I am moving my dividend projection for AOD up a bit. There are several reasons. The market has improved slightly providing a higher NAV base. I know NAV and dividend yield aren't perfectly connected but NAV does offer a comparison as to what can be earned in the universe if a percentage is employed. Since AOD started out at a 2.16 div rate with a 19.05 NAV this was an 11.33% div.
Aod also does not employ leverage which they could and maybe will (5% to 10%) with so many bargains around.
AOD does not sell call options which the could with say 10% of the portfolio.
AOD does not own preferreds which are paying 12% to 20% and they could. This would enhance per share earnings. These preferreds are also selling in the 10.00 range and offer excellent capital appreciation potential.
AOD uses only 35% of the portfolio for div capture and could increase this amount.
AOD can use a more agressive market appreciation assumption. The market is down so far that I believe from these levels a 10 to 15 % capital appreciation assumption for solid div paying companies would not be out of line for the next 3 years. Please recall we have gone up 13% in the past 4 days.
Taking all of these assumptions and observations I assume AOD will pay a 12% div on NAV. This is unchanged from the public offering and is $1.03.
AOD will assume a 12.5% appreciation and use a 10% factor against NAV to generate $.86. If AOD stops here you get a 1.89 annual div(1.03 plus .86) A 1.89 div represents 87.5% of the initial dividend. Remember while AOD NAV has gone down so has the market but AOD has gone down about 15% more so my new guess is a 12.5% reduction to 1.89 to .1575 per month is well within the realm of possibility.
Of course if they don't want to cut it they have several other strategies to pursue(leverage,options,preferreds, increased capture percentage, more agressive market appreciation assumptions).
maybe i'm messed up in the head but i'd like to see them cut the dividend. maybe 30%. i think they can still generate enough income and not cut but why not cut the payout and invest some dividend income to rebuild NAV. stocks are way down and it seems like a good time to use income to buy more assets at depressed prices (with yields btwn 6% and 8%, or more). by averaging in $$ to the buy/hold portfolio all year, they have a good chance for some serious capital appreciation in 2010. then they announce an increase in the div and we fire on all cylinders.
does that sound totally ridiculous ?
Also bookmark, AOD is a fund not a stock and while it's market price has to do with supply and de,mand it's underlying NAV is determined by the price of the holdings. While they may also be a function of supply and demand please look at the underling divs of the individual stocks. They in no way approach 30% so AOD will have to employ some of the variables I outline in my initial post to keep the div up here. Not trying to be a smart *** but there are many mving pieces to this fund and it's ability to pay. Again, reread initial post.
Good analysis. But the one unknown that can make a big difference is the amount of special dividends that they have and will be generating, such as the $8 upcoming TWC special dividend. By adjusting the number of these and the number of shares held, I have no doubt that AOD can keep paying the full 2.16. The downside is that the nav gets hit when these special divs go ex-div.
Yes you are correct AOD can always cover the div with specials but then the NAV goes to hell. I am stating what I believe AOD can pay as a dividend and still project a slightly increasing NAV. I believe best case is 1.89 and would not be surprised if it were .24 lower. I am very long and hoping for no cut at all but have to plan my beer budget for 2009. Just kidding it's much more serious than that.
The amount AOD pays out is dependent upon their holdings paying the dividends to AOD as they did before the crises. AOD cannot, unless they desire to pay ROC, payout more than they receive. If 60% of the securities held by AOD keep paying their divvys and the recapture program "works" as before, then divvys remain the same. It isn't AOD who cuts us out of divvys. It is the securities held by AOD. I would speculate that maybe 10 to 20% of the securities held by AOD cut their divvys and 80% did not. If the 20% cut is 50% of prior divvys then expect a modest dividend decrease of 10%.
The below link t a Business Week article shows that more companies in the S&P 500 index increased their dividends from 2007. Most other companies held the same. A handfull of companies decreased dividends which was more than last year, but still only a handfull.
AOD could replace the issues in their portfolio which will cut dividends and easily find replacements which have or will increase their divvies.
If so, there would be no dividend reduction in 2009.
Your amount is pretty close to correct but you have to take the fact that AOD has fallen more than the market. They have huge portfolio turnover so their reinvestment opportunities will be more expensive for them than before resulting in less income. Now as I posted they have many options and strategies they can pursue to help out the dividend. we will just have to wait until dec 15 but I will jump for joy if it is 1.89 rather than 1.08. I think it will be. AWP is another question. I am scared of that one.