Healthcare 5-7% Yields, 11%-15% Discounts: Tekla Healthcare Opportunities, Gabelli Healthcare & Wellness Trust
Summary
- THQ yields 7.41%, GRX yields 5.19%.
- THQ is selling at a -10.95% discount to NAV.
- GRX is selling at a -14.89% discount to NAV.
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Looking for attractive yields in the healthcare sector? Healthcare got a boost in the market this week after the Super Tuesday results made it appear that Joe Biden has a better chance of getting the nomination.
Given the aging demographics in the US, healthcare seems like a logical place to try and earn some income. The problem, though, is that, overall, the healthcare sector's overall dividend yield is skimpy, at ~1.79%, just above tech's anemic 1.41% yield.
Of course, there are a fair amount of higher yield vehicles within the healthcare sector, including some REITs, and a small number of closed-end funds.
One of the interesting things about CEFs is that you can often buy them at a discount to their net asset values.
Tekla Healthcare Opportunities Fund (NYSE:THQ) and Gabelli Healthcare & Wellness Trust (NYSE:GRX) are two CEFs which have a history of trading at discounts.
As of intraday 3/5/20, THQ was selling at a -10.95% discount, and GRX was selling at a deeper -14.89% discount. Both discounts were higher than their 1-, 3-, and -5-year average discounts to NAV:
The Z-scores show three-month discounts that are deeper than the six-month and one-year scores for both THQ and GRX:
Profiles:
THQ - The fund's objective is to seek current income and long-term capital appreciation through investing in companies engaged in the healthcare industry, including equity securities, debt securities and pooled investment vehicles.
GRX - The trust will invest at least 80% of its assets, plus borrowings made for investment purposes, in equity securities such as common stock and preferred stock and income-producing securities, such as fixed income debt securities and securities convertible into common stock, of domestic and foreign companies in the healthcare and wellness industries. The remaining 20% of its assets may be invested in other securities, including stocks, debt obligations and money market instruments, as well as certain derivative instruments in the healthcare and wellness industries or other industries.
Both funds use ~21-22% leverage, and have a similar quantity of holdings, but THQ is more than three times bigger than GRX. GRX has lower expenses, and was founded in 2007, while THQ IPOd in 2014:
Distributions:
GRX yields ~5.19%, and pays $.14 quarterly, in a March/June/Sept/Dec. schedule, while THQ pays $.1125 monthly. THQ has a managed distribution, i.e. a steady payout, while GRX analyzes its payouts and can adjust them up or down, as management sees fit. GRX raised its quarterly payout from the $.13 to $.14 in February 2019.
Distribution Coverage:
Here's a negative point for THQ - its distribution coverage fell from .99X to just .86X in its most recent fiscal year, ending 9/30/19. GRX's coverage is stronger, but also fell, to a lesser degree, from 1.07X in 2018 to .99X in calendar year 2019:
Distribution Growth:
Although some financial sites show a -2% five-year distribution growth rate for GRX, that's due to a $.14 special distribution it did in 2014 - its five-year growth rate is 3.18% for its regular quarterly payouts.
Other than a $.3024 special distribution it did in 2015, THQ's monthly payout has remained flat, at $.1125, with 0% growth.
Distribution Sources:
Another negative for THQ, depending upon your point of view, is that its fiscal year 2019 distributions were comprised of 87% return of capital. While return of capital defers distribution income from taxes, it also lowers your cost basis, so, when you sell your shares, there will be more taxes due. Capital gains covered 12%, and ent investment income, NII, covered 1% of THQ's payouts in fiscal 2019.
GRX had just 1.79% return of capital in 2019, with 94.64% of its distributions based upon capital gains, and 3.57% on NII:
Holdings:
THQ's top 10 holdings formed ~44% of its portfolio, as of 12/31/19, with many big cap names, such as Johnson & Johnson (JNJ), Merck (MRK), Pfizer (PFE), and UnitedHealth Group (UNH), among others:
(Source: THQ site)
THQ's top four sectors comprise ~80% of its sector exposure, with Pharmaceuticals being the largest, at ~30%, followed by Healthcare Providers/Services, 19%, Biotech, ~16%, and Healthcare Equipment/Supplies, at 5.6%.
THQ mainly invests in common stocks and warrants, 79%, but also has 15% exposure to debt. Like GRX, THQ also writes covered calls options, a strategy that we've covered often in our articles.
(Source: THQ site)
THQ's holdings' credit quality is 81% investment grade, with the majority in the A to BBB tranches. GRX's portfolio is 98.32% AAA, with 1.65% AA.
GRX - The biggest difference between the two funds' holdings is that GRX also has 21.5% exposure to the food industry, with ~56% exposure to the healthcare industry in its top sector rankings:
(Source: GRX site)
GRX holds such food industry giants as Nestle (OTCPK:NSRGY), ConAgra (CAG), and Japanese firm Kikkoman (OTCPK:KIKOY). So, coffee, pet food, Slim Jims, soy sauce and many other ubiquitous consumer products are part of this portfolio. GRX's top 10 holdings only form ~21.6% of its portfolio.
(Source: GRX site)
THQ's portfolio is 98.69% US-based, while GRX has 76.60% US exposure, with Japan its second biggest area, at 5.65%.
Performance:
The two funds have similar NAV total returns since inception, with THQ at 9.97%, and GRX at 9.89%. However, GRX was formed in 2007, and had to survive through the crash of 2008 and the recession, while THQ IPOd in 2014. THQ has an edge in its three- and five-year returns, while GRX had much better NAV and market price returns in 2019:
GRX also has two preferred issues, a 5.76% Cumulative Preferred A series, and a 5.875% Cumulative Preferred B series, both of which are priced above their $25.00 call values.
Summary:
We rate GRX a buy based upon its attractive yield, stronger distribution coverage, its additional food industry exposure, and its much higher NAV/share growth since its inception. To be fair, GRX has had seven more years than THQ to grow its NAV/share, but, as previously noted, some of those additional years were in the heart of a market crash and a recession.
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This article was written by
Analyst’s Disclosure: I am/we are long GRX. 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.
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Comments (23)
I work in healthcare and the conversations we have, its just very very sad. I have to ask as a thought experiment what would happen we actually did have an insurance market, like in car insurance? Where its very easy to use and overall does a great job Heck I think I have around a million bucks total coverage in a high risk state (Colorado) and it costs me 100 smackers a month, not bad, right?Long and averaging into GRX for a nice slow conservative well run fund at a discount with a not too high distribution rate that can be more easily maintained.
Might want to fix typo in text to match table:
Healthcare Equipment/Supplies, at 5.6% -->14.3%
markets.businessinsider.com/...
I held THQ for a bit and sold at a profit. I really like the mixture of stocks and even a few REITs. Top notch management team with the CEO having a PhD in biological sciences, other med pros and business people. They run HQH which had a good past. These folks know the business! I sold due to the leverage, which probably isn't the best in a recession. I think it's probably the best diversification model for a healthcare CEF with leverage.
I also bought BME long and picked MPW at the same time. Bernie and Warren were telling jokes about reforming the health care system. Democrat Keystones Kop humor better than Obama's socialized medicine quips that only increased insurance companies chokehold on medicine. Trump had a fantastic idea to disclose actual medical care costs so competition could arise in a free market. That idea was killed quick! Result? BME and MPW bought cheap.
I am up quite a bit due to the health care scare which pays part of my Medicare! Great coverage of both CEFs. When THQ goes down I will buy it again.
