Tag Archives: alternative

Even After Recent Drop, PGP Is A Sell

PGP trades at a large premium, putting it at risk for a steep decline. When rates rise, high premium and highly leveraged funds will suffer. Friday’s drop is a sign of how risky the fund truly is. The purpose of this article is to evaluate PIMCO Global StocksPLUS & Income Fund (NYSE: PGP ) as an investment option. To do so, I will evaluate the fund’s characteristics, recent performance, and trends within the industry as a whole to attempt to determine if PGP will be a profitable investment going in to 2016. First, a little about PGP. PGP’s stated objective is to seek a total return comprised of current income, current gains, and long-term capital appreciation. The fund attempts to achieve this objective by building a global equity and debt portfolio and investing at least 80% of the fund’s net assets in a combination of securities and instruments that provide exposure to stocks and/or produce income and by utilizing call and put options to generate gains from options premiums and protect against swift market declines. Currently, the fund is trading at $16.91/share, after Friday’s decline of 8.62%. The fund pays a monthly dividend of $.18/share, which translates to an annual yield of 12.77%. While the fund has come under pressure over the past few trading sessions, performance in the past few months has been strong, with the fund up almost 15% in the past three months, excluding dividend payments. Given that performance, and its high yield in this low rate environment, PGP may seem like a sound investment. However, there are a few reasons, which I will outline below, why I would avoid PGP going forward. First, and probably most important, PGP trades at an enormous premium to Net Asset Value (NYSE: NAV ), currently at 56.24%. This in and of itself is a red flag for any fund, as it indicates investors are paying well above the fair market rate for future performance. PGP has been able to maintain this high premium because it has a history of reliability for its dividend payout, which is high, and investors have flocked to PGP and other similar funds to earn this yield while interest rates have remained at record lows. While this strategy may have paid off during that environment, once rates start to rise, investors will shift out of riskier funds and in to safer asset classes that will begin to pay more. Funds that demand a high premium, such as PGP, will be most at risk. This was evident during Friday’s drop, as credit markets were rattled over Third Avenue’s decision to suspend redemptions on one of its credit mutual funds. This decision hit many Pimco funds hard on Friday, but funds that trade at large premiums were hit the hardest. For example, PHK, which also trades at a premium (albeit at only 10%) dropped over 7%, which was similar to PGP’s drop. Meanwhile , PCN, which trades at a 7.62% discount to NAV, dropped only 2.44% and PCI, which trades at an almost 16% discount to NAV , dropped only 1.18%. While this is just a snapshot of one trading day, it demonstrates how funds with high premiums are more sensitive to market swings and are riskier for the initial principle investment. Second, interest rates are likely to increase this week, as 92% of economists surveyed by the Wall Street Journal are predicting a December rate hike to be announced during the Fed’s meeting this week. If Yellen announces a hike, and lays out the groundwork for future hikes in 2016, investors may begin to exit riskier funds like PGP, as yield on safer investments, such as Treasury bills, will begin to be higher. Again, due to its large premium, PGP will probably suffer more than most and the drop could be steep. In the past month, as expectations for the first rate increase became more pronounced, PGP has suffered, down about 5% (excluding dividends). With the rate hike becoming more evident, I expect this decline to continue. Third, while PGP has traded at an ultra-high premium for quite some time, historically the fund has traded at NAV, or at a discount. It wasn’t until the depths of the of the financial crisis and the near zero interest rates in 2009 that PGP began to sell at a premium. Investors have irrationally bid up this fund to the point where owning it now sets up the investor for a very quick, steep drop in principle. When rates rise, I expect PGP to return to pre-recession valuations, which would mean a dramatic decrease in share price from where it stands today. Of course, avoiding PGP has risks of its own. The fund has traded at a premium successfully for years, and its high yield, along with capital appreciation, has rewarded investors handsomely. If Yellen announces that the Fed will yet again delay raising rates, or lays out a dovish stance for future increases in 2016, funds like PGP could rally, as that could indicate the low rate environment will be around for longer than anticipated. Additionally, PGP’s yield of almost 13% could be enough to entice investors to stay the course throughout 2016, even with rising rates. While rates rising seems to be an almost certainty, those rates will most likely still be at historically low levels. Investors may decide that the high yield and below investment grade credit sectors that compose PGP could be worth the risk. However, I expect the Fed to follow through with the December rate hike, and lay a groundwork for a few rate hikes in 2016. This albeit slow rate of increases will gradually steer investors out of high-yielding closed-end funds, and PGP should fall quicker than others. Bottom-line: PGP has paid a reliable, high-yield during a period of ultra-low interest rates, rewarding investors with high income during a time when such income was hard to come by. The fund has also performed strongly from its 2009 lows, more than doubling in share price. However, this performance has priced PGP well above NAV, and has shown itself prone to dramatic losses when the market gets rattled, such as on Friday. With volatility expected in the credit markets in the coming months as interest rates are set to rise, the risk-reward of PGP is just not there. While the yield is high, and PGP has proven to pay it reliably, there are other Pimco funds available with similar yields, that won’t expose investors to such a large potential loss in principle. Heading in to the new year, I would caution investors away from PGP at this time.

Algonquin Power: U.S. Dollar Dividend, Canadian Dollar Share Price, And Huge Insider Ownership

Algonquin Power is getting lots of love from Canadian stock analysts. It has a unique structure of paying its dividend in US Dollars, removing foreign exchange risk for income investors. Insiders own 19% of the company. Algonquin Power and Utilities ( OTCPK:AQUNF ) (AQN.TO) is a Canadian-based electric, natural gas, and water utility serving 488,000 customers. US investors are offered an interesting combination of above-average dividend growth paid in US Dollars while gaining exposure to the benefits of a falling US Dollar with a company well liked by Canadian research analysts. Management expects 15% growth in assets, approximately 15% growth in adjusted EBITDA and greater than 10% growth in adjusted EPS. In Canada, the majority of assets are in renewable power generation while its US footprint is strong to utility distribution with 31 electric, gas, and water businesses. Algonquin Power’s cross-border structure provides an interesting twist for US investors: Income is paid in US Dollars and share prices trade in Canadian Dollars. While dividend growth investors may turn their heads at a huge dividend cut in 2009, an understanding of the company’s structure should overcome this stigma. Water will be a bigger part of Algonquin Power. AQUNF is working on acquiring the water utility assets of private equity firm Carlisle Infrastructure Group LLC. After the acquisition of California and Montana based Park Water is complete, Liberty Utilities will be the 6th largest US water utility by customer count. However, two municipalities, Missoula, MT and Apple Valley, CA are trying to purchase their respective water districts and have been aggressive in filing court documents seeking to force these businesses back into the public domain. Until these issues are resolved, the acquisition cannot proceed. The company recently expanded its Distribution footprint into New England with the purchase of New Hampshire’s Granite State Electric Company and Energy North Natural Gas. In addition, Algonquin Power announced its participation in the Northeast Energy Direct project, a $5 billion natural gas pipeline project that will connect Marcellus production to the Northeast. Algonquin Power went public during the Unit Trust craze in Canada and converted to a C corp. when the Canadian government clamped down on its abuses. In the conversion process, AQUNF cut its dividend in 2009 by 74%, but has been raising dividends since then. The current 5-year dividend growth rate stands at 15.5%. The dividend was most recently increased last June by 10.3%. Based on a $7.70 price for AQUNF (C$10.31 for AQN.TO) and a $0.384 dividend, the current yield is 4.98%. Algonquin Power is expected to earn C$0.43 this year and C$0.50 next. This is slightly less than its dividend, creating a payout ratio of over 100%, but the firm’s trends are positive. Based on its most recent 5-year, $4 billion capital expansion plan, the company is targeting growth in assets and EBITDA of 15% CAGR, EPS and cash flow growth of 7-10% CAGR, and 10% dividend growth rate. More information on its capital plans can be found in its most recent Investor’s Day Presentation pdf. Below is a graph of past and expected EPS, in Canadian Dollars. Source: S&P Algonquin Power is getting lots of love from Canadian stock analysts. For example, BMO Research (Bank of Montreal) recently issued a review reiterating its Outperform rating: Algonquin Power saw its target price increased to C$12.50 from C$11.50 at BMO Research, following an investor day it hosted on December 1. The broker reiterated its outperform view. BMO said Algonquin remains one of its best ideas in power and utility. It also noted that Algonquin is now comprehensively viewing its business from a horizontal and vertical lens to broaden and capture additional growth opportunities. Clear is that this strategy has been successful and expanded its secured opportunity set and provide further support to the 10% dividend growth guidance through 2020, the broker added. BMO increased its EPS estimate to C$0.52 for 2016 while reducing its 2017 forecast to C$0.59. The 2015 outlook remains at C$0.43. BMO is not the only broker who likes Algonquin Power. From Dakota Financial News : A number of other brokerages also recently commented on AQN. RBC Capital lifted their price target on shares of Algonquin Power & Utilities Corp from C$11.00 to C$12.00 and gave the company an “outperform” rating in a research report on Thursday. TD Securities lifted their price objective on Algonquin Power & Utilities Corp from C$11.00 to C$11.50 and gave the stock a “buy” rating in a research report on Monday, November 9th. Scotiabank lifted their target price on shares of Algonquin Power & Utilities Corp from C$11.00 to C$12.00 and gave the stock a “sector perform” rating in a research note on Monday, November 9th. CIBC boosted their price objective on shares of Algonquin Power & Utilities Corp from C$6.50 to C$7.00 and gave the company a “sector outperform” rating in a research note on Thursday, November 26th. Finally, Macquarie began coverage on shares of Algonquin Power & Utilities Corp in a report on Thursday, November 26th. They set an “outperform” rating on the stock. As most international investors know, the sharp spike in the value of the US Dollar has hurt the valuation of its holdings when converted back into USD. For example, the 26% decline in the value of the Canadian Dollar has caused a decrease in dividends paid in Canadian dollars by Canadian firms. When both were at parity, a $1 in Canadian dividends was worth $1.00 in USD. However, currently the same Canadian dollar would translate into $0.734 in USD. Algonquin Power’s unique dividend policy is to pay its dividend in USD for US investors as to make the income portion of an investor’s total return unaffected by the trials and tribulations of the international foreign exchange market. Algonquin Power is able to do this because 80% of its EBITDA is generated in the US and is paid to the company in US Dollars. This attribute should be both a comfort and an advantage to income investors. On the share price side of total return lies an interesting opportunity. If you believe the USD is overvalued compared to the Canadian Dollar, investing in Canadian-listed stocks could provide an interesting boost in potential capital gains. Below is a chart of the US-listed AQUNF (black line) and the Toronto-listed AQN.TO (gold line): The major difference is the slide in the exchange rate starting in Nov. 2013. Over time, if the current exchange rate moves back to parity, share prices should respond positively. However, in the short term, as the US Fed begins to raise rates while the Canadian Central Bank either loosens or maintains its low rates to combat its current commodity-generated economic weakness, the move towards higher exchange rates will favor the US rather than Canada. Insider ownership is substantially larger than most utilities. From Algonquin Power’s tear sheet pdf, insiders own 19.6% of the outstanding stock. Regardless of industrial sector, this level of insider ownership usually connects the retail investor and management at the hip, and should be viewed as a positive attribute. Over the medium term, Algonquin Power should continue to increase its US assets through expansion of alternative power generation and acquisition of smaller US utilities, almost in a roll-up type process. Management’s growing customer base covers the major types of utilities in electric, natural gas, and water services. This allows the company to review opportunities over multiple sub-sectors of the utility sector. Although a cursory review of its dividend history could prove unsettling, I would consider the current dividend supported by management’s growth plan as being a reliable source of income. Investors looking for comfortable utility dividend income and a play on both above-average industry growth and a rebound of the Canadian Dollar over time should review AQUNF. Previous articles on Algonquin Power can be found from Oct. 2014 and March 2015 . I have been long AQUNF since Sept. 2010. Author’s Note: Please review disclosure in Author’s profile. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

VTI: A Good Low Cost U.S. Market ETF For Your Portfolio

Summary Investing can be as simple or as complex as you want to make it. Many investors should start with one well diversified global ETF with a low expense ratio. This article reviews VTI, an ETF that can be added to the core portion of most investors’ portfolios to increase exposure to U.S. market equities. With the strong recent performance of the U.S. market, investors should consider using dollar cost averaging if adding large new investments in U.S. equities to a portfolio. Simply Investing – Philosophy Keep investing simple, consistent, diversified and low cost and you will significantly increase your chance of success. One well diversified global ETF with a low expense ratio is all that is required for many people starting to invest in equities, and an ETF that meets these criteria is the Vanguard Total World Stock ETF (NYSEARCA: VT ). As an investor’s experience, time dedicated to investing activities and desired risk, increases, many investors add ETFs to the core of their portfolio to gain exposure to new areas or increase exposure to areas that the investor believes will outperform. The next step for many investors is to allocate a percentage of their portfolio to “edge” positions, which offer additional risk and opportunity. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) This article reviews VTI, an ETF that can be added effectively to the core portion of most investors’ portfolios to increase exposure to U.S. market equities. VTI – Investment Synopsis VTI’s objective is to track the performance of the CRSP U.S. Total Market Index. VTI invests in large-cap, mid-cap and small-cap equity diversified across growth and value styles. VTI employs a passively managed, index-sampling strategy. VTI five year performance compared to the S&P 500 (click to enlarge) Source: Yahoo Finance (12/14/2015) As the chart above shows, VTI and the S&P 500 have tracked each other very closely over the last five years and both are up approximately 60% over that period. VTI -Equity Characteristics Source: Vanguard (as of 10/31/2015) As the table above indicates, VTI is very diversified, holding 3,797 stocks. The median market cap is very large at $52.1 billion. VTI’s current price/earnings ratio at 21.9 is high compared to historical levels and compared to foreign equities. VTI – Top 10 Holdings Source: Vanguard (as of 10/31/2015) VTI’s top ten holdings are very large, well known, companies and at 15.2% of total net assets, make up a fairly large proportion of the total holdings. VTI – Equity Sector Diversification Source: Vanguard (as of 10/31/2015) VTI’s largest stock holdings are in the financial sector, followed by technology, consumer services and health care. Expenses and dividend yield VTI’s expense ratio is 0.05%, this is well below the average expense ratio of similar funds. Given the relatively high price of the U.S. markets, it is likely that future returns, may be lower than those recently experienced. In this environment, it is important that the core of your portfolio is allocated to funds with low expense ratios like VTI. VTI’s forward looking dividend yield is 1.98% based on the last four quarters distributions. Other U.S. Market ETFs Source: Seeking Alpha (12/14/2015) Above is a list of the top 10 U.S. market ETFs, listed by assets under management (AUM). As indicated, VTI is the third largest U.S. equity fund as measured by assets under management. For those that want to do further research, additional detail on these ETFs is available on Seeking Alpha’s ETF Hub. Conclusion Your chance of long term investment success increases significantly by keeping your investing simple, consistent and well diversified. Most investors would benefit by building a core position in a well diversified global ETF with a low expense ratio like the Vanguard Total World Stock ETF. After establishing this core position, well diversified, low cost, U.S. market ETFs like VTI can increase your exposure to U.S. markets for those investors looking to do so. With the strong recent performance of the U.S. market, investors should consider using dollar cost averaging if adding large new investments to a portfolio.