GAB: Is This ~10% Yielder A Buy?

Summary

• GAB offers investors a distribution policy of 10% with distribution of its average net assets each year.
• The expense ratio for this fund sits at 1.4%, and it utilizes the leverage of cumulative preferred shares at approximately 22% of assets.
• The fund has shown periods of outperformance versus the S&P 500, with the 1, 15, 20, and 25 years beating the S&P 500 returns.

Gabelli Equity Trust (NYSE:GAB) is a fund offered by Gabelli with close to $2 billion in assets. The fund has a primary investment objective of long-term capital growth, with income as a secondary objective. GAB has a long history as the fund's inception date goes back to August 21, 1986.

I recently wrote an article about Gabelli Dividend & Income Trust (GDV), "Closed-End Fund GDV: Great Fund With Potential At An Attractive Price," where I was favorable on GDV. A reader had commented that I should check out GAB, and while I believe GDV is overall a better purchase right now, I do like what I see when looking at GAB and decided it warranted an article. I also want to note that I love all the comments and direct messages about funds that I may not have heard of and give me lots to look into! While I wish I could write an article on every fund suggested, I just currently do not have the time.

The last article done on GAB appears to be from November 1, 2017, from Left Banker, "History's Lessons On Gabelli Equity Trust's Rights Offering." Left Banker's article has a lot of great information about the rights offering GAB conducted in 2005, 2014, and 2017. I would implore you to read the very fine article. The quick summary is that these rights offerings had in the past been a chance to acquire shares while the market price dropped on announcement and then slowly recovered from there.

Distribution

The fund's primary objective is long-term capital appreciation, but I find this curious as the fund has a managed distribution policy of 10%. That indicates to me that the primary objective could be for the income while having a managed distribution policy set at 10%. The actual market price distribution rate is currently 9.87% and the NAV rate is 9.70% as of 5/2/2018.

Source - CEFconnect

The fund currently pays out $0.15 per share quarterly; a quarterly pay schedule is less attractive than a monthly pay schedule but does not warrant a complete avoidance of a quality fund.

A good chunk of the distribution is ROC, and looking back at its history, it appears the fund has managed to still grow the NAV, meaning it is not ROC destructive. So the majority of the distributions offered by GAB can be seen as a tax advantage, as the cost basis is lowered by the amount of the distribution that is ROC. This is deferring the tax obligations until the fund is sold by the individual.

GAB even has splits in its history, once in 1999, again in 2014, and also in 2017. These were large splits, for example, the 1999 split was 11 for 10, and in 2014, the split was 1,023 for 1,000.

Performance

Source - GAB Fact Sheet

As you can see above, GAB does have a history of beating the S&P 500 over the longer term, and even for 2017, when the S&P 500 had a stellar return of 21.83%, GAB came in at a return of 24.64%! When going back to the inception date of August 21, 1986, again GAB outperformed the S&P 500 in that time period. When looking at YTD, GAB is showing a NAV decline of 2.26% while the market price has climbed a scant .58% according to CEFconnect's performance for GAB. The S&P 500 YTD is showing a decline currently of 1.12%.

With the market price rising slightly this year and the NAV declining, that brings us to a narrowing discount. GAB is showing a 1.62% discount to market price and an average one-year discount of 2.37%. This gives GAB a z-score of 0.30, meaning that the fund is currently slightly overvalued to its recent discount.

Source - CEFconnect

Although, when looking at its overall discount/premium chart, you can hardly say that this is a fund that trades at a perpetual discount or premium as the fund has made wide moves either direction.

Holdings

The most recent holdings list I could find is from the fact sheet that is dated December 31, 2017, but when looking at its annual turnover rate of 11.4%, I would say this fund does not do a lot of trading in and out of its positions over the year.

When looking at the top holdings, it does appear to hold some attractive names. I especially like the financial holdings and, as has been recently indicated, they should be attractive if the Fed continues to increase interest rates. The food & beverage sector can also be viewed as more defensive as these companies are often secular in nature.

Rollins, Inc. (ROL) is a consumer and commercial services company. The company provides pest control services and protection against termite damage, rodents and insects to over 2 million customers around the globe. Rollins' wholly-owned subsidiaries include Orkin, Inc., PCO Services, HomeTeam Pest Defense, Western Pest Services, and The Industrial Fumigant Company. ROL currently has a 1.15% dividend yield.

Honeywell International, Inc. (HON) is an American multinational conglomerate company that produces a variety of commercial and consumer products, engineering services and aerospace systems, providing its services to a wide variety of customers, from private consumers to major corporations and governments. The company currently offers a dividend rate of 2.07% and has likewise increased its dividend for seven years. Honeywell had its Q1 earnings report on April 20, 2018. Results exceeded the high end of the company's guidance. EPS came in at $1.95, up 14% Y/Y. The company subsequently raised its full-year EPS guidance to a new range of $7.85 to $8.05.

Mastercard, Inc. (MA) needs no introduction as everyone I'm sure is familiar with it. The company currently has a miniscule dividend yield of 0.54%. The appeal of MA is in its growth though and not its dividend, but it has been increasing the dividend for the last six years, however, it still amounts to very little. MA released earnings on 5/2/2018, delivering an EPS of $1.50, which beat estimates of $1.24. MA also beat on revenue estimates coming in at $3.58 billion, a 31.1% Y/Y jump. It even announced an increase in expectations for 2018 with revenue growth to come in the high-teens vs. the prior forecast of mid-teens.

Conclusion

While I do like GAB, I like GDV better at the current valuations. I wouldn't completely write off starting a position in GAB however with its much higher distribution rate vs. GDV. The main attraction to GAB is the 10% distribution, but the fund also dampens this attractiveness by having a quarterly pay schedule.

GAB has had rights offerings in the past that have been good times to buy. I just unfortunately did not know about GAB when it announced the rights offerings for 2017 or else I would probably have purchased some. The current z-score indicates you are not getting a great deal by investing today with only a 1.62% discount to NAV.

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Analyst’s Disclosure: I am/we are long HON. 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.

I may initiate a position in GAB and/or GDV in the next 72 hours.