Cleaning House: Positions Closed Part 1
Whenever I purchase a stake in a company my plan going in is always to hold for the long term. Essentially I want to treat my positions as if I owned the whole business and avoid the temptation to trade in and out of positions depending on Mr. Market's moods.
However, sometimes it seems right to make some sales. My decision to make these sales were partially for tax loss harvesting, although there wasn't much, as well as I had soured on the positions some. Although the primary reason was that frankly my portfolio, or rather number of positions, was becoming burdensome.
My FI Portfolio had grown to 55 different companies and while I understand the benefits of diversification I felt that there was likely better use of my time and capital. The problem lies in the fact that many of my positions were only purchased in one or two chunks, and the last 3 years or so of not being able to invest didn't really help the matter, and as such the positions just weren't that large. With very little capital at stake/risk it led to me not really wanting to go through the hassle of doing anything more than a very cursory examination of the businesses each year.
I've closed 4 positions total over the last week or so and there's another 2 that I'm very seriously contemplating closing but need to decide before the end of the year. I'll cover the first 2 positions today so without further ado.
Cummins, Inc. (CMI)
I originally purchased 23 shares of Cummins (CMI) back in October 2012. That seems like forever ago. I reinvested the first 3 dividend payments back into more shares and then started taking dividends in cash.
|Cummins (CMI) Position Closed|
My sale of Cummins was primarily one based on just not having a big enough exposure to the company and partially souring on the company. I've included a few metrics about Cummins in the following table.
As you can see revenue has grown solidly from the end of 2011, the last completed fiscal year before I purchased shares, through both 2017 and the TTM period with growth of 13% and 28%, respectively.
However, margins have been compressing significantly or management is just have a bad run at the operational level. This can be seen in the 46% decline in net income, only 10% growth in operating cash flow and 21% growth in free cash flow through the end of 2017. The numbers come to -30%, 6% and 10%, respectively, through the end of the TTM period.
In that same time the dividend has continued to grow, on both a total dollar and per share basis, and has far outpaced the growth of any of the relevant metrics. That's led the free cash flow payout ratio to climb from ~22% in 2011 to 41% in 2017 and 47% for the TTM period. It's still plenty safe at these levels; however, further growth is likely going to be constrained to earnings/free cash flow growth.
Dividend growth was solid over the time that I owned Cummins; however, the last 3 increases have all come in right around 5%. That's still not bad considering that shares are yielding ~3.5% given the small stake that I had I figured it was time to take my money and run by building up my cash.
By closing my position in Cummins my FI Portfolio's forward 12-month dividends decreased by $106.33.
T. Rowe Price (TROW)
I originally purchased 20 shares of T. Rowe Price in March 2015. I took the first 3 quarterly payments and the $2 special dividend payment in cash and then reinvested the dividends since.
|T. Rowe Price (TROW) Position Closed|
My sale of T. Rowe Price was primarily borne out of needing to trim the number of positions that I own and T. Rowe was some low hanging fruit with very little capital invested there.
T. Rowe the business has been doing just fine. Fiscal year 2014 had ended a few months prior to my initiating a position in T. Rowe. From 2014 through the end of 2017 and the end of the TTM period T. Rowe has done just fine.
Revenue has grown 20% and 33%, respectively, while net income is up 22% and 49%, respectively. Likewise total cash dividends are up 22% and 44% for the same periods while per share dividends were up 30% and 52%. Even with the rapid dividend growth the payout ratio has held steady at 38% for 2014, 38% for 2017 and 36% for the TTM.
T. Rowe's dividend growth has been all over the place with dividend growth ranging from 4% to 23% for the ~4 years that I've owned the company.
I can't help but think that I might have made a rash decision here to sell and getting caught up in the market turmoil. I wouldn't be opposed to re-adding T. Rowe to my portfolio in the future because I think the business/industry is still a solid one to be in.
T. Rowe has likely seen some pressure on their business as the "passive investing/indexing" revolution took hold. Given the bull run since 2009 it should come as no surprise that indexing has performed well. However, now that we're seeing a return of volatility and the horrendous December thus far I wouldn't be surprised to see some people swap to more active management meaning a potential boost in AUM as people transfer funds there.
Closing my position in T. Rowe Price reduced my FI Portfolio's forward 12-month dividends by $60.92.
These 2 positions provided $167.25 in annual dividends so they will surely be missed. However, I've now added to my cash buffer $4,983.76 which will help to give me some dry powder to work with should the markets continue to move lower.
Given the overall valuation levels of the market in general I see that as a very real possibility and the odds just move higher should a recession ever rear its head.
In addition to these 2 positions I've already closed out another 2 that I'll cover likely on Monday and have at least 2 more that I'm considering closing and will need to decide on before the end of trading on Monday.
Have you been tax loss harvesting? Did the bull market of the last 10 years let any positions creep into your portfolio that probably shouldn't have? Let me know in the comments below.