CET: Very Attractive 18% Discount, Variable Income, And Excellent Past Performance

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Khanchit Khirisutchalual Introduction: In the past few weeks, we have written articles on two other equity funds that have a very long history going back to 1929. They were Adams Diversified Equity ...

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They were Adams Diversified Equity ...</p>\n\n<a href=\"https://seekingalpha.com/article/4697826-cet-very-attractive-18-percent-discount-variable-income-and-excellent-past-performance\">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":"BK4559","symbol_name":"巴菲特持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4697826-cet-very-attractive-18-percent-discount-variable-income-and-excellent-past-performance","article_id":"2442685440","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1469387313/image_1469387313.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2442685440","pubTimestamp":1717938000,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Khanchit Khirisutchalual Introduction: In the past few weeks, we have written articles on two other equity funds that have a very long history going back to 1929. 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They were Adams Diversified Equity Fund (ADX) and General American Investors (GAM), and you can read our articles here and here. This discussion of some of the nation’s oldest closed-end funds, or CEFs, would not be complete without covering the Central Securities Corporation (NYSE:CET). We will refer to the company as \"Central\" or \"CET\" in the rest of the article. CET was incepted on Oct. 1, 1929, and since its incorporation, it has operated as a closed-end management investment company. For over 95 years, the fund has managed a mostly domestic portfolio of investments, consisting principally of common stocks of U. S. companies, but also includes a large exposure to at least one privately held company. Even though the fund invested a small amount several decades earlier in this company, it has grown into its largest single holding and accounts for over 22% of the company’s assets. The fund is internally managed, and the management focuses on the long-term appreciation of the fund’s NAV (net asset value). Income is only a second consideration. In that sense, income from this fund is not very consistent. It can vary from year to year, and 90% of the income is distributed at the end of the year. Even then, if you look at the past several years, income from the fund has been significant, even if it was uneven. The average yield over the last 10 years has been in the range of 6%. The long-term performance of CET has been simply excellent and outperformed the S&P500 over the last 10, 20, 30, and 50-year periods. For instance, over the last 50 years that ended Dec. 31, 2023, the fund has returned 13.7% per year (annualized) on the NAV basis (assuming reinvestment of all dividends and distributions). During the same period, the S&P500 has returned 11.2% (annualized, including reinvested dividends). The fund is internally managed and uses zero leverage. As per the fund's literature,  \"The Corporation’s investment objective is long-term growth of capital. Income received from investments is a secondary consideration. In pursuing Central’s investment objective, we invest primarily in equity securities that we believe are undervalued at the time of purchase and have the potential for growth. It is our goal to own companies that we believe will generate superior returns when compared with the broad market and preserve the Corporation’s capital in an inflationary environment. A guiding principle is the consideration of equity securities as units of ownership of a business and the purchase of them when the price appears to be low in relation to the value of the total enterprise. Central owns a limited number of companies, and it invests for the long-term. Honest management working in the interests of all shareholders is of the utmost importance in the appraisal of investments. We may sell securities for a variety of reasons, including excessive valuation, deteriorating results or to redeploy assets into more promising opportunities. Central is not restricted as to the types of securities (e.g., equity, fixed income) in which it invests. We may invest in securities of issuers with any market capitalization. Central is not required to be fully invested in securities and generally maintains a portion of its total assets in cash and securities considered to be cash equivalents.\"  Other salient features of this fund are as follows:  Central Securities Corporation, Inc. is an independent, internally managed, closed-end investment company. Its common shares are listed on the New York Stock Exchange. The fund CET uses no leverage or may have a very insignificant amount of leverage. The fund is invested nearly 92% in the U.S. equity market. Another 5% is in cash. The rest is invested in countries like the UK, Switzerland, and Brazil. As of May 31, 2024, the fund under its management had roughly $1.484 billion in net or total assets. The fund is an actively managed fund, and during the year 2023, it had an expense ratio of 0.55%, including the management fee and the operating expenses. However, this is per the author’s calculation, as we could not find any official figure in the annual report or on the fund’s website. Distribution yield: It is difficult to state the distribution yield of this fund accurately on any specific date. It pays twice a year, once a small token amount in the month of June, and then the majority of the distribution in the month of December. We will be providing some rough calculations for the yield in a later section (Table-2). There is no minimum distribution guarantee that the fund is committed to. However, its stated policy is to distribute nearly all the net investment income and any of the realized capital gains during the year. In the last ten years, the yield (as per our rough calculations) has varied from 3.7% to 10% plus. So, when the market is doing well, the fund is likely to provide a higher yield, and if the market is doing poorly, the distributions will be low as well. As of May 31, 2024, CET's market price offered a discount of -17.86% to its NAV. The 3-year average discount is -16.2%, while the 12-month average is -18.36%. Please note that the fund updates its NAV only once a week, as of every Friday (but posted on the following Monday). The fund's NAV, as of May 31, 2024, stood at $52.29, which is an improvement of 11.6% from its NAV (of $46.49) as of the last annual report (Dec. 31, 2023).  Financial Outlook: Let's look at the fund's financial health to see if the fund is earning enough to pay for the distributions. The most recent detailed report that is available to investors is the annual report for the period of Jan. 2023 – Dec. 31, 2023. However, we also have a brief quarterly report (first quarter 2024) to look at. Here is what it looks like in terms of NII, Distributions, and Net Assets at the beginning and end of the statement period. (all amounts are in US $ (except Shares Outstanding)); negative amounts are shown inside parentheses, per the Annual report, 12 months ending Dec.31, 2023. Also, we will provide the per-share data and comparison with the year 2022. Table-1: Author (Data source: CETs 2023 Annual report, 12 months ending Dec. 31, 2023.) Table-1B: Author (Data source: CETs 2023 Annual report, 12 months ending Dec. 31, 2023.) Net Investment Income: First, some terminology and definitions. The net investment income (or NII in short) is the net income that a fund earns from its investment in the form of dividends, distributions, and interests or derivatives like options, minus all the fund's expenses, including management fees, operating expenses, commissions, and interest on leverage (if used), etc. For equity-based funds, especially in high-growth sectors like Technology, the NII is \"not\" very relevant. However, for fixed-income or bond funds, it is relevant. For some other hybrid or sector funds, the importance of NII lies somewhere in the middle, as the distributions are met by a combination of NII and capital gains. CET primarily invests in equities of common stocks, many of which do not even pay any dividends, though many do. As we can see in the above table, in 2023, it generated $21 million of investment income, but after accounting for expenses, it was reduced to just $14 million or $0.51 per common share. The fund paid a total of $1.85 in distributions in 2023. So, the NII made about 27% of the distributions. So, the rest of the distribution came from the realized capital gains. We see a similar picture in the year 2022. The good thing is that the fund does not have to pay any minimum distribution amount as most other funds do. Therefore, it is not obligated to generate a certain amount of capital gains by force-selling of underlying holdings. The downside is that the distribution is uneven, sometimes as low as 3%, while in other years, it is much higher. This works well for the fund manager to focus on long-term appreciation of the fund, and that shows in its performance. However, for anyone who depends on a fixed income, it may not be a good thing. But even then, if we go by averages, we will see in the later section that the fund has paid an average of 6% distributions over the last 10 years. Distributions: The fund states its dividend policy as follows:  “Our dividend and distribution policy is to pay out substantially all net investment income and realized capital gains. The amount of net investment income and capital gains may vary significantly from year to year. It has been our policy to make two payments to holders of Common Stock each year. A cash payment is generally made at mid-year, and a distribution consisting primarily of realized capital gains is generally paid at year-end. Stockholders are generally given the option of receiving the year-end distribution, either in additional shares of stock or in cash, at their election. We have paid dividends every year since 1955.”  The table below shows the 10-year history of the distributions. Also, none of the distributions were ROC (return of capital). According to our calculations, the average distribution yield during the last ten years has been roughly 6.27%, though it has varied quite a bit from year to year. Table-2: Data source: CET’s website, some calculations by Author. So, Is The Distribution Covered? For this, fund and for the types of underlying investments it makes, the coverage of distribution by NII is not relevant at all. What we can say is that the fund is NOT overpaying the distributions, as the management is focused on growing the NAV. We can see the NAV has steadily grown during the last decade. Also, based on its history, we can make a reasonable assumption that going forward, investors should get an average of 6% income, though it may vary from year to year. Discount/Premium: The fund is currently trading discounted of -17.86% (to its NAV, as of May 31, 2024), which is slightly better than its 3-year and 5-year averages. However, it is slightly worse than the more recent history. This is also reflected in the Z-scores for various time periods, as they are all positive numbers. Below is the five-year history of premium/discount. However, in addition to the discount, one has to keep in mind the overall market valuation. Even though the fund's NAV has been appreciating in 2023 and 2024, along with the broader market, we still get to buy the shares at a nearly 18% discount. This discount has been present for most of the last decade. This discount exists mostly for two reasons: first, because of its large stake in a privately held company, and second, because of a very uneven distribution policy. That said, the discount adds to the margin of safety. Sure, the best time to buy was in 2022, as it was true with the rest of the market. However, we can rarely catch the bottom or the top, and investing is about the future and not the past. Chart-1: CET – Premium/Discount Chart (over five years) Courtesy: CEFConnect.com Fund's Holdings: The fund is mostly invested in the equities of U.S. stocks, with a nearly 23% exposure to a privately held company. The fund had only 33 positions as of Dec. 31, 2023, so in that sense, it is a fairly concentrated fund. Financial services and Technology are the two sectors with the largest exposure. In addition, CET has continued to maintain its significantly large investment in \"The Plymouth Rock Company,\" a privately held company. It is important to note that this investment is in a privately issued and illiquid security. Plymouth Rock operates in the insurance business and underwrites and manages more than $1.9 billion in personal and commercial auto, homeowners, and umbrella insurance in Massachusetts, New Hampshire, Connecticut, New York, New Jersey, and Pennsylvania. Plymouth was founded in 1982, and it has grown both organically and by acquisitions. Also, it was the biggest positive contributor to CET’s absolute performance in 2023, although its return lagged the S&P 500 Index. Some of the top holdings (besides Plymouth Rock) are Progressive Corp. (PGR), Analog Devices (ADI), Alphabet (GOOGL), Motorola Solutions, Inc. (MSI), Charles Schwab Corp. (SCHW), and Meta Platforms (META). Table-3: (Data as of 03/31/2024) Source: CET's Annual report Table-3B:   Author (Data-source: CET's Annual report) Performance and Valuation: Below is the performance comparison as presented by the fund in its fact sheet as of 03/31/2024. Table-4A: CET’s long-term performance as of Dec. 31, 2023   Source: CET’s Annual report Table-4B: CET’s 25-Year Inv Returns as of Dec. 31, 2023 Source: CET’s Annual report In the table below, we will compare performance-related metrics with several other similar funds, though each fund has its own unique attributes. We will also include the S&P500 for the sake of comparison. The following funds are included:  (CET) Central Securities Corporation (GAM) General American Investors (ADX) Adams Diversified Equity Fund (USA) Liberty All-Star Equity (SPY) S&P-500 Trust.  Table 5: (Data - period as specified, otherwise as of Mar. 31, 2024)   Item Desc. CET  GAM ADX USA S&P 500   Fund Style Equity Fund  Large-cap Blend Large-cap Blend Large-Cap Core (growth and value) Largest 500 companies   Dividend Yield% (as of 05/31/2024)  5.05% (Annual) (Based on 2023 payout and avg. prc)   5.52% (Annual) (Based on 2023 payout and avg. prc)  1% regular, year-end special (~6%). Last year 8.1% 10.68% 1.30%   Dividend Policy Variable, no minimum. Variable, no minimum  Min. 6% of NAV, 90% at year-end ***New Policy 8% Announced  10% of NAV N/A   Discount/Premium (as of 05/31/2024) -17.86% -18.18% -10.70% -2.33% n/a   Annualized Return [CAGR] From 2008-2023 (mkt-prc) 9.43% 7.48% 9.78% 7.38% 9.69%   Max. Drawdown (2008-2023) -47.6% -59.1% -48.4% -52.2% -48.5%   Std. Deviation (2008-2023) 16.7% 20.12% 17.1% 18.4% 16.2%   10-Year CAGR (NAV, 2014-2023) 12.02% 8.77% 11.50% 9.49% 11.88%   5-Year CAGR (NAV, 2019-2023) 15.58%** 14.28% 15.16% 13.56% 15.53%   3-Year CAGR (NAV, 2021-2023) 12.4%** 11.00% 9.57% 7.36% 9.85%   1-Year CAGR (NAV, 2023-2023) 20.54%** 25.94% 26.30% 26.13% 26.11%   Fees (excluding interest) 0.55% 1.35% 0.66% 0.93% 0.09%   Leverage 0% 12% (in the form of Pref. shares) 0% 0% 0%   No. of holdings 33 66 91 146 504                 Assets (total) $1.484 Billion $1.58 Billion $2.8 Billion $1.92 Billion $508 Billion   Allocation Equity Fund, private co equity, only 33 holdings, 97% domestic. Large-cap blend common stocks, 83% domestic. Large-cap common stocks (median mkt-cap of 290 Billion), 96% domestic Large-Cap Core, 60% Growth, 40% Value, 87% Domestic Largest 500 US companies   Click to enlarge **For CET, for 1, 3, and 5-yr CAGR, market price was used instead of NAV.  Note: Some of the data (e.g., number of holdings and leverage) may not be current. We can see that the CET has literally outshone all other investments in almost all time periods, including the S&P500. Also, the fees are the lowest of all funds, except the S&P500, for obvious reasons. Table 4A provides the performance that goes as many five decades. It is wonderful to see that this fund beat the S&P500 for all time-frames. It shows the management’s commitment and competence in managing and steering the fund successfully during the good times and bad. The current CEO, John C. Hill, has been at the helm since 2021 but has been with the company since 2016. The previous CEO, Wilmot Kidd, who served from 1973 until 2021, is still serving as the Chairman of the Board. All that said, it is always good to remember that past performance does not guarantee future returns. Risk Factors: Investors need to be aware of certain risk factors that are associated with this fund and CEFs in general. Risk factors could be summarized as follows:  CET fund carries no leverage. As such, the fund should not have any adverse impact from the current high interest rates environment. That said, many of its underlying holdings are sensitive to the direction of interest rates. But, this is not unique to CET. As of now, the Fed has been indicating higher rates for a longer time. The fund has less than 5% exposure to international equities. This has been a plus in the last decade, but international equities may outperform the US markets in the next decade as they catch up. That said, many of its underlying holdings are multinational companies, and they have substantial exposure to world markets. The general risks due to the worsening geopolitical situation. Market risks: There is still some possibility of a recession in 2024 or 2025, though most market participants expect a soft landing or no landing at all, but the risk cannot be ruled out. If a recession does happen, it will impact the underlying securities of this fund as well.  Concluding Thoughts: As stated earlier, CET's past performance has been par excellence and has outpaced its peers for the most part. Besides, CET also had a strong performance during the last decade of 2000-2009. It outperformed the S&P500 by 5.3% annually for those 10 years, which is remarkable.  The distributions are paid on an annual basis and are uneven from one year to the next, which is a big disadvantage for income investors. If history is any guide, the fund's distributions, on average, exceed 6%, which is not bad. Overall, CET is a great fund for buy-and-hold income investors who do not need very high income and would rather invest for long-term capital appreciation. However, the current valuation is rather high, just like the rest of the market. 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