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HPI: 7.7% Yielding CEF, But Trading At Premium To NAV

Published Fri, 05 Jun 2020 12:08:50 -0400 on Seeking Alpha

A zero-interest-rate environment has triggered the demand for preferred equities over the last two months.
The fund recently reported a monthly distribution of $0.1235, which currently makes up a 7.68% yield.
The fund has outperformed the iShares Preferred and Income Securities ETF over the last decade.
This time, we will present our readers with the John Hancock Preferred Income Fund (HPI), which was incorporated in August 2002. It is a closed-ended fund that is primarily focused on investment-grade preferred equities and debt securities. It pays a regular monthly distribution of $0.1235 per share and offers a 7.68% dividend yield as of May 29, 2020. This fund has recently experienced a sharp market price decline of more than 50% after the beginning of the coronavirus crisis in the U.S., following with a very strong rebound as a result of sharp actions of the Fed and the U.S. Treasury over the last two months. In terms of the key bullish catalysts, we find the following: (1) better-than-expected re-opening of the U.S. economy and (2) zero-interest-rate environment over the next couple of quarters.
About the Fund

(Source: Investor fact sheet)
This fund has the largest exposure to preferred securities of 76.2%, while fixed income securities make up approximately 16.3%. It currently uses effective leverage of approximately 35%, which we find a bit too high for the current market environment. In fact, we would prefer leverage to be cut down to less than 25% for the rest of 2020, before macroeconomic, political and health-related environments return back to normal. In addition, approximately 75% of total securities in the portfolio have a maturity profile of more than 20 years.
We find this as highly positive, as this gives the fund enough time to off-set any kind of short-term recessionary pressures or political risks including the most recent coronavirus crisis or escalation of political tensions between the U.S. and China. In terms of geographic... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
FORD MOTOR 9.41   17.1 0.55 0.60 6.37
ISHARES S&P US PREFERRED STOCK INDEX FUND 37.21   0.0 0.00 2.08 5.60
DUKE ENERGY 94.96   21.0 4.52 3.78 4.02
MORGAN STANLEY 44.32   9.7 4.59 1.40 3.21
DTE ENERGY 129.23   21.3 6.07 3.78 2.94


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