Conclusion: The Adams Express Company (NYSE:ADX) appears to be pursuing a sub-optimal distribution policy despite its new distribution strategy recently adopted by its Board.
We conclude that shareholders are foregoing, i.e., not realizing, on average a 2.6% annualized investment return relative to its benchmark S&P 500 and its year-end distribution policy during the period the year-end distribution goes ex-dividend.
New Distribution Policy: It appears that the only difference between ADX’s old distribution program and its new one is that in addition to distributing $.05 per share quarterly to its shareholders ($.20 per share annualized), the year-end distribution will be set by a formula that would distribute the balance of a 6.0% return on the average trailing twelve months stock price (October), as opposed to realized capital gains. This creates greater predictability regarding the year-end distribution. The key is: are investors paying up for this year-end distribution? We believe not.
Deficiency Analysis: Our analysis is based on the comparative market returns of ADX versus the S&P 500 during the monthly period of its year-end distribution (November ex-dividend) for the past three years. We conclude that shareholders are foregoing on average 2.6% in annualized investment return relative to the S&P 500 and its year-end distribution policy during the year-end distribution period.
The Assumptions: We assume that ADX and its large cap benchmark S&P 500 market returns should be similar. ADX’s year-end distribution should be reflected in ADX’s overall valuation relative to the S&P 500 during the distribution period.
We first compared the beginning-and-ending monthly share price returns during the period ADX goes ex-dividend on its year end-distribution. (See “Appendix”)
Results: Over the past 3 years we compared the month-end share price (October), prior to the period the year-end distribution goes ex-dividend with that of the end of the month (November).
As illustrated in the table below, based upon the percentage change in share price, ADX over the three year period on average was down 3.2% versus down 0.7% for the S&P 500. Therefore, ADX trailed the S&P 500 on average by 2.6% for those periods. Again, this was during the period ADX typically goes ex-dividend for its year-end distribution.
We then calculated the return on the year-end distribution based upon the share price’s month-end prior to the year-end distribution going ex-dividend. On average, the year-end distribution generated an incremental 3.5% return.
Adding up the Pieces: We added ADX’s price change (-3.2%) and its year-end distribution return (3.5%) to calculate an average total return for that period (0.3%). We then subtracted from ADX’s total return (0.3%) the relative price change of the S&P 500 (-0.7%) for that same period to generate the 0.9% (rounding) incremental return to ADX’s shareholders for the year-end distribution period.
All Things Being Equal: ADX shareholders should benefit not only by the price change of its benchmark average (-0.7%), but shareholders should also receive an additional return based on the year-end distributions (3.5%), or 2.8% total return for that distribution period.
Since ADX’s actual total return was only 0.3%, the gap was 2.6% less (rounding) than would have been predicted by the combination of returns of its benchmark and its year-end distribution.
Therefore, shareholders are foregoing an incremental 2.6% as a result a year-end distribution policy. Effectively, a portion of the return on ADX’s year-end distribution is being “crammed down” into its share price return during this year-end distribution period.
An Alternative Distribution Policy: An alternative would be to spread ADX’s predictable capital gains into a quarterly distribution through a managed distribution program (“MDP”).
This would likely provide better price support for the stock throughout the year as opposed to a year-end distribution policy. As a consequence, the financial media would “pick up” the 6.0% yield as opposed to a 1.2% yield that “Yahoo Finance” is now showing for ADX. (Remember, CEF investors are yield investors.)
Not a Moot Point: This would all be a moot point if it wasn’t for ADX’s persistent and gapping discount of 14.3% versus its peer group of 9.6%. Moreover, our database shows that those CEFs that are characterized as GenEqFnds, similar to ADX, that have a managed distribution program currently trade at a 0.8% discount versus 14.3% for ADX.
Anticipated Year-End Distribution 2011: Based upon a current share price of around $10 per share (see appendix table), the anticipated November distribution would represent approximately $.50 per share ($.45 per share year-end distribution and $.05 regular quarterly distribution). Assuming a stable share price over the next two months, investors can expect a 5.0% yield on their investment between now and an estimated distribution ex-dividend date in mid-November. Seems attractive.
After Thoughts: I’m on record as saying the investment management part of ADX's business has been workmanlike. My issue is that the Board has done very little to maximize shareholders’ value.
There is something inconsistent with a seemingly OK investment performance and a CEF that is consistently trading at gapping discount relative to its peer group. Investors are sending a message.
I think ADX is in the right church with regards to rethinking its distribution policy; they’re just not sitting in the right pew.
Disclosure: I am long ADX.