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

I 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!