Yesterday I sold all my shares of China Mobile Ltd. (CHL), a provider of mobile telecommunications services in China and Hong Kong. This is only the second time that I've sold shares since starting DivGro in January 2013. The purpose of this post is to explain why I decided to part ways with CHL.
I list several rejection criteria to consider when evaluating a stock for removal from DivGro. Some relate to stock performance and extraordinary events, such as mergers. Another relates to the dividend payment and, specifically, whether it is suspended, cut, or frozen. In the case of CHL, my reason for selling is due to CHL's recent dividend cut.
The way I apply my rejection criteria is somewhat flexible, in the same way that I do not absolutely require the dividend yield of a stock to exceed 2.75% before buying shares. When INTC froze its dividend last week, I didn't immediately sell my shares. I investigated INTC's future prospects and found sufficient reason to continue to hold my shares.
Dividend Cut
David Fish recently reported on overdue dividend increases for stocks in his CCC list. In some cases, the dividend-increasing streaks of foreign companies (trading on U.S. exchanges as American Depository Receipts) are at risk of ending, not because they're cutting or freezing their dividends, but because of the effect a strong U.S. dollar is having on the dividend payments in U.S. dollar terms.
In the case of CHL, though, the company's recent dividend payments clearly constitute a cut in the foreign currency. With a final dividend of HK$1.615 for fiscal year 2013, the total dividend for 2013 is HK$3.311, some 3% lower than the total dividend for 2012:
On August 26, CHL declared a 2014 interim dividend of HK$1.540, payable on October 9 to shareholders of record on September 2. This time, the interim dividend is 9% lower than the corresponding 2013 interim dividend.
By maintaining its conservative dividend payout ratio of 43%, CHL is allowing operating results to dictate its dividend payment. I respect the board's decision to do so. It is a responsible approach and should help to strengthen the company's cash flow generating capability and its future development.
However, as a dividend growth investor I'd like to be sure about maintaining and growing my dividend income over time. If one or more of DivGro's holdings cut their dividends, I can no longer be sure of that. Although I dislike selling DivGro holdings, I dislike dividend cuts even more!
For me, another minor irritation about foreign stocks is their practice of paying dividends semi-annually through one interim and one final dividend payment. Quite often, these two payments are substantially different. If you're unaware of this practice, it would appear that the company is raising (or cutting) its dividend intermittently. While I now know about this practice, it still requires some wherewithal to properly adjust yield on cost and projected annual dividend income when dividends change every time.
Impact on DivGro
CHL is a Telecommunication Services sector stock. By selling CHL, I have only one holding remaining in that sector, namely NTT. Coincidentally, NTT also is a semi-annual dividend payer. Its dividend has dropped in US$ terms. In foreign currency terms, though, NTT's dividend is continuing to rise.
With enough cash for another $2,500 buy, I'll be looking to invest in a new dividend growth stock. I'm still underweight in the Consumer Discretionary sector, despite adding MCD earlier this week.
By removing CHL, the number of holdings in DivGro goes down to 34. One of my goals for 2014 is to increase the number of holdings to 36, balanced across all 10 sectors in my watch list. With a few months to go, I'm confident that I'll reach that goal.
Trading Summary
Jul 26, 2013
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Bought 47 shares of CHL at $53.27 per share:
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$
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2,503.87
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Sep 24, 2014
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Sold 47 shares of CHL at $61.40 per share:
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$
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2,885.93
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Capital gains:
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$
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382.06
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Dividends received:
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$
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132.24
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Trading expense fees:
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$
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0.00
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Net profit:
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$
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514.30
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Given net profit of $472.38 $514.30 on an initial investment of $2,503.87 and a holding period of 426 days, my investment in CHL earned an annualized return on investment (ROI) of 16.18% 17.61%. Though I'm not particularly happy to be selling CHL, a return of 16% 17% per annum certainly makes me smile!
Please note:Since I've sold my shares of CHL after the ex-dividend date for 2014's interim dividend, I expect to receive that dividend payment in early October. When that happens, I'll update the trading summary and ROI calculation above. Updated on 13 October 2014.
47 shares of CHL represent $90.32 of expected annual dividend income, which reduces DivGro's projected annual dividend income to $4,680.63.
Full Disclosure: Long INTC, NTT, MCD
Please note:
47 shares of CHL represent $90.32 of expected annual dividend income, which reduces DivGro's projected annual dividend income to $4,680.63.
Full Disclosure: Long INTC, NTT, MCD
FerdiS,
ReplyDeleteI was also thinking of selling my CHL shares after reading the same article. However I plan on holding my shares for now because I like the diversification to emerging markets and don't think the shares too highly valued at the moment. You can expect some minor dividend cuts from non-US stocks and I wouldn't be overly concerned about those. I might consider cutting my position to half if CHL share price climbs higher from here.
Thanks for sharing!
Thanks for stopping by and commenting, Leveraged DGI -- you have an interesting perspective. I'm willing to accept currency exchange risk and, therefore, I would tolerate declining dividends due to the dollar's strength. But if a foreign company cuts its dividend, that raises red flags for me. In my view, CHL's recent decrease of 9% is too much to stick around.
DeleteTake care!
I like your approach here and think you made the move I would have made if I were in your position. I think understand currency risk is one thing (I own UL, so I've seen this), but actually raising the dividend is important, independent of how it looks in dollars. The reason we focus on dividend growth stocks is for that reason, dividend growth. If we don't see the growth we are expecting, decision must then be made whether to hold or sell.
ReplyDeleteAppreciate you posting your transaction history here.
Hi writing2reality! Yes, when we buy shares of foreign stock, we should accept and understand the currency risk involved. In the long run, the effect of currency fluctuation works both ways and probably cancels out. That's why I wouldn't blindly sell shares if the U.S. dollar equivalent of the dividend decreases, even though David Fish (maintainer of the CCC list) does remove stocks from the CCC list in those cases. For example, BCE is being removed... :-(
DeleteSame for UL I believe, although they are getting close to getting back on the list.
DeleteI don't think so. Looking at the Notes tab on the CCC list, it looks like UL can only get back on the list in 2017.
DeleteFerdi, where and how do you pull your information on dividend cuts?
ReplyDeleteI learned about this particular cut by reading David Fish's article (which my post links to). I'm also a subscriber to dividend.com, which provides a tool to access dividend change information. Its a bit of a manual process -- you enter the date and returns dividend changes announced on that date.
DeleteYea, you would think in these ages you would be able to receive an alert if a dividend is cut as opposed to looking it up manually.
ReplyDeleteI believe you can set up an alert for stocks in a watch list at dividend.com. To me its less useful, 'cause you get inundated with e-mails. I'd rather they add the functionality to their system to filter by watchlist. That way I can pull just the relevant information. I suggested this twice and they're still "thinking about it".
Delete