Nothing To Worry About With PIMCO Taxable CEFs

Summary

• We think too much is being made of the lower coverage in the UNII report and that those ratios tend to ebb and flow over time.
• We do not foresee a distribution cut to the non-agency MBS funds (PCI, PKO, PDI) and only low chances to other taxables. PHK and PGP are at higher risk of cuts.
• For now, I'm in watching mode. Sort of like I was last month. The only changes I have made are to nibble at PKO and PDI with my distributions.
• We would be trimming/selling PIMCO muni CEFs in favor of other holdings on our conviction lists. We can rebuy funds after they trim the distribution and investors sell off the shares.
• In October 2019, PCI's coverage ratio was below 38%. Did the fund cut its distribution? No.
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(This report was issued to members of Yield Hunting on May 26th.)

Branding matters. Think of this. In the 1980s, PepsiCo (PEP) began running commercials with The Pepsi Challenge, where people would try two colas as a taste test and select which they liked better. Not surprisingly, Pepsi was the favorite choice. However, more surprisingly, Coca-Cola (KO) did the same taste trials and it found similar results - people preferred Pepsi.

Coca-Cola noted that this was due to their sweeter formula, which led them to creating one of the most dreadful of all marketing decisions ever, Coke II. The real interesting thing is that people tend to say they prefer Coke to Pepsi. That is borne out by market share, with Coke having a much larger market share than Pepsi.

The moral of the story is that people by product based on factors outside of taste. Relating to the closed-end fund ("CEF") world, people buy funds based somewhat on brand over "taste."

Enter PIMCO - the Mercedes, the NY Yankees, or the Coca-Cola of the bond world.

PIMCO funds are renowned income tools for individual investors. Today, they yield in excess of 11%, thanks to the much lower prices compared to three months ago. The distribution remains unchanged, giving your DRIP a bit of octane.

PIMCO recently released its monthly Earnings Report for April. The data wasn't all that positive but not overtly alarming either. No moves are necessary outside of small preferences on incremental buys. Coverage ratios, a la income production, was significantly below the distribution for the PIMCO Dynamic Credit Income Fund (PCI) and modestly so for the PIMCO Corporate&Income Strategy Fund (PCN), the PIMCO High Income Fund (PHK), the PIMCO Strategic Income Fund (RCS), the PIMCO Income Strategy Fund (PFL

Analyst’s Disclosure:I am/we are long PCI, PDI, PKO. 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.