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The Nuveen Quality Preferred Income Fund (ticker: JTP) seeks a high level of current income by investing at least 80% of its net assets in preferred securities and up to 20% in debt securities, including convertible debt securities and convertible preferred stock. All of its assets at the time of investment are investment grade quality (BBB/Baa or better), but some securities may subsequently fall in rating.
JTP is currently selling at a discount to NAV of -7.37% compared to the 6 month average discount of -7.03%. The 1-Year Z-Statistic is -0.66. This means the current discount to net asset value is about two-thirds of a standard deviation below the mean.
What is the likelihood JTP can raise its monthly dividend?
To determine this, I look at the Average Earnings/Current Dividend Ratio. This ratio tells you whether or not a fund is earning its current dividend. If the value is well above 100%, it means the fund can easily afford to raise its distribution rate.
For JTP, the average earnings over the last six months are $0.0525, which is higher than the recently monthly payout of $0.05. The Average Earnings/Current Dividend ratio is now 105.0%.
There is also a high positive value for “Undistributed Net Investment Income” or UNII. This is the life-to-date balance of a fund’s net investment income less distributions. For JTP, the UNII per share is +0.1488 which provides a nice cushion of nearly three months of dividends to protect the monthly payout.
JTP has two “sister” funds at Nuveen that also invest in preferred securities – JPS and JHP. These funds have significantly lower Average Earnings/Current Dividend ratios and UNII per share:
Data as of March 31, 2011
Ticker
Latest Distribution
Earnings per share
UNII per share
Avg. Earnings/Distribution
.0500
.0525
.1488
105.0%
.0550
.0557
.0607
101.2%
.0520
.0531
.0787
102.0%
How much leverage is used, and what is the preferred share asset coverage?
In 2008, some leveraged closed-end funds got into trouble because they violated the Investment Company 1940 Act when their asset coverage for the preferred shares went below 200% and they were forced to liquidate portions of the fund at a bad time. JTP currently uses modest 22.47% effective leverage. The preferred asset coverage ratio is currently 447% which provides a large margin of safety.
JTP has significant interest rate sensitivity, since over 50% of the portfolio is invested in preferred securities maturing in 30+ years. For this reason, it is important to diversify JTP with other investments with lower duration (e.g. floating rate securities or shorter term instruments). But the current yield spread over Treasuries is quite generous and already discounts moderate future increases in interest rates.
Portfolio Management Team
The fund is managed by Spectrum which is one of the leading managers of preferred securities. Spectrum is led by two principals with a combined 50 years of preferred securities experience. Spectrum uses a value-oriented approach which emphasizes research to identify appropriate companies, sectors and market opportunities.
L. Phillip Jacoby is the CIO at Spectrum. He began his career in 1981 with the Northern Trust Company. He then joined E.F. Hutton & Co. as a Vice president and Fixed Income Salesman through most of the 1980’s. He was a Senior Investment officer at USL Capital Corporation (a Ford Motor subsidiary) and joined Spectrum in 1995. He holds a BSBA (Finance) from the Boston University School of Management.
Mark A. Lieb founded Spectrum in 1987. Prior to that, he was a Founder, Director and Partner of DBL Preferred Management, Inc., a cash management subsidiary of Drexel Burnham Lambert. His prior employment included the development of a preferred stock trading desk at Mosely Hallgarten & Estabrook. He holds a BA in Economics from Central Connecticut State College and a MBA (Finance) from the University of Hartford.
Asset Allocation (as of 02/28/2011)
Hybrid Preferreds
48.9%
Capital Preferreds
44.1%
Debt & Convertibles
2.8%
Other assets
3.9%
Cash
0.4%
Credit Quality
AAA
0.4%
AA
1.2%
A
32.2%
BBB
53.7%
BB
9.9%
No Rating
2.6%
Maturity Breakdown
30+ Years
55.66%
20- 29 Years
15.4%
10-19 Years
8.6%
5-9 Years
53.7%
0-4 Years
5.5%
Ticker: JTP Nuveen Quality Preferred Income
  • Total Net Assets= 689.4 MM Total Common Assets= 534.5 MM
  • Annual Distribution Rate= 7.82%
  • Income Only Yield= 8.42% (from latest annual report)
  • Dividend Frequency= Monthly
  • Current Monthly Distribution= $0.05 per share ($0.60 per year)
  • Baseline Expense ratio= 1.19% (before interest expense)
  • Discount to NAV= -7.37% 6 Month Avg. Discount= -7.03%
  • Average Maturity (years)= 31.03
  • Portfolio Turnover rate= 20%
  • Effective Leverage= 22.5%
  • Average Cost of Leverage= 1.30%
  • Average 3 Mos. Daily Trading Volume= 145,000 shares (about $1.1 Million)
Overall, I think JTP is a worthwhile purchase at current levels. The distribution yield is attractive and there is a good chance of a dividend increase in the near future.

Disclosure: I am long JTP, JPS.
Source: JTP: Worthwhile Preferred Closed-End Fund Which May Soon Raise Its Dividend