Thursday, August 6, 2015

Recent Sell: Baxter and Baxalta

Aug 4, 2015: Sold 37 shares of BAX at $40.55 per share.
Aug 4, 2015: Sold 37 shares of BXLT at $37.57 per share.  


Yesterday, I reported selling all my shares of Partnerre Ltd (NYSE:PRE) because it is being acquired by Italy's Exor SpA (OTCPK:EXOSF). I sold my shares because EXOSF does not have a track record of paying dividends. PRE performed wonderfully well for me over the 27 months I owned shares, returning 58% (or 26% annualized).

Today, I'm reporting two more sells. After receiving an unsolicited takeover offer from an Ireland based competitor, the share price of drug maker Baxalta (NYSE:BXLT) jumped nearly 20% higher in early morning trading, eventually closing 12% higher after heavy trading. Furthermore, Baxter International (NYSE:BAX) announced a quarterly dividend of only 11.5¢ per share, significantly down from the 52¢ per share the company paid before the spin-off of BXLT.

While the rejection criteria I use to manage DivGro provide reasons not to buy a stock, I sometimes use them to guide a decision to sell:

REJECTION CRITERIA
  1. Dividend is cut or frozen
  2. Company is being acquired
  3. Company is merging with another
  4. Company plans a spin-off or split
Certainly, (4) applies because BAX recently spun-off BXLT.

Now it appears that BXLT is being targeted for acquisition. Ireland-based Shire PLC (NASDAQ:SHPG) offered to acquire BXLT for $45.23 per share. The takeover offer is unsolicited and the board of directors of BXLT has already rejected the offer:
“The Board today reaffirmed its conclusion that Shire’s proposal significantly undervalues Baxalta and its attractive prospects for growth and value creation, and that a merger at this time would be severely disruptive at this very early stage of Baxalta’s existence as a public company and presents a significant and real risk to value creation for our shareholders.”
Although BXLT rejected the offer, it doesn't mean the takeover won't happen. SHPG could increase its offer, either by negotiating with BXLT or by going hostile. So, rejection criterion (2) could apply.

Finally, both BAX and BXLT recently announced quarterly dividend payments. As mentioned earlier, BAX will pay 11.5¢ per share while BXLT will pay 7¢ per share. This totals 18.5¢ per share, significantly down from the 52¢ per share quarterly dividend paid by BAX prior to the spin-off.

Overall, the dividend cut (criterion (1)) is 64%, which is quite disappointing. As a dividend growth investor, my objective is to generate a growing dividend income stream. For that reason, the combination of BAX and BXLT is no longer suitable for DivGro.

Of course, I could have waited to see if SHPG would increase its offer. That could certainly happen, but DivGro is not about speculation, so I'm happy to move on.

Trading Summary


bought 37 shares of BAX in December 2013 at $67.71 per share, securing a starting YoC (yield on cost) of 2.89%. In May 2014, BAX increased its quarterly dividend by 3¢ per share, resulting in a YoC of 3.08%.

After the spin-off, I posted an article summarizing the tax basis allocation. Here, instead, I'll just use the combined numbers as I'm selling BAX and BXLT together.

2013-12-09
 Bought: 37 shares of BAX at $67.63 per share:
 $
2,505.31
2015-08-04
  Sold: 37 shares of BAX at $40.55 per share:
$
1,500.31
2015-08-04
  Sold: 37 shares of BXLT at $37.57 per share:
$
1,390.06
Capital gain:
$
385.06

Dividends received:
$
114.33

Commissions/fees:
$
3.00

Net gain:
$
496.39

The net gain is 19.81% on the original amount invested, or 12% annualized, which is quite satisfactory!

Before the spin-off, 37 shares of BAX yielded $76.96 of annual dividend income. Consequently, I'm reducing DivGro's projected annual dividend income to $6,522.50.

If you're own BAX and BXLT, are you planning to hold onto your shares or sell them? Thanks for reading/commenting!

14 comments :

  1. Yep! Did the same as you for the same reasons... although I havent sold BAX yet, I likely will shortly. I would say that your ROI on BAX is quite good. Time to put that money to work on a higher yielding stock!

    ReplyDelete
    Replies
    1. I couldn't help but consider BAX and BXLT together. When they both announced new quarterly dividends, I immediately added them together to compare with what BAX paid before. Quite disappointing, to say the least... anyway, it'll be fun to deploy the money elsewhere.

      Take care!
      FerdiS

      Delete
  2. Hi,
    i sold BAX and BXLT few days ago too, but unfortunately before this jumped higher by Shire PLC offer. But I had a gain of 5% from my purchase, so its good to be outside of this stock.
    Rgds,
    Patrick

    ReplyDelete
    Replies
    1. Sorry that you missed out on the somewhat higher BXLT price. 5% is not bad, though. Best of luck redeploying your funds.

      Cheers
      FerdiS

      Delete
  3. I can't blame you. I just cut them both today. Nice ROI, but sad nonetheless I had high hopes for these companies, but the management wanted a fresh start, reset the dividends.
    Thanks for sharing your thoughts and analysis on the sell.
    D4s

    ReplyDelete
    Replies
    1. Thanks for commenting -- looks like you had similar ideas. I have a sense that growth will eventually provide a solid basis for increased dividends, but I'm afraid that will take a while. The new yields are just not good enough, in my view.

      Take care!

      Delete
  4. I'm still holding both BAX/BXLT and don't plan to sell anytime soon as I expect both to go up in near future. If they are anything similar to ABT/ABBVIE they will go up. BAX has Activist Investor Third Point and BXLT has Shire offer as well. I think the near term capital gain would be much higher than any dividend you would get from the new investment using their money.

    ReplyDelete
    Replies
    1. Thanks for sharing your perspective -- I've chosen a different route for DivGro. My overall objective is dividend growth, followed by total return. I'm sure there are many readers who think like you do.

      I'm not so sure about your expectation of near term capital gains exceeding dividends from another investment. That sounds like pure speculation. For your sake, I hope you're right! I'm moving on, so it wouldn't matter to me one way or the other.

      Cheers!

      Delete
  5. I also sold Baxalta today. Kept BAX for now but really not sure yet what I'll do with it.
    Changed my BXLT to OHI - happy with the yield difference here :)

    ReplyDelete
    Replies
    1. OHI is great -- I own it myself. Much better yield. Good luck deciding what to do with BAX. I'm moving on.

      Cheers
      FerdiS

      Delete
  6. FerdiS,

    Can't blame you there. The unfavorable change in the dividends by both firms is really unfortunate. They kind of telegraphed this, but I was keeping my fingers crossed that there would be some upside on where the dividends settled.

    I'm going to hold on and see where things go. Hoping the dividend growth makes up for this, in time. We'll see.

    Thanks for sharing!

    Cheers.

    ReplyDelete
    Replies
    1. Hi Jason -- good to hear from you!

      I was disappointed when the combined dividend was trimmed 64%. I can only guess the two companies are positioning themselves for growth. Hopefully that will happen and those investors (such as yourself) who stuck it out will be compensated nicely!

      The nice track record of dividend increases has been wiped off the table, and BAX and BXLT are starting with a clean slate. Maybe 5 years from now, I'll become a shareholder again :-)

      Cheers
      FerdiS

      Delete
  7. I did the same, I'm out. I had hoped the dividends would be better after the split but that was a big disappointment.

    ReplyDelete
    Replies
    1. Thanks for sharing, Mike -- my thoughts exactly... big disappointment so I'm moving on.

      Delete

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