AT&T is out, Verizon is in, Rule of 72

 

What Happened? 

AT&T announced a restructuring plan.  It announced a merger with its TimeWarner assets with Discovery to create a new streaming company.  Sounds good, right?  AT&T sheds TimeWarner, and a merger, what could go wrong?  The stock went up 4%.  Then people read the fine print:  

"Attractive dividend – resized to account for the distribution of WarnerMedia to AT&T shareholders. After close and subject to AT&T Board approval, AT&T expects an annual dividend payout ratio of 40% to 43% on anticipated free cash flow¹ of $20 billion plus."

Doing the math on the new payout ratio, you get FCF payout from $15B to $8B.  I did not sell on the news right away.  I wanted to make sure this was correct.  Basically, you will get a piece of the new TimeWarner spinoff, and AT&T stock with a 4% yield as opposed to the current 6% yield.  Now if you are looking for value and capital gains, it is not so bad of a deal.  If you can handle a 2-3% cut to your income, then keep it.  However, this goes against my golden DGI rule:

"If a dividend is cut, sell."

I don't want a piece of a company that doesn't pay a dividend (TimeWarnerDisco spinoff), I don't want to own a media company (I owned AT&T before it bought TimeWarner), and I want the best in the communications market.  Now I didn't own AT&T because of its growth, but I did own it for its high dividend yield and free cash flow.  However the market is saturated, and there are better players out there, like Verizon.

Verizon isn't looking to become a media giant, and my son has owned them for a few years to his profit.  I am not a big fan of this sector as it is, because it is saturated, but I might as well hold something a little more stable and safe. 

I did sign up for after hours trading, and seeing the direction it was going the next day as the institutions  were continuing to rotate out, I made my biggest sell-off ever.  What was the damage?

Well, since the stock was essentially flat, I was in the red for $800 after the first day drop.  However, I had collected $900 in dividends over the past 4 years I owned it.  I netted $100, which is pretty pathetic for a 4 year investment.  However, I can tax harvest (my first this year) for -800 on my taxes (-3k is the limit every year), which helps reduce my taxes, and still walk away with a net profit, which is the fun of tax loopholes.

Do you own it?  Should you sell?  It depends on your situation.  If you show a profit (however minor), and benefit from tax harvesting, why not?  The $11k I received from selling I dropped into OHI, OKE, and a small amount into Verizon.  This increased my monthly dividends by $1, so I actually made out, but those two former stocks are the riskiest in my low-risk portfolio.  So we will see how things progress.

Meanwhile, I learned about the Rule of 72.  Just a fun little metric to look at.  I always try to figure out how long it takes for a dividend stock to pay for itself.  Typically a 5% yield that never changes should pay itself off in 20 years.  However, stocks go up, and yields increase.  So it should theoretically be less than 20 years.  

This is typically covered in my Equity Cost column in my holdings spreadsheet (see holdings in the menu).  I take what I paid for it, minus the gains in the stock since then, minus the dividends received.  Once this number goes negative, the stock has paid for itself.

Rule of 72 is better, because you take into account the stock market growth rate (and this numerator changes from 69-75 depending on yield).  I am going to try and fine-tune it a bit more, since it initially applies to interest rates, but it can be converted to handle stocks.  However, it can be far from accurate.  See below.

I have been doing this for 4-5 years.  I already have 3 stocks that have paid for themselves.  My lowest yielder, MasterCard, which has increased in capital gains value at an insane rate, paid for itself first.  Rule of 72 calculates it wouldn't pay for itself until 73 years from now!  My other two, QCOM and TGT had such huge growth in short amounts of time, they also met their equity cost in less than 16 and 18 years, respectively.  

So, it might need some fine-tuning, but it is a good metric for the slower stocks, to give me an idea on when they should pay for themselves, and I should always aim for less than 20 years.  Now this also makes me wonder if I should cash out fast growers like Target (tripled value) to my initial investment, and reinvest the excess into something higher than my yield on cost (YOC), is another matter.  I'll expound more on this next month...

Dividend Increases & Special Payouts

None!  Target is expected to have a massive increase in August, we will see...

May Purchases: (not much!)

T	-322
OHI	150
OKE	50
VZ	35
QCOM	4
ABT	2
CVX	3