It’s rare for me to sell a position in my portfolio. Most positions are not speculative and have long dividend growth streaks stretching up to 50+ years.
I’ve outlined in My Business Plan a few reasons for a sell.
When to Sell or Strongly Consider Selling:
1.) Dividend is eliminated, cut or held constant
2.) A major reorganization happens
3.) The company has serious changes to fundamentals
4.) The company becomes extremely overvalued
5.) The company has a total return less than 5%/year over last 5 years
6.) The company increased its dividend at a rate below inflation
7.) The company plans to be acquired or merges
I thought this company might be in 5.) above so I took a look. The company is also approaching 6.) above with the latest weak increase.
OMI opened at 27.42 5 years ago and I sold at 33.33 last week. This is an annualized return of just 4%. Now this isn’t a total return since OMI has paid a yield of approximately 3%. Add in the yield and an investor that purchased shares back in Nov. of 2009 would have a 7% annualized return.
However, the beginning price happens to fall in 2009 when prices of most companies were depressed. Instead I’m using my cost basis since I purchased shares mid-2012 which was just below the price I sold. My total profit was exactly $245 not counting dividends. The good news is that I won’t owe much tax since there was little profit.
For me, I care a lot about the growth of a company and future prospects. Without earnings growth, it’s about impossible to grow the dividend unless you increase the payout ratio. I’m worried about slow growth ahead for OMI.
The stock price growth of OMI also looks anemic compared to some of their competitors.
Let’s look at two graphs of OMI next to the Health Care Equipment & Supplies industry as a whole courtesy of Charles Schwab Research.
The 2 year chart is concerning but the 5-year chart is even worse. Next I wanted to look at the recent dividend increases.
The latest raise was only 4% and as you can see, the growth has been slowing down. I expect a 3% yielder to have a higher dividend growth than 4%.
I decided to be proactive and sell this company before they fell into one of my reasons above. I also plan to add one more rule for when to sell or strongly consider selling:
8.) when the company can be replaced by a better idea(s) that not only matches the lost income but has a higher probability of stronger dividend growth.
So I sold all 150 shares for 33.33/share losing $150 in annual income with proceeds of $4999.50.
I then made two purchases in companies I already own with most of the proceeds:
40 GIS @ 50.44 ($65.60 increase to annual dividends) – Cost of $2017.60
32 NVS @ 88.47 ($87.00 not including a raise for 2015) – Cost of $2831.04
By the way, GIS most recent increase was about 8% while NVS was 7%. Morningstar also gives 2-stars to OMI while giving 3-stars to both GIS and NVS.
I gave up $150 in annual income and replaced that with these two purchaes (total of $152.60 new annual income) with about $150 left over from the proceeds. This $150 more than covers the taxes I’ll owe on the $245.
What do you think of this move?