Saturday, August 10, 2019

Recent Sells (Part 1)

Lately, I've been using David Van Knapp's quality scoring system presented in this article on high-quality, high yield DG stocks. I love the simplicity of the system and it appears to do a remarkable job identifying high-quality stocks. Also, there appears to be a positive correlation between quality scores and my recent ranking of the top holdings of dividend ETFs (presented here and here).

So I decided to rank the dividend growth [DG] stocks in my DivGro portfolio by quality score with the objective to identify and potentially close weaker positions. The results of this ranking can be found here.

Seven of my DG stocks got quality scores below 15. For reference, only DG stocks with quality scores of 15 and above are considered to be high-quality stocks.



The quality scoring system employs five widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator, for a maximum of 25 points. I call the total score a stock's quality score.

Here are the quality indicators used in determining a stock's quality score:

You can read about these quality indicators by following the provided links.

Medium-Quality and Low-Quality DivGro Stocks


The following table shows the DG stocks in my DivGro portfolio with medium- and low-quality scores. The table includes columns with key metrics of interest to DG investors, including years of consecutive dividend increases (Yrs), the dividend Yield for a recent Price, and 5-year compound annual dividend growth rate (5-Yr DGR).



Four of the stocks have lower quality scores because they're not ranked or rated by Value Line. This means the stocks are missing out on up to 10 quality score points and they're not necessarily "weaker" positions. Some closer scrutiny is needed!

Founded in August 1984 and based in Orlando, Florida, National Retail Properties (NNN) is a publicly owned REIT that acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases. NNN is a Dividend Champion with a streak of 29 years of higher dividend payments and a Very Safe dividend safety score of 95. I consider the stock to be a high-quality DG stock and I'm rather positive that NNN would earn at least 5 points from the Value Line quality indicators if Value Line were to rank and rate the stock.

I can argue a similar case for Main Street Capital (MAIN), even though its dividend safety score is deemed Safe rather than Very Safe. Founded in 1997 and based in Houston, Texas, MAIN is a principal investment firm that provides long-term debt and equity capital to lower middle-market companies and debt capital to middle-market companies. MAIN is the gold standard among business development companies (BDC's) and a generous monthly dividend payer. It is also the stock I've held the longest in my DivGro portfolio.

Tanger Factory Outlet Centers (SKT) is another DivGro stock that is not ranked and rated by Value Line. SKT is a publicly-traded REIT focusing on developing, acquiring, owning, operating, and managing outlet shopping centers in the United States and Canada. SKT is a Dividend Champion with dividend increases every year since it became public 26 years ago. But the stock is hated by investors despite solid financials and an investment-grade balance sheet. The stock price is down about 60% since reaching an all-time high in July 2016, which has driven the dividend yield up to a lofty 8.51%.

The fourth stock that is not ranked and rated by Value Line is EPR Properties (EPR), a specialty REIT that invests in entertainment and experiential commercial real estate properties in the USA and Canada. EPR has a dividend increase streak of "only" 9 years because of a dividend cut during the last recession. While the dividend is deemed Safe by Simply Safe Dividends, concerns over the health of the movie theater industry (EPR's largest income generator) and growing risks of a liquidity trap could inhibit EPR's growth potential.

I'll cover the other lower-quality stocks in Part 2.

My Decisions


I'm holding onto my NNN, MAIN, and SKT positions.

NNN and MAIN are clearly high-quality DG stocks that landed in the group of medium-quality stocks only because Value Line did not rank or rate them.

While the same probably is true for SKT (which only needs 3 additional points to be deemed high-quality), the REIT is dealing with deteriorating operating results due to its exposure to some troubled tenants. As a result, Simply Safe Dividends have downgraded SKT's dividend safety score to Borderline Safe. This means SKT's dividend does not appear to be at risk of an imminent cut, but that the firm will need to be careful about capital allocation decisions, especially if business conditions deteriorate.

By holding onto my SKT position, I'm accepting the increased inherent risk. My SKT position is less than 1% of DivGro's total portfolio value and I'm being rewarded with a generous dividend (my average yield on cost is 7.1%). Of course, I'll need to monitor SKT closely and reconsider my position if the risk-reward situation changes materially.

I have decided to part ways with EPR.

The stock's quality score of 9 is the lowest of all my DivGro stocks, and I can't see how EPR could make up the 6 points needed to move to the high-quality group.

Unlike SKT, which continued to increase its dividend even in recession years, EPR cut its dividend in 2009 and only started growing it again in 2011:


Source: Simply Safe Dividends

While EPR's sales were somewhat stable during the recession, the company nevertheless cut its dividend to preserve capital. Perhaps exacerbated by the dividend cut, EPR's stock plummeted by 75% during the recession years, while the S&P 500 lost "only" 55% from peak to trough. So EPR appears less recession-proof than the average stock.

EPR became a monthly dividend payer in 2013 and I'll admit, that's one feature of EPR ownership I'll certainly miss! On the other hand, my other monthly dividend payers, MAIN and Realty Income(O), have better risk profiles than EPR.

EPR is trading above fair value, based on the following FASTgraphs chart in which the stock's price is correlated with adjusted operating earnings:



With EPR trading above fair value, I decided it was a good time to close my position.

Trade Summary


I bought shares of 50 shares of EPR in October 2018 at $66.98 per share and received dividends totaling $185.25 from my investment. My sell price was $73.70.

Here is a summary of trades and dividends, along with a net profit analysis:


2018-10-23
Bought 50 shares of EPR at $66.98 per share:
$
3,349.00
2018-11-15
 Dividend on 50 shares at 36.0¢ per share:
 $
18.00
2018-12-17
 Dividend on 50 shares at 36.0¢ per share:
 $
18.00
2019-01-15
 Dividend on 50 shares at 36.0¢ per share:
 $
18.75
2019-02-15
 Dividend on 50 shares at 37.5¢ per share:
 $
18.75
2019-03-15
 Dividend on 50 shares at 37.5¢ per share:
 $
18.75
2019-04-15
 Dividend on 50 shares at 37.5¢ per share:
 $
18.75
2019-05-15
 Dividend on 50 shares at 37.5¢ per share:
 $
18.75
2019-06-17
 Dividend on 50 shares at 37.5¢ per share:
 $
18.75
2019-07-15
 Dividend on 50 shares at 37.5¢ per share:
 $
18.75
2019-08-06Sold 50 shares of EPR at $73.70 per share:$3,685.00
2019-08-15
 Dividend on 50 shares at 37.5¢ per share:
 $
18.75
                                               
               

Capital Gain:
$
336.00

Dividends Received:
$
185.25

Commissions/Fees/Taxes:
$
2.08
Net Gain: $519.17

I made a net gain of 15.5% on the original amount invested, which is a gain of 19.7% annualized.

Selling these shares reduced DivGro's projected annual dividend income by $225.

Concluding Remarks


I'm using a slightly modified version of David Van Knapp's quality scoring system to assess the quality of DG stocks. The system is simple and does a great job identifying high-quality stocks.

Recently, I ranked the dividend growth [DG] stocks in my DivGro portfolio by quality score and identified lower quality positions to possibly close.

Part 1 of this article covered four of these stocks, though I argued that three of them (NNN, MAIN, and SKT) probably would qualify as high-quality DG stocks if Value Line were to rank and rate them.

On the other hand, EPR scored only 9 points and I don't believe EPR would've scored 6 additional points if Value Line were to rank and rate the stock. As a consequence, I decided to close my EPR position and did so for an annualized gain of about 20%.

I'm planning on regularly updating the quality scores of DG stocks, including those I don't own in my DivGro portfolio. If EPR's quality score improves significantly, I'd consider reopening a position. For now, though, I'm out.

In Part 2 of this article, I'll discuss the other lower-quality stocks: WP Carey (WPC), Iron Mountain (IRM), and International Paper (IP), and present my decisions on what to do with those positions.

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