I will be discussing in the next weekly post one other trade made on Friday, February 14, 2014 (a Canadian REIT bought on the Toronto Exchange with my CAD stash), as well as all of the trades made between 2/18/14 and 2/20/18 except for ELB discussed briefly below.
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Canadian Natural Resources (own):
Canadian Natural Resources announced that it would acquire certain Canadian assets of Devon Canada for C$3.125B. Part of that asset package includes a "revenue royalty stream" which is targeted to earn approximately C$75M in cash flow during 2014. CNQ is considering adding that royalty stream with its own revenue portfolio and either create a new vehicle to provide cash flow to existing shareholders or monetize that asset through a sale later this year. The combined royalty stream would be between C$140M to C$150M in 2014.
The acquired assets also include 6 major owned and operated natural gas plants and acreage in Western Canada, with an estimated current production of about 383 mmcf/d of natural gas, 10,800 bbl/d of light crude, and 12,000 bbl/d of NGLs. There is also undeveloped sites included in this asset purchase. The purchase excludes Devon's Horn River and heavy oil properties.
This acquisition is discussed in a
Motley Fool article.
The stock reacted positively to this news:
Closing Price 2/19/14 (bucks down day):
CNQ: $36.69 +0.92 (+2.57%)
Item # 3 Bought: 50 CNQ at $31.88 (12/23/13 Post)
The Canadian dollar has been sliding in value against the USD over the past several months. The importance of that slide for an owner of CNQ can be seen by simply overlaying a chart of CNQ (traded on the NYSE using USDs) and the ordinary shares (CNQ:TO) traded in Toronto.
CNQ Interactive Chart
Closing Price Last Monday:
CNQ: $37.05 +0.06 (+0.16%)
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Yorkville High Income MLP Fund (YMLP)
 |
| YMLP Quarterly Dividend Reinvestment |
YMLP is a MLP ETF. A reader inquired several weeks ago about why this fund was underperforming the index. I have not checked how the total return performance of YMLP compares to owning the individual MLPs.
There are two possible reasons for underperformance of a MLP ETF compared to the index that it is attempting to track. For YMLP, the relevant index is called the Solactive High Income MLP Index. In its 2013 Annual Report, YMLP claims that the fund gained 9.98% in 2013, while the index returned 15.98%.
2013-Yorkville-Annual-Report.pdf What causes such a large tracking error?
First and foremost, the ETF is just a bad ownership structure for MLPs when a fund is weighted more than 25% in that type of security. The fund then has to be organized as a regular "C" corporation and pay taxes.
In a normal fund structure, the dividends received by the fund are simply passed through to the shareholders. The fund receives a dividend deduction for the amount paid to its shareholders, causing a dividend wash at the corporate level.
As a regular "C" corporation, YMLP will in its words "accrue deferred income taxes for any future tax liability" that is associated with "that portion of MLP distributions considered to be a tax-deferred return of capital as well as (ii) capital appreciation of its investments". The Funds "accrued tax liability will be reflected each day in the Fund's NAV".
YMLP Tax Accrual
I explained generally this major disadvantage of a MLP ETF when I purchased YMLP. Eventually I will sell this security and focus entirely on ETN MLPs. As I have stated in the past, it is just a question of choosing your poison. I do not want to fool anymore with K-1s at tax time. I don't need the headache.
The YMLP distributions have been treated as a return of capital. The amount of a distribution treated as a ROC reduces the cost basis by an equivalent amount.
I currently have an artificial and unrealized profit in the shares created by that accounting cost basis adjustment, but I have not been taxed on the distributions.
Eventually, as one would expect, the IRS gets its pound of flesh provided I sell the shares held in a taxable account before my demise. If I own the shares at death, there would be a benefit to my heirs, provided the IRS rules then allow the cost basis to be stepped up to the market price and the shares have appreciated above their original purchase price.
I sold a 50 share lot bought in an IRA and still own 150 shares in a taxable account plus shares acquired with the quarterly distribution.
BOUGHT 50 of the ETF YMLP at 19.08-Taxable Account;
ADDED 100 YMLP at $18.75;
Bought 50 YMLP at $19.05-Regular IRA-
Sold 53 YMLP at $18.56-Regular IRA
This issue is also explained in a recent
Seeking Alpha article.
The second reason involves fund expenses. The annual fund operating expense is reported at .82%.
There are two advantages to an MLP ETF: (1) no K-1s and (2) no exposure to the credit risk of the sponsor which is the case for an ETN MLP. For that later advantage, there is a price to pay which is the tax accrual hit at the fund level. I have sold all other MLP ETFs since the disadvantage of the tax accrual issue outweighed the benefits in my opinion. In the MLP space, all future purchases other than YMLP's distribution reinvestment will be MLP ETNs.
YMLP holdings
Closing Price Last Monday:
YMLP: $18.11 +0.02 (+0.11%)
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Coca Cola (own):
KO had another lackluster earnings report. The shares have slid in price since its release. The problem is the usual one. The lack of growth in the North America beverage business. Still, I believe the market has reacted in a somewhat irrational manner to this report.
Coca Cola reported adjusted earnings per share of $.46, in line with estimates, but revenues fell short at $11.04B. Excluding the impact of currency and "structural changes", revenues did increase 4% in the quarter. Worldwide volume growth was 1% for the quarter. In North America, sparkling beverage volume declined 3%. "Still beverage" volume in NA grew by 4%.
2013 Q4 Earnings Release (SEC Filing)
Still beverage refers to non-alcohol, non-carbonated beverages such as tea, juice drinks, coffee, sports drinks and non-carbonated energy drinks. (e.g. Minute Maid orange juice; Dasani water; Powerade; Honest Tea, Vitamin Water:
Brands: The Coca-Cola Company)
For 2014, the company expects currency issues to be a 7% headwind to full year operating income and 10% headwind for the first quarter. KO is targeting repurchases in the $2.5 to $3 range.
As noted previously, I quit reinvesting the dividend back in 2010 based on valuation. I will consider using all of the cash dividends paid since I quit reinvesting the dividend to buy an odd lot when and if the price falls between $33 to $34, which would raise my $25 average cost per share slightly.
Last week,
The Coca-Cola Company increased its quarterly dividend by 9% to $.305 per share. At my current average cost per share of $25.41, the new dividend rate increases my yield to 4.8%.
Closing Price Last Monday:
KO: $37.50 +0.32 (+0.86%)
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First Trust/Aberdeen Global Opportunity Income Fund (FAM)
The world bond fund, which I own, cut its monthly dividend from $.13 to $.11 per share.
First Trust/Aberdeen Global Opportunity Income Fund Decreases its Monthly Common Share Distribution to $0.11 Per Share for March The reason given for the cut was to bring the distributions more in line with income.
The recent distributions have been supported by a return of capital.
CEFConnect
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Railroads:
Forbes recently published an article titled "
Why America's Second Rail Boom Has Plenty Of Room To Run"
Over the weekend,
Barrons published an article that discusses CSX.
Bought: 100 CSX at $26.33
Closing Price Last Monday:
CSX: $27.69 +0.37 (+1.35%)
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In its September 2012 IPO, SRC sold 33,350,000 shares at $15 per share. The company had a reverse merger with Cole Credit Property Trust II in July 2013. This merger caused the cancellation of the original SRC shares and the receipt of 1.9048 shares of the new SRC for each share of the old SRC owned at that time. Just think of it as a 1.9048 for 1 stock split.
Last Semi-Annual Ex Interest Date: 10/9/13
 |
| 2014 Roth IRA Sold 50 AFPRE at $22.75 |
AFPRC Roth IRA History:
AFPRC Profit:
 |
| 2014 Roth IRA AFPRE 50 Shares +$46.99 |
Item # 3 Bought 50 AFPRC at $21.75-Roth IRA
Security Descriptions: The
Merrill Lynch Depositor Inc. PPLUS Cl A 6.3% TRUCs Series RRD-1 for R.R. Donnelley & Sons Co. (PYS) is an
Exchange Traded Bond in the
Trust Certificate (TC) form of legal ownership. The TC represents an undivided beneficial interest in R.R. Donnelley senior bonds maturing on 4/15/2029 that are owned by a Grantor Trust.
RR Donnelley & Sons Profile Page at Reuters
RR Donnelley & Sons Key Developments Page at Reuters
PYS has a lower coupon than the underlying senior bond. The TC has a 6.3% coupon on a $25 par value, whereas the bonds owned by the Grantor Trust have 6.625% coupon on a $1,000 par value.
PYS Prospectus
The PYS prospectus does allow for the call warrant owner to redeem the Trust Certificates at par value plus accrued interest. Given the pricing of the underlying bond, and the fewer number of bonds supporting the lower PYS coupon payment, I would not expect a call warrant redemption in the foreseeable future.
FINRA Information on Underlying Bond:
Bonds Detail
According to FINRA, the underlying bond is rated junk. Moody's has a Ba3 rating and S & P is at BB-. One major negative for the bondholders is that RRD pays a too generous common stock dividend. The quarterly common share dividend is $.26 per share.
The underlying bond had traded at 94 shortly before my purchase. At that price the current yield would be about 7.05% with a YTM near 7.28%.
The TC, which has a lower coupon, has a current yield of about 7.975% at a total cost of $19.75, and a YTM near 9.14% (calculated using the
Morningstar Bond Calculator) The TC was a better buy than the underlying bond.
Trust Certificates trade flat which simply means that whoever owns the security on the ex interest date receives the entire interest payment. Buyers do not pay sellers accrued interest which would occur if I had bought the $1,000 par value 2029 bond in the bond market.
Underlying Bond Prospectus (subject to make whole redemption, see page S-3 et al)
Last November, R.R. Donnelley sold $350M in 6.5% senior unsecured bonds maturing in 2023.
Prospectus
The
Astoria Financial 6.5% Series C Perpetual Preferred (AF.PC) is a potentially perpetual equity preferred stock that pays non-cumulative and qualified dividends.
PYS is near its two year low:
PYS Interactive Chart
Prior PYS Trades: Most of my prior profits were realized from two fifty share lots sold in 2010:
++$222.68.jpg) |
| 2010 PYS Two 50 Share Lots=+$222.68 |
Bought 50 PYS at 20.01 March 2010;
Added 50 PYS at 19.59 June 2010;
Sold 50 PYS at 20.76 July 2010;
Sold 50 PYS @ 24 November 2010.
My last transaction was to sell 50 shares
at 23.2 in April 2011.
Related Trades: I have bought and sold the 2029 bond and other RRD senior bonds. (E.g.
Bought Back R.R. Donnelley 8.875% Senior Bond Maturing in 2021 at $96.95;
Bought 1 R.R. Donnelley 8.875% Senior Bond Maturing 5/14/2021 at 92.69;
Sold 1 RRD Senior 8.875% Bond Maturing 2021 at 100)
I currently own just 1 RRD $1,000 par value bond:
Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89 If I could sell that one anyone near its current price of 108-110,
Bonds Detail, I would do so. However, I have never seen a bid for just one bond, but I do not look very often either.
I have profitably bought and sold the common stock (RRD) repeatedly, with my lowest purchase price being
at $8.75 (January 2013) I do not currently own the common shares and would not buy the common at its current price either.
RRD Stock Quote (price at time of PYS buy=$17.33)
Recent Earnings Report: At the time of my purchase, the last RRD earnings report was for the Q/E 9/30/13. RRD reported adjusted E.P.S. of $.38 ($.08 GAAP) on revenues of $2.6B. Free cash flow for the quarter was reported at $193.9M.
SEC Filed Press Release Long term debt was $3.2401B as of 9/30/13.
SEC Form 10-Q for the Q/E 9/30/13 (debt discussed starting at page 14)
RRD common shares have a 3 star rating from Morningstar with a consider to buy price at $8 or below.
Rationale and
Risks: The primary motivation for purchasing this security is income generation. The yield at a total cost of $19.75 is about 7.97% with a YTM near 9.14% given the purchase at a significant discount to the $25 par value. And, the foregoing yields are tax free since this taxable bond was bought in a Roth IRA.
The YTM computation of course assumes that the security is held to maturity and RRD survives to par value on 4/15/29. If that occurs, the Trustee will receive the redemption proceeds and then redeem each TC for $25 plus the final interest payment.
I seriously doubt that I will own this bond for more than a few months or years at the most. My goal is to capture part of the YTM yield a long time before the security matures, which is accomplished by selling when and if the security pops in price.
The company summarizes the risks of its senior debt issues in the prospectus for the recent issued 2023 bond starting at page S-16,
Prospectus, starting with an acknowledgement that the company has a "significant amount of debt". The company also references in that Prospectus the risk factors summarized in its 2012 Annual Report, starting at page 10:
Form 10-K.
I view both the credit and interest rate risk to be material. I deal with both of those risks by buying and selling opportunistically and by limiting my exposure to a nominal amount.
Future Buys and Sells: I am not likely to buy more, but would consider buying another 50 shares when and if the current yield exceeds 9%.
Closing Prices Last Monday:
PYS: $20.39 +0.02 (+0.10%)
AF-PC: $23.41 +0.13 (+0.56%)
3. Paired Trade Roth IRA: Bought 50 DLRPRE and Sold 50 AEC at $16.91 (see Disclaimer):
Snapshot of Trades:
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| 2014 ROTH IRA Bought 50 DLRPRE at $23.36 |
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| 2014 Roth IRA Sold 50 AEC at $16.91 |
Associated Estates Realty (AEC) is an equity REIT that owns apartment buildings. The current quarterly dividend is $.19 per share. The current yield at a total cost of $16.91 per share is approximately 4.5%. The last ex dividend date was on 1/13/2014. I made a slight profit on the shares.
Bought Roth IRA: 50 AEC at $16.59 I received two quarterly dividend payments.
DLRPRE-Security and Company Description: Digital Realty Trust Inc. 7% Cumulative Preferred Series E (DLR.PE) is an equity preferred stock, issued by the REIT
Digital Realty Trust (DLR) that pays cumulative and non-qualified dividends at the fixed coupon rate of 7% on a $25 par value. Digital Realty owns data centers.
Brad Thomas wrote an article about Digital Realty that was published last December by
Seeking Alpha.
Digital Realty Trust Profile Page at Reuters
Digital Realty Trust Key Developments Page at Reuters
Common Stock Chart:
DLR Interactive Chart
The current yield at a total cost of $23.36 is about 7.49%. The tax status of the dividend is not relevant when a security is purchased in a ROTH IRA. The DLRPRE dividend becomes tax free irrespective of its tax characterization when bought in a Roth IRA. With no taxes, and before an inflation adjustment, money will double in about 9.6 years at a 7.49% rate.
Estimate Compound Interest
This REIT has 3 cumulative equity preferred stocks that are currently outstanding.
Digital Realty Trust Inc. 7% Cum. Redeem. Pfd. Series E Stock (DLR.PE)
Digital Realty Trust Inc. 6.625% Cum. Redeem. Pfd. Series F (DLR.PF)
Digital Realty Trust Inc. 5.875% Cum. Redeem. Pfd. Series G (DLR.PG)
DLRPRE
Prospectus Optional Redemption on or after 9/15/2016
DLRPRF
Prospectus Optional Redemption on or after 5/5/2017
DREPRG
Prospectus Optional Redemption on or after 4/9/2018
They are what I call functionally equivalent and are in pari passu with one another. Each have $25 par values and pay cumulative dividends on a quarterly basis. All have dividend stopper clauses. All of them have conversion rights into common stock in the event of a change of control.
While they have different coupon rates, the prices of each security will adjust for those differences in coupons, creating a closeness in current yields. There will also be differences in the optional redemption dates that may be material when selecting one issue over another. There is a limited exception, which permits an earlier redemption, relating to the preservation of the REIT's tax status.
When selecting one of two or more functionally equivalent securities, I will first look at the current yield at the then available prices. All other considerations being equal or close to equal, I would generally prefer buying the one with the highest yield. An exception may occur when the yields are close to one another, and I simply do not want to buy the highest cost shares, preferring to save some capital for other investments or a possible average down on the security selected for purchase.
The optional call date and coupon may become relevant considerations too. It is at least conceivable that a 6.6% preferred stock may be called on or after the optional call date. Interest rates may remain steady or decline some, and the credit profile of the issuer may improve. There is simply less of chance that an issuer will ever redeem an equity preferred stock yielding less than 6%. Securities with less than 6% coupons are simply more likely to become perpetual, at least until the earlier of the owner's death or the issuer's bankruptcy.
At the time of my purchase, the lowest coupon DLR preferred stock was selling at the highest current yield. The spread was less than .2%.
I went with DLRPRE since I view the interest rate risk to be less dicey.
DLRPRG, with its 5.875%, will likely end up being a perpetual security. Eventually the owner of that security will have to time their exit before it loses even more value due to a significant and non-temporary rise in interest rates.
DLRPRE, with its 7% coupon, may end up being a perpetual security too, with a similar interest rate risk profile. However, it can be redeemed on or after 9/15/2016, the earliest call date of the three issues. It is at least conceivable that the issuer will be able to refinance that one at more favorable rates. I doubt it but I may be wrong about the future course of rates.
If DLRPRE can be refinanced at less than 6% in September 2016, that may end up being enough savings for the issuer to redeem it. Consequently, the owner of DLRPRE may be saved from the inevitable timing issue connected with a significant non-temporary rise in rates, possibly in the nick of time, by having this security called at par value plus the accrued dividend.
As to the conversion feature, I view this provision as having value, possibly worth a .1% to .2% in yield, but all of the DLR preferred stocks have change of control provisions.
It is just important to remember for the future what happened with a private equity firm did a leverage buyout of Innkeepers. The owners of the common received a nice payday.
The owners of Innkeepers preferred received nothing, and eventually the preferred stock became worthless when the REIT declared BK, having been loaded up with debt by the acquirer. There was no change of control provision in the prospectus of that preferred stock which would have given the owners an opportunity to participate in the buyout, through a conversion to common stock, or have their security redeemed at par value plus accrued dividends.
This preferred stock was trading over $27 back in May 2013 before investors became unnerved about the spike in rates. Thereafter, the price declined to a low near $21.5 before rebounding.
DLR.PE Stock Chart
DLRPRE Prior Trades: None
DLR Recent Earnings Report: For the 2013 third quarter, Digital Realty reported core FFO of $1.16 per share on operating revenues of $379+M.
SEC Filed Press Release
SEC Filed Conference Call Presentation
10-Q (total debt outstanding was 4.8B-$4.1B in unsecured debt and .7B secured; debt to adjusted EBITDA was 5.4x; fixed charge coverage at 3.5x)
After my purchase, DLR reported 2013 4th quarter results. The company reported 4th quarter FFO of $1.26 and reaffirmed 2014 core FFO guidance of $4.75 to $4.9 per share.
Digital Realty Reports Fourth Quarter And Full-Year 2013 Results The 4th quarter FFO consensus estimate was for $1.14 per share.
DLR Analyst Estimates
This last report is discussed in a
Motley Fool article.
Rationale and
Risks: I generally discuss the advantages and disadvantages of REIT preferred stocks in this 2009 post:
REIT Cumulative Preferred Stocks:-Advantages & Disadvantages
The reason for the paired trade is to pick up almost 3% more in yield.
It is noteworthy for me that AEC declined shortly after my purchase, bottoming near $13.4 in September 2013.
AEC Interactive Chart If it plunges again in price, I will reconsider buying back the 50 shares.
One advantage of a preferred stock is that the dividend can not be cut. AEC did slash its common stock dividend from $.25 per share to $.17 per share back in 2002, and then kept that $.17 quarterly rate until the 2012 first quarter.
Associated Estates Realty Corporation (AEC) Dividend History As noted when I discussed buying the stock, it will most likely be several more years before the $.25 rate comes back into being, if ever. Needless to say, that is not a commendable dividend growth history.
While the preferred stock dividend can be deferred, the issuer would have to eliminate the cash common dividend first, and a REIT has to pay a cash dividend to maintain its tax status when it has net income.
The preferred stock does have interest rate risk, but the common shares can also be hurt by a rise in rates since many investors view a REIT's common shares as bond substitutes and a non-temporary rate risk will eventually cause borrowing costs to rise. While rents may be going up more than costs, a significant rise in rates could pinch FFO and cause a decline in the common share price as cash flow expectations reset.
According to Quantumonline, the DLR preferred stocks are rated investment grade by Moody's at Baa3 and junk by S & P at BB+.
The company discusses risks incident to its business starting at page 8 of its 2012 Annual Report.
Form 10-K
Future Buys and Sells: I may add another 50 shares of a DLR preferred when and if the current yield goes over 8%.
Closing Prices Last Monday:
DLR-PE: $24.05 +0.22 (+0.94%)
AEC: $17.29 +0.07 (+0.41%)
4. Added 100 GDO at $18.06 (see Disclaimer):
Snapshot of Trade:
Security Description: The
Western Asset Global Corp Defined Opportunity Fund (GDO) is a leveraged world closed end bond fund.
GDO will liquidate on or about 12/2/2024. This gives the fund one of the characteristics of an individual bond, the promise to return an investor's money on a date certain. Unlike an individual bond, however, there is no promise to pay a fixed sum (i.e. par value). The investor in GDO will simply receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value. Hopefully, the managers will keep the liquidation date in mind when selecting, buying and selling bonds.
According to the sponsor, the duration is relatively short at 4.15 years as of 12/31/13.
While the fund is weighted in investment grade credits, it had a significant junk bond exposure as of 12/31/13:
CEFConnect Page for GDO
Data From Day of Purchase (2/13/14):
Closing Net Asset Value Per Share: $20.37
Closing Market Price: $18.08
Discount: -11.24%
Average 3 Year Discount: -5.51%
NAV Per Share 2/24/14: $20.37
Last SEC Filed Shareholder Report:
WA Global Corporate Defined Opportunity Fund Inc (period ending 10/31/13)
Prior Trades: I have repeatedly bought and sold this bond CEF. My most recents purchases include the following:
Item # 7 Bought: 50 GDO at $18.03 (11/19/13 Post);
Item # 7 Bought 100 GDO at $17.79-Regular IRA (10/24/13 Post); Item # 4 Added 50 GDO at $17.58-Roth IRA (6/29/13 Post)
I last sold shares the following prices:
$20.73 (February 2013);
$20.79 (December 2012);
$19.69 (July 2012);
$19.18 (June 2012);
and $18.72 (January 2012).
In the Roth IRA, I realized trading gains of $340.33 in 2013.
Rationale and
Risks: I am generally comfortable with this fund. Dividends are paid monthly at the current rate of $.116 per share. At that rate, the yield would be about 7.7% at a total cost of $18.06 per share. Over the past year, the monthly dividend was first cut from $.12 to $.115 before being raised to $.116. The fund went ex dividend for its monthly dividend shortly after my purchase.
I would note that I liquidated my position in early 2013. All of the shares previously sold were bought at higher prices than my recent buys.
Like other bond CEFs, GDO was hurt by the rise in rates starting last May which caused a decline in net asset value. One known risk for CEFs is that the discount has a tendency to expand during periods of market declines for owned assets, as individual investors flee. The use of leverage aggravates the decline.
On 5/1/13, the net asset value per share was $21.07 and the discount was at -4.79%. The market price close that day was $20.06. From 5/1/13 through this month, the fund has paid $1.158 per share in dividends. The discount has expanded by 6.45% between 5/1/13 and 2/13/14, which is largely responsible for the market price decline.
I discuss other risks in the previously linked posts.
Closing Price Last Monday:
GDO: $18.07 +0.05 (+0.28%)
5. Bought 50 Pepsico at $78.25 (see Disclaimer):
Snapshot of Trade:
 |
| 2014 Bought 50 PEP at $78.25 |
Company Description: PepsiCo Inc. (PEP) is of course one of the largest worldwide purveyors of beverages and snacks.
The "Lay" part of Frito-Lay snack business started in Nashville.
PEP & The Origins of Frito Lay
There is an interesting story of a couple who owned a gas station in Nashville and invested $8,000 in Herman Lay's chip company in 1948. Statues of that couple can now be found on the Belmont University campus:
New Statue Honors Johnson Family, Belmont Benefactors
Pepsi has about a 64% share of the U.S. salty snack market.
In addition to Pepsi Cola and Frito-Lay, the major brands include Tropicana, Quaker, Gatorade and Latin America Foods.
Morningstar has a 4 star rating on
PEP with a $88 fair value estimate.
I simply view the stock as fairly valued at $78.25. I would not characterize that price as cheap or undervalued.
Prior Trades: When my Vix Asset Allocation Model flashed the formation of a Phase 2 Unstable Vix Pattern back in September 2008, one response was to sell my Pepsi position profitably at $70.81.
I then did what I was suppose to do. I waited for an opportunity to buy the shares back at less than $50 a few months later.
Stocks, Bonds & Politics: Pepsico Buy (May 2009). Then, I did something stupid and sold the shares bought a favorable price:
 |
| 2009 PEP 50 Shares +$339.92 (holding period 2 months) |
When the LB gets into a trading rhythm, thoroughly imbued with the short term vision thing, it is hard to get it to focus on doing what is for the best.
As I have said many times, the catastrophic phase of a long term bear market is the most opportune time to build up positions in high quality, dividend paying stocks. The prices have declined so the starting yield number is attractive. The general idea is to then hold the stock until death or an obvious, non-temporary and massive turn for the worse in the firm's long term prospects.
Pepsico recently raised its quarterly dividend 15% to $.655 per share or $2.62 annually. At a total and constant cost per share of $49.83, my dividend yield would now be 5.86%. In a few more years, it would have most likely climbed over 10%.
I later bought and sold a smaller position in an IRA:
Item # 6 Sold 50 PEP at $66.48-ROTH IRA (May 2012)(
snapshot of profit=$175.42)-
Item # 2 Bought 50 PEP at $62.69-ROTH IRA (February 2012)
I also later flipped a 30 share lot in a taxable account:
 |
| 2012 PEP 30 Shares +$182.95 |
About all that I can say about this trading history is that it produced profits with short term holding periods.
Last Earnings Report: The market reacted negatively to PEP's last earnings report released before the market opened on 2/13/14. The stock closed at $81.49 on 2/12/14 and had been drifting down since closing at $86.39 on 11/14/13.
PEP Historical Prices The stock hit a downdraft on 2/13, declining 2.2% to $79.69 and fell another 2.01% on Friday, 2/14/14, closing at $78.09. The two day decline in response to the earnings report was 4.21% and 9.6% from the 11/14/13 closing price of $86.39.
What did Pepsico do to earn this slap from institutional investors, who are paid large sums of money to underperform dumb indexes?
PepsiCo Achieves 2013 Financial Targets and Announces Increase of 35% in Cash Returns to Shareholders
PEP increased its annual dividend by 15% to $2.62 from $2.27, which will take effect in the 2014 second quarter. The company also anticipates increasing its share repurchases to $5B this year.
For the 2013 4th quarter, PEP reported adjusted earnings per share of $1.05 (GAAP at $1.12), beating expectations by 5 cents. Revenues, hurt by currency exchange issues, rose .8% to $20.11B. Snack volumes increased by 3%. Organic growth was 4.1%. Core operating margin expanded by 40 basis points.
In 2014, PEP expects 7% core constant currency E.P.S. growth in 2014 compared to 2013. The core E.P.S. was $4.37 in 2013. So the company anticipate a 2014 E.P.S. number of $4.68. Assuming that number proves prescient, then the P/E at a total cost of $78.25 would be about 16.72. I would label that number as fair, but not cheap for a consistent, stable and slow E.P.S.grower like PEP.
The company is targeting $10B in cash flow this year and $7B in free cash flow.
I suspect that one reason for the share price decline is that PEP rebuffed the wishes of some institutional investors to separate its North America beverage business.
Bloomberg
Subsequent to the earnings release, Trian Fund Management, who controls about $1.2B in PEP shares, sent a letter to PEP's Board urging separation of the global beverage and snack businesses. Trian stated that it will engage other large shareholders to support this plan.
Earnings Call Transcript - Seeking Alpha
Pepsico 2013 10-K
Rationale: Pepsico does not qualify for purchase under my Large Cap Valuation Strategy, but does qualify under the Dividend Growth Strategy.
Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds (3/22/2010 Post)
At a total cost of $78.25, and the new dividend rate that becomes effective this June, the starting dividend yield is over 3% at 3.35%, one of the many criteria under this strategy.
While E.P.S. growth is slow and revenue growth even slower, the company has a long term record of reliability increasing earnings in the high single digits.
The quarterly dividend rate was $.26 per share in 2005 and will be $.655 effective with the June 2014 second quarter, up from the prior rate of $.5675.
Pepsico (PEP) Dividend History
Given its financial strength, reliability, and dividend growth history, I am comfortable with initiating a position, but have had some difficulty in the past holding onto one.
Risks: Pepsico discusses risks incident to its business starting at page 10 of its 2013 Annual Report recently filed with the SEC.
Pepsico 2013 10-K
I would just highlight some of the risks. Many consumers are turning away from sodas and other drinks containing sugar based on health concerns. There will appear, usually on a weekly basis, some news story highlighting this issue. A recent report alleged that sodas may cause cancer due to the use of a caramel coloring agent known as 4-mel.
CNN.com
Another piece of research, which I view as junk science, originated from Harvard last year that blamed
180,000 deaths worldwide on sugared beverages. There is simply no way that those researchers controlled for other factors contributing to obesity including food/candy consumption and exercise, as well as the many other factors that contribute to diabetes and cardiovascular diseases. I view this particular report as nothing but garbage, although I do not doubt that the over consumption of a lot of things will cause obesity, diabetes and a premature death for a number of individuals based on a host of risk factors pertinent to their freely chosen lifestyles.
Most of these types of reports are in my view alarmist and based on junk science. However, consumers will hear them, and many will change their consumption habits.
I drink one regular caffeine and sugar filled Coca Cola a day. I do not like Pepsi colas. I do buy Pepsis for one my mother's caregivers who drinks two a day. She is overweight but I seriously doubt that it has much to do with her consumption of soft drinks.
Future Buys and Sells: I would not have bought these shares if I still owned the shares bought below 50 back in 2009. I will consider averaging down with another 50 lot purchase when and if the price approaches $70, near the price that I sold shares in September 2008.
Closing Price Last Monday:
PEP: $78.88 +0.66 (+0.84%)
6. Bought 50 AREPRE at $23-Regular IRA (see Disclaimer):
Snapshot of Trade:
 |
| 2014 Regular IRA Bought 50 AREPRE at $23 |
Security and Company Description: The
Alexandria Real Estate Equities Inc. 6.45% Cumulative Preferred Series E (ARE.PE) is an equity preferred stock issued by the REIT
Alexandria Real Estate Equities (ARE).
Dividends are non-qualified and cumulative. An Alexandria press release shows that the dividends paid to either the common or preferred shareholders in 2013 were not classified as qualified by Alexandria.
Alexandria Real Estate Equities, Inc. Announces Tax Treatment Of Year 2013 Distributions For higher bracket tax payers, it makes more sense from just a tax point of view to own both REIT common and preferred shares in a tax deferred retirement account. I prefer to own them in the Roth IRA rather than a regular IRA since the income generation in the ROTH is not taxed when paid or distributed to the account's owner.
Dividends are paid quarterly at the fixed coupon rate of 6.45% on a $25 par value. Alexandria has the option to redeem this security on or after 3/15/2017.
This preferred stock is currently rated investment grade by Moody's at Baa3 and junk by S & P at BB.
Prospectus
The prospectus contains a change of control provision (starting at page S-11)
There is also a typical dividend stopper clause that would prohibit Alexandria from deferring a payment of the cumulative preferred dividend while continuing to pay a cash dividend to the common stockholders:
Alexandria Real Estate Equities is a REIT that owns life science properties.
Profile at Reuters.com As of 12/31/12, "we had 178 properties containing approximately 17.1 million rentable square feet of life science space". The operating properties were approximately 93.4% leased at that time.
10-k at page 33 A property list can be found at page 37.
Key Developments Page at Reuters
The company recently reaffirmed F/Y 2014 adjusted FFO guidance at a range between $4.6 to $4.8 per share.
Prior Trades: None
Last Earnings Report: For the 2013 4th quarter, Alexandria reported FFO of $82.5M or $1.16 per share on a 11.6% increase in revenues to $168.8M.
Earnings & Supplemental 12.31.13 Occupancy was at 95.9% for the operating properties.
Earnings Call Transcript - Seeking Alpha
Rationale: The primary reason for buying this security in a IRA is to generate income.
The dividend yield is about 7% at a total cost of $23 per share.
In the event this security falls 10% or so in value, I will transfer it to a ROTH IRA.
Risks: The company discusses risk relating to this security in the
Prospectus starting at page S-11. The company summarizes risk factors incident to its operations starting at page 9 of its last filed Annual Report,
SEC Form 10-K
Interest rate risk is the dominant risk, followed by volatility risk and credit risks in my opinion. I cut down on the risks by buying this security in a regular IRA. If the price falls significantly in value, I will pay less of an income tax when transferring it out of the regular IRA into the Roth IRA. Hopefully, after that conversion, the security will recover in value at some point.
Closing Price Last Monday:
ARE-PE: $23.43 +0.25 (+1.08%)
7. PJA Redeemed by Call Warrant Owner: I can confirm that the call warrant owner did in fact redeem the trust certificate PJA. I received the $25 par value for my 150 shares held in a taxable account plus $5 in accrued interest. This security just paid its semi-annual interest payment:
Profit:
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| 2014 PJA 150 Shares +$270.6 |
Bought 50 PJA at 19.45 December 2009;
Bought 50 of the TC PJA at 25.06 April 2011;
Added 50 of the TC PJA at $24.6 November 2011
I also owned 50 shares in a Roth IRA.
Stocks, Bonds & Politics: Call Warrant Exercise on PJA/Trust Termination for PKH
Trust Certificates: New Gateway Post
