Posted on

Gabelli Dividend & Income Trust: A New Safe 5.375% Preferred Stock IPO

Share



Introduction

Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest preferred stock issued by Gabelli Dividend & Income Trust (GDV). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we submerge into our brief analysis, here is a link to the 497 filing by Gabelli Dividend & Income Trust – the prospectus. (Source: SEC.gov)

For a total of 2 million shares issued, the total gross proceeds to the company are $50 million. You can find some relevant information about the new preferred stock in the table below:



Source: Author’s spreadsheet

Gabelli Dividend & Income Trust 5.375% Series H Cumulative Preferred Shares (GDV.PH) pays a fixed dividend at a rate of 5.375% and has a par value of $25. The new preferred stock is not rated by Standard & Poor’s but is anticipated to be rated Aa-3 by Moody’s Investors Service. The new IPO is callable as of 06/07/2024, and it currently trades above its par value at a price of $25.29. This translates into a 5.31 current yield and a 5.12% yield-to-call.

Here is the product’s Yield-to-Call curve:



Source: Author’s spreadsheet

The Company

The Gabelli Dividend & Income Trust, or the Fund, is a diversified, closed-end management investment company whose objective is to provide a high level of total return.

Under normal market conditions, the Fund invests at least 80% of its assets in dividend paying or other income producing securities. In addition, under normal market conditions, at least 50% of the Fund’s assets will consist of dividend paying equity securities. In making stock selections, the Fund’s investment adviser looks for securities that have a superior yield and capital gains potential.

Source: Gabelli.com | The Gabelli Dividend & Income Trust

Below, you can see a price chart of the common stock, GDV:



Source: Tradingview.com

While the text above provides us with a stepping stone in terms of information about the fund, it means nothing without looking at some numbers:



Source: CEFData.com

The fund’s investment advisor is Gabelli Funds, LLC. Other closed-end funds from the same investment advisory are: GAB, GLU, GCV, GGZ, BCV, ECF, GGO, GGT, GUT, GDL, GRX, GNT, and GGN.

The Gabelli Family

The chart below shows some relevant information about the other 23 preferred stocks issued by The Gabelli Funds.



Source: Author’s database

To get a better idea of where the new preferred stock stands in comparison with its relative peer group, you can see the chart below. It presents the preferred stocks from the group by their % of par and current yield.



Source: Author’s database

An observation could be made that almost all of these securities trade at a current yield between 5.00% and 5.50%, which makes the newly issued GDV.PH fairly priced with the rest of the Gabelli preferred stocks. Now let’s exclude those with a call risk, which means I’ll leave only these issues with a positive Yield-to-Call.



Source: Author’s database

The picture is pretty much the same. Most of the issues trade close to their par and return between 5% and 5.5% yearly. I want to add one more point of view, a chart by Years-to-Call and Yield-to-Call with the securities that have not reached their call date yet. In other words, the yield curve in the peer group by their Yield-to-Worst:



Source: Author’s database

In addition, in the following chart you can see a comparison between the GDV’s other preferred stocks and the fixed-income securities benchmark, the iShares U.S. Preferred Stock ETF (PFF).



Source: Tradingview.com

Almost no correlation between GDV.PD, GDV.PG, and GDV.PA versus PFF. GDV.PA and GDV.PD totally outperform the benchmark, while GDV.PG is a bit closer to the ETF but it also performs far better. As it can be seen, during the massive sell-off at the end of the last year, PFF had lost more than 10% of its value, while GDV.PG had lost 5% and the A and D preferred even managed to stay flat!

Sector Comparison

The chart below contains all preferred stocks in the Closed-End Fund – Equity sector (according to Finviz.com), regardless of their type of dividend rate, by their market price as a % of par value and their current yield. It must be remarked that this is again only Gabelli funds.



Source: Author’s database

Asset Coverage Ratio

Pursuant to the 1940 Act, the Fund generally will not be permitted to declare any dividend, or declare any other distribution, upon any outstanding common shares, purchase any common shares or issue preferred shares, unless, in every such case, all preferred shares issued by the Fund have at the time of declaration of any such dividend or distribution or at the time of any such purchase or issuance an asset coverage of at least 200% (“1940 Act Asset Coverage Requirement”) after deducting the amount of such dividend, distribution, or purchase price, as the case may be. As of the date of this Prospectus Supplement, all of the Fund’s outstanding preferred shares are expected to have asset coverage on the date of issuance of the Series H Preferred Shares of approximately 404%. In addition to the 1940 Act Asset Coverage Requirement, the Fund is subject to certain restrictions on investments imposed by guidelines of one or more rating agencies that have issued ratings for the Existing Preferred Shares and are expected to issue a rating for the Series H Preferred Shares.

Source: 497 Filing by Gabelli Dividend & Income Trust

Use of Proceeds

The Fund estimates the total net proceeds of the offering to be $48,200,000, based on the public offering price of $25.00 per share and after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us.

The Fund intends to use net proceeds from this offering to redeem a portion of the Fund’s outstanding Series E Auction Rate Preferred Shares. The Fund intends to call a portion of the Series E Auction Rate Preferred Shares for redemption within three months of the completion of this offering. Pending such redemption, the proceeds will be held in high quality short term debt securities and similar instruments.

Source: 497 Filing by Gabelli Dividend & Income Trust

Note: The Series E Auction Rate Preferred Shares (4,000 shares with liquidation preference $25,000 per share), along with:

  • 3,600 shares of Series B Auction Market Cumulative Preferred Shares, liquidation preference $25,000 per share, and
  • 4,320 shares of Series C Auction Market Cumulative Preferred Shares, liquidation preference $25,000 per share,

are existing private preferred shares of the company.

Addition to the iShares U.S. Preferred Stock ETF

With the current market capitalization of the new issue of around $50 million, it cannot be an addition to the iShares U.S. Preferred Stock ETF (PFF).

Conclusion

As fixed-income traders, we follow every preferred stock or baby bond that is listed on the stock exchange. As such, GDV.PH is on exception, and we share with the public the homework we always do. It is not necessary for the IPO to be an arbitrage and a bargain, but in many cases, the new security happens to be better than the ones already trading on the market.

I believe GDV.PH is a good one. An Aa-3 rating by Moody’s is no joke (an analog for AA- by the S&P). The fund is slightly leveraged, only 22%, and with an asset coverage of more than 400%, the preferred shareholders can feel more than safe with this preferred stock. Further, this one, except with the high quality, comes with a nice return of Yield-to-Worst of 5.12%. As we saw from the historical price chart and the comparison with the PFF, the GDV preferred stocks have very low volatility and they hardly may make you feel threatened. With the approaching lower interest rates, I think GDV.PH is an excellent preferred stock IPO to balance the risk profile of the portfolio.

Trade With Beta

Coverage of Initial Public Offerings is only one segment of our marketplace. For early access to such research and other more in-depth investment ideas, I invite you to join us at ‘Trade With Beta.’

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source:

Initial Public Offering & Preferred Stock News


Author: