Tuesday, December 8, 2015

Recent Sell

Whenever I make a new purchase, or the rare sale, for my portfolio I feel it's only fair to get a post written giving all of the juicy details.  Normally I try to get the posts out as quickly as possible but there was way too much going on in my personal life over the past two months that I just didn't have the time.  So I want to update you all on some of the changes made to my portfolio.  I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.

Last week I took a look at Union Pacific to determine what exactly to do with the position.  I could do nothing, add more, or sell for tax loss reasons.  On Friday, December 4th I decided to close out my position.

Whenever I invest in a company my expected holding period is usually at least 10 years rather than jumping around from company to company.  After all if the dividend stream remains in tact and there's no real threat to the dividend being cut or the long term viability of the company, why sell?  I mention in my introduction that one of the reasons I like to write about my purchases is because I have a record of my investment thesis and can look back to see what I missed to hopefully learn from it and avoid the same mistake in the future.  I find the sale posts are often more enlightening for my own purposes.

I'll detail the transactions and returns first and then discuss my reasoning afterwards.

Transactions & Returns

I originally purchase two lots of Union Pacific across the two brokerage accounts that I have.  I first purchased 13 shares on June 4th of this year with a total cost basis of $1,323.55.  Later in the month on June 25th I added 11 more shares in my other account with a total cost basis of $1,072.39.  The average cost basis of the shares was $99.8308.

I received one dividend payment at the end of September and will receive one more payment at the end of this month.  Luckily both of those are qualified dividends so they will be taxed at 0% this year.

I sold the 13 share lot for $77.9427 which gave proceeds, net of commissions, of $1,005.29.  The 11 share lot was sold for $77.9301 which provided $852.25 in proceeds net of commissions.

Once the dividend is paid later this month it will work out to a 1.10% return from the 2 dividend payments.  Unfortunately the share price change looks ugly.  An average cost basis of $99.8308 sold at an average price of $77.3975 works out to a loss of 22.47%.  That bring the total return for the position to -21.37%.  Even worse is the annualized returns works out to -39.74%.  Returns are net of fees but don't include taxes.

Reasons for the trade

Obviously when I invested in Union Pacific I did not plan to close out my position so soon and especially at a big loss like this.  However, the market moved against me and I decided to step away from Union Pacific for a couple of reasons apart from the fact that the shares are down relatively big and I can harvest the tax losses.

For starters, just about every shipping segment is down year over year and that isn't likely to change much going forward.  While the business model of Union Pacific is great when the economy is chugging along just fine, a problem comes when the economy is struggling.  Specifically energy related products like oil and coal.  Coal is likely to continue to show declines year over year and oil is now trading near the lowest level since 2009.  Oil will come back; however, Union Pacific will have to compete with pipelines when that happens.  Oil transport by rail has a huge advantage in the early and middle stages of an oil/natural gas boom because their rails are already in place so you just have to get it to the closest terminal.  Once the pipelines get built out though they are a much more efficient means to transport the oil/natural gas to the processing plants on the coasts.

Another reason that I went ahead and closed my position is that I expect cash flow to continue to be tight from my day job which means lower savings and investment capital.  After taking the better part of a year off and trying to get caught up on everything there's been continual expenses creeping up that I had forgotten about.  On top of that we don't have our property taxes saved up yet which are due at the end of January and total around $6k so we need to raise cash to help pay for that.  I expect to be able to work that through savings, but why not raise some cash through the portfolio as well to help out on our taxes.  If cash flow was better and we were more stable with our cash savings then I likely would have just average down my cost basis.

The biggest reason is that I honestly missed some things in my analysis.  Well, not the analysis part of the company, rather the purchase price/timing.  As I mentioned above Union Pacific's operations are largely out of their control.  You can't ship goods by rail if your customers don't have goods to ship.  This makes their operation quite cyclical in nature and I should have required a larger margin of safety when I made my purchase.  I still believe the valuation will prove itself over the medium to long term and that shares actually have a large margin of safety at the current price.

My plan is to add Union Pacific back to my portfolio sometime after the time limit to avoid a wash sale is done in early January.  I don't consider myself a market timer but I also don't see any real catalysts to push the share price higher.  Even if the share price does rebound to around $90 I'll still be able to lower my cost basis on the position by about 10% as well as gain some tax relief.  This sale was a confluence of several events happening at the same time that made me consider and then execute on this move.  I still believe in Union Pacific over the long term and am looking forward to adding them back into my portfolio.

Effects on the Dividend Stream

The sale of Union Pacific reduced my forward 12-month dividends by $52.80 to $5,977.54.  Including the $1.02 from my Loyal3 portfolio brings my total taxable accounts forward dividends to $6,038.57.

Have you made any sales to clean up your portfolio or for tax loss harvesting?  

Image courtesy of Stuart Miles on FreeDigitalPhotos.net.


  1. Union Pacific is one of the few companies that I am really excited about owning for the long haul....no pun intended. I understand why you're doing the tax loss harvesting. Our Union Pacific shares are in a tax qualified account, so it wouldn't help us to sell. I hope your week is going well

    1. Bryan,

      I fully intend to repurchase shares sometime during Q1 of next year and would love to see the shares continue to move lower until then. UNP looks to be a solid value now and I should have required a larger margin of safety with my original purchase before adding it to my portfolio. Oh well, live and learn.

      Thanks for stopping by!