Late last month, I made a couple of biotech purchases and I thought those might be my last transactions of 2020.  I was wrong!

After some additional thought, I instead decided to make a few tweaks to my Portfolio before we close out the year.

When all was done, I recorded two pairs of sales with corresponding purchases.  I lightened up on my Industrials a bit.  I consider Industrials to be my most overweight sector, as their weighting in my Portfolio is nearly 2x that of Industrials in the S&P 500.

These were all rather small transactions, but they nudged my Portfolio in the desired direction.  Industrials remain my most overweight sector, but at least I’ve addressed that to some degree.

The first pair of transactions was to trim my Caterpillar (CAT) position and use those proceeds to add to my Lowe’s Companies (LOW) position.

The second pair of transactions, executed several days later, was to trim my Air Lease (AL) position and use those proceeds to establish a new position in Merck & Co. (MRK).

There are lots of details to share regarding these moves, so let’s get to them…

 

Caterpillar (CAT)

In the midst of the pandemic, CAT’s earnings are estimated to be down about 50% in 2020.  Significant recovery is expected in the next couple of years, but after 7 straight months of a higher stock price, this recovery seems priced into the stock.

In addition, CAT chose to freeze its dividend in June during its normal raise period.  This was an understandable move given the economic uncertainty at that time.  However, it’s still a dividend freeze and I thought I could move any sale proceeds into a stock that is still raising their dividend.

I’m still long CAT, and the trim here doesn’t preclude me from adding to CAT in the future.  Hopefully, it will be at a noticeably lower price should the stock pull back over the coming months.

On 12/4/20, I sold 5 shares at $182.04/sh. (approximately 13.8% of my position).  After the SEC fee, the sale proceeds were $910.18.  At that sales price, shares of CAT yielded 2.26%.  This is slightly lower than my current average Portfolio yield of 2.42%.

I sold my most expensive shares – ones that I purchased earlier in the year, on 1/22/2020, at $142.82.   Thus, the sale resulted in a short-term capital gain of $196.08.

The sale resulted in a reduction in annual forward dividend income of $20.60, or $5.15 each quarter.

Despite the trim, I still hold 31.102 shares of CAT, and it’s still the 36th largest position in my Portfolio (out of 50 stocks), behind Walgreens Boots Alliance (WBA) and ahead of Hormel Foods (HRL).

 

Lowe’s Companies (LOW)

One company that hasn’t seen a decrease in business due to the pandemic is Lowe’s.  In fact, their revenues and earnings have surged in 2020 as people have been frequenting the stores often in an effort to upgrade their homes.  This makes sense since people are staying home more often as part of recent lockdowns.

It certainly helped Lowe’s that they were allowed to remain open during the pandemic after being deemed “essential”.

I missed my chance add to my LOW position earlier in the year.  Despite a nice run up in price since then, I feel like shares around the $150 level are fairly valued.  This is roughly 17.5x this year’s earnings, and there appears to be some support at this level.

With the price hovering around that $150 mark after a decline from as high as $180 just a couple of months ago, I decided to add a few shares to my position.

On 12/4/20, I purchased 6 shares of LOW at $150.3364/sh., for a total of $902.02.  My LOW position has now grown to 94.784 shares.

The stock yielded 1.60% at my purchase price.  This is roughly 0.8% below my current average Portfolio yield.

This purchase resulted in the addition of $14.40 in annual forward dividend income.

With this additional purchase, LOW is now the 12th largest position in my Portfolio, trailing Fastenal (FAST), but leading Johnson & Johnson (JNJ).

 

Air Lease (AL)

Air Lease has always been a big part of my dividend Portfolio.  It was a top 10 stock for me earlier this year, before the pandemic hit.

As you can imagine though, the airline industry has not fared well in recent months.  AL actually dropped from over $47 at the start of the year to less than $10 back during the depths of March.  That’s quite the percentage fall in less than 3 months!

Since then, the stock has recovered well, even though airlines are still impacted by the fallout of the pandemic.

AL was always a stock sensitive to economic conditions, but the pandemic surely highlighted that fact.

Therefore, now that the stock price has recovered a good deal, I thought I might reduce my weighting in the stock a minor amount moving forward.  It’s not a big change, mind you, just a trim to reduce my weighting in another Industrial firm, and re-allocate the sale proceeds to a more defensive name.

On 12/10/20, I sold 10 shares at $42.60/sh. (only 3.03% of my position).  After the SEC fee, the sale proceeds were $425.99.  At that sales price, shares of AL yielded 1.50%.  This is nearly 1 full percentage point lower than my current average Portfolio yield.

Just like I did with CAT, I sold my most expensive shares.  In this case, I sold shares that I purchased on 8/23/2019, at $39.19/sh.   The sale resulted in a long-term capital gain of $32.09.

The sale also resulted in a reduction in annual forward dividend income of $6.40, or $1.60 each quarter.

I almost held off on the sale for another week in order to capture the next dividend for the shares, but decided to just execute the trade since it wasn’t a significant dividend amount.

After the trim, I still hold 319.54 shares of AL, and it’s now the 15th largest position in my Portfolio, behind Aflac (AFL), but ahead of AbbVie (ABBV).

 

Merck & Co. (MRK)

MRK is a pharmaceutical company… one of the largest in the world.  The company develops, manufactures, and markets medicines for a variety of diseases, including diabetes and cancers.  The company develops human therapeutics, as well as those for animals.  Areas of focus include oncology, vaccines, and cardio-metabolic disorders.

Currently, it’s most well-known drug is Keytruda, which is used to treat certain cancers by working with one’s immune system.  The drug is already a big seller, and it’s currently being evaluated for several additional indications, so it’s quite possible that Keytruda will become the world’s best-selling drug in a few years (when AbbVie’s Humira loses patent protection).

Merck & Co. was founded in 1891 in New York, but is currently headquartered in New Jersey.

MRK pays an above-average dividend (over 3% yield) and appears fairly valued at around $83.

MRK hasn’t shown the best earnings track record over the past couple of decades, however business has accelerated over the past 5 years, and seems poised to continue that given the promise of Keytruda and its other drugs.  Also, I don’t believe the company has any significant drugs that will lose their exclusivity anytime soon, so that bodes well for near-term prospects as well.

On 12/10/20, I took my proceeds from the AL sale and then purchased 5 shares of MRK at $82.90/sh, for a total of $414.50.

The stock yielded 3.14% at my purchase price (nearly 0.7% above my current Portfolio average).

This purchase resulted in the addition of $13.00 in annual forward dividend income.

MRK is a new Portfolio position… my 50th overall.  It’s also my 8th Healthcare stock in my Portfolio, tying the number of Information Technology holdings I have.

MRK starts as the smallest position in my Portfolio, replacing Amgen (AMGN), which only held that position for less than a month.

I could triple the size of my MRK position and it would still be the smallest position in my Portfolio.  Thus, I will definitely look to make this holding more significant in the coming months, otherwise it’s not worth holding a position in my Portfolio.

 

As I usually do with new holdings, let’s take a quick look at the dividend growth history dating back to 2000…

 

 

MRK doesn’t have the most attractive dividend history, to say the least.

First there was the period of no dividend raises from 2006 to 2011, which was then followed by the 2.1% to 2.4% raise period from 2013-2018.  Nothing to write home about, for sure.

However, 2019 and 2020 have seen an uptick in the dividend growth, and I’m hoping that will continue for the foreseeable future.  If Keytruda can deliver strong growth in the years ahead, I would think the dividend growth will follow.

The payout ratio is roughly 43% based on this year’s earnings estimate of $5.99/share.  Thus, room exists for future dividend raises.

After last month’s dividend increase, MRK now has 9 consecutive years of dividend raises.

 

Summary

I recently made a pair of buy/sell transactions, reducing ever so slightly my weighting in the Industrial sector.  Let’s call them Portfolio tweaks.

Trims were made to CAT and AL, while I correspondingly added LOW and MRK, with MRK being a new Portfolio holding.

The amounts involved were small relative to my Portfolio value, but the transactions moved my Portfolio in the direction I’d like to go.

The result of the 4 transactions was a net withdrawal from my Portfolio of $19.65, and a tiny $0.40 increase in my annual forward dividend income.

With the CAT and AL sales, I registered a short-term capital gain of $196.08, and a long-term capital gain of $32.09, respectively.

With the establishment of the MRK position, the number of stocks in my Portfolio rose to a nifty 50.

 

Do you have any portfolio adjustments you’d like to make before year’s end?  If so, what are you looking to accomplish?  Please share in the comments!