Thursday, September 8, 2016

FMF - A Change in Direction?

  Since I wrote about my further adventures in covered call options using my self-directed 401k I’ve been inundated with requests for financial advice. On Sunday the clerk at Casey’s General Store asked if I had anything smaller when I tried to pay for my coffee refill with a $5 bill and a few days before that one of the ‘Slappys’ I regularly see on my afternoon walks with Daisy and Baxter told me that he was drinking a giant can of ‘Steel Reserve’ beer because it was ‘f&@^ing cheap’ and asked what I thought about that. With that kind of feedback the thought crossed my mind that I should start my own financial services podcast but since I don’t have the time for that I decided I’d offer a 6 month update on the performance of my Found Money Fund (or FMF for short).

  The FMF was an outgrowth of my paying off my 2013 Chevrolet Spark in two years using extra money I occasionally get from giving chess lessons, helping users with the shoe store software I stopped writing almost a decade ago, collected spare change, tax returns, cash back rewards, mileage expenses from work, etc... Once my car was paid off I started using my found money to buy four stocks: Phillip Morris (PM), AT&T (T), Coca-Cola (KO), and mortgage real estate trust company American Capital Agency Corp. (AGNC). All four stocks pay dividends (which I reinvest into the stocks commission free) and except for AGNC have been profitable companies for many years. When I last wrote about the FMF in March it had just hit an all-time profit of $583 or (9.6%) and was providing $33 a month in dividends that I reinvested in the stocks commission-free. In the intervening 6 months I’ve made 7 buys of $500 and now receive $48 in dividends that I reinvest.

March 1, 2016Buy 11 KO @43.626416865.0879.75514.64
March 1, 2016Buy 27 AGNC @17.99516865.08-40.26514.64
March 1, 2016Buy 13 T @ 37.336416865.08211.47514.64
March 1, 2016Buy 5 PM @91.4116865.08263.68514.63
April 18, 2016Buy 5 PM @101.2418004.16502.241096.13
July 7, 2016Buy 11 T @42.817895.88555.141506.14
July 27, 2016Buy 11 KO @43.596518472.1787.681321.81

  The March 1st buys were mostly funded by my tax return and as you can see by the prices I paid in subsequent buys the stock market exploded in value and the prices of these stocks also exploded also. The FMF regularly hit new all-time profit highs with a peak of $1615 on July 6th (19.2%) before giving back 20% of those gains to sit at a $1347 profit on Labor Day. Why has the stock market in general and my stocks in particular exploded this year? There are lots of reasons but I think a main one is the massive amounts of money that have flooded the world economy to promote economic growth. Despite the best meaning efforts most of this money ends up with people who already have money and is creating investment bubbles of inflated prices in lots of places including the stock market. That is precisely why I chose long standing quality stocks for the FMF with the exception of AGNC who I will get to shortly. At some point the stock market bubble will burst like all bubbles do but that would only be a short term setback for top-quality companies like Phillip Morris, AT&T, and Coca-Cola who would be able to pick up market share and buy up competitors at discounts.

  On February 25th PM and T were the most profitable investments with KO chugging along and AGNC showing a loss despite providing the bulk of the dividends (mortgage real estate trusts like AGNC have to provide 90% of their profits as dividends to obtain a preferred tax status from the government). Six months later little has changed with PM, T, and KO but AGNC has surged past KO in profitability.

StockAverage
Purchase
Price
Price on
Labor Day
Purchased
Shares
Reinvested
Shares
DividendQuarterly
Dividend
PM83.935567.9300.3231.0230.93
KO42.862102.84571.3140.3520.41
AGNC19.639257.3410012.4120.1860.69
T36.360446.39673.3920.4833.79
Total
Quarterly
Dividends
145.82
Monthly
Dividends
48.60

  The reinvested dividends have accumulated an extra 12 shares of AGNC which makes its bottom line more susceptible to swings in price as far as the FMF is concerned. Right now AGNC is in an upswing because it spent $562 MILLION DOLLARS to purchase management company it had been paying $400 million dollars a year to in fees. The purchase was lauded and the price of AGNC skyrocketed. But then AGNC did something very curious – they lowered their dividend from 20 cents a share to 18 cents a share. This decision was also lauded and the stock went up again. When I first purchased AGNC in March of 2015 the dividend was 22 cents a share which was lowered to 20 cents in May 2015.

  This caused me to do a little digging into AGNC. I found that in addition to the common stock I own they also have a preferred stock (AGNCP) that gives a 50 cent quarterly dividend that hasn’t been cut in at least 4 years. The preferred stock apparently gets their dividend off the top and leaves the common stock with what’s left. AGNC is trading at 19.5 currently but I think that a lower dividend will have to lead to a lower stock price at some point. A price of $18 would make the dividend the customary 12% yield which seems to me what most people want from this type of investment.

  This leaves me in a quandary with one of the FMF pillars. I can see a downturn in AGNC and if past performance is predictive another dividend cut could be in the future next year. Covered call options on AGNC don’t sell for nearly the same prices as stocks like Intel and Exxon yet the stock is still profitable. I decided to take a ‘Solomon-like’ attitude and cut the baby in half. I put in a sell order for the 100 shares of AGNC stock I purchased at a trailing stop price of 50 cents, meaning that when the price of AGNC goes down 50 cents from the highest point after I placed the trailing stop order my sell order will be placed. This will guarantee me a reasonable profit which I will keep in the form of the 12 shares from the reinvested dividends. I’m not sure what I will do with the proceeds in the event I do sell the AGNC shares. I tend to think I will hold onto the cash to buy AGNC back at a lower price. The other option would be to throw the proceeds into a stock like Intel that I understand a lot better than AGNC. More annoying to me is that I thought I had picked my four stocks carefully enough that I could just let them run on auto-pilot but AGNC is now making me think which is not something I had in mind when I started this exercise 18 months ago.