Recent Sale

This is a tough article to write. I don’t like to sell stocks too often. I look at each stock in my portfolio as valuable branches to my dividend growth tree, ultimately providing me bountiful dividends with which to pay my expenses. Every time I cut a branch from my tree, my tree produces less dividends. However, if it’s the occasional pruning to make the tree stronger and better over the long haul, then it is a chore I must perform and ultimately will be better off for it.

You can view over to the right hand side of my blog I have 38 articles filed under the Recent Buy category, while I only have 4 articles filed under Recent Sale. That’s almost a 10-1 ratio, which goes to show how rarely I decide to sell holdings from my portfolio. I consider myself a long-term buy and hold (monitor) investor, but unfortunately sometimes situations require me to reconsider my investments in certain companies. I found myself in one of those exact situations very recently and decided to part ways with a certain company.

I sold all 40 shares of UNS Energy Corp. (UNS) on 3/6/13 for $47.635 per share. This liquidates my entire position.

UNS shares are richly valued here. It’s currently trading for a P/E ratio of 21.57, which is a bit strong for a slow growing utility. Accordingly, the yield has dropped down to a level that is also low for a utility. Currently, UNS shares have an entry yield of 3.65%. Certainly not outstanding for accepting a lower growing dividend. UNS recently raised its dividend by only 1.2%, paying out a new rate of $0.435 per quarter per share over the old rate of $0.43 per share. This was after last year’s dividend increase of only 2.4%.

Obviously, not what I’m looking for in a utility holding. I’d prefer a yield of 4-5% with 4-5% growth from a utility holding. Overall, however, I’m not huge fans of utilities as dividend growth investments. The growth is limited with these stocks, but I do like the fairly consistent revenue streams. I plan on targeting around 5% of my portfolio allocated to utilities over the long-term.

Not all is bad with this investment. It actually worked out quite well. As I wrote about here, I purchased all 40 shares of UNS at $37.24 per share. This is a total return of 31%, after factoring in a total of $68.80 received in dividends and commission fees. This is a pre-tax return. Not bad for just over one year of tying up my capital, and especially from a typically stodgy business like a utility. I could have held for a couple more weeks to collect March’s dividend, but I don’t really want to hold a business I’m not enamored with just for $17.40 in dividends.

So, unfortunately that’s my second sale already of 2013 and we’ve only just begun. A bit uncharacteristic of me, but one should always be mindful of their investments and whether they still fit in the portfolio. After looking at this stock’s valuation, yield, growth rate and expected future returns I feel confident that I’ll be able to better allocate my capital. And that’s really what it’s all about.

This sale reduces my annual dividend income by $69.60. I expect to fully replace this lost income very quickly, and actually hope to increase it by investing in a stock that’s yielding slightly higher.

I now have 30 positions in my portfolio after this transaction.

I’ll update my Freedom Fund in early April to reflect the sale.

 Full Disclosure: None

Thanks for reading.

Photo Credit: jannoon028

Comments

  1. says

    I think you made a rational decision. Looking at the valuations of the stocks in my portfolio, the only one I’m concerned about right now is HRL, which has a historically high P/E of 20.5. I think it’s moderately overvalued, but not so much that I feel compelled to sell. If it continues to trend higher, though, I may reevaluate my position.

    • says

      DGM,

      Thanks for stopping by.

      If it was just moderate overvaluation, like you have going on with HRL, I would have continued to hold my position. However, I had a fairly strong overvaluation (over 20 for a utility is strong), a low yield (due to the overvaluation), but most importantly (and what led to my decision) is the lack of growth in the dividend and earnings which led me to lose confidence in this investment.

      It should be noted that I’m not a huge fan of utilities to begin with. Moderate overvaluation of a strong, high quality company (like HRL) would just lead me to hold off on buying new shares.

      Best wishes!

    • says

      Investing Early,

      Thanks for the vote of confidence! It’s sometimes a bit lonely as an investor. There is certainly counsel (you readers are a wonderful source of such), but in the end the decision falls solely on my shoulders. So, it’s always good to get a pat on the back from fellow investors!

      Best regards.

  2. says

    There are too many good opportunities out there to sweat the sale of a company whose dividend growth is marginally above inflation. Good call in my view.

    • says

      Integrator,

      Thanks! I agree. I went back and forth on this one for a good 2 days, looking at every angle. In the end I just could not justify myself continuing to hold it as an investment. I would never purchase a stock with a 3.6% yield with a 2% DGR.

      Take care!

  3. says

    DM, I understand your rationale behind this trade and agree with it as well. I did the same thing with other stocks. For example when I bought ABT last year and after the spinoff the yield dropped from 3-something to 1.6% I decided to sell. If I held the stock for 20 years and built some yield on cost with the stock I would probably have kept the stock, but now I could get a better deal elsewhere. As you said, an occasional pruning of the tree is needed to bring better fruit next year.

    • says

      Martin,

      I don’t really worry too much about YOC, to be honest. I simply focus on current fundamentals. My YOC could be 20%, but if I’m only receiving 0.2% current yield on my capital invested it would probably be prudent for me (as a dividend growth investor) to invest in something where I’m able to get 3-4% on my money. That would instantly increase my dividend stream, even though my immediate YOC would be reduced. A high YOC simply means an investment has played out well for you.

      Best wishes!

    • says

      Well, I was looking on it from the perspective of how long you held the stock. If you held for 20 years and your yield on cost was let’s say 20%, but current yield is only 0.2%, then you are really receiving 20% and not current yield on the shares you purchased previously 20 years ago. Of course, I wouldn’t invest any new money to such stock, since then you would really be receiving only 0.2% and that would be wasting money and time and you can get a better deal elsewhere.

    • says

      Martin,

      That’s not true. You’re receiving exactly what the stock is currently paying, regardless of when you purchased it.

      If you had bought KO 10 years ago and are sitting on relatively sizable capital gains, your KO shares are still CURRENTLY yielding 2.86%.

      So let’s say you own 100 shares of KO with a cost basis of $20 per share. That means your YOC is 5.6%, based on the current $0.28 per share quarterly payout. But, your current yield is only 2.8%. You’re only going to be receiving $112.00 in annual income from these shares.

      If you sell these 100 shares for a total of $3,922 and reinvest in MO at 115 shares ($3,922) which is currently yielding 5.18% you’ll increase your annual income to $202.40.

      See, even though your YOC goes down with MO to the current yield you just almost doubled your annual dividend income. Even though you had a high YOC with your KO shares, you were still only yielding 2.8% on your $3,922 invested. You could free up that $3,922 and reinvest at a higher yield and receive more money.

      YOC is what I consider a “feel good metric”. It makes you feel good, but doesn’t really do much more than that.

      Best wishes!

    • says

      Journey,

      I haven’t really established hard rules like that. I find that as I gain experience as an investor I use “hard” rules and numbers less and less. I suppose the best way I can put it is that you get a feel for things. With UNS, for instance, I simply looked at the numbers and it just didn’t make sense for me. A low growth rate, high valuation, low yield (for a utility) and lack of any significant future growth made it clear that this stock doesn’t fit my strategy currently. Things could change in the future.

      That all being said, I try to make sure the yield on my investment and the DGR add up to 10-12% in most cases. So, say the yield is 3% and the DGR is 9%, that would be fine for me as that adds up to 12%. That’s a function of the Dividend Discount Model or Gordon Growth Model. Utilities and telecoms are generally allowed a little leeway as the entry yields are typically higher, but the revenue streams are more stable.

      Best wishes!

  4. says

    I decided I’m going to sell 2/3 of my UNS stake. I do believe good things are in store for this utility since they have been cleared to raise rates. I think that’s the reason the stock price took off. UNS had been stuck in a rate freeze for quite a while until recently. The dividend growth has been disappointing the past couple years, but I have a hunch it will improve.

    One could argue that the good news is already baked into the price, it’s easy to replace the income, plus the dividend growth has slowed down considerably. With that in mind I’m going to liquidate most of my holding.

    I really don’t like selling anything, but I feel this is a prudent move. Same with what you did.

    • says

      Compounding Income,

      I was wondering how you felt about UNS. I don’t blame you for selling off a large portion. If I had a larger position, like you do, I may have kept a small portion in case the future growth is higher due to rate increases. However, I had a much smaller position so it wouldn’t have made sense for me to sell off even 50%.

      I don’t like selling anything either. It creates a taxable event and I have to pay commission to free up capital I’d otherwise rather have still invested. Now I have to pay commission all over again to invest in something else. So, selling is obviously not preferable. But, I’ll do it if it’s the rational thing to do. And in this case I felt it was.

      Best regards!

  5. says

    It sounds like a great move for the all the reasons that you mentioned. If you wouldn’t currently invest in it then that’s a good idea that maybe it’s time to get out. I consider taking some skin out of the game every now and then is a prudent move.

    • says

      Pursuit,

      I agree. Sometimes selling and taking profits off the table is the best move to make, especially if the likelihood that those profits will disappear is high.

      I can’t see how UNS will appreciate significantly from here any time soon, and rather think the odds of it declining are higher…especially with a broader market pullback. The valuation is just very high for a slow growing utility.

      Not only did I take some profits from the sale, but also reinvested most of the capital from this transaction at a higher yield, so my passive income will also increase. Win-win!

      Hope all is well.

      Best wishes!

  6. gibor says

    about 1 year ago I was very close to buy UNS, had couple of limit buy, but it didn’t reach this price by couple of cents, than I bought some different stock. The major reason I wanted to buy UNS it very good 12-14% dividend growth, If I’d buy it than, probably I would sell it too, because suddenly dividend growth went down to 2% … another prove that current yield is more important that hoping of consistent higher dividend growth….
    btw, I still hold ABT after spin-off and I want to see what will be next dividend increase… if it will be low, I’ll probably sell ABT and buy more ABBV

    • says

      gibor,

      When I first purchased UNS it had a high dividend growth rate and I anticipated that to continue. This just goes to show you that past results do not predict future actions.

      However, this was still a great investment all-around. If I could get a 31% return annually from every investment I made I’d be a very wealthy man in short order. I’m not made I invested the money, but do rather wish they had held the DGR higher and I’d still be a shareholder. I just can’t see significant share price appreciation from here any time soon, so that is something to think about if I were to hold.

      ABT’s next dividend increase will definitely be something to watch. If it can raise the dividend significantly over a couple years or so I’d strongly consider buying back in. I think it’s a solid company. I’m a little less certain with ABBV, but that could change with pipeline developments.

      Take care!

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