This past week I had some Portfolio activity. I had one sale and two purchases in a stock re-allocation.
With my sale, I purged one of my Financial sector holdings that recently cut its dividend.
I then took those proceeds and invested into two existing Portfolio positions. One stock I’ve been looking to add to for a while. The other is down on its luck and adding a few shares allowed me to keep some of my sale proceeds in the Financial sector.
Have you put the puzzle pieces together yet? If not, here are some details on my trio of transactions to allow you to piece the picture together…
Wells Fargo & Co. (WFC)
WFC had issues it was dealing with coming into 2020. The company was still trying to recover from fake account scandals that took place years ago. However, things only got worse when the pandemic arrived. The business shutdowns that resulted from the pandemic led to large provisions being needed for potential loans losses, and to the Federal Reserve placing a cap on bank dividend payouts after annual stress testing.
EPS growth from 2014-2019 has been rather anemic, too. However, it was the recent 80%+ WFC dividend cut that disappointed me the most and triggered me to look elsewhere. The stock yield is now rather low (~1.6%). Dividend growth will probably be minimal at best over the next year or two.
I had only initiated my WFC position in January of this year. I thought the worst might have been baked in to the stock price at that time, but I was wrong. I had sold some of my TCF Financial shares (TCF) at the start of the pandemic thinking my money would be safer with a larger bank. Again, I was wrong. I may be wrong again by having sold WFC here, but I’m willing to take that risk.
While WFC may eventually regain its past performance, I don’t know when that will occur. Since it doesn’t appear to be anytime soon, I’m willing to take my loss and move my money to places with brighter prospects.
On 9/10/20, I sold all 118.337 shares at $24.35/sh. After the SEC fee, the sale proceeds were $2,881.45. At that sale price, shares of WFC yielded 1.64%.
The sale resulted in a short-term capital loss of $1,540.07, as well as a decrease in annual forward dividend income of $47.33.
UnitedHealth Group (UNH)
UNH is a position I initiated a little over a year ago. I made a couple of purchases at the time within a few weeks of each other, as that’s been the extent of my UNH additions.
The stock price was much lower then, so I now lament not adding more shares at the time. The EPS and dividend growth for the company continues to power along, thus I don’t foresee the stock revisiting those past lows. If I wanted to add UNH shares, I was going to have to average up my position.
UNH has been languishing at the bottom of my Portfolio despite good performance, so I’ve been wanting to increase the size of my position. One thing that makes it a bit harder to invest in UNH is its lower yield. However, that’s more than compensated for with price appreciation and dividend growth.
With UNH’s yield closely matching that of WFC, it was a chance for me to swap shares, improving my Portfolio quality while maintaining an equivalent yield.
It wasn’t a complete swap, but the majority of my WFC sale proceeds went into bolstering my UNH position.
On 9/10/20, I purchased 8 shares of UNH at $310.65/sh., for a total of $2,485.20. My previous purchases last year were at $241 and $229, so this was a significant step up in price. Had I waited a day, I could have scooped up the same shares under $300. However, the timing is what it is.
My UNH share total has now climbed to 20.22 shares, and my cost basis has risen to a little over $265.
The stock yielded 1.61% at my purchase price. This is essentially 1% lower than my current average Portfolio yield of 2.60%.
This purchase resulted in the addition of $40.00 in annual forward dividend income.
Note, my purchase was the day before the stock went ex-dividend, so I’ll see a $10 boost in my UNH dividend later this month.
With this purchase, my UNH position is now the 30th largest in my Portfolio, in between a pair of additional Healthcare stocks in Gilead Sciences (GILD) and Quest Diagnostics (DGX).
TCF Financial (TCF)
Like most banks, TCF has struggled in the COVID-19 environment. The stock has declined over 45% since the start of the year.
The company had been working on synergies from last year’s merger with the former Chemical Bank (CHFC) before all the disruption caused by COVID-19 began. It’s expected this integration should complete soon, and thus many merger-related expenses will abate.
Like WFC, TCF has had to manage losses in its loan portfolio, but it appears to be a small percentage of overall loans (~5%). With interest rates so low these days, the net interest margin of banks suffers as well, and TCF is no exception there.
Despite significant reasons to be cautious on the stock, analysts project EPS growth in the upper teens the next two years. TCF also offers a nice yield as this point, too… well above 5% at current levels.
The dividend was frozen this year during the normal raise period, but I believe dividend growth can continue next year.
I decided to keep some of the WFC sale proceeds in the Financial sector by boosting my TCF holdings a bit. The purchase provided a nice opportunity to average down my TCF cost basis, too.
If my timing with the WFC sale turns out to be poor due to WFC rising in price shortly thereafter, I suspect TCF will benefit, too, helping me to capture some of the potential gains I will have missed with WFC.
On 9/10/20, I purchased 15 shares of TCF at $26.25/sh., for a total of $393.75. My TCF share total now stands at 120.244 shares.
The stock yielded 5.33% at my purchase price. This is well over my current average Portfolio yield of 2.60%.
This purchase resulted in the addition of $21.00 in annual forward dividend income, which is close to half of what I gave up with the WFC sale. The big spread between the banks two yields was created when WFC instituted their dividend cut.
With this purchase, my TCF position is the 43rd largest in my Portfolio, or the 5th smallest, depending on how you look at it. This position is behind The Walt Disney Co. (DIS) and ahead of Omega Healthcare Investors (OHI) in my Portfolio.
I leave open the possibility of adding to this position since it’s one of my smaller holdings. However, in that case I need to be mindful of its higher yield and make sure its dividend weighting doesn’t become too significant. TCF also has a BBB- S&P credit rating, so that will probably limit my investment, too.
Summary
Early September saw me execute three transactions, all on the same day… one sale and two purchases.
With the sting of a dividend cut still fresh in my mind, muted prospects for dividend growth in the near future, and what could be years to reach previous EPS levels, I decided to move on from WFC.
I took those WFC sale proceeds and invested in two existing holdings in my Portfolio, one in the Healthcare sector (UNH), and the other in the Financial sector (TCF).
The result of the three transactions was a net withdrawal from my Portfolio of $2.50, and an minor increase in my annual forward dividend income of $13.67 (basically a wash from both perspectives).
While there was no significant change in invested capital or forward dividend income as a result of the transactions, I do like my Portfolio composition more after the moves, especially bumping up the size of my UNH position, which I’ve been wanting to do.
I recorded a capital loss (short term) of $1,540.07 with the WFC sale. I’ll use that to offset plenty of capital gains that I’ve got on the books for 2020.
With WFC no longer in my Portfolio, my number of Portfolio stocks has been reduced to 47.
Do you continue to hold stocks in your portfolio that have cut their dividend this year? Or have you sold and re-allocated that capital? I’d love to hear about how you are handling those portfolio stocks. Please share in the comments!