This past week was relatively quiet when it came to trading activity with the stocks I have been trading and following.
A few things happened:
1. The expected dividend on Blackrock Kelso (BKCC) was paid at $.32 per share. This company went “ex-dividend” on 01/02. I have held it since early December, and although it moved up to as high as $11.56, it did not hit my breakeven point of $11.62, so I will continue to hold it and wait.
2. Both Verizon and AT&T passed their ex-dividend dates this week. AT&T will pay $.43 per share, and Verizon $.4875 per share on 1/31.
The price of both companies were holding up well, but coincident with the ex-dividend date came news that AT&T had reduced the price of the older version of the iPhone to $49. As you may know, AT&T had negotiated exclusive rights to the iPhone with Apple. In other words, if you just “had to have” an iPhone, the only network you could use was AT&T’s. Initially I think this was noteworthy, but over the past couple of years, competing phones from HTC and Research in Motion (i.e. “Blackberry”) have been introduced in the market that can do everything (and more) than the iPhone can do. Still, Apple has wonderful marketing and continues to have a cult like following for its products, so this exclusive arrangement has some value. Cutting the price on the older model just as Verizon is about to introduce the availability of the iPhone on their network made analysts who cover the telecommunications industry on Wall Street nervous. They were concerned that this might be a bad omen for the gross margins of both companies if it signals the initial shot of a price war, so the price per share of both stocks fell, and this happened on the day after the ex-dividend date, when a reduction in price per share is expected anyway.
To net it out, AT&T is currently slightly below the price where I bought it (it closed at $28.85 per share, and my average purchase price is $29.24). Verizon closed at $35.93, which is above my average purchase price of $34.84. My personal opinion is that the reaction to the news of a potential price war on the iPhone was overblown and the negative effects on the price per share of both companies will be short lived. I expect to sell Verizon early this coming week, and will also sell AT&T, assuming it trades above my average price. I could sell both at their current levels, and declare victory on the average share price between the 2, along with having captured the dividend, but I am going to wait a day or two as I think they both might recover from the effects of the analysts pessimism.
3. Last week’s “Watch List”
One of the companies I noted that was worth watching in last week’s blogs was Clorox. Unfortunately, the company issued a press release early this week that they were revising their 2011 sales forecast downward, and also planning to take a charge against goodwill associated with their acquisition of the “Burt’s Bees” product line. Some analysts believe that Clorox overpaid for this business, but Clorox defended their decision based on the current and future expected contribution of the Burt's Bees product line. The stock fell from its year end closing price of $63.28 to a low of $60.56 on Monday when this news came out. The volume of shares traded that day exceeded 6.9 million shares, which was about 3 times higher than its normal volume. The stock continued to trade very heavily for the remainder of the week, and recovered some of the loss on Monday. It closed the week at $62.05.
For this strategy, I look for companies that have revenues that are at least stable, and hopefully growing Year over Year, along with stable or improving gross margins and profits. On one hand, you could view the drop in share price as having created a temporary bargain, and an increase in the dividend yield. I, however, opted to cross this one off my list for this quarter, as I don’t like unexpected bad news. Don’t get me wrong - I still think Clorox is a great brand and well run company – there are simply other opportunities out there that are more attractive, and are a better fit for my criteria with this strategy. I’ll keep Clorox on the list and see how they are doing in April, as the next ex-dividend date approaches. By the way, I think it is important to point out that the company did not mention any possibility of reducing its dividend, and from what I can see, they don’t need to, as their free cash flow can continue to support the current payment.
As a complete aside, if you are amused by how litigious our society has become, click on the link at the bottom of this paragraph. One of the consumer products marketed by Clorox is “Fresh Scoop” cat litter, and you may have seen the ads on TV that demonstrate their claim that cats prefer to “do their business” in litter boxes filled with this brand compared to other brands, such as Arm & Hammer’s “Super Scoop”. Church & Dwight, the maker of the competing product marketed by Arm & Hammer is taking exception to these claims, and has filed suit against Clorox. Only in America
OK, back to reality. . . I did purchase initial positions in shares in 2 of the other companies mentioned last week. I bought shares in the Royal Bank of Canada (RY) at $52.17, and may to add more if it goes below $51.50 between now and its ex-dividend date on 1/24.
I also purchased an initial position in Southern Company (SO), at $37.96. SO has traded in a narrow range for a long time, with a slow, steady appreciation in price over the long term, and was trading at a point that was below its recent high of $38.54, which motivated me to make the purchase. I may add more if the price falls to $37.50 or below over the next week to reduce my average cost, as the ex-dividend date approaches. Southern Company will pay a dividend of $.455 per share to shareholders as of 1/28.
Current Holdings
Here is an update of the stocks I am holding, and my breakeven point for each one, as well as the dividend that has been captured, or that will be captured.
| Stock Symbol | Company Name | Breakeven Share Price | Current Share Price (01/07) | Dividend Captured |
| BKCC | Blackrock Kelso | $11.62 | $11.43 | $0.3200 |
| HNZ | Heinz | $50.36 | $48.47 | $0.4500 |
| PCG | Pacific Gas & Elec. | $48.22 | $47.02 | $0.4550 |
| SO | Southern Company | $37.97 | $38.08 | $0.4550* |
| T | AT&T | $29.24 | $28.85 | $0.4300 * |
| VZ | Verizon | $34.84 | $35.93 | $0.4875 * |
| RY | Royal Bank of | $52.17 | $52.39 | $0.5000 * |
* Indicates ex-dividend date has not passed yet
Recently Closed Positions
No positions were closed since last week’s posting.
On the Horizon
There are a few companies that I will be watching over the next few weeks, as they are good fits for most of the parameters I have established for capturing dividends as they are paid.
Stock Symbol | Company Name | Closing Price 01/07 | Dividend Expected | Ex- Dividend Date |
DUK | Duke Energy | 17.79 | $0.25 | |
LLY | Eli Lilly | $34.90 | $0.48 | |
PAYX | Paychex | $31.87 | $0.31 |
Duke Energy is a conservatively managed power generation and distribution company, operating in several states, including North and South Carolina , Ohio , Indiana and Kentucky
Eli Lilly is, of course, a well known and large pharmaceutical firm. Lilly has relatively stable, but slowly growing revenues, and manages its costs well, producing a predictable profit. The price of the stock has remained in a range of a low that is just over $32.00 per share, to a high of just under $38.00 per share. The closing price on Friday was $34.90. I will be watching this stock, and possibly opening a position if the price declines to a point that is below $34.40. The dividend payment will be $0.48 per share, which translates to another annual yield of well over 5%.
Paychex is one of the leading providers of outsourcing for the payroll function for small to mid-sized companies. The company grew rapidly in the 1990’s, and has experienced a flattening of revenue over the past few years as this market has matured and attracted a variety of competitors. As they continue to seek new customers to grow market share, Paychex is also expanding into new areas with its existing base of customers, to provide value added services, such as 401k plan management.
Since August of 2010, the price of the stock has been steadily increasing as Paychex has managed its costs well. The company’s business model is one of a recurring revenue stream from it’s contracted subscriber base, so its revenues and profits are fairly predictable, and an uptick in the economy can only help a service company such as Paychex. I don’t expect any surprises in either direction over the next few weeks, and will look at the possibility of opening a position if the price of the stock declines below $30.75.
Closing
I’ve received some encouraging feedback privately about this blog, and some questions that I have responded to privately as well. There have been over 100 visitors to the site, from the US , Canada (Hi Vince!) and Asia (Samir, is that you??) Feel free to post comments or questions here on the blog, or, if you want to correspond privately, email me at ken.hannan@gmail.com The blog is intended to generate discussion and ideas. I am not a professionally licensed trader, and don’t pretend to know everything. As always, you should do your own research before making any decisions on investing. What is right for one person is not always good for another.
Most of the ideas I get are based on screening tools that I run, followed by reading about the company, and reviewing summary financial statements and key indicators about the performance of each company. Other ideas originate as a result of many years of business experience and natural curiosity about a variety of businesses. A few are from discussions I have had with people I have grown to respect, like my father-in-law, who first introduced me to the dividend opportunity with The Southern Company.
Until next week,
Ken
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