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Eaton Vance Tax-Managed Diversi Message Board

  • mike57dk mike57dk Nov 9, 2012 2:52 PM Flag

    Second Share Repurchase update - Interesting developments

    Last month, Eaton Vance fund management reported that they had purchased 936,100 shares of ETY in the fund portfolio ...under a stated authority to repurchase, at management discretion up to 10% of the outstanding shares in the fund.
    That 936,100 share purchase constituted about 0.61% of the total outstanding shares in ETY and we guesstimated that management was committing to spend around $8,700,000 per month to buy-back shares in the open market ....
    Yesterday...ETY released their second monthly report showing the purchase of an additional 587,200 shares over the previous four weeks ...bringing the total owned to 1,523,300 shares or approximately $14,334,253 in current market value. ( they spent about $5.6 million more in October to buy the shares )
    This aggressive share re-purchase has served to REDUCE the discount to NAV by 1.66% over just the last 60 days ...which is a nice improvement ....and illustrates managements firm intention to get the approximate -14% discount to NAV reduced over the next few months to a more reasonable -10% or even less ...In summary - Its a GOOD START.

    More OPINION - November is ex-dividend month for the $0.253 per share distribution so perhaps that influenced management thinking to buy 587,000 shares in Oct as compared to 936,000 shares in September the Presidential election and the probability of market turmoil and lower prices ( which we are seeing ) might have affected their decision to reduce the velocity of purchases ....figuring they could BUY cheaper after the election and the dividend ex-date in late November. ( makes sense to me anyway )

    So ...they are holding approximately 1% of the funds outstanding shares ...with a mandate to buy-back another 9% over the next six months or so ....

    Investment Thesis ( revisited ) :

    * - Fund is buying $6 - $10 million dollars of its own shares each month ....This aggressive buying will shore up the market price and help reduce the discount to NAV

    * - ETY produces a current yield of 10.75% ...paid out quarterly could actually capture FIVE quarterly dividends over the next 12 months and two weeks by BUYING before the Nov ex-dividend date ...( making your 12 1/2 month yield approximately + 13.4% )

    * - ETY , like many equity funds, has about $500,000,000 of Capital Loss Carry-forwards thru 2017 to " wash" against ANY Capital Gains it might earn in that time frame ....the net result will be TRUE ZERO in capital gains taxation thru 2017 ....( a hell of a good deal considering the tax talk in DC these days )

    * - Assume you earn $1.00 per share in distributions in 2013 ....approximately $0.10 of that amount is taxable ....probably at 35% on average with the 2013 tax code would owe the IRS $0.035 in taxes for every DOLLAR you earned in 2013 ....3.5% Versus 35% on CD Interest / stock dividends / rental income ...#$%$ ?

    * - taxation rules on Option Income funds was settled in the early 1990's by the US Supreme Court Congress would have a hell of a hard time moving the 2013 tax tables and accounting rules to funds like ETY ...and it would take another Supreme Court ruling to amend it ....frankly ...I seriously doubt that Barney Frank / Nancy Pelosi / Chris Dodd / or Austin Goolsbee ( Obama's economic / taxation guru ) even understand the aforementioned ...or are thinking of trying to change the tax structure of these " tax advantaged funds " ....My contention is that faced with a choice of paying 35% tax on equity income from ETFs / stocks / bonds / CD investments and rental income .....OR ...paying 3-4% for an equity investment that is very similar ...Investors will flock towards Option Income mutual funds ....starting in SEVEN WEEKS .....and more BUYERS of the fund ....VERSUS more SELLERS will drive up the market price ....perhaps substantially.

    In the meantime ...we continue to collect our 10% + quarterly income stream ....i.e. - We get paid ...and paid well wait for the long anticipated economic recovery ....

    Hope this proves useful ....Comments appreciated - thx

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    • Why SEVEN weeks, why not eight, or nine, or ten? The only interesting development from here on will be north of $12.00 a share!

      • 1 Reply to A Yahoo! User
      • Am not really sure about your reference to " SEVEN weeks, why not eight, or nine, or ten ? " but lets project that you may have been asking about the share re-purchase and the two monthly reports provided by fund management thus far ....
        We should get the third report on share buy-backs sometime after the first week in December, and while the overall market has, and continues to be " shaky " ...I am GUESSING that Eaton Vance management will continue to aggressively purchase shares in the open market ...especially after ex-dividend ( today ) when the market price will have declined substantially...The stock is trading around $9.15 per share at this writing...and that would give fund management an opportunity to BUY shares at a low price ...and book a nice unrealized capital gain as the share price rebounds from paying the $0.253 per share dividend distribution.

        The interesting development to watch for will be how the overall discount to NAV is impacted by the share buy-back - I note that its about -15.6 % this am ...but that may be reflective of the stock going ex-dividend today as well ....The NAV itself is quoted at $10.85.

        Quick box-score check on YTD performance of ETY :

        1. Starts 2012 at $9.00 per share market price quoted at $9.15 or 1.6%

        2. Has paid out a $1.049 per share distribution YTD ...or 11.6%

        3. Total return is approximately PLUS 13.2% ytd ....with about 40 days left in the year ....and the fair chance to see the market price recover from the $0.253 dividend payment during the next few weeks / month ....guestimate another $0.25 per share market price increase ?? or a plus 2.7%

        4. Share Buy-Back in November & December helps reduce the 15.6% Discount to NAV another $0.25-$0.35 per share it another + 3% market upside ....and while wistful / hopeful ...we have a decent forecast to get a Total Return from ETY in calendar year 2012 of between + 18% to + 21% ....( with 13.2% already achieved with a $9.15 market price )

        Not rocket science ....but a plus 20% return from an equity based mutual fund with favorable tax aspects enough to keep this fund out of the dog house ....

        Hope this helps address your concern ....

        Sentiment: Hold

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