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Pioneer Municipal High Income Looks Attractive Here

Summary High tax exempt yield of nearly 7%. Very low leverage cost using auction rate preferreds. 7% discount to NAV for a fund that often trades at a premium. It looks like the Federal Reserve is getting ready to raise the short-term Fed Funds rates before the end of this year. Currently the Fed keeps the target rate in a range from zero to 25 basis points, or an average of 0.125%. Most likely the initial rate increase will be quite modest. There are several ways the Fed can increase the rate. Some possible options are: – Eliminate the range concept and set the new target interest rate at 0.25%. (average increase of 0.125%) -Bump up the range slightly to 0.125%-0.375%. (average increase of 0.125%) -Bump up in the range by 25 basis points to 0.25%-0.50%. I don’t think any of these rate increase options would surprise the market, and it is quite likely that the more important longer-term rates (like the 10-year Treasury rate) have already discounted any Fed rate increase. It wouldn’t surprise me to see a drop in longer-term rates once the uncertainty about the first Fed rate hike has passed. The 10-year yield in the US is now about 40 basis points higher than the 10-year yields in Spain and Italy, so there is plenty of room for a drop here. In years since 2008, there have been major changes in the financing of muni bond CEFs. The CEF auction rate preferred (e.g., ARP) market basically froze up in early 2008. There has been no new ARP financing since then. There was about $60 in billion in ARP financing outstanding in 2008, but most of this has been redeemed since then. A number of new leveraging options to replace ARP financing have been developed for muni bond CEFs, but these newer financing tools are currently more expensive than ARP financing by 50 basis points or more. The muni CEFs that have replaced ARP financing with these newer forms of leverage have lower earnings than before, which leads to lower sustainable dividends. Funds that have kept their ARP financing deserve to sell at a premium, or at least a lower discount to NAV. The Pioneer Municipal High Income Fund (NYSE: MHI ) is a leveraged national municipal bond fund. It seeks high current income exempt from regular Federal income tax with capital appreciation through investment in investment grade US tax exempt municipal securities. I have discussed various factors below, which I use to evaluate municipal bond closed-end funds. Note: Data below is sourced from the Pioneer Investments web site unless otherwise stated. Factor #1: What is the distribution rate? MHI currently has a high distribution yield of 6.91%. It pays a regular monthly dividend of $0.07 per share or an annual distribution of $0.84. Factor #2: What is the likelihood the fund can raise its monthly dividend? To determine this, I look at the Average Earnings/Current Dividend Ratio. This ratio tells you whether or not a fund is earning its current dividend. If the value is well above 100%, it means the fund can easily afford to raise its distribution rate. For MHI, the average earnings for April, 2015 was $0.0712, so the latest Average Earnings/Current Dividend ratio = 101.7%. This factor is a slight positive, since MHI over-earned its last distribution. There is a large positive value for “Undistributed Net Investment Income” or UNII Balance of +0.1622, which means that MHI has over two months of interest in reserve, which can cover future monthly shortfalls that may develop for quite some time. Factor #3: What is the Expense Ratio? I look at the Baseline expense ratio, which does not include leverage costs. MHI has a baseline expense ratio of 1.03%, which is reasonable for a fund with attractive low cost leverage. Factor #4: What is the discount to NAV? MHI is currently selling at a -7.46% discount to NAV. The 6-month average premium is 1.75%. The one year Z statistic is -1.94. So on a one-year basis, the discount is nearly two standard deviations below average. Overall, this factor is a big positive for MHI. Source: cefanalyzer Factor #5: How much leverage is used, and what is the borrowing cost? In the last annual report, the fund reported that 25% of the total managed assets were financed by leverage obtained through ARP financing. The maximum rate for each series is 125% of the 7 day commercial paper rate or adjusted Kenny rate. Dividend rates on APS ranged from 0.088% to 0.261% during the year ended April 30, 2015. This leverage is highly favorable and is a major positive factor for MHI. Factor #6: What is the AMT exposure? The fund did not provide recent AMT data, but up to 25% of the fund may be invested in securities subject to AMT. For this reason, this fund may not be ideal for investors with heavy AMT exposure. Factor #7: What is the credit quality? This is the S&P ratings quality breakdown for MHI as of 6/30/2015: AAA 6.82% AA 21.22% A 5.85% BBB 18.88% BB 8.51% B 8.32% CCC 2.35% Not Rated 26.52% MHI has medium to high credit risk with an average credit rating around BB+. Factor #8: What is the interest rate exposure? MHI has a weighted average life of 7.85 years and a duration of 9.17 years (leverage adjusted = 12.28). This is a little above average. I prefer funds with an average adjusted duration of 10.0 or less. Factor #9: What is the call exposure? Here is a table with the call exposure as of June 30, 2015: Under 5 years 48.8% 5-9.99 years 30.7% Over 10 years 1.0% Other 4.2%% Non-Callable 15.3% MHI has moderate call risk over the next few years if interest rates fall. For most investors, this is not a major concern, since they are worried more about higher interest rates than lower interest rates. Morningstar computes the average coupon rate of its bonds at 6% with an average price of 106. Given the high level of the UNII balance, there is only limited short-term risk to the monthly dividend even if interest rates fall more than expected. Factor #10: For a national fund, what is the breakdown by state? Top 5 States Texas 11.59% Illinois 11.40% New York 8.08% California 6.61% Washington 6.01% There is currently no exposure to Puerto Rico. Source: Morningstar Factor #11: How good is the trading liquidity? MHI has an average daily volume of 102,000 shares, and an average dollar volume of $1.25 million. Factor #12: What percent of the portfolio is in Housing-Multifamily bonds? I like to avoid funds where the Housing Multi-Family sector is above 10%. MHI has no exposure to housing bonds. Factor #13: Fund Management MHI is managed by David J. Eurkus and Jonathan Chirunga. Mr. Eurkus has more than 40 years of investment experience and has been the portfolio manager of the fund since inception. Mr. Chirunga joined Pioneer in 2011 and has been an investment professional since 1996. Based on the above 13 factors, I am currently quite positive on MHI. It is an attractive fund because of its high relative discount to NAV, very low leverage costs and reasonable expense ratio. Disclosure: I am/we are long MHI. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Cash Is King: Was It Ever True?

The phrase “Cash is king,” has become a rather ubiquitous part of financial vernacular. I did some research on who first coined the phrase, and while not particularly clear, one source credits the former CEO of Volvo as first uttering the line in 1988. In any case, “cash is king” describes the general power of the asset , its stability, and means to many ends as a financial tool. Despite its weakness as a productive investment today in an era of low interest rates, cash is still a storehouse of value in a global market where equities, bonds , and real estate seem to dominate most portfolios. However, for those that have sold out of or avoided securities markets for the past several years, holding majority positions in cash has presented severe opportunity cost. Sitting on cash instead of holding stocks, bonds , or other assets has not necessarily been the best of timing decisions. Of course sometimes it takes several years for a timing call to play out. Who’s to say that in another five years stocks will be 35% lower, bond yields will be significantly higher, and the only smart play, in hindsight, would have been to hold cash. But, if you are indeed holding a preponderance of cash today, the thought of whether the train will ever return to the station could quite possibly be haunting you at the moment. The longer the bull runs, the more painful and disconcerting it may be to hold true to a cash-heavy thesis and wait patiently for stocks, bonds, or both to become cheap in one’s eyes. Further, with yields inferior to normal annual inflationary pressures in the 1-3% range, idle cash is also losing purchasing power. That may or may not be a tolerable situation for the average investor to endure. So I would argue that the allure of cash as a regal asset has certainly lost some of its sparkle given the recent annals of market history and this era of ZIRP. The incrementally weaker cash seems to be from an investment perspective, the higher the valuation that is placed on other assets. The irony of the matter is that the American dollar, on a global level, has become much stronger over the past year while cash, in and of itself, continues to languish as a coveted asset. The decision of how much cash to hold in today’s market may be one of the most troubling questions for investors. While the sanest thing to do may be to hold a lot of it, given seemingly excessive valuations in equities and minimal productivity out of bonds, how much opportunity cost can be withstood? Buying a stock with a 3-5% yield and stressed valuation may be the “lesser of two evils,” if holding unproductive cash and generating no income is less desirable. While it may seem like the wise decision now, can you live with a 25-50% implosion of capital when and if the market markedly corrects? If, on the flip side, you continue to opt for sitting on cash, how much “pain” can be endured if stocks head higher and bond yields stay low? At some point, admitting an error in a timing strategy or edging back into securities may prove the more prudent move. Another potential outcome is that stocks remain in a trading range for a significant amount of time without a double-digit percent correction. Again, if you are keeping close tabs on valuations, at what point is it deemed “safe” to get back into stocks. While cash still has many attractive properties, low interest rates and demand for other higher yielding securities has diminished a lot of the glitter oftentimes ascribed to it. A higher interest rate environment may prompt a “re-coronation,” but don’t expect that to happen overnight. In the meantime, holding on to substantial amounts of cash may continue to be a frustrating prospect where king may play second fiddle to court jester as an appropriate characterization of its recent value to investors. Original post

Southern Company: A Stock For Income Investors

SO has been undertaking correct strategic initiatives by incurring capital spending to develop and strengthen power generation fleet. Company can opt to accelerate its capital spending targeted at renewable power sources. Southern expects to grow its long-term earnings in a range of 3%-4%. Dividend offered by SO stays secure, and the stock is a good investment prospect for income-hunting investors. Utility companies have remained a popular investment choice for income-seeking investors, as utilities offer attractive and solid dividends. In recent times, utility companies have accelerated their capital spending to expand and strengthen regulated operations. Also, utility companies have been scaling down unregulated operations, which will provide stability to their revenue and earnings. Southern Company (NYSE: SO ), which has a solid regulated asset base, stays an impressive investment prospect for long-term income investors, as it offers a solid yield of 5.1% . The company has been undertaking various construction projects and incurring capital investment to strengthen its regulated asset base, which will fuel its rate base and earnings growth in future. However, delays and cost overruns associated with the ongoing construction projects have inflated the company’s risk profile and will limit the upside to the stock price in the near term. The stock is trading at a slight discount to its peers on the basis of forward P/E, which I think is justified given risk delays and cost overruns. Financial Highlights and Stock Price Catalysts The company’s financial performance is backed by its regulated assets base; the company generates more than 90% of its earnings from regulated operations. Southern Company posted a strong performance for 2Q2015; EPS for the quarter came out to be $0.71 , ahead of consensus of $0.69 and the 2Q2014 EPS of $0.68. The performance for the second quarter was supported by rate increases, the strong performance of its subsidiary Southern Power and favorable weather conditions; total weather normalized sales increased by 1%. Also, the company enjoyed weather normalized growth for the second consecutive quarter in all of its three customer segments, including commercial, residential and industrial segments. The company maintained its 2015 EPS guidance range of $2.76-$2.88; however, I think given its strong first half performance, Southern will increase its EPS guidance range for 2015 in October during the 3Q2015 earnings call. The company has been making capital investments to strengthen its power generating fleet; the company plans to make capital spending of more than $16 billion from 2015 through 2017, which will allow its long-term earnings to grow in a range of 3%-4% . In addition, the company has been aggressively working to grow its renewable generation portfolio, and plans to have a renewable generation capacity of almost 3,200MW, including solar, wind and biomass. The company will continue to direct capital spending toward the expanding renewable energy portfolio to take advantage of the 30% solar investment tax credit before the end of 2016. Moreover, given the attractive regulatory environment for renewable capital spending, the company can opt to increase its capital spending for future years, which will positively affect its future earnings growth and the stock price. The following graph reflects the current and planned renewable resources for Southern. Source: Investors Presentation Despite the company’s strong regulated asset base, the ongoing construction of nuclear and coal gasification (IGCC) projects stay a concern for investors. The company’s nuclear project ‘Vogtle’ is on track, and unit 3 and unit 4 are expected to be in operation in 2Q2019 and 2Q2020, respectively; however, substantial construction work remains, and cost overruns and delays will weigh on the stock price. On the other side, the company registered another charge of $14 million for the Kemper project; the project is expected to be completed by 1Q2016. However, delays beyond 1Q2016 are expected to increase the project cost by $20-$30 million every month. Cost overruns and construction delays associated with the ongoing two construction projects have inflated Southern’s risk profile and will limit stock price appreciation in the near term, and the stock return will be dividend driven. The stock trades at a slight discount to peers, which I think is justified given the construction risk attached to the company; Southern is trading at a forward P/E of 15.20x , versus the utility sector’s forward P/E of 16.5x . In my opinion, the stock valuation will not expand and the stock will not trade in-line with its industry P/E multiple until the company’s construction project-related risk decrease or/and its EPS growth accelerates. Separately, the company’s management does not have any plans to issue equity until 2017 to finance its planned capital investments; however, if the company experiences delays and increases in construction costs, the management might revisit their financing assumptions and could consider to issue equity, which will adversely affect its EPS. Summation Southern Company has been undertaking the correct strategic initiatives by incurring capital spending to develop and strengthen its power generation fleet. Going forward, the company can opt to accelerate its capital spending targeted at renewable power sources, which will augur well for its long-term earnings growth; currently, Southern expects to grow its long-term earnings in a range of 3%-4%. Also, dividend offered by the company stays secure, and the stock is a good investment prospect for income-hunting investors, as it offers a yield of 5.1%. However, the construction risk will limit a stock price increase in the near term. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.