from neutral.
Part of the decline in price and rise in yield may be due to the holidays and the absence of some market participants.
Bonds did rally some yesterday:
Closing Prices 12/30/13:
TLT: $102.51 +0.70 (+0.69%) : iShares 20+ Year Treasury Bond ETF
IEF: $99.69 +0.27 (+0.27%) : iShares 7-10 Year Treasury Bond ETF
LQD: $114.48 +0.34 (+0.30%) : iShare Investment Grade Bond ETF
BABS: 54.40 +0.31 (+0.57%) : SPDR Nuveen Barclays Build America Bonds ETF
MUB: $103.82 +0.23 (+0.22%) : iShares National AMT-Free Municipal Bond ETF
TIP: $110.06 +0.31 (+0.28%) : iShares TIPS Bond ETF
I recently added several 50 share lots in exchange traded bonds and equity preferred stocks anticipating an average down. I have set the average down price based on yield, requiring either a 8% or a 8.5% yield for an additional 50 share purchase, adjusted for a brokerage commission.
Some of those securities and their average down prices include the following:
Price Needs to Go Below for 50 Share Average Down:
Senior Bond KWN $24
Equity Preferred SLGPRI: $20.2
Equity Preferred EVERPRA $21
Equity Preferred BPFHP $20.4 (requiring 8.5%)
Junior Bond THGA $19.6
Equity Preferred CBLPRD $23
Equity Preferred AFPRC $20.2
I anticipate hitting two or three of those targets during the 2014 first quarter.
My current guess is that long term bonds are closer to normalized rates than intermediate term bonds based on the market's current inflation forecasts embodied in the pricing of 5, 10, and 30 year TIPs. On 12/30/13, the breakeven spread on the 30 year TIP closed at 2.31% (difference between the nominal at 3.9%, Daily Treasury Yield Curve Rates, and the 30 year TIP at 1.59%, Daily Treasury Real Yield Curve Rates0
The ten year broke out of its recent trading range and crossed the 3% yield barrier last Friday. Daily Treasury Yield Curve Rates; Standard Chart - WSJ.com That caused me to change my short term outlook to neutral leaning toward slightly bearish from neutral.
Part of the decline in price and rise in yield may be due to the holidays and the absence of some market participants.
Bonds did rally some yesterday:
Closing Prices 12/30/13:
TLT: $102.51 +0.70 (+0.69%) : iShares 20+ Year Treasury Bond ETF
IEF: $99.69 +0.27 (+0.27%) : iShares 7-10 Year Treasury Bond ETF
LQD: $114.48 +0.34 (+0.30%) : iShare Investment Grade Bond ETF
BABS: 54.40 +0.31 (+0.57%) : SPDR Nuveen Barclays Build America Bonds ETF
MUB: $103.82 +0.23 (+0.22%) : iShares National AMT-Free Municipal Bond ETF
TIP: $110.06 +0.31 (+0.28%) : iShares TIPS Bond ETF
I recently added several 50 share lots in exchange traded bonds and equity preferred stocks anticipating an average down. I have set the average down price based on yield, requiring either a 8% or a 8.5% yield for an additional 50 share purchase, adjusted for a brokerage commission.
Some of those securities and their average down prices include the following:
Price Needs to Go Below for 50 Share Average Down:
Senior Bond KWN $24
Equity Preferred SLGPRI: $20.2
Equity Preferred EVERPRA $21
Equity Preferred BPFHP $20.4 (requiring 8.5%)
Junior Bond THGA $19.6
Equity Preferred CBLPRD $23
Equity Preferred AFPRC $20.2
I anticipate hitting two or three of those targets during the 2014 first quarter.
My current guess is that long term bonds are closer to normalized rates than intermediate term bonds based on the market's current inflation forecasts embodied in the pricing of 5, 10, and 30 year TIPs. On 12/30/13, the breakeven spread on the 30 year TIP closed at 2.31% (difference between the nominal at 3.9%, Daily Treasury Yield Curve Rates, and the 30 year TIP at 1.59%, Daily Treasury Real Yield Curve Rates0
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Recent Developments:
The government reported that personal income increased by .2% in November. Personal consumption expenditures (PCE) increased by .5%. The price index for PCE increased by only .1%. The personal savings rate was reported at 4.2%. Personal spending is up at an annual rate of 4.5% over the past six months. News Release: Personal Income and Outlays
Brian Wesbury estimates that real GDP is growing at 2% annual rate in the current quarter. ftportfolios.com/Commentary
The 2014 predictions made by the GS chief economist, summarized in this Business Insider article, are bullish for the U.S. economy. He expects above trend growth and an inflation rate less than 2%.
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Lexington Realty (own)
Brad Thomas wrote a detailed article about LXP that was published by Seeking Alpha. After trading the preferred securities issued by Lexington on and off, I now own only the common shares. Item # 1 Bought: 100 LXP at $10.33 (12/3/13 Post)
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Railroads (own CSX):
Morningstar recently gave American railroads a wide moat rating for the reasons which have been obvious for a long time. 2 Wide-Moat Railroads
I mentioned the natural monopoly and cost advantages when buying a position in CSX. Item # 5 Bought: 100 CSX at $26.33 (11/12/13 Post) However, the government has the power to erode those advantages with regulations.
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Duff & Phelps Global Utility Income Fund (DPG)
This stock CEF owns electric, gas and water utilities, MLPs and telecommunications companies.
I bought the following lot on 11/21/12 when the discount to net asset value per share closed at -5.97% Item # 1 Bought 100 of the CEF DPG at $17.3 (November 2012) The net asset value per share was then at $18.43, with a closing market price that day of $17.33.
The other 100 share lot was purchased in the ROTH IRA during December 2012, when the discount to net asset value per share was -8.17%. Item # 3 Swap Trade Roth IRA: Sold 100 of 150 GYB at $18.03 & Bought 100 DPG at $17.31
Part of my unrealized total return on the shares has been retarded by the slight expansion in the discount to net asset value per share since my two purchases.
I will try to review, at a minimum, the annual and semi-annual reports published by funds that I own. Over the weekend, I reviewed the recently released DPG annual report. For the year ending 10/31/2013, the fund's net asset value increased 20.1% which I view as good given the industry sectors. The fund does some option writing and realized $1.5M in net premiums from that activity. As of 10/31/13, the market value of owned assets was at $1.084+B purchased at a cost of $931+B.
The fund had realized gains for the F/Y of $25.76M. The dividends of $53+M were covered by the $31+M in income and $25+M in realized gains, but the firm showed a ROC of $20.27+M. This is a benign return of capital due to using a capital loss carryforward as an offset. Based on footnote 6 of this report, there is still a short term loss carryforward of $6.998+M as of 10/31/13.
Sponsor's website: Duff & Phelps Global Utility Income Fund — Home
Morningstar Page for DPG
The fund is paying a $.35 per share quarterly dividend. The last ex dividend date was 12/12/13.
DPG CEFConnect Page
Lexington Realty (own)
Brad Thomas wrote a detailed article about LXP that was published by Seeking Alpha. After trading the preferred securities issued by Lexington on and off, I now own only the common shares. Item # 1 Bought: 100 LXP at $10.33 (12/3/13 Post)
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Railroads (own CSX):
Morningstar recently gave American railroads a wide moat rating for the reasons which have been obvious for a long time. 2 Wide-Moat Railroads
I mentioned the natural monopoly and cost advantages when buying a position in CSX. Item # 5 Bought: 100 CSX at $26.33 (11/12/13 Post) However, the government has the power to erode those advantages with regulations.
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Duff & Phelps Global Utility Income Fund (DPG)
This stock CEF owns electric, gas and water utilities, MLPs and telecommunications companies.
I bought the following lot on 11/21/12 when the discount to net asset value per share closed at -5.97% Item # 1 Bought 100 of the CEF DPG at $17.3 (November 2012) The net asset value per share was then at $18.43, with a closing market price that day of $17.33.
The other 100 share lot was purchased in the ROTH IRA during December 2012, when the discount to net asset value per share was -8.17%. Item # 3 Swap Trade Roth IRA: Sold 100 of 150 GYB at $18.03 & Bought 100 DPG at $17.31
Part of my unrealized total return on the shares has been retarded by the slight expansion in the discount to net asset value per share since my two purchases.
I will try to review, at a minimum, the annual and semi-annual reports published by funds that I own. Over the weekend, I reviewed the recently released DPG annual report. For the year ending 10/31/2013, the fund's net asset value increased 20.1% which I view as good given the industry sectors. The fund does some option writing and realized $1.5M in net premiums from that activity. As of 10/31/13, the market value of owned assets was at $1.084+B purchased at a cost of $931+B.
The fund had realized gains for the F/Y of $25.76M. The dividends of $53+M were covered by the $31+M in income and $25+M in realized gains, but the firm showed a ROC of $20.27+M. This is a benign return of capital due to using a capital loss carryforward as an offset. Based on footnote 6 of this report, there is still a short term loss carryforward of $6.998+M as of 10/31/13.
Sponsor's website: Duff & Phelps Global Utility Income Fund — Home
Morningstar Page for DPG
The fund is paying a $.35 per share quarterly dividend. The last ex dividend date was 12/12/13.
DPG CEFConnect Page
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Royal Dutch Shell (RDS/A):
I received on 12/24/13 the shares purchased with the recent quarterly dividend paid by the "A" shares of Royal Dutch Shell.
I bought 50 share lots in two separate accounts. In both accounts, no withholding tax was taken for this dividend paid by a corporation based in the Netherlands. In one account, the reinvestment price was $66.77 and $66.8082 in another.
On 12/24/13, the shares traded in a range between a low of $69.94 and a high of $70.34. RDS-A Historical Prices So I know that the brokers did not buy the shares in open market transactions on 12/24. The shares have not traded at $66.80 between 12/16 and 12/24.
I will likely sell the shares held in one of the satellite taxable accounts whenever I have a 10% annualized return. Prior to the onset of the FED's Jihad Against the Saving Class, I did not have a brokerage account with this firm but only an online savings account used to purchase CDs. As those CDs started to mature in 2009, I refused to roll them over and instead opened a brokerage account at that firm. I have been using some of the funds formerly devoted to CDs to buy dividend paying stocks like Royal Dutch. When and if a 6 month CD rate returns to 4+%, I will switch back to CD purchases in staggered maturities, a ladder roll approach, which usually means roughly equal weights between 6 months to 3 years.
As noted in this blog, I went online to purchase some long CDs immediately after hearing the Fed's announcement of a 0%-.25% federal funds range "for an extended period of time".
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China Fund (CHN):
As previously discussed, this stock CEF has paid large distributions over the past three years, mostly sourced from long term capital gains. I received the shares purchased with the year end distribution last week:
On the ex dividend date, the net asset value per share is adjusted down by the dividend amount per share. Some individual investors are not aware of that fact. These large distributions over the past three years have resulted in an unrealized loss on the shares. This last reinvestment did lower my average cost per share to $22.88 from $23.26.
CHN Page at CEFConnect
The China Fund, Inc. - Home
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Vanguard Star: This mutual fund is a low cost balanced fund of funds. An account can be opened for $1,000. The total expense ratio is .34%. Vanguard - Vanguard STAR Fund I received in late December my year end distributions.
Portfolio Composition as of 11/30/13:
The return in 2013 has been hurt by the fund's bond allocation. The five year annualized return through 12/26/13 was 13.96%.
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Adams Express (ADX)
For this stock CEF, I changed my distribution option from reinvestment to payment in cash back in January 2013.
I have been receiving the quarterly income dividends in cash.
On 12/27/13, I received an income distribution of $79.58 in cash. However, the long and short term capital gains distributions, totaling $530.52, were used to purchase 42.071 shares at $12.6101.
I can not complain. The closing share price on 12/27/13 was $13.10. I may reduce my position by selling my highest cost 200 shares at anytime, which would reduce my average cost per share to $10.14. Those shares were bought in May 2008 and can barely be sold profitably now. The current position is 926+ shares with an average cost per share of $10.76. While the unrealized gain is over $2,000, the total return is much higher factoring in the dividends.
ADX page at CEFConnect
ADX has committed to at least a 6% annual distribution rate. Adams Express Company Most of that total will be sourced from long term capital gains paid at year end. This fund will not support a dividend with ROC. So, if it can not achieve that distribution rate due to a market decline, similar to what happened in 2008, then I would anticipate a temporary cessation of that managed distribution policy.
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Canadian General Investments Ltd. (CGI:TOR)(own 200 shares)
I also received on 12/27 the year end capital gain distribution from this Canadian stock CEF paid in CADs after a 15% withholding tax:
On 12/27/13, the net asset value per share was C$25.47. The shares closed at C$18.2, up C$.54. At that time, the discount to net asset value per share was -28.54%.
Sponsor's website: Morgan Meighen & Associates
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Royce Micro Cap (RMT)(own 749+ shares)
I changed my dividend instruction to payment in cash several months ago, but Fidelity continues to reinvest the dividend:
This last share purchase with dividends brings me up to 749+ shares. I am leaning toward paring this position in 2014 by selling the highest cost 200 shares.
According to CEFConnect, RMT has gained 54.43% in price and 45.4% in net asset value over the past year through 12/27/13. Over five years, the total annualized return was 25.95% based on market price and slightly less using net asset value per share. That is a little too hot for me, unless of course I am wrong about money growing on trees.
Closing Price 12/27/13: RMT: $12.63 +0.05 (+0.40%)
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Coca Cola (own 265+ shares):
The Barrons' columnist Jack Hough opines that KO shares "could" rise "20% or more over the next year. He cites an analyst from Janney Capital Markets who has a $52 target price who argues that the parabolic rise in middle class consumers with 700 million new members by 2020 will spur sales. That makes sense to me. I have been making the same argument. That point would be a justification for buying and holding several large multinationals (see my comment at 12/24/12 at 9:48 P.M. to this Seeking Alpha article on KO with no "likes")
On another issue mentioned in that article, I have noticed at Kroger's aggressive pricing by Pepsi and Coca Cola throughout 2013. Both have trained me to buy when the price sinks to 3 fridge cartons for $11.
I own 265+ shares with an average cost per share of $25.41. I have quit reinvesting the dividend:
In another Barrons' article about money manager Fayez Sarofim, his investment approach is described as buying great brand name companies like Coca Cola and never selling. There is something to be said for that approach with the following caveats.
The price of KO stock, adjusted for stock splits, is currently below the peak price of $42.75 hit in 1998. KO Interactive Chart Even blue chips hit asinine valuations during the blowout phase of the long term bull market that started in August 1982. I see no reason to continue holding any stock that reaches unjustifiable and totally irrational valuation levels. Within a short period of time, investors will come to their senses. KO's stock price was cut by more than 50% by 2002.
And, I had an opportunity to buy at $19.36 in early March 2009. Stocks, Bonds & Politics: Buy of KO at 38.72 (3/10/09 Post-$19.36 adjusted for subsequent 2 for 1 stock split).
It is important to take into account the impact of inflation on a dollar's purchasing power. It would take $61.13 to buy what $42.75 would have bought in 1998. Inflation Calculator: Bureau of Labor Statistics In other words, for the buyer of KO stock at $42.75 in 1998, the price would have to rise to $61.13 to break-even on a purchasing power basis, excluding the dividends. I would have been far better to sell in 1998 and then buy back the shares back when valuation levels reached rational levels. An investor could have bought twice as many shares as sold in 1998, using only the proceeds realized from the 1998 sale.
Another important consideration is the dividend growth rate. It is important to know that rate of growth over at least a five and ten year period.
Coca-Cola Company (The) (KO) Dividend Date & History - NASDAQ.com (unadjusted for the 2012 stock split)
In 2003, the KO split adjusted quarterly dividend rate was $.11 and $.28 in 2013. Compare that rate of growth with HCP discussed in Item #1 below.
I would add a note about Mr. Sarofim. He has become extremely rich as a money manager, as noted in the Barron's article. His "expertise" can be acquired by investing in the Dreyfus Appreciation Investor (DGAGX) mutual fund that has underperformed the S & P 500 over the past 1, 3, 5, and 10 years.
The list of the 25 top holdings of this fund can be found at MSN. As an experiment, an investor could write down on pieces of paper the names of those stocks, all of which are household names, throw the pieces of paper up into the air, and start picking them up one at a time. The first one will have a 5.09% weight, the next will be at a 4.92% and so on, matching the percentage of net assets shown in the preceding linked MSN page. I wonder whether that method will outperform the money manager expertise that goes into the weightings of the Dreyfus Appreciation fund.
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1. Bought 50 HCP at $36.31-Satellite Taxable Account (see Disclaimer): I would describe this buy as a marginal one. I am primarily attempting to build up a diversified REIT portfolio after the recent price correction.
Royal Dutch Shell (RDS/A):
I received on 12/24/13 the shares purchased with the recent quarterly dividend paid by the "A" shares of Royal Dutch Shell.
 |
| Main Taxable |
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| A Satellite Taxable Account |
On 12/24/13, the shares traded in a range between a low of $69.94 and a high of $70.34. RDS-A Historical Prices So I know that the brokers did not buy the shares in open market transactions on 12/24. The shares have not traded at $66.80 between 12/16 and 12/24.
I will likely sell the shares held in one of the satellite taxable accounts whenever I have a 10% annualized return. Prior to the onset of the FED's Jihad Against the Saving Class, I did not have a brokerage account with this firm but only an online savings account used to purchase CDs. As those CDs started to mature in 2009, I refused to roll them over and instead opened a brokerage account at that firm. I have been using some of the funds formerly devoted to CDs to buy dividend paying stocks like Royal Dutch. When and if a 6 month CD rate returns to 4+%, I will switch back to CD purchases in staggered maturities, a ladder roll approach, which usually means roughly equal weights between 6 months to 3 years.
As noted in this blog, I went online to purchase some long CDs immediately after hearing the Fed's announcement of a 0%-.25% federal funds range "for an extended period of time".
**********************
China Fund (CHN):
As previously discussed, this stock CEF has paid large distributions over the past three years, mostly sourced from long term capital gains. I received the shares purchased with the year end distribution last week:
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| CHN Reinvestment $497.97 Bought 24.282 Shares at $20.504 |
CHN Page at CEFConnect
The China Fund, Inc. - Home
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Vanguard Star: This mutual fund is a low cost balanced fund of funds. An account can be opened for $1,000. The total expense ratio is .34%. Vanguard - Vanguard STAR Fund I received in late December my year end distributions.
Portfolio Composition as of 11/30/13:
The return in 2013 has been hurt by the fund's bond allocation. The five year annualized return through 12/26/13 was 13.96%.
******************
Adams Express (ADX)
For this stock CEF, I changed my distribution option from reinvestment to payment in cash back in January 2013.
I have been receiving the quarterly income dividends in cash.
On 12/27/13, I received an income distribution of $79.58 in cash. However, the long and short term capital gains distributions, totaling $530.52, were used to purchase 42.071 shares at $12.6101.
I can not complain. The closing share price on 12/27/13 was $13.10. I may reduce my position by selling my highest cost 200 shares at anytime, which would reduce my average cost per share to $10.14. Those shares were bought in May 2008 and can barely be sold profitably now. The current position is 926+ shares with an average cost per share of $10.76. While the unrealized gain is over $2,000, the total return is much higher factoring in the dividends.
ADX page at CEFConnect
ADX has committed to at least a 6% annual distribution rate. Adams Express Company Most of that total will be sourced from long term capital gains paid at year end. This fund will not support a dividend with ROC. So, if it can not achieve that distribution rate due to a market decline, similar to what happened in 2008, then I would anticipate a temporary cessation of that managed distribution policy.
*********************
Canadian General Investments Ltd. (CGI:TOR)(own 200 shares)
I also received on 12/27 the year end capital gain distribution from this Canadian stock CEF paid in CADs after a 15% withholding tax:
On 12/27/13, the net asset value per share was C$25.47. The shares closed at C$18.2, up C$.54. At that time, the discount to net asset value per share was -28.54%.
Sponsor's website: Morgan Meighen & Associates
****************
Royce Micro Cap (RMT)(own 749+ shares)
I changed my dividend instruction to payment in cash several months ago, but Fidelity continues to reinvest the dividend:
 |
| RMT $673.45 purchases 54.797 Shares at $12.2899 |
This last share purchase with dividends brings me up to 749+ shares. I am leaning toward paring this position in 2014 by selling the highest cost 200 shares.
According to CEFConnect, RMT has gained 54.43% in price and 45.4% in net asset value over the past year through 12/27/13. Over five years, the total annualized return was 25.95% based on market price and slightly less using net asset value per share. That is a little too hot for me, unless of course I am wrong about money growing on trees.
Closing Price 12/27/13: RMT: $12.63 +0.05 (+0.40%)
************
Coca Cola (own 265+ shares):
The Barrons' columnist Jack Hough opines that KO shares "could" rise "20% or more over the next year. He cites an analyst from Janney Capital Markets who has a $52 target price who argues that the parabolic rise in middle class consumers with 700 million new members by 2020 will spur sales. That makes sense to me. I have been making the same argument. That point would be a justification for buying and holding several large multinationals (see my comment at 12/24/12 at 9:48 P.M. to this Seeking Alpha article on KO with no "likes")
On another issue mentioned in that article, I have noticed at Kroger's aggressive pricing by Pepsi and Coca Cola throughout 2013. Both have trained me to buy when the price sinks to 3 fridge cartons for $11.
I own 265+ shares with an average cost per share of $25.41. I have quit reinvesting the dividend:
 |
| KO Unrealized Gain as of 12/30/13=$4,169.77 |
The price of KO stock, adjusted for stock splits, is currently below the peak price of $42.75 hit in 1998. KO Interactive Chart Even blue chips hit asinine valuations during the blowout phase of the long term bull market that started in August 1982. I see no reason to continue holding any stock that reaches unjustifiable and totally irrational valuation levels. Within a short period of time, investors will come to their senses. KO's stock price was cut by more than 50% by 2002.
And, I had an opportunity to buy at $19.36 in early March 2009. Stocks, Bonds & Politics: Buy of KO at 38.72 (3/10/09 Post-$19.36 adjusted for subsequent 2 for 1 stock split).
It is important to take into account the impact of inflation on a dollar's purchasing power. It would take $61.13 to buy what $42.75 would have bought in 1998. Inflation Calculator: Bureau of Labor Statistics In other words, for the buyer of KO stock at $42.75 in 1998, the price would have to rise to $61.13 to break-even on a purchasing power basis, excluding the dividends. I would have been far better to sell in 1998 and then buy back the shares back when valuation levels reached rational levels. An investor could have bought twice as many shares as sold in 1998, using only the proceeds realized from the 1998 sale.
Another important consideration is the dividend growth rate. It is important to know that rate of growth over at least a five and ten year period.
Coca-Cola Company (The) (KO) Dividend Date & History - NASDAQ.com (unadjusted for the 2012 stock split)
In 2003, the KO split adjusted quarterly dividend rate was $.11 and $.28 in 2013. Compare that rate of growth with HCP discussed in Item #1 below.
I would add a note about Mr. Sarofim. He has become extremely rich as a money manager, as noted in the Barron's article. His "expertise" can be acquired by investing in the Dreyfus Appreciation Investor (DGAGX) mutual fund that has underperformed the S & P 500 over the past 1, 3, 5, and 10 years.
The list of the 25 top holdings of this fund can be found at MSN. As an experiment, an investor could write down on pieces of paper the names of those stocks, all of which are household names, throw the pieces of paper up into the air, and start picking them up one at a time. The first one will have a 5.09% weight, the next will be at a 4.92% and so on, matching the percentage of net assets shown in the preceding linked MSN page. I wonder whether that method will outperform the money manager expertise that goes into the weightings of the Dreyfus Appreciation fund.
**********************
1. Bought 50 HCP at $36.31-Satellite Taxable Account (see Disclaimer): I would describe this buy as a marginal one. I am primarily attempting to build up a diversified REIT portfolio after the recent price correction.
After hitting $55.28 on 5/21, the shares had fallen 35.26% until my purchase at $36.31. HCP Interactive Chart That chart may show the 50 and 200 day SMA lines and the recent dividend payments. I can include dividends and splits by selecting those categories under "events". SMA lines can be added by clicking "technical indicators" and then typing the desired time period.
Snapshot of Trade:
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| 2013 Bought 50 HCP at $36.31 |
Portfolio Diversification
HCP is the only REIT in the S& P 500 Dividend Aristocrats, a list limited to firms included in the S & P 500 that have increased their dividends for twenty five or more consecutive years.
HCP is currently rated 4 stars by Morningstar with a $50 fair value estimate.
Company Website: HCP Inc
Profile page at Reuters
Key Developments Page at Reuters
HCP Key Statistics Page at Yahoo Finance
HCP Analyst Estimates at Yahoo Finance
The current consensus estimates are 2.99 in 2013 and 3.06 in 2014. The growth in FFO Y-O-Y is of course anemic and uninspiring. Based on the forward estimate, and a $36.31 share price, the P/FFO is about 11.86 which is reasonable.
The quarterly dividend rate for 2013 was $.525 per share. HCP generally raises its dividend during the first quarter of each year. The 2013 rate was an increase of $.025 per share from the $.50 paid in 2012 or a mere 4%.
The dividend history shows growth in a slow, methodical kind of way: Dividend Information | HCP The quarterly rate was $.415 in 2004 and $.0525 in 2013. I am confident that I will not live to see a doubling of the dividend. On the positive side, the dividend was not cut during the last recession.
Those investors who wax poetic about REITs get enthused about the dividends and dividend growth. Compared to other dividend growers, the rate of growth is best described as anemic. And, while HCP did not cut the dividend during the recent Near Depression, many American REITs did slash their rates. I would not put the dividends paid by REITs in the same safety category as those paid by PEP, GIS, KO, CL, etc.
After the company abruptly terminated its President on 10/2/13, Brad Thomas who writes about HCP at Seeking Alpha sold his shares back in October.
2012 Annual Report Filed with the SEC
As of 12/31/2012, the company states that it had interests in 441 senior housing facilities and 420 of those were leased to single tenants under triple net leases (page 5-Annual Report). The company had then interests in 312 post-acute/skilled nursing facilities, 273 medical office buildings, 21 hospitals and 114 life science properties (pages 6-7).
For anyone listening to an earnings call or reading an earnings report, there will appear a term "RIDEA" which is defined as follows by the company:
As of 12/31/2012, the owned portfolio summary contained at page 9 of the 2012 Annual Report is as follows:
The company also had at that time $540M in assets under development or redevelopment.
More property is included in what HCP calls its Investment Management Platform where it has an interest in a joint venture (Page 10)
HCR Manor Care operates more than 500 skilled nursing homes and rehabilitation centers, hospices, assisted living centers and home healthcare centers. It was a public company until it was bought out by The Carlyle Group. I regard that concentration as a major negative. HCR's normalized fixed charge coverage ratio for the 12 months ending 9/30/13 was 1.19x, down from 1.24 on 6/30/13, page 3 of the SA Earnings Call Transcript.
Prior Trades: None
Recent Earnings Report: For the 2013 third quarter, HCP reported a 9% increase in FFO per share to $.79.
FAD (funds available for distribution) increased 22% to $.67 per share. SEC Filed News Release
Both numbers were negatively impacted by "management transition-related costs of $26 million or $.06 per share, including the acceleration of equity-based compensation and severance payments". Earnings Call Transcript - Seeking Alpha
Occupancy for senior housing stood at 85.5% at quarter's end, a 50 basis point decline from the year ago quarter.
HCP's debt is discussed starting at page 14 of the recently filed 10-Q: Q/E 9/30/2013 As of 9/30/13, the company had outstanding $6.6B in senior unsecured notes and another $1.4B in mortgage debt. The mortgages are secured by 132 healthcare facilities with an average weighted maturity of four years. The weighted average interest rates on the senior unsecured debt issues was then 5.1% with a weighted average maturity of five years.
In its most recent issuance, the company sold $800M in senior 4.25% unsecured notes maturing in 2023. That note is rated Baa1 by Moody's and BBB+ by S & P. Bonds Detail Part of the proceeds were to be used to repay a $400M senior 5.65% note maturing on 12/15/13. SEC Form 8-K
Rationale: (1) Very modest dividend income appreciation and potential share price appreciation: I would not anticipate a dividend growth rate outside of a 4% to 5% range over a rolling five year period. At a 4% constant annual growth rate, it would take about 17.67 years for the dividend to double.
At the 2013 quarterly rate of $.525 per share, the dividend yield would be about 5.78% at a total cost of $36.31. If I assumed a 4% increase for 2014, which would bring the quarterly rate to $.546, the yield would increase to about 6%.
(2) Rational Valuation at $36.31 Based on TTM FFO and Projected 2014 FFO: The current P/FFO, based on the forward FFO consensus estimate, is reasonable in my opinion at 11.86. When the shares closed at $55 back in May 2013, the forward P/FFO was at 17.97. Without question, I would be a seller at that valuation level.
Risks: I view the heavy concentration to HCA ManorCare to be a major negative. Another potential negative is the high concentration of facilities in California.
Interest rate risks are manifested in two ways. As rates rise, those investors who view REITs as bond alternatives will start to find more appealing to them investments. And, as noted above, HCP's debt has a five year or so weighted average and has to be constantly refinanced by the company.
Medicare and Medicaid reimbursement issues, particularly for skilled nursing homes, are always a major issue. A major negative change in reimbursement rates could cause widespread bankruptcies of operators, similar to what happened in the late 1990s.
The company discusses risks incident to its operations starting a page 13 of its last SEC filed Annual Report. Another discussion of risk factors can be found starting at page S-7 of a recently SEC filed bond prospectus.
Future Buys/Sells: I am not likely to buy more based on my analysis of the risks. Since the shares were bought in a satellite taxable account, where my main objectives are capital preservation and income, my objective is modest, hoping for a 10% annualized total return after brokerage commissions, preferably within one year after purchase.
2. Sold 100 of IGI at $20.20 (see Disclaimer): I have been in a trading mode for this bond CEF for over three years now.
Snapshot of Trade:
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| 2013 Sold 100 IGI at $20.2 |
Closing Price for an investment grade bond ETF on 12/22/13: LQD: $114.70 -0.18 (-0.16%)
Snapshot of Profit:
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| 2013 IGI 100 Shares +$76.56 |
Security Description: The Western Asset Investment Grade Defined Opportunity Trust (IGI) is an unleveraged closed end bond fund that invests primarily in U.S. investment grade bonds.
CEFConnect Page for IGI
IGI Page at Morningstar (currently rated 3 stars)
Data for Friday 12/20/13 (Trading Day before Transaction)
Closing Net Asset Value: $21.26
Closing Market Price: $19.33
Closing Discount: -9.08
On 12/18/2013, this security went ex dividend for its regular monthly dividend of $.10 per share and a long term capital distribution of $.3096 per share. I received that dividend on 12/27/13:
I also received two other monthly $10 dividend payments, bringing the total dividends up to $60.96. The total dollar return on this $1936 investment, made on 10/11/13, was $137.52 or 7.1%.
Data for Monday 12/22/13 (date of trade)
Closing Net Asset Value: $21.24
Closing Market Price: $20.08
Closing Discount: -5.46%
Discount at $20.2= -4.9%
The entire rise in price on 12/23 was due to a narrowing of the discount. The net asset value declined by two cents per share from the prior trading day.
Prior Trades: Prior to this last trade, I sold IGI and bought GDO as part of a paired trade. Item # 7 Paired Trade: Sold 100 IGI at $20.22 in Roth IRA and Bought 100 GDO at $17.79-Regular IRA October 2013; Item # Bought Roth IRA: 100 IGI at $19.43 (9/7/13 Post)
This brings me to total realized gains on the IGI shares to $538.63 ($76.56 + the profits reflected in the four snapshots found in the prior linked post).
Trades to date include the following: Item # 3 Bought 100 CEF IGI at $19.89 in IRA February 2010; Item # 2 Added 100 of the CEF IGI at $19.79 February 2010; Item # 5 Sold 100 IGI at 21.26- IRA (June 2010); ITEM # 3 Sold:100 IGI @ $20.75 November 2010; Item # 1 Added 100 IGI at $19.65 March 2011; Item # 3 Sold 100 IGI @ $20.76 May 2011; Item # 5 Bought 100 IGI at $20.7 in Roth IRA July 2011; Item # 2 Bought 100 IGI at $20.69; Item # 2 Sold 200 IGI at $21.52+ August 2011; Item # 3 Bought Roth IRA: 100 IGI at $19.43 September 2013; Item # 7 Sold 100 IGI at $20.22 in Roth IRA October 2013; Item # 3 Added 100 IGI at $19.28 October 2013-shares sold and discussed in this item.
In order to generate a profit on the shares, I had to trade this security.
Rationale: This bond CEF is relatively low yielding. I am now and have been for several years in a trading mode for this fund. The pop in price on 12/22/13 reduced the discount in one day from -9.08 to -4.9 based on my sale's price. And, I was able to juice the total return with a $40+ dividend paid on 12/27.
I will consider repurchasing the fund at greater than a 8% discount to its net asset value per share. My last two purchases were at the lowest prices ($19.43 and $19.28) ever paid for these shares as shown by the preceding list of trades.
3. Sold 100 PFK at $26.65 (see Disclaimer):
Snapshot of Trade:
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| 2013 Roth IRA Sold 100 PFK at $26.65 |
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| 2013 Roth IRA PFK 100 Shares +$705.51 |
I was leaning toward keeping this one until the price improved some, as discussed in the introduction section of the 11/27/13 Post, but decided to harvest my profit. I can reinvest the proceeds into a higher yielding bond.
Prior Trade: My most recent trade was to sell 100 shares for a $962.38 profit. Snapshot at Item # 3 Sold 100 PFK at $28.25-Bought 100 PFK at $18.466
Rationale: The yield of this security has been floating down based on the low inflation numbers published by the BLS. The CPI calculation is based on the unadjusted CPI for all urban consumers. (data at research.stlouisfed.org) I can pick up 3% to 4% more in yield per year with another security. And, the focus of my management of the ROTH IRA is to generate income which is tax free when paid into that account and non-taxable when withdrawn.
The monthly interest payments are of course variable. On 12/10/13, I received a monthly interest payment $8.17 on my 100 shares, down from $9.08 in November. Even at a $9 average monthly payment and a total cost per share of $26.65, the current yield would be about 4.06%.
In addition, I would lose over $150+ of my profit by holding this security until maturity, when I would receive the $25 par value.
Future Buys: If this one fell below par value, I would consider buying up to 100 shares. I have no qualms about the credit risk. The only issue for me is that the coupon is likely to remain low given the low inflation rate.
4. Bought 100 ARCP at $12.74-Roth IRA (see Disclaimer):
Snapshot of Trade:
This security was bought as a replacement for 100 ARSEF, a Canadian REIT, that was sold due entirely to Canada's imposition of a 15% tax on the dividend paid into the IRA.
Security Description: American Realty Capital Properties (ARCP) is a REIT that owns single tenant, free standing commercial real estate that is net leased to corporate tenants that are "primarily" investment grade. The IPO for this company occurred in September 2011.
Company Website: American Realty Capital Properties
This REIT has acquired properties with a combination of long and medium term leases and will continue to do so "with approximately 70% long-term leases and 30% medium-term leases, with an average portfolio remaining lease term of approximately 10 to 12 years." (page ARCP 09.30.2013 10-Q)
As described at pages 5-9 of its most recent 10-Q, this company is an active acquirer of real estate companies and properties.
A map showing the properties can be found at American Realty Capital Trust. In Tennessee, the company owns 47 properties that are leased to such companies as Wendy's, IHOP, Walgreens, Dollar General, Hardees, and FEDEx.
Dividends are paid monthly: Dividends | American Realty Capital Properties
The last monthly dividend was for $.0783 per share, paid in December, and represented an increase from $.0758 paid in November. The dividend rate for December 2011 was $.0729 per share. The rate of growth over the foregoing two year period was 7.4% or an average of 3.7% per year.
The next ex dividend date is in early January.
If the acquisition of Cole Real Estate Investments is approved by the shareholders, then ARCP will raise its dividend from an annual rate of $.94 to $1.00, paid in monthly installments. In that case, the monthly dividend would be raised from the current $.0783 rate to $.0833: American Realty Capital Properties Announces Monthly Dividend for January 2014
The share price closed at $17.82 on 5/2 and thereafter slid into its current channel range, mostly floating between $12.5 and $13.5. ARCP Interactive Chart
This is a link to a recent Seeking Alpha article on ARCP written by Brad Thomas. This is a link to another Seeking Alpha article that highlights the recent acquisition activity.
Prior Trades: None
Recent Earnings Report: For the 2013 third quarter, American Realty Capital Properties reported AFFO of $46.7M or $.21 per share. As of 9/30/13, the REIT had 1,219 properties with a 100% occupancy rate:
Portfolio Composition as of 9/30/13:
After the quarter's end, ARCP completed its acquisition of CapLease. The portfolio had 1,328 properties as of 11/6/2013:
Pending and Organic Acquisitions (organic at $1.1B anticipated to close during the 2013 4th quarter with an average capitalization rate of 7.8%):
I have a general inchoate concern that this REIT is growing too fast. One concrete concern is that the rapid growth adds more debt, and investors have legitimate concerns about interest rates going up.
American Realty Capital Properties Receives Financing Commitments to Increase Total Borrowings Under Credit Facilities up to $2.87B
In the 3rd quarter earning's press release, ARCP notes that Moody's assigned a Baa3 rating to it.
The AFFO guidance for 2014 was $1.13 to $1.19 with a target payout ratio of 85% to 90%.
See also: ARCP 09.30.2013 10-Q (debt is discussed in notes 7, 8 and 9 starting at page 16)
Rationale: (1) Income + Some Potential Capital Appreciation in the Shares: The current dividend yield is about 7.38% at a total cost per share of $12.74.
If the monthly rate is soon raised to $.0833 after the Cole Real Estate Investments acquisition is consummated by the parties, then the yield would rise to about 7.84% at a total cost of $12.74 per share.
The recent share price correction makes some capital appreciation a more realistic possibility.
(2) Reasonable Valuation: The current consensus FFO estimates are for $.86 in 2013 and $1.15 in 2014. The forward P/FFO at a $12.74 price is about 11.08. FFO growth based on those forecasts would be 33.72%.
Risks: The company discusses risks incident to its operations starting at page 13 of the 2012 Annual Report. ARCP -10-K
My concerns include its rapid growth, and the negative impact of rising rates on FFO. Since I started to invest back in the late 1960s, I have seen many roman candles shoot up and then fall back to earth.
Future Buys and Sells: I may average down with another 50 to 100 share lot. I am not likely to average up.
5. Sold 50 of the Synthetic Floater GYC at $22.3-Roth IRA (see Disclaimer): The Corporate Asset Backed Corp. CABCO Series 2004-102 Trust SBC Communication Inc. Floating Rate Certificates (GYC) is a Synthetic Floater in the Trust Certificate.
The current coupon is the greater of 3.25% or .65% over the three month Libor rate up to 8% per annum cap, on a $25 par value. The underlying security is a 6.45% fixed coupon, senior unsecured bond issued by SBC Communications (now AT & T) that matures in 2034. Bonds Detail
Snapshot of Trade:
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| 2013 Roth IRA Sold 50 GYC at $22.3 |
Snapshot of Profit:
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| 2013 Roth IRA 50 Shares +$167.98 |
Added 50 GYC at $18.66 -Roth IRA (10/24/13)
This was my second round trip for GYC during 2013. This last 50 share transaction brought my total realized gains for GYC up to $587.54 ($419.56 in prior trades).
Trades: Item # 8 Sold 50 of 100 GYC at $20.8 (10/31/13 Post)- Item # 1 Bought Roth IRA: 50 GYC at $20 (9/7/13 Post); Sold 100 GYC at 22.22: Ongoing Reassessment of Synthetic Floaters (7/28/12 Post)(snapshot of profit=$357.45)-Item # 3 Bought 50 GYC at $15.5 May 2009 and Item # 3 Added 50 GYC at $21.60 in Roth IRA February 2011; Sold 40 GYC at $22.3 in regular IRA November 2010-Bought TC GYC at $21 September 2010
GYC Prospectus
I will consider buying back these shares when and if the price sinks back to $18-$19.5.
I did hold this 50 share lot long enough to receive the last quarterly interest payment, a mere $10.17.
GYC is a low yielding security and its minimum coupon of 3.25% is likely to be the applicable rate for at least two more years. The benefits of this security will not be realized until interest starts to rise significantly, with the 3 month Libor rate returning to a more normal level.
3-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar - St. Louis Fed
While it is not an everyday occurrence, an unusually large price move, up or down, in a trust certificate just happens from time to time. The most bizarre was a move in XFL late one day from below its $25 par value to over $33. I could not hit the sell button fast enough:
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| Sold 100 XFL at $33.31 Profit $821.98 |
Politics and Etc:
1. Jordon Belfort: Why is this Jordan Belfort a free man?
He orchestrated a penny stock swindle as the founder of "Stratton Oakmont" that cost investors more than $200 million. WSJ.com He apparently has zero positive attributes including the ability to genuinely feel remorse. Yet he served a mere 22 months in a minimum security prison and is now back in circulation as a "motivational" speaker.
The NY Daily News ran a story about the efforts made by prosecutors to collect restitution from this animal. A Businessweek article summarized the efforts being made to collect restitution from Belfort who is back living the good life.
At a minimum, Belfort should have been sentenced to life without possibility of parole, hopefully serving his sentence in the worst penitentiary in the U.S. Yet, his crimes were still small potatoes compared to those committed by the Masters of Disaster, none of whom were even charged for their many crimes against society that almost caused a Great Depression and put millions out of a job.
Belfort's crimes have become the subject of a recently released movie, "The Wolf of Wall Street (2013) - IMDb", starring Leonardo DiCaprio who recently portrayed Jay Gatsby in "The Great Gatsby (2013) - IMDb" . DiCaprio as Jordon Belfort was featured on the cover of Barrons.com.
The Wolf of Wall Street received a favorable review in the NYT. In that review, another movie, "Margin Call (2011) - IMDb", is mentioned by the reviewer. That movie is currently available under Amazon's Prime membership program and was favorably reviewed by the NYT and The New Yorker.
For those unfamiliar with Amazon Prime membership program, a customer pays $79 once a year and receives free two day shipping on eligible items, access to certain movies, TV shows and Kindle titles.
