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Eaton Vance Tax-Managed Diversi Message Board

  • mike57dk mike57dk Jan 25, 2011 8:11 PM Flag

    8.16% Discount to NAV ? - less than 30 days to x-div date ...

    Many of the previous posters have warned AGAINST buying closed end funds and paying a premium to NAV ....and I fully agree with that approach .... why pay MORE than what something is readily worth in the market ....

    In a similiar vein .... most of us are looking for a "good-value"... something on sale ....BELOW its inherent market value.

    ETY's Net Asset Value is being quoted about 8.16% ABOVE the current market price ....That represents almost a compelling value especially in consideration of the fact that the next dividend X date is less than 30 days away ....allowing a BUYER at todays price to get the next dividend and the following FOUR dividends scheduled to be paid in approximately a 13 month holding period .....effectively a FIVE DIVIDEND STRATEGY in a little more than a year.

    Using the metaphor of a bath tub full of water .... the water ( stock market ) will seek equilibrium or fair value .... the large discount to NAV will cause a wave of buying as investors seek to take advantage of this temporary abnomaly .... pushing the price closer to the $12.38 NAV ....

    We collect the $0.2895 per share dividend in Feb ....plus four more dividends of $0.2895 over the next 13 months or about $1.45 per share in income ...plus the price appreciation of $1.01 per share ...( to the current NAV price ) so call it a $2.45 per share gain over the next 13 months ....That works out to a +21.61% gain ....not too shabby ....

    If the fund continues to appreciate along with the market ....AAPL / Google / IBM / Nestle / JP Morgan / Chevron are all principal holdings ....and should cause the NAV to continue to rise ....lets speculate to $14 per share ....Our investment return at $14 would be $2.63 in market appreciation and $1.45 in tax advantaged income or $4.08 per share....that's a 35.9% total return ....

    One can only hope .... but an investment return between 21-36% in a big cap mutual fund ....with almost no tax implications would make this fund a solid "performer" in almost any portfolio.

    Summary - well worth holding and even adding to positions ....especially when you can buy it with an 8% discount ....

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    • All well and good but I think I'll wait until they cut the dividend again then buy in.

      • 1 Reply to oilcapt
      • The market price discount to NAV has improved to about 8.4%...as the recent market upswing has boosted the value of the underlying stocks in the fund ....thats a compelling discount when you look at the holdings ...AAPL IBM / NESTLE etc etc ....

        ETY recently reduced their dividend to a more manageable level and is scheduled to go x-dividend in 10-12 more days ....and while dividends are NEVER guaranteed and can change quickly ...we should expect the fund to be able to sustain the new dividend distribution at least 2-3 more quarterly payments ....and we have the opportunity to collect FIVE dividends over the next 12 1/2 months of investment duration ...

        Summary - Top quality holdings, 8.4% discount to NAV, five dividends in less than 13 months ....90%+ of which will be TAX FREE ...it does not get too much better than this ...

        regards ....

    • I hold some shares, but I think you overstate the NAV case. It is at a discount to the current NAV, but there is no predicting that the NAV will remain the same in 13 months.

      Devil's advocate, they earn 15-cents per share, and pay that $1.41 you aim for, then the NAV has to drop by $1.26, from $12.38 to $11.12. And as you said, why pay a premium? So the share price should be $11. But then the net gain is 90-cents.

      The net is still quite good, and there is the upside possibility of a strong market in 2011, and consequent higher earnings.

      But you are assuming they nail the market this year, earning $1.41, and paying $1.41 dividends, based on a $12.38 investment basis. They have not done that in the past. I have a high regard for their talents, but I would set the bar lower than you do. It would be nice to see the NAV gains you want to see, but it is also possible to value this about where it is.

      • 1 Reply to votingmachine
      • Thanks for your comments ...and I fully sgree that there are NO GUARANTEES with the dividend stream ...but... the fund did just reduce the dividend payout to a much more reasonable level and we should expect that can and should be able to sustain that level of payout at least for a few more quarters ....and any further reductions would be minimal ...my point being that investors should at least expect the $0.2895 per quarter / per share announced in mid December. So lets call that $1.44 for five dividends over the next 13 months... if its $0.20-$0.30 per share less ...ok ...but our reasonable expectation should be between $1.20 -$1.40 in earnings ...

        The NAV just represents "fair market value" of the portfolio ...and ETY is trading about 8% below fair value ...paying a high dividend ..most of which is non-taxable .... the fund had an NAV of $13.64 in Nov of 2009 ...with essentially the same portfolio ( turnover is less then 25% in this fund ) so its not unreasonable to hope / expect that the NAV could appreciate to that level once again ...and the market price of the fund was in the mid-high $13 per share range then as well.

        Their option write strategy allows them to earn most of the dividend without diluting the NAV ....They SELL S&P 500 index options and take in the premiums ...closing out the majority before expiration ....and because the underlying portfolio has appreciated ...are able to pay out thru a managed distribution some of the unrealized gains as a "return-of-capital" or "other capital" ...In a down market .. they just keep the option premiums taken in from the index options ....

        Summary - You are very RIGHT ...there are a number of "bad" things that would imapct the investment thesis ...but the tactical plan is best summarized by " Get paid ...well ...while waiting for a market upswing " and ETY does exactly that.

        Regards and thx for commentary...

 
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