Recent Sells (Part 2)

Welcome to Part 2 of my article on recent sells.

I've been using a slightly modified version of David Van Knapp's quality scoring system to assess the quality of my DivGro stocks. The system is simple and does a great job identifying high-quality stocks, and also lower quality positions that may be candidates for the chopping block.

In Part 1 of this article, I discussed four lower quality positions and decided to close one of them, EPR Properties (EPR). In Part 2, I'm covering three additional lower quality stocks and my decision to close out two of them.

Recap

The quality scoring system presented by David Van Knapp has been very inspirational. I've used a slightly modified version of the system to rank the Dividend Aristocrats, the Dividend Kings, and my own portfolio of dividend growth [DG] stocks.

I love the simplicity of the system and it appears to do a remarkable job in assessing the quality of DG stocks. In ranking my DivGro portfolio by quality score, I identified seven stocks with lower quality scores. Six of these stocks got quality scores in the range 10-14, deemed Medium-Quality, and one got a quality score of 9, deemed Low-Quality.

Here is a summary of the quality scoring system and the points assigned for five different quality indicators, and the quality assessment for different quality scores:



See Part 1 of this article for links to descriptions of each of the quality indicators, as well as to the suppliers of the ranks and ratings used.

Medium-Quality and Low-Quality DivGro Stocks

The following table shows the DG stocks in my DivGro portfolio with medium- and low-quality scores:



As explained in Part 1, four of the stocks have lower quality scores because they're not ranked or rated by Value Line. Those stocks miss out on up to 10 quality score points, so they're not necessarily "weaker" positions.

I argued that National Retail Properties (NNN), Main Street Capital (MAIN), and Tanger Factory Outlet Centers (SKT) most probably would qualify as High-Quality DG stocks if Value Line were to rank and rate them.

However, it is unlikely that EPR Properties (EPR) would make up the 6 points needed to obtain a quality score of 15. Because I'm looking to improve the overall quality and risk profile of my portfolio, I closed my EPR position.

As for the remaining stocks, they are the focus of Part 2.

WP Carey (WPC) is one of the largest diversified net lease REITs, with properties in the United States and Europe. The company invests in high-quality, single-tenant industrial, warehouse, office, and retail properties subject to long-term leases with built-in rent escalators. WPC's dividend is deemed Safe and yields 4.9% at $84.55 per share. WPC is on track to become a Dividend Champion in three years.

Another REIT with international operations, Iron Mountain (IRM) provides storage and information management services in North America, Europe, Latin America and the Asia Pacific. IRM yields an impressive 8% and has a 5-year DGR (dividend growth rate) of about 17%. Those are attractive but potentially unsustainable numbers. IRM has a Borderline Safe dividend safety score and a BB– credit rating, which is below investment grade.

International Paper (IP) is the world's largest paper and packaging company with key markets in key markets in North America, Europe, Latin America, North Africa, India, and Russia. IP’s businesses include industrial and consumer packaging as well as uncoated papers and pulp. The stock yields 4.51% at $44.38 per share and has a Borderline Safe dividend safety score of 52. The stock is down 27% from its 52-week high.

My Decisions

I'm holding my WPC position for the foreseeable future.

WPC owns over 1,100 properties in 25 countries around the world. WPC's portfolio is broadly diversified and generates consistent funds from operations from long-term rental agreements with financially healthy tenants. The stock is likely to generate total returns of about 7% per year in the next ten years. The stock is trading at an all-time high and well above fair value, so my only regret is that I didn't buy more shares when I opened the position!



I decided to close my IRM position.

IRM is trading down about 15% from its 52-week high and pressure keeps mounting on Iron Mountain to improve its balance sheet and payout ratio. Given IRM's generous dividend, the company is constrained in how it can deploy capital for growth.

Only a small portion of IRM's growth plans can be funded from retained cash flow, so the only other options are issuing more shares (which is dilutive and costly!) or borrowing more money (which increases leverage). As things stand, IRM's junk bond credit rating means borrowing costs will be higher than normal.

While it pains me to give up IRM's generous dividend, improving DivGro's quality and risk profile is more important to me at this time.

I'm also closing my IP position.

IP slashed its dividend in 2009 and its stock dropped 87% during the recession years, while the S&P 500 lost "only" 55% from peak to trough. With some anticipation of a coming recession, I think IP is too risky to keep around in my portfolio.


Source: Dividend.com

IP is facing some key challenges, and the stock's decline is reflecting market uncertainty about the IP's future. The company operates in a slow-growing industry that is quite sensitive to the U.S. economy. Its paper division will likely face increasing headwinds as businesses transition away from physical paper. While the company has done well in shifting focus to higher-margin pulp and boxes, further improvements will be hard to come by given IP's debt-laden balance sheet.

Trade Summary

IRM

I bought 200 shares of IRM in two lots at an average cost basis of $32.67. In all, I collected dividends totaling $336.05 and I sold my shares for $31 per share.

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

2018-11-07	Bought 150 shares of IRM at $31.94 per share:	$	4,791.00
2019-01-03	Dividend on 150 shares at 61.1¢ per share:	$	91.65
2019-03-11	Bought 50 shares of IRM at $34.86 per share:	$	1,742.99
2019-04-02	Dividend on 200 shares at 61.1¢ per share:	$	122.20
2019-07-02	Dividend on 200 shares at 61.1¢ per share:	$	122.20
2019-08-08	Sold 200 shares of IRM at $31.00 per share:	$	6,199.87
	Capital Loss:	$	334.12
	Dividends Received:	$	336.05
	Commissions/Fees/Taxes:	$	0.00
	Net Gain:	$	1.93

I essentially broke even with this trade with a net gain of $1.93. 

Selling IRM will reduce DivGro's projected annual dividend income by $488.80.

IP

I bought 100 shares of IP in December 2018 for $42.50 per share and collected dividends totaling $100 before selling those shares for $39.83 per share. In all, I collected $100 in dividends from IP.

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

2018-12-20	Bought 100 shares of IP at $42.50 per share:	$	4,250.00
2019-03-15	Dividend on 100 shares at 50¢ per share:	$	50.00
2019-06-14	Dividend on 100 shares at 50¢ per share:	$	50.00
2019-08-06	Sold 100 shares of IP at $39.83 per share:	$	3,983.00
	Capital Loss:	$	267.00
	Dividends Received:	$	100.00
	Commissions/Fees/Taxes:	$	1.09
	Net Loss:	$	168.09

I made a net loss of 4% on the original amount invested, which equates to a loss of 6.3% annualized.

Selling these shares reduced DivGro's projected annual dividend income by $200.

Concluding Remarks

This two-part article presented three recent sells, EPR, IRM, and IP.

In all cases, I believe the risk-reward ratio of these holdings no longer fit my risk profile. And, having closed these positions, I have plenty of cash available to add higher-quality DG stocks and so increase the overall quality of my DivGro portfolio.

Soon I'll report on several recent buys!

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