Thursday, June 7, 2012

UMPQ/Added 50 ERC at $14.75-ROTH IRA/Bought 1 J.C. Penny 5.65% Senior Bond Maturing 6/1/2020 at 87.898

Umpqua Holdings (UMPQ) announced a 29% increase in its quarterly dividend to 9 cents per share. The common shares are owned as a LT selection. Bought 30 UMPQ as LT at $11.53. Prior to 2008 and the onset of the Near Depression, the annual dividend rate was 74 cents per share. So, like a lot of banks, UMPQ is simply making up some of the lost ground with this kind of dividend hike. This bank is headquartered in Portland, Oregon and has 184 branches in Oregon, Washington, northern Nevada, and California. Umpqua

The AllianceBernstein Income Fund (ACG) was ex dividend for its monthly distribution yesterday.

I could not discover any good reason for the robust stock market rally yesterday. Apparently, according to news reports, there were unnamed sources that allegedly said there were talks among German and EU officials about helping Spain's banks. Reuters The head of the ECB asserted that markets were underestimating Europe's resolve. And the Fed Beige Book showed the U.S. economy was improving at a moderate pace. FRB: Beige Book - June 6, 2012  The best headline on the reason appeared in Barrons, which referred to the cause as "wishful thinking". 

1. BOUGHT 1 J.C. Penny 5.65% Senior Bond Maturing 6/1/2020 at 87.898 Last Tuesday (Junk Bond Ladder Basket Strategy)(see Disclaimer): This bond is a senior unsecured note issued by JC Penney that pays interest semi-annually on 6/1 and 12/1. 

The company has experienced a decline in sales due at least in part to a change in its pricing strategy. JCP attempted to clarify its pricing strategy message last Tuesday, which sent the stock down over 5% intra-day. 

As a result of a poor first quarter report, S & P cut its ratings on JCP debt to BB-,   TEXT-S&P The company reported a loss and eliminated its dividend. J. C. Penney Company, Inc. Reports 2012 First Quarter Results On the day of that report, the shares had their worst one day loss in history, falling $6.57 to $26.75. Given the issues surrounding the company now, I limited myself to just a one bond buy. 

According to FINRA, this bond is currently rated at Ba1 by Moody's and BB- by S & P.  

2011 Form 10-K The long term debt is listed at page F-18 of that report. The weighted average interest rate was 7.1% and the weighted average maturity was 23 years. As noted at page F-19, the 2020 senior note was offered in May 2010.

My confirmation states that the current yield at my cost is 6.369% and the YTM is 7.561%. My goal on this bond is very modest. Hopefully, JCP's operations will improve sufficiently for the bond to rise 5%+ in price. To achieve a 5% gain on the bond after brokerage commissions, the bond would need to rise to 93+. Assuming I could sell the bond in one year for 93+, the annualized return would be over 11%.  

The common stock (JCP) did rise in yesterday's rally, closing at $24.88, up 61 cents for the day. The current consensus estimate is for a E.P.S. of $1.35 this year and $2.39 for the F/Y ending in January 2014. JCP Analyst Estimates

I looked at a few bonds maturing in 2020 that were rated  by Moody's one notch above this JCP bond.

Black Hills 5.875% Last Close 112.387 YTM 4.12%
Hillenbrand 5.5% Last Close 109.706 YTM 4.08%
Waste Management 4.75% Last Close 111.869 YTM 3.11%

This is a sample of similar rated bonds (Ba1 by Moody's) maturing in 2020:

LifePoint Hospitals 6.625% Last Close 104.5 YTM 5.76%
MeadWestvaco  9.75% Last Close 127.359 YTM 5.51%
CB Richard Ellis 6.625% Last Close 105 YTM 5.53%
R R Donnelley 7.625% Last Close 91.5 YTM 9.144%

The RRD bonds continue to trade at much higher yields than similarly rated bonds, suggesting that investors do not accept the current ratings.

2. Added 50 of the Bond CEF ERC at $14.75 Last Tuesday-ROTH IRA (see Disclaimer): I now own 200 ERC shares in the ROTH IRA and another 350 in a taxable account. I have never reinvested the dividend.   

ERC is currently paying a $.10 per share monthly dividend. At that rate, the dividend yield would be approximately 8.14% at a total cost of $14.75 per share.  When held in the ROTH IRA, that is in effect a tax free yield.  

On the day prior to my purchase, the fund closed with a net asset value per share of $15.78 and at a discount of -5.96 to NAV based on the closing price of $14.84.  

ERC page at the Closed-End Fund Association

SEC Form N-Q listing the holdings as of 1/31/12 

SEC Filed Shareholder Report for the period ending 10/31/11: WELLS FARGO ADVANTAGE MULTI-SECTOR INCOME FUND

In the fact sheet, the sponsor states that the expense ratio, including interest expense, was 1.14%. 

The fund does use leverage which will juice the yield during periods of abnormally low short term rates.  However, during periods of rising rates, leverage will add to an investor's losses. 

This fund will own junk bonds, but was weighted (54.7%) in AAA rated securities as of 10/31/11:  

Looking at the holdings as of 1/31/12 in the last filed SEC Form N-Q, it appears to me that the fund may have reduced its exposure to investment quality bonds, but I did not tally a number since the ratings were not disclosed in that report.

My last ERC transactions was to sell 100 share at $15.49 (July 2011) and then to buy 50 shares at $14.75 in the Roth IRA (September 2011). I realized a long term capital gain of $244.9 on the 100 shares sold, see snapshot at Item # 1 Sold 100 of 550 ERC at 15.49

If I can sell any bond CEF for a net profit on the shares after trading the shares, while collecting the dividend, I am satisfied, particularly when that type of security is held in a retirement account where I focus more on tax free income generation and preservation of capital.

Wells Fargo Advantage Multi-Sector Income Fund (ERC) closed at $14.84 yesterday. The fund reported a net asset value per share of $15.89, which created a discount to net asset value of -6.61 based on yesterday's closing price.  

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