GDV.PR.K: A Rates Play, Reiterate 'Buy' Rating

seekingalpha04-30

The common shares of the Gabelli Dividend & Income Trust have been downgraded to 'Hold' from 'Buy'.The preferred shares of GDV, specifically Series K, still offer a good buying opportunity due to the ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nGDV.PR.K: A Rates Play, Reiterate 'Buy' Rating\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-30 10:46 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4687357-gdvprk-a-rates-play-reiterate-buy-rating><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The common shares of the Gabelli Dividend & Income Trust have been downgraded to 'Hold' from 'Buy'.The preferred shares of GDV, specifically Series K, still offer a good buying opportunity due to the ...</p>\n\n<a href=\"https://seekingalpha.com/article/4687357-gdvprk-a-rates-play-reiterate-buy-rating\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"GDV","symbol_name":"GDV股息收入基金","start_time":0,"source_url":"https://seekingalpha.com/article/4687357-gdvprk-a-rates-play-reiterate-buy-rating","article_id":"2431813493","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/611086620/image_611086620.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2431813493","pubTimestamp":1714445179,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"The common shares of the Gabelli Dividend & Income Trust have been downgraded to 'Hold' from 'Buy'.The preferred shares of GDV, specifically Series K, still offer a good buying opportunity due to the ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"GDV":"GDV股息收入基金"},"translate_title":"GDV.PR.K：A利率发挥作用，重申“买入”评级","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"GDV":1,"US10Y.BOND":0.9,"US12M.BOND":0.9,"US2Y.BOND":0.9,"US30Y.BOND":0.9,"US3Y.BOND":0.9,"US5Y.BOND":0.9,"US6M.BOND":0.9,"US7Y.BOND":0.9,"US912797HH31.BOND":0.6,"US912797HG57.BOND":0.6,"US912797HE00.BOND":0.6,"US912797GW17.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GB79.BOND":0.6,"US912797FS14.BOND":0.6,"US912797FH58.BOND":0.6},"content_text":"The common shares of the Gabelli Dividend & Income Trust have been downgraded to 'Hold' from 'Buy'.The preferred shares of GDV, specifically Series K, still offer a good buying opportunity due to the recent increase in rates.Series K has the longest duration and has been heavily affected by the increase in rates, but the current bout of higher yields is expected to be over.The Series K benefits from asset coverage requirements as demanded by the 1940 Act, which ensures credit risk is minimal.The shares are trading with a discount to liquidation preference of over -25%, indicating the market is now pricing the Series K as having a very high duration.   BrianAJackson/iStock via Getty Images Thesis We have recently downgraded the common shares of the Gabelli Dividend & Income Trust (GDV) CEF to 'Hold' from 'Buy', after a very compelling total return for the name. In the article, we mentioned the preferred shares for the CEF, which we have not covered in almost two years. The GDV preferred equity has a different risk/reward profile, and while the common shares no longer offer an appealing entry point, the CEF preferred Series K (NYSE:GDV.PR.K) still does. The market has shifted significantly since we first started covering the preferred shares two years ago, original coverage which highlighted the structural features of the shares and their protection via regulatory requirements in a CEF. In today's article, we are going to highlight why the violent move up in rates this year has opened up a good buying opportunity for the preferred equity, especially the duration sensitive GDV.PR.K. Rates have shifted upwards in 2024 We entered the year with five rate cut expectations, as per Goldman, but find ourselves at a juncture where the market is barely pricing in one cut for the rest of the year:   FF rate (The Daily Shot) The above graph, courtesy of 'The Daily Shot' from WSJ, shows the market pricing for the Fed Funds rate change in 2024. As you notice from the above chart, we started the year with 160 bps of cuts priced in, but are now below 40 bps of cuts (we are at -0.34% to be exact). Fed Funds futures are basically indicating barely one Fed cut this year right now. If data continues to come in strong, expect the market to fully price out Fed cuts in 2024. We are of the opinion that raising rates in an election year is virtually impossible from a political standpoint; thus, stronger data just means the Fed will need to wait at the current rates for longer. Series K - the longest duration preferred equity Series K was the last preferred equity issuance from the CEF in 2021, and it has the longest duration:   Capital Structure (Fact Sheet) The preferred shares are cumulative, have a fixed rate of 4.25%, and have a first call date in October 2026 (fixed years after the issuance date). Given the low coupon for the series (the lowest from the debt structure currently), we are thinking about them as a 5-year duration at this stage. A high duration for the Series K means they have been heavily battered by the duration onslaught in 2024:   Series K correlation (Seeking Alpha) While the series is marginally up in 2024, we can notice the close correlation with 10-year treasuries in the above graph (UTEN is a proxy for ten year treasuries, and we have reviewed this ETF here). We think the current bout of higher yields is over, with the market now close to pricing no cuts in 2024. This will translate to no further pressure on pricing from the duration component for the rest of the year. High current yield, a proxy for short rates The best way to think about GDV.PR.K is as a proxy for rates, since the credit risk embedded in the shares is extremely low. We are going to discuss further in this section the coverage requirements for CEFs which ensure credit risk is minimal for preferred equity holders. The current yield for the shares is in excess of 5.7%:   Yield (Preferred Stock Channel) The shares are trading with a discount to liquidation preference of over -25%, indicating the market is now pricing the Series K as having a very high duration. If rates were to collapse, then we would see a pull to par from both the duration component (let us assume a 5-year duration) and the pricing of a potential call. A potential call on the shares would only happen if rates were to move very low again, allowing the CEF to place new preferred equity at a cost of 4.25% or less. While the probability of that happening is low right now, a significant shift lower in rates would start pricing such an occurrence. We did see the positive reaction from the preferred equity after rates peaked in October 2023:   Price Move (Seeking Alpha) From the lows to the highs, we had a move of approximately +10%, all while the market was pricing in excess of 160 bps in cuts, hence our rough duration estimation of 5 years. Credit risk is almost inexistent As opposed to traditional preferred equity where an investor needs to carefully analyze the underlying company, CEF preferred equity holders benefit from regulatory protection: To the extent that the Fund’s obligations under such transactions are not so earmarked, segregated or covered, such obligations may be considered “senior securities representing indebtedness” under the 1940 Act and therefore subject to the 300% asset coverage requirement. The 1940 Act stipulates minimum coverage requirements for the preferred shares, coverage which ensures the subordination of the common shares and the forced deleveraging when the underlying assets underperform:   Asset Coverage (Annual Report) When the underlying assets in a CEF lose value, the first impact is felt by common shareholders. The very leveraged CEFs are forced to de-leverage if the underlying assets fall enough in value. We have seen this with MLP CEFs during the Covid crisis, where true long-term impairment to NAV was realized. The coverage regulatory requirement ensures the preferred equity will always recovery 100%, unless the underlying holdings go to zero overnight. For GDV, that is quasi-impossible; therefore, credit risk is very small here. What does Series K do then? Given the current rates environment, we have established it is unlikely for Series K to be called in the next 5 years, despite its 2026 first call date. This will translate into the preferred shares being a proxy for rates and being a medium to capture the higher current rates environment. We like true proxies for rates like Series K, which yield a bit more than treasuries given their liquidity profile. Unlike short-term bond funds, which will re-set lower as the Fed cuts, Series K will not re-set lower. In fact, the preferred shares will benefit from duration via a higher price. The best way to think about GDV.PR.K is as locking-in high rates for longer and getting the benefit of duration via a higher price down the road. Pencil in a +10% gain if the market were to price 5 to 6 rate cuts again. Conclusion  GDV.PR.K represents the Series K preferred equity from GDV. The shares are cumulative and have a high duration (which we estimate at 5 years roughly) and are set to be the last to be refinanced from the capital structure, despite their October 2026 call date. With regulatory requirements in place for asset coverage, GDV.PR.K represents a rates play at this stage, and a smart way to capture the current high-yield environment. With a current yield in excess of 5.7%, and the potential for a 10% capital gain if the market were to price back in 5 to 6 Fed cuts, GDV.PR.K is appealing. We own the shares and reiterate the 'Buy' rating after the violent move up in rates this year.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2431813493"}