Opinions
Larry Berman CFA, CMT, CTA
Financial 15 Split Corp
FTN-T
DON'T BUY
Nov 23, 2015
Stock price when the opinion was issued
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It is a company invented by bankers. They take a collection of companies and package up the stocks and sell out preferred shares and capital shares. They sell call options to enhance the yield. They have to maintain a certain net asset value. The preferred shareholders are protected. You may suddenly get no yield some quarters. The fees and the risk are also high, as well as the yield.
As he understands how these split corps work, one gets the dividend and one gets the growth. It depends on what you want out of life. If you want street yield, these manufactured products might be right for you. He doesn’t buy them because he doesn’t like his clients to be paying 2 layers of fees. He isn’t against the product. Dividend yield of 14%.
Is the high-yield sustainable?As he understands it, this is a corporate finance, where they will take the common and preferred shares, and lever up the common 2 for 1 in terms of growth, and the preferred shares just get the yield. A very concentrated play on the direction of the underlying basket of common. If you believe those 15 stocks are something to be owning right now, you are going to get some good capital appreciation and the yield is safe. If you go into a bear market with the 15 stocks, your yield is not at all safe. This is not without risk.
He is not an expert on this holding. It has a strong yield (around 10%) that attracts many investors. During the 2016 market meltdown, it fell by about 50%. So he feels there must be leverage in this product. He suggests looking into the prospectus to better understand the leverage.
Leverage allows them to provide such a large dividend. Typically 2:1 leverage, so you get double the bang for the buck. Lots of volatility, big ups and big downs. When markets are working, work great. Up to the board of the fund as to what distribution they pay out.
Over 20 years, you'd have done better just holding a basket of US or Canadian banks, such as XLF or ZEB.
14.5% yield. Look back further than a couple of years. The averaged yield has been 3%. In the ’08 crisis they went from about $18 to about $2. He believes they are paying out capital gains in their underlying companies. In the last few years there was no crisis so there was little risk.