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Summary

  • CFP has announced that the current dividend will be paid through December 2014.
  • Conservative investors should steer clear, aggressive investors can look for trading opportunities in the name.
  • Beware of future rights offerings and dividend cuts.

Cornerstone Progressive Return Fund (NYSEMKT:CFP) is a closed-end fund that went ex-dividend on August 13. Its dividend payment was 7.73 cents which equates to a 20.3% yield. Is this too good to be true?

Last week, CFP announced that it would pay this dividend through December 2014.

CFP's latest financial report is its Annual Report for the year ended December 31, 2013. CFP derives its income primarily from its 79.9% holdings in other CEFs. In 2013, the fund paid out $31.6MM in dividends, of which $11.5MM was funded by net investment income. Further examination reveals that $3.8MM was investment income from their holdings while the balance was realized gains and portfolio appreciation. Only 12% of the dividend is covered by cash flow from its investments. In other words, the fund has to liquidate holdings to pay the dividend and this is borne out by its 101% portfolio turnover rate.

In 2013, the Fund committed to pay out almost $32MM in dividends. Its Net Assets were only $119MM at the end of 2012. Thus, 26.9% of assets were committed to the dividend, but the portfolio was only generating 3.2% in cash flow. Thus, it was not surprising that in 2013 they raised almost $65MM from a Rights Offering.

For 2014, they committed to pay out over $36MM in dividends from a net asset base of $169MM or 21%. In May 2014 of this year, it completed a rights offering at a 10% discount to the prevailing price. If history repeats, the Fund will cut it dividend for 2015 and will eventually have to do a Rights Offering.

An examination of CFP's dividend history from 2011 reveals that management sets a monthly dividend for the year and then cuts it for the next year. The average cut was 8.1%.

YearMonthly DivChange
20147.73 cps-9.5%
20138.54 cps-6.6%
20129.14 cps-11.3%
201110.3 cps

Source: NASDAQ.com

If history is of any use, investors should look out for an announcement in November for the fund's dividend for the first quarter of 2015. I anticipate that the dividend will be cut and if we apply the average cut of 8.1%, then the monthly dividend would be 7.10 cps. If the dividend yield remains at 20%, this equates to a share price of 4.26 or a fall of 2.3% from current prices, net of 3 dividend payouts prior to November.

If I were to look at CFP using my usual methodology, I would be a buyer here. CFP currently trades at a 8.4% premium to NAV while the weighted average premium over 5 years has been 21.8% which implies a 13.2% price appreciation.

6-mo1-yr3-yr5-yrWgtd Avg
+15.7%+17.8%+19.7%+24.4%+21.8%

Source: CEFConnect.com

In conclusion, as with every investment caveat emptor applies here. This a CEF to date, not to marry. Between now and November, I do not anticipate another rights offering, so aggressive investors may want to speculate at these levels.

Disclosure: The author is long CFP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.