02/13/11 Update

Sunday, February 13, 2011

Past Week’s Activity

This was an interesting week in the stock market (aren’t they all?) with continuing encouraging news of the US and global economic recovery, but tempered with hints of the dangers of inflation.  As the economies of the world recover and grow, the demand for raw materials and goods and services increases.  This is a 2 edged sword.  On one hand, it is a natural outcome and consequence of growth.  On the other hand, the laws of economics come into play, and as demand increases, prices rise.  This translates into inflated prices, which eventually work their way through the system, and consumers see increases in the prices of goods and services at the retail level.  This dampens demand, which hampers the recovery.  Getting the proper economic policies in place to stimulate growth while managing inflation is a difficult balancing act.

The news from Egypt of President Mubarak’s decision to step down was welcome news late Friday as the US stock market was approaching its close for the week.  But with one issue settled, the immediate question about his successor began to be discussed.  Will the new government be as stable for the area?  Will the flow of commerce through the Suez Canal continue without interruption?  The news I am hearing indicates that the military forces that are now in power are committed to provide a democratic process, and a continuation of the treaty with Israel.   If this plays out as described, it would be ideal in terms of stability for the region and the advances in world economies in my opinion.

I think that as this situation continues to evolve, we can be thankful that it appears to be relatively peaceful, and that the will of the people of Egypt is being acted upon.  They want improved economic conditions, higher employment, and the opportunity for a better standard of living.  This does not appear to be an opportunity for extremists to seize power, as it was in Iran when the Shah was ousted and extremists came into power.  Egypt is a great country with an incredibly rich heritage that dates back to early civilization.  Since shortly after its defeat by Israel in the brief war between the countries in 1967, it has been a stabilizing force and a moderate voice in the Mideast, which has been good for the entire world.  Let’s hope that this continues, that the transition of power is relatively calm, and that the people of Egypt achieve a better way of life as a result of the risks they have taken.

 

Closed positions this past week

2 stocks in the dividend harvest portion of my portfolio were successfully sold this past week.  PAYX (Paychex) moved up to a position of profit on Monday, so I sold it and booked a $.07 gain in addition to the $0.31 dividend that will be paid on 2/14. 

DD (DuPont) remained well above its purchase price throughout the week.  The ex-dividend date passed on 2/10 and the stock remained surprisingly strong.  I sold it based on the rules I established for this strategy, and will definitely put it on the list to consider when its next quarterly dividend date approaches.  It generated the single highest per share profit of any trade I’ve had under this strategy.  I was tempted to continue to hold it, but ultimately decided to stick to my rules and not to argue with a strong gain.  There may come a time when I need to sell one of these at a loss, and this will help to counterbalance that, if it occurs.

If only ALL of my picks could be like this!

So here is the summary of what was sold, and the profits that were booked this week:

Stock Symbol	Company Name	Profit per share	Dividend Captured	Days Held
PAYX	Paychex	$0.07	$0.455	15
DD	DuPont	$4.45	$0.410	14

Current Holdings

Below is the updated list of stocks being held, either awaiting the ex-dividend date to pass, or awaiting the opportunity to sell where the dividend is due or already paid.

Stock Symbol	Company Name	Breakeven Share Price	Current Share Price (02/04)	Dividend Captured
HNZ	Heinz	$50.36	$48.01	$0.4500
PCG	Pacific Gas & Elec.	$48.22	$46.53	$0.4550
SO	Southern Company	$37.97	$38.03	$0.4550
DUK	Duke Energy	$17.92	$17.84	$0.2450
BCE	Bell Canada Enterprises	$36.27	$36.39	$0.455*
CNP	CenterPoint Energy	$16.17	$16.19	$0.1975*

* Ex-dividend date has not yet passed

The first 2 above remain below their respective break even points.  Southern Company’s Ex-dividend date passed this week, and if the stock price remains above the break even point, I will sell it early this coming week.  Duke Energy’s Ex-dividend date also passed this week, and as soon as it climbs back above its breakeven point, I will sell it as well.

Bell Canada and CenterPoint Energy are both slightly above where I purchased them, but their ex-dividend dates are approaching, so I will have to wait until they pass before considering selling either of them.  Based on experience, I expect both to decline slightly when the ex-dividend date passes.

I want to talk about Heinz, as it is the poorest performer of any stock I have purchased since I started this blog.  My intent here is for complete transparency.  It is easy to highlight and celebrate the victories, but I think it is equally important to evaluate decisions that don’t work out as hoped, and decide what to do next.  Ignoring declining investments is not a good idea, and one of my best managers in my career had a key phrase when discussing problematic situations.  She said: “Hope is not a strategy.”

Heinz, of course is a household name and one of the most recognized great American brands.  Who hasn’t had their ketchup at some point in life?

But Heinz is much more than ketchup, and its reach is well beyond our domestic shores.  It sells a variety of food products, including condiments, sauces, frozen foods, desserts, entrees, snacks, appetizers, infant nutrition and other processed foods throughout North America, Latin America, Europe, Asia, Africa and the Middle East.

Product sales have been fairly steady, despite the global economic problems.  Profits have declined slightly year over year (2010 vs 2009) but not precipitously.  Approximate 68% of Heinz shares are held by institutions, and there has been no change in analyst recommendations.  Several continue to rate HNZ as a “Buy” or “Stong Buy”, and the mean price target is $51 per share.

Heinz annual dividend yield is about 3.7%.  As the price of the stock has declined, this calculation of (Dividend paid annually divided by stock price) has increased slightly.

The last ex-dividend date was 12/20/10.   Since ex-dividend dates occur every 90 days (e.g. quarterly), I have passed the midpoint date between ex-dividend dates.

I also look at some technical trading characteristics of stocks, although I don’t base decisions entirely on these.  I see the technical aspects of a stock’s trading pattern as a number of interesting data points that may contribute to a decision to buy or sell, but not the only factor.

For Heinz, there are a couple of simple things that I find interesting.  See the chart below:

1.      I see an increasing price trend overall.  It isn’t linear, but it is clearly trending upward.

2.      The 50 day moving average (the green line) is above the 200 day moving average (the red line).

3.      The price of the stock has flirted with the 200 day moving average, but has had the strength to remain above it.

There are a variety of technical characteristics that you can examine on any stock.  There are firms on Wall Street that devote time and energy to build mathematical models and algorithms in an attempt to predict where a stock is headed based on technical trading patterns.  They couple their models with computer automated trades, taking the human element (and emotions) out of the buying and selling decisions entirely.  It can make your head spin when you think about it.  If you want to see an example of this, look at the number of shares traded, and the price range for Citicorp (C) on any given day.  Computerized trades are generated daily that result in hundreds of millions of shares exchanging hands, and many of the trades are for profits of a penny per share or less.  I have neither the training nor the mental capacity to engage in this level of analysis, and certainly don’t have the capital that is required to do this either.  I am a single investor, simply trying to capitalize on individual opportunities, one at a time. 

The cornerstone of my “Dividend Harvest Strategy” is to only purchase shares of companies that I have examined and analyzed, and would feel comfortable holding for an extended period of time if necessary.  That said, the strategy also employs selling shares shortly after there is a profit, so that funds can be redeployed to capture dividends that are approaching.

So – what to do with Heinz. . . . My conclusion:  Nothing has fundamentally changed since I purchased it.  If I was looking at it for the first time as the ex-dividend date approaches this quarter, I would probably see a “bargain”, since its price has temporarily declined.  Therefore, what I am likely to do is to purchase an additional position in Heinz, doubling the number of shares I hold, and capture the upcoming dividend that will occur in late March.  In doing so, I will decrease the breakeven point for the stock (it will be a combination of purchase prices plus commissions divided by 2), and will consider all the shares as one block when attempting to sell them at a net profit.  In the meantime, I will capture the upcoming dividend in March on all shares.

As The Beatles said in their great song We Can Work It Out: “Only time will tell if I am right or I am wrong.”

On the Horizon

Stock Symbol	Company Name	Closing Price 02/04	Dividend Expected	Ex- Dividend Date
D	Dominion Resources	$44.08	$0.4925	03/02/11
NU	Northeast Utilities	$33.57	$0.2750	02/28/11
CINF	Cincinnati Financial	$33.58	$0.4000	03/21/11
CTL	Century Link Inc.	$45.10	$0.7250	02/16/11

Eli Lilly has been removed from this chart, as the Ex-dividend date passed on 2/11.  It didn’t move down, and I didn’t buy it.  I will put it on the watch list for next quarter, as it is a good company and it pays a decent dividend.

Dominion Resources was strong this past week.  In retrospect, Tuesday would have been a good day to pick up some shares.  I didn’t.  The ex-dividend date is still a couple weeks away, and the stock is showing strength.  I may end up purchasing a small position even at the current price level.

I will be watching and possibly purchasing initial positions in the following companies over the next few weeks:

Northeast Utilities (NU)

This is another provider of energy services, with operations in the (drum roll) Northeast US.  The company serves consumer and business customers for natural gas and electricity in Western MA, Connecticut and New Hampshire.  Like other utility companies, the revenue and profit is fairly predictable.  Based on the harsh winter that we have had in the Northeast, coupled with the start of the economic recovery, I expect quarterly revenues and profits for this quarter to be better than what the company experienced last year.  On top of this, this past week NU announced that it was raising its dividend from $1.025 per share annually to $1.10 per share.  This is a sign of confidence in the future earnings of the company by NU management, approved by their Board of Trustees.  In the press release that accompanied the announcement, the company stated that even with the increase in the dividend, they still expected to have $1 Billion per year available to continue to invest in improving the infrastructure for their customers.

There is a lot to like about NU in my opinion for the Dividend Harvest Strategy, and the increase in the dividend is likely to generate new demand for the stock and attract new investors, or increases in investments from existing investors.  About 76% of the shares are owned by Institutions already, and when a company increases its dividend, it becomes increasingly attractive relative to other investment choices, due to the increased return that investors will realize.  Logically, this should translate into increased demand for the stock in the company, and with the basic economic laws of supply and demand, I expect this to contribute to continue the strength in the stock price.  All of this makes for a great candidate for this strategy, to buy the stock, capture the dividend, and then sell the stock at a profit.

It will be interesting to see if this plays out like I am envisioning, but in a worst case scenario, I would not have any problem sleeping at night if I had to hold NU for a while, since it is yielding over 3% per year just on the dividend.

Cincinnati Financial (CINF)

This is a candidate that I have purchased and sold successfully in the past under this strategy, and it continues to be a good candidate to capture the upcoming dividend of $0.40 on 3/21.  There is time to watch and wait for a potential buying opportunity on CINF, as the ex-dividend date is still over a month away.  In the previous quarter I sold CINF at a profit at $32.17 per share.  The price of the stock has moved up since then, and is now at $33.58.  I will wait for some weakness, and hope to have the opportunity to purchase an initial position below where it is currently trading. 

CINF is a well run insurance company, focusing primarily on property and casualty insurance.  It witnessed a slight decline in revenues and profits in 2008 vs 2007, primarily caused by the effects of the recession.  The revenues and profits appear to be heading in the right direction at this point, and the stock is slowly and steadily advancing as a result.  They recently announced their quarterly results and significantly beat the estimates of analysts.  All of this points to a good candidate once again for this strategy, in my opinion.

Century Link, Inc. (CTL)

The final candidate this week is Century Link, Inc.  This is a bit more speculative than my normal candidates, and I am unsure of whether I will actually purchase it.  Century Link is a provider of Telephone services, primarily in the Southeast US states, but with a growing footprint across the US.    It provides local, long distance, internet, TV, home security and managed network services to its business and residential customers.  Its subscriber base includes 7 million access lines, 2.3 million broadband (internet) customers and 587,000 video subscribers.

The company is growing and the stock price has been increasing, but recently declined.  In addition, CTL is acquiring another large telephone company, Qwest Communications.  It is officially being called a “Merger”, but from what I read, CTL is in the driver’s seat on this deal and will essentially run the combined company.  I could write an entire article about the history of Qwest, but for the purposes of this week’s entry, suffice to say that Qwest has had a troubled past, and represents opportunity for improvement.

If this one is purchased, it will be a quick play.  The company goes “ex-dividend” on 2/16, so Monday, 2/14 is the last day to buy it to capture the dividend, since the shares traded on any stock take 2 days to “settle” in a brokerage account.

I am sitting on the fence with this one, but the combination of events, and what I see as a temporary decline in the stock price that has begun to recover, and a dividend yield of 6.6% ($0.7250) make this  tempting.

Q&A

Now that this blog has been going for a while, I’ve started to get some feedback and questions, so I thought it would be worthwhile to start each week with a section dedicated to Questions & Answers.  Sometimes the content might only be comments that people have made, and there may be times when I get criticized for actions taken on purchases and sales of certain stocks, or other matters.  That’s ok.  Part of what I want to accomplish (In addition to making full retirement more comfortable and a “sooner” vs “later” possibility) is an exchange of ideas.

If people want to maintain anonymity, I will respect that desire.  If they want their name published, I’ll accommodate that request as well.  If there isn’t specific direction given, I will probably just provide a first name, and how I know the person.

The first entry is the result of a personal conversation with one reader, and an email with another.  These are both highly intelligent young men who are college graduates.  They both said that they enjoy my blog, but they don’t always understand it.  I think that their respective areas of professional expertise and careers are in areas that are not directly related to the business world.

The learning I take from these comments is that I may need to provide more information and definitions about the investments that I discuss.  I will also try to add links within the blog going forward.    I thought I might also add a section called “The Basics” each week, to provide a definition and some examples about investment terms, vehicles, and concepts.  As you know, I am not a registered investment professional, but I have learned about investing through 40+ years of experience. (How is that for slipping in the disclosure statement?)

I will start to add “The Basics” next week.

Closing Comments

Please continue to provide comments and questions.  I like hearing from people, and am open to ideas on dividend stocks that you may hold or are considering, as well as positive or negative critiques of what I am doing.  My email address is: ken.hannan@gmail.com

The Official Disclaimer:  I am not a licensed investment professional, and that what is contained in this blog is the result of my own research and opinions only, and is not investment advice.  It is only a strategy that I am employing personally in an attempt to capture short term dividends on selected stocks.  Each person has different investment goals, objectives, and timeframes.  As such, each person should do his or her own research before taking any action on any type of investment.

As always, if you enjoy reading this, I would appreciate it if you would forward the URL to one or two other people who might like to read it, or post it on your facebook page so that your FB friends can view it as well.    I am seeing about 50 hits per week from around the world at this point, and getting a few comments each week as well. 

Happy Valentines Day to all. . .Have a good week, and prosperous trading!

Ken