BOE: Global Exposure At A Discount

Summary

• The discount remains attractive on this fund that focuses on global positions.
• BOE's largest sector allocation is to tech, though not overwhelmingly so.
• This lower exposure to tech and focus on global positions, meant the fund's historical performance appeared lackluster - going forward could be more attractive.
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Written by Nick Ackerman, co-produced by Stanford Chemist

BlackRock (BLK) offers many different closed-end funds. They are one of the largest fund sponsors in the space. Several have been the top-performing over the last couple of years. One fund that doesn't get a lot of attention is BlackRock Enhanced Global Dividend Trust (NYSE:BOE). This is understandable as its historical performance has been weaker, and distribution has several cuts since it launched.

However, investing should be a bit more forward-looking. Two of the reasons that made this fund underperform was the lower exposure to tech and the higher exposure to global positions. I'm personally looking to add more global exposure to my portfolio as I'm heavily invested in U.S. positions. Adding BOE and even Eaton Vance Tax-Managed Global Buy-Write Fund (ETW) over the last year has been rectifying the situation.

As we know, historically, the U.S. hasn't always outperformed international stocks. Though hard to believe because of recency bias. Due to the last decade+ being dominated by U.S. investments. That isn't to say that U.S. stocks won't have some positive returns; just that it could finally be time for international stocks to shine.

(Source - Fidelity)

BOE has an investment objective to "provide current income and current gains, with a secondary objective of long-term capital appreciation." They intend to achieve this through, "investing in at least 80% of its net assets in dividend-paying equity securities and at least 40% of its assets outside of the U.S. The Fund may invest in securities of companies of any market capitalization but intends to primarily in securities of large-capitalization companies. The Fund generally intends to write covered put and call options with respect to approximately 30% to 45% of its total assets, although the percentage may vary from time to time with market conditions."

BOE focuses on writing options on single stocks. The fund reported as of February 26th, 2021 that it was overwritten by 43.32%.

The fund is a fair size at nearly $812 million in managed assets. The expense ratio of this fund comes to 1.09%.

(Source)

Performance - Attractive Discount

As mentioned previously, BOE has admittedly been a weaker performer over the longer term. They have provided positive returns but it would have been lagging if we looked at comparing to several U.S.-based options. For example, BlackRock Enhanced Equity Dividend Trust (BDJ).

BDJ doesn't have quite the same allocation, favoring financials quite significantly. I also want to look at ETW again here and compare. Both ETW and BOE are focused on global funds. However, ETW favors tech at a higher allocation. Which I believe helps explain the last 10-year period.

Data by YCharts

That being said, we are seeing BOE starting to marginally pull ahead of ETW on a YTD basis. Primarily due to the volatility, we have been getting as tech cools off.

Data by YCharts

One attractive metric for BOE right now is the discount of 8.11%. On a 1-year basis, this might not look so great. However, we are now seeing the effects of last year's crash. At that time, discounts widened significantly, to levels some funds have never hit before. That is why I've been looking more at the 3 and 5-year averages as of late. The 3-year average discount is 11.10%. The 5-year average comes to 10.53%. Still, significant and deep discounts though look a bit better than the 1-year average compared with the current.

The fund seems to be perpetually discounted around these levels. Though that wasn't always the case, it has been for a significant amount of time. On several occasions previous to the last decade of trading, the fund would even hit premium levels.

(Source - CEFConnect)

What I see now is the fund is already at around its largest discount levels. Meaning that during the next crash, we shouldn't see too much expansion of discount widening further.

Distribution - 6.36% Distribution Yield

The other sore spot historically for the fund is the distribution cuts. While many funds cut during the 2008/09 period, this fund cut 6 times in the last decade. Though interestingly enough - they did not cut for the first time until 2012. Significantly after when other funds were cut in 2008/09.

(Source - CEFConnect)

I also wanted to point out the large special distribution that was paid. It is significant and I believe helps explain the need for another cut after that was paid. Remember, a distribution is just simply assets from the fund moving to the shareholder. Therefore, that large special of $1.35 took a significant amount of assets from the fund. Those are assets that are utilized for earnings through income and appreciation.

The ex-date for that payout was 12/15/2017. On the previous date, the fund had a NAV of $14.50, the following day it went to $13.10. Of course, reflecting this $1.35 payment, and there was an additional $0.05 that the fund must have just depreciated that day. Anyway, the point is that the special distribution accounted for over 9.3% of assets that day that the fund no longer had for earnings. Which I believe ties back to that latest distribution cut in mid-2018.

At this time, the NAV distribution rate comes to 5.84% - which seems fairly reasonable. As an equity fund, they will fund this primarily through capital gains.

(Source - Annual Report)

We can see that net investment income [NII] coverage comes to around 34.5%. This was a drop from last year's 40.8% NII coverage. This could be simply due to repositioning of the portfolio as they reported 61% turnover. We also see that they were repurchasing shares. It wasn't by a significant amount, but it was enough to reduce some of the payout to shareholders. In turn, means that it would have had a small effect on the NII itself too.

Holdings - Global Tilt

Of course, to go back to one of the more interesting points of bringing this fund up in the first place; the tilt towards global holdings that could perform well going forward. Here we see that the U.S. allocation still makes up quite a considerable amount at ~56% allocation. After that, we have the highest allocation to the U.K. and France. Though no single country dominates the top listings as the U.S. does. This is typical, even for globally-focused funds.

(Source - Fund Website)

The other thing drawing attention to here is the sector allocations. Tech makes up the largest slice of the pie. However, it isn't at a significant amount compared to peers. Within the portfolio on this broader view of the fund, we have significant exposure to several other sectors as well: healthcare, industrials, consumer staples and financials. All of these sectors are rather unique and provide plenty of diversification for BOE.

(Source - Fund Website)

Shifting over to look at their top ten; we see some recognizable names that are U.S.-based. Companies like Microsoft (MSFT), that seem like it's in just about every fund's portfolio. Then we have Visa (V), another popular dividend stock and popular fund holding (though not quite as popular as MSFT.)

(Source - Fund Website)

Then we have some less popular U.S. names that we don't typically see in other portfolios in significant quantities; Texas Instruments (TXN) and Comcast (CMCSA) and Bristol-Myers Squibb (BMY). It isn't that these companies aren't worthy of holding, they just don't appear in the top tens or a lot of discussions

TXN is of particular interest to me as I hold a position directly as well. They "design, manufacture, and sell semiconductors to electronics designers and manufacturers worldwide." The stock has been performing unbelievably strong and sports a P/E ratio of 27.63 at this time. Indicating that it is quite expensive at this time. Though they have been able to put up some good earnings results.

Helping to push up the valuation of this stock, I believe is the strong dividend. It has been growing significantly with a 3-year CAGR of 19.68%, 5-year CAGR at 21.67% and 10-year CAGR of 22.61%. It is a leader in dividend growth for its sector. They've been raising the dividend for 15 years now.

(Source - Seeking Alpha)

Sanofi (SNY), BOE's third-largest holding, is a French pharmaceutical company. They "engage in the research, development, manufacture, and marketing of therapeutic solutions in the U.S., Europe, and internationally."

They are one of the many pharmaceutical companies that are working on a COVID-19 vaccine. Though it was delayed, they still haven't given up on hoping to get approval later in 2021.

Even with that setback, it would appear their Q4 earnings were still quite good but had missed on revenue estimates. Revenue does look like year-over-year there was a small decline. EPS did manage to grow despite this, and they expect to see further growth in the "high single digits" for 2021.

SNY also pays a dividend; however, like many European companies, it isn't a regular amount. It varies as earnings vary, as is more typical of European stocks. It is also paid annually.

(Source - Seeking Alpha)

Conclusion

BOE might have historically been a weak performer, but I believe the fund is set up to potentially deliver a brighter future. I'm looking to continue to add more global exposure to my portfolio lineup, so BOE can be an appealing option for that. It is still trading at an attractive discount and offering an enticing distribution yield. The discount should help limit downside movements due to discount expansion during the next crash; being that the fund is already near the widest levels.

Beyond those main attractive features, the top holdings are also interesting and differentiated from what we typically see. We have a couple of the "usual suspects" but also material exposure to companies we don't always see. More broadly, the sector exposure is weighted towards tech, but only by a slim margin. Allowing for sector exposure to plenty of other sectors in a material way - a truly diversified equity fund.

Disclosure: I am/we are long BOE, BDJ, ETW, BLK, MSFT, TXN. 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.