Adams Express' New Distribution Policy Well Intentioned but Poorly Executed - Joe Eqcome

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Joe Eqcome is the pen name of Robert A. Frank, CFA, a Wall Street executive who has spent over 30 years as an investment professional. Mr. Frank is the founder of GrowthIncome Research & Management, LLC. GrowthIncome Research & Management, LLC’s business mission is focused on... More

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Adams Express' New Distribution Policy Well Intentioned but Poorly Executed 3 comments

Sep 10, 2011 12:45 PM | about stocks: ADX

As Winston Churchill remarked, "The Americans will always do the right thing... after they've exhausted all the alternatives.

Apparently, The Adams Express Company's (ADX) Board hasn’t exhausted all its possibilities.

Its current commitment to target a distribution of 6% of the trailing month-end stock price as of October 31 through the use of a special year-end distribution is a silly piece of logistics.

Apparently, ADX will continue to make quarterly distributions at its current rate of $0.05 per share and for its annual year-end distribution it will distribute the balance to fulfill its 6% commitment.

So, if I’m interpreting this correctly—and I hope I’m not, this is no different than its current distribution schedule with the exception of targeting a 6% total distribution to the average trailing 12 month end stock price--which is only slightly higher than the 5.2% total distribution the past two years from net investment income and capital gains.

Now, all the Board has accomplished is “gaming” the stock price for the year-end special distribution.

Why wouldn’t the Board consider a managed/level distribution program that would incorporate the CEFs long-term capital gains history into the quarterly distributions? They certainly have enough history to come-up with this calculation. This would have a tendency to maintain a higher stock price year long as quarterly distributions would be level.

If the Board’s goal is to narrow the discount, they probably accomplished this objective around the special year-end distribution period. Then after the ex-dividend date the stock will go back to its one of the CEFs market segments highest discounts.

The Board needs to establish a level quarterly distribution policy if it wants to accomplish its goal of permanently narrowing the discount.

This new policy is well-intended but poorly executed.

Joe Eqcome
Stocks: ADX

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Phanatical Comments (4)

Why would the 6% annual distribution "game" the stock price?

19 Sep 2011, 01:12 PM Reply Like

Phanatical Comments (4)

Hi Joe, I was just wondering if you could explain more how the new policy "games" the stock price? Why would the discount close just for the year end discount?

19 Sep 2011, 01:14 PM Reply Like

Joe Eqcome Comments (553)

Phanatical,

Let me provide an example.

If you were a dividend investor and I told you that I will be paying my distribution annually (once a year) at a rate of 6% on my average 12 month lagging stock price this would have a tendency for traders and investors to bid the stock price up as it gets closer to the ex-dividend date.

Once the distribution goes "ex", I no longer have a reason to own the stock until the same time next year. This means the price will likely fall and the discount widen.

If I were to spread the 6% distribution yield over 4 quarters I would likely attract a higher average stock price over the year as opposed to having the stock price "spike" at a single point then decline after the distribution goes "ex".

I hope this is helpful

Joe Eqcome

24 Sep 2011, 04:43 PM Reply Like