Mid Day Ramble – Not Much Income Action

We are watching the stock market “party on” for no real reason except we have no real new news on China. With a bit of time on our hands I thought I would share a couple “canary in the coal mine” companies I like to watch.

2 companies that are more local (Minnesota)–and thus maybe of heightened interest for me are Best Buy (NYSE:BBY) and the Mesabi Royalty Trust (NASDAQ:MSB). Of course MSB isn’t a company, but is a royalty trust, which owns a bunch of land in northern Minnesota which holds iron ore. Best Buy, as everyone knows, is kind of the last man standing (or is it woman standing?) in the consumer electronics business.

I like to watch the financials of these 2 because they kind of represent 2 different segments of the economy–1 is consumer focused, the other dependent on the manufacturing segment. I don’t claim to have any special knowledge of these 2, but I have watched them for years and years.

The financials of these firms can give us a clue on the health of various economy segments. For instance sales at Best Buy can drop like a rock if the consumer is under stress–i.e. unemployed etc. The MSB units can flucuate wildly based on investor thoughts on the future (the next year or two).

Best Buy released earnings today which were pretty good–importantly total sales and comparable store sales were up a bit. Instantly I know that the consumer isn’t feeling much stress–for now. You can be certain that unnecessary large screen TVs and home theater systems are some of the 1st things to leave ones “wish list” when there is fear in the air. Chinese tariffs have not bit hard yet, but the company is cautious about the future with new tariffs scheduled to kick in soon.

Mesabi released royalty payments received from Cleveland-Cliffs (the miner and buyer of the iron ore) (NASDAQ:CLF) on 8/2/19 for the quarter ending 6/30/2019 and they were fairly solid at almost $12 million which translates into around 90 cents/unit.

So what is this telling me? Best Buy tells me things are “ok” as far as the consumer is concerned–and this is most important for forecasting any recession (at least to me) in the next couple of quarters. Mesabi financials tell me the industrial segment is doing well–BUT Mesabi investors tell me CAUTION. MSB has traded as high as $32 in the last year, but is currently at $22.68–investors are no longer willing to “pay up” for the high yield (10-15% depending on distributions declared). Investors are forecasting weakness ahead.

With this data it would seem unlikely that we will see much real economic weakness in the next quarter or two. Of course this can change quickly, but I wanted to share my thoughts on these 2 “canaries”.

21 thoughts on “Mid Day Ramble – Not Much Income Action”

  1. Hello Tim and Everyone else! I was at a portfolio manager’s market update yesterday and he believes we are approaching a bubble on utilities (not because of interest rates but because of flight back into growth stocks). For their income portfolios, they have avoided bonds and preferreds and are buying div paying stock. As far as a shopping list for fixed income, I’m watching: UTG, QTS, IRT, IRM, EOD, SDIV, ERC, XLU, PFF , XLF and dividend paying large caps like JNJ, INTC, CSCO maybe some pipelines TRP, AMLP.
    Curious if anyone has constructed a portfolio with a similar concept of diversified holdings paying dividends?

    1. Debbie

      We build large dividend growth stock portfolios and use various data sets for our initial search. One good resource is the spreadsheet offered at dripinvesting.org under the Tools link. Updated monthly, it can be a great starting point for establishing a buy list and target prices. As search criteria, we focus on growth metrics (sales and earnings), moat size and dividend growth momentum over various time periods. We do not chase yield through high yield stocks. Rather, we let dividend yield come to us through expected future dividend compounding. We rarely use products but have used NOBL from time to time as a proxy. Our oldest portfolio started in late 2006 and performed very well through the crisis, in terms of total return, as the max draw down was about half of the S&P 500. This portfolio, like many focused on dividend income, has been a little erratic lately as many of these companies are affected by the trade war.

      1. Marc, thank you for this resource. It sounds like you are a portfolio manager? If so, I am interested in talking to you. I’m in the midst of securing several proposals . Do you have a website? You can email me directly at signature@att.net

  2. I cannot stand electronics retailers or sporting goods stores as long term investments. How many different franchises have we seen go under in our lifetimes? Is there any way to innovate? Low prices are all that matters.

    Only a matter of time Best Buy will be gone and the next hot one will come in.

  3. Tim – A quick read on MSB says it will wind down 21 years after the last person on a list of 25 buys the farm…. Are any of the 25 still alive??? Their website seemed very vague on the topic as if nobody’s checked recently on the survival of the 25.

      1. Thanks, Tim. A Rockefeller named “Andrew Carnegie Rockefeller?” Who knew…. With the youngest being about 58, I guess maybe the mine has a likelihood of maturing before the Trust does. That’s probably all covered in the docs and website….. I haven’t done much with royalty trusts but did follow Canadian mining royalty, streaming, and mineral project generation company ATUSF for awhile.

        1. 2WR—way back when–more than a 100 years ago, both Rockefeller and Carnegie were big players on the iron range in Minnesota. Those dudes had there fingers in everything if they thought they could make a few bucks.

  4. I’ve been slowing building cash waiting for buy opportunities and was wondering if anyone else might be willing to share their “shopping lists” particularly for reasonably liquid income-based issues?

    I’m closer to the stance of looking for reliable future income vs. capital gains but willing to consider/learn from other viewpoints…

    thanks!

    1. For reasonably safe perpetual 5% GNT-A NCZ-A GGN-B ECF-A, maybe PRIF-A HFRO-A. 6% but callable COF-P CBKLP. 6.5% short term with mild risk GECCN. NLY-F NLY-I NLY-G if you want to gamble on REITs. Less than 5% but with protection against high rates MS-A GS-D.
      If you’re a trader here’s some that are just ok for buy&hold but have price swings with limited downside, good for trading. ECCB GYB PYT, maybe GJS.

    2. Gary, I started nibbling on Macys (M) this week as it flirted with 10 year lows. This is more of a bet on the spending power of the American consumer going into the holiday season than it is on the long term prospects for the company. Macys also pays a fat dividend (10.13% at the current share price) and will go ex-div in a couple of weeks.

  5. Maybe one day people will stop investing by using signs. A yield curve inversion does automatically mean recession. This inversion was bad judgement by Fed Chair. Consumer and unemployment numbers are good. Now of Fed chair would cut, my bet is long rates recover

  6. Tim – I have owned a few shares of MSB for many years and first read about the company when I used to get Richard Young’s Intelligence Report. MSB is interesting, but it can be hard to predict the future of iron ore prices. For readers that don’t know, iron ore is a critical component in making steel. One of the major reasons that Mesabi may have rallied in the past year is the due to the Vale dam collapse in Brazil earlier this year which shut down one of the biggest iron ore mines in the world, and this resulted in a much lower supply of iron ore entering the market.

    1. kaptain–I owned it for a few quarter many, many years ago–not a place to chase yield. I know 1 person was touting it on SI at $28-$30 for the yield.

    2. The other thing about MSB is the dividend varies widely by quarter since it is based on shipments – and during the winter a lot of the shipments on the Great Lakes get shut down. Investors who are not aware of this may panic when they see the quarterly dividend go from .94 to 1.39 to .89 to .21. But the .21 which was declared on July 21 corresponds to the winter shipping shutdown timeframe. It is comparable with prior years.

      If you look, the decline basically started around that July 21 declaration date. There may be other things going on but I would expect some rebound as the next dividend date approaches

      1. Maverick, the dividend on MSB varies greatly on a quarterly basis as you mentioned. I’ve only got about 50 shares, so I just sit back and collect the royalty payments. Not selling my shares, but not buying any more either at current price levels.

        1. Kaptain Lou, do you have your shares in a taxable or tax-deferred account? I understand the K-1 implications are very complex.

          I sold MSB @ $27 a while ago for a cap loss, and am not sure if I should go back in. This is in my IRA, so no tax issues.

  7. I owned MSB ~30 years ago and got out because it was supposed to wind down & disappear.

    Guess that may not happen in my lifetime. lol

    1. Tim and all,

      While I have been packing for a trip tomorrow, I saw this article on PEGI (Pattern Energy). Wind Energy, one of the Rida Mauwa’s best picks.

      https://seekingalpha.com/article/4288424-pattern-energy-upside-amid-takeover-talks?ifp=0
      First I thought I should not circulate rumors then I woke up sitting in front of my PC as usual. The market action seems to support this rumor. I sold quite a few shares of PEGI in my retirement accounts. Ans own a few shares of BEP (Brookfield Renewables), which has been climbing recently. I was also shocked by the gapped up price increase on TERP Wind and Solar (I do not have positions there). It seems to me that Brookfield could be aiming to make Renewables as an excellent (IMHO) strategy to compete against the Chinese (PRC) which has invested heavily on renewables. From what I read on SA, PEGI had so so quarter but has invested heavily in making Wind in Japan where they can get consierably higher margin. Please do your own DD. I believe PEGI has pro forma dividend in the high 6% range, dropping from mid 7%, which prompted to sell without waiting. History of PEGI: volatile except in recent times.
      Tim, not sure whether I should post this one in User Initiated. Please do do if appropriate. THANKS!

      1. Bloomberg News on Pattern Energy (PEGI):
        https://www.bloomberg.com/profile/company/PEGI:US
        When asked by Media to Pattern Energy, it declined to comment. DividendChannel.com pro forma dividend yield is just 6.23%. BEP also been climbing with dividend yield just 5.48%. Terp 4.71%. Rida with Pendy wrote an non subscription article on PEGI back in April 15, 2019. As I recall from Rida Morwa, dividends were QDI (true for Schwab). Vanguard brokerage considered Box 3, non dividend distribution for PEGI in 2018 Form 1099.
        I will probably hold my remaining 1,559 shares for now. Hate to buy more ARCC, probably the best of BDC in terms of reward/risk basis. BDC at late stage of bull market (assuming), seems bad bet; and I do not want to end up over allocation to a single company as I did with AmTrust Financials with 3 related companies.
        CTL (Century Link) has been basing. Nothing new until the next quarterly report in early part of November (unconfirmed per Fidelity.com).

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