Tag Archives: infrastructure

Tax-Free Income From Municipal-Bond CEFs: A Closer Look

Summary Municipal-bond closed-end funds offer excellent opportunities for high levels of tax-free income. This category is the largest in the closed-end fund space. Here I look in some detail at funds that rose to the top in an earlier filtering of the entire municipal bond CEF universse. A Closer Look at Top-Scoring Municipal Bond CEFs I recently discussed tax-free, municipal-bond, closed-end funds ( here ). Tax-free munis comprise the largest category of closed-end funds. Two sites ( Cefanalyzer and cefconnect ) were the primary sources for the previous report. They list 99 funds covering tax-free national municipal bonds with over $45 T in AUM, so narrowing down that lot to a manageable number of candidates to research can be daunting. I identified several that looked to be potentially appealing based primarily on criteria set out by Eli Mintz using the relationship between return on NAV and discount as a filter. Briefly, Mintz noted a modest linear relationship between the two metrics and argued that funds falling well below the linear trend line were most worth exploring when making new purchases. I received some excellent feedback in the comments to that article. In particular, several readers pointed to two Eaton-Vance funds as being among today’s best opportunities in tax-free CEFs. In this article I want to expand in greater detail some of the funds previously noted plus the two Eaton-Vance offerings. The funds I’ll discuss are: MFS High Yield Municipal Trust (NYSE: CMU ) Dreyfus Municipal Bond Infrastructure Fund, Inc. (NYSE: DMB ) Eaton Vance Municipal Bond Fund (NYSEMKT: EIM ) Eaton Vance Municipal Bond Fund Ii (NYSEMKT: EIV ) MFS Municipal Income Trust (NYSE: MFM ) Nuveen Municipal Advantage Fund Inc (NYSE: NMA ) Nuveen Municipal Market Opportunity Fund Inc (NYSE: NMO ) Nuveen Select Quality Municipal Fund Inc (NYSE: NQS ) Nuveen Dividend Advantage Municipal Fund 2 (NYSEMKT: NXZ ) Nuveen Dividend Advantage Municipal Fund 3 (NYSEMKT: NZF ) Invesco Trust For Investment Grade Municipals (NYSE: VGM ) Invesco Advantage Municipal Income Trust II (NYSEMKT: VKI ) Invesco Municipal Opportunity Trust (NYSE: VMO ) This is a mixed group with some focused on high yield, others on credit quality, others on duration. The funds that appeared most interesting using Mintz’s criteria, which emphasizes high NAV return and deep discounts tend to push further out on the credit-quality scale, have longer durations, and relative high percentages of their portfolios subject to AMT. As the appeal of these funds is tax-free income, the AMT issue can be a deal breaker for some investors. Here is a heat-map table summarizing Discount, Distributions, Net Investment Income, Average Portfolio Maturity and Leverage. (click to enlarge) The next chart compares credit quality among the funds. On the horizontal axis, I’ve listed the funds and, in parentheses, their average portfolio credit rating based on number of bonds (data from Morningstar ). (click to enlarge) The superior credit quality of the two Eaton-Vance funds (EIM, EIV) is clearly evident in this chart. The percentage of each portfolio’s bonds that is subject to AMT shows a wide range as seen in the next chart. EIM and EIV are zero-AMT funds. The MFS funds (CMU and MFM) carry the highest AMT liabilities at 24% for MFM and 22% for CMU. The Nuveen funds (NMA, NMO, NQS, NXZ and NZF) are lowest of the non-zero group with the Invesco funds (VGM, VKI and VMO) intermediate. EIM and EIV are zero-AMT funds. The MFS funds (CMU and MFM) carry the highest AMT liabilities at 24% for MFM and 22% for CMU. The Nuveen funds (NMA, NMO, NQS, NXZ and NZF) are lowest of the non-zero group with the Invesco funds (VGM, VKI and VMO) intermediate. The next table shows effective durations, unadjusted and adjusted for leverage: Effective Duration Unadjusted Adjusted for Leverage CMU 6.56 10.20 DMB 6.49 9.40 EIM 4.86 8.00 EIV 2.86 4.70 MFM 7.00 10.00 NMA 7.10 10.88 NMO 7.72 12.10 NQS 7.76 12.32 NXZ 7.47 11.31 NZF 8.29 12.80 VGM 7.97 13.44 VKI 7.71 12.97 VMO 7.82 13.11 Again, the Eaton-Vance funds, especially EIV, stand out from the pack. Summary The Drefus fund made this list on the basis of its deep discount (ranking 4th of the 99 funds screened) and a return on NAV near the median (51/99) which place it very high using the qualitative Mintz criteria. Leverage (10.39%) is low for this category (12/99), which helps to moderate risk for the fund. Duration is shorter than all but the Eaton-Vance funds, which reduces interest-rate risk relative to the rest of the pool. On the negative side, credit quality is low, averaging BBB- for the portfolio. Unfortunately, it has the highest negative net investment income in the field (99/99); the fund’s payout yield is 6.47%, but its actual yield is only 4.84%. One might reasonably expect a distribution cut soon. As the funds primary appeal is its high yield for low leverage, the specter of a dividend cut takes it out of my consideration. For investors primarily interested in high levels of tax-free income, the Invesco funds (VKI, VGM and VMO) might be most appealing. Next would come the MFS funds (CMU and MFM). VKI pays a tax-free 7.01% (2/99); excess NII is a negative -0.25%. The other two offer similar results. But these three funds use the highest levels of leverage to achieve those returns. For the entire universe of national tax-free CEFs, only 5 exceed 40% leverage, these three Invesco funds are among those five. For VKI, leverage is 40.54% (97/99) with VGM and VMO (96 and 95/99) only slightly behind. The MFS funds also offer high yields. CMU is paying 6.77% (11/99) and MFM pays 6.31% (47/99). Unlike the Invesco funds, they do so without paying shareholders more than they are taking in. CMU’s excess NII of 0.72% ranks 3/99 for the tax-free muni-bond CEF universe and MFM’s 0.49% ranks 6/99. It would appear their yields are safe for the near term. Leverage is moderate, CMU carries 35.56% (55/99) and MFM carries 30.04% (25/99). CMU’s average portfolio credit rating of BBB- is low, but not out of line with the Invesco funds. MFM is much better at BB+. None of these high-yielding funds would appeal to investors who place a high priority on minimizing AMT, however, as they are among the highest for this metric. The Nuveen funds carry deep discounts, which drive moderately high yields from less risky portfolios. Those discount range from the mid -13%s to the mid -14%s. and rank 5, 7, 8 and 13 of all 99 funds. This generates yield near 6% (5.93 to 6.09%) from moderate leverage (32.13 to 33.98%), which clusters the fund near the lower mid-range of leverage for all funds. Credit quality is intermediate for the group (all BBB average rated except NXZ at BBB-). I’ll close with the Eaton-Vance funds. These are clearly the best for a more conservative investor who is more interested in credit quality (A- for EIM and AA for EIV) than yield (6.28% for EIV, ranking 49/99 and 5.91% for EIV, 68/99). For investors subject to AMT, the fact that they are AMT free can enhance those yields on a tax-equivalent basis as well. Leverage is high, however; both fall into the top 10% of all funds. These funds did not make the cut in my initial analysis because that exercise depended heavily on Mintz’s relationships between NAV return and discount. From that point of view EIV falls directly on the trend line and EIM, with its greater discount, falls moderately below it. As respondents to my last article, especially wiseone123 and Johan2003 , point out these funds have strong portfolio, attractive yields and discounts and should be considered strong candidates by anyone looking for entries into muni-bond CEFs at this time. Thanks to the commenters on the previous article for their excellent feedback, especially with regard to the Eaton-Vance funds, which certainly appear to be the choice of the lot. If one were to follow Mintz’s lead, then EIM would probably be the better choice of the two, but this comes at the cost of reduced portfolio credit quality. The most conservative investor would likely choose EIV with its high credit quality, low duration and reasonably high yield. Even using Mintz’s criteria, the fund is a reasonable buy as it is not in the more problematic space above the trend line. (For discussion of the NAV distribution/discount relationship with a summary of all 99 funds, see my earlier article, linked above.) Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

ALLETE: Not A Compelling Buy For Dividend Investors

Summary Reliance on aging coal-fired power generation is a risk. Capital expenditures and dividend payments exceed operational cash flow. Dividend yield is solid but has not grown and is unlikely to grow meaningfully in the future. ALLETE, Inc. (NYSE: ALE ) primarily operates as a regulated utility, providing services for customers in Wisconsin, Michigan, Minnesota, and Illinois. By comparison to some utilities, ALLETE’s largest customers are primarily industrial in nature, with these large customers (mining and paper industries primarily) drawing 54% of KWH generated. Because of this, ALLETE profit is tied directly to the health of these industries. Luckily, Minnesota mining production has continued at full-speed even in the face of a global rout in commodities that have deeply impacted the iron and steel industries. Investors who own ALLETE should focus more of their attention on the health of ALLETE industrial customers rather than traditional utility research, such as demographic trends and unemployment growth in the service areas that primarily affect residential consumers. Aging Infrastructure And Management’s Plan The vast majority of energy production for ALLETE comes from coal-fired power generation. At the end of 2014, 64% (1,277 MW) of energy production was coal-fired. The majority of these coal-fired plants are getting quite old — while units 3 and 4 at the Cohasset, MN facility are the newest (producing 75% of generation at this massive facility), these were still originally constructed in 1973 and 1980. Like a large swath of US coal-fired plants, obsolesce may soon be around the corner. The average lifespan of a coal-fired plant is forty years, according the National Association of Regulatory Utility Commissioners . While the Cohasset facility has seen many updates over the years, facts remain that the bones of the facility have aged. Those that follow my work on utilities know that I’m a big fan of natural gas and other renewable power regeneration. This isn’t driven by my own personal feelings on the environmental impact. Regardless of your thoughts on environmental regulation, investors should nonetheless be aware of the fact that the Environmental Protection Agency has begun taking a harder stance on coal and that course is unlikely to change. Regulations on pollutant emission will likely only continue to strengthen and so will the cost burden on utilities to maintain necessary updates on these aging coal-fired plants. As a recent example of the cost impact, ALLETE is nearing completion of an environmental upgrade at one of its plants; total cost will run $260M to bring the plant into compliance with the Mercury Emissions Reduction Act. While this is cost recovery eligible through rate increases on the retail customer and if approved these customers will have no alternative but to bear the cost, industrial customers (which if we remember constitute the majority of revenue) do have the option to pursue other providers with approval from the state or can generate their own electricity on-site. This is why it is imperative that investors who remain long on ALLETE as a company pay close attention to the strides the company is making in renewables and natural gas. The company is targeting a production goal of thirds — one-third of energy production with coal, one-third with renewables, and one-third with natural gas. This was most likely driven in part by the Minnesota Next Generation Energy Act of 2007, which requires 25% of retail energy sales to be from renewables by 2025, with hurdles of 17% in 2016 and 20% in 2020. These hurdles are around the corner, but luckily ALLETE does have a foundation to work off of. There is some minimal existing hydroelectric production (105 MW) spread throughout Minnesota, but the likely new crown jewel for ALLETE is its Bison Wind Energy Center in North Dakota, which produced 497 MW of energy at the end of 2014. Further bolstering renewables production is the agreement reached to purchase hundreds of megawatts of production from AES Corporation (NYSE: AES ) early on in 2015. I’m long AES Corporation, and I see this as a win/win for both companies. AES has spread itself way too thin around the globe and these asset sales make sense to let the company gain focus on more core facilities. ALLETE in return gains solid wind production facilities that will likely be immediately accretive to earnings per share. As another related victory for ALLETE in the renewables space, the deal for ALLETE to construct a wind farm for Montana-Dakota Utilities, a division of MDU Resources Group (NYSE: MDU ) shows that the company has an industry reputation for knowing what it is doing when it comes to wind construction. Operating Results (click to enlarge) Total revenue has grown at a 5.81% over the past five-year period and this trend is set to continue with revenue projected at 1.2B for 2015. Fuel expenses have fallen as coal prices have taken a nosedive, a benefit that many utilities have enjoyed in recent years. This input cost windfall has resulted in expanding operating margins. Net income growth would have been stronger if not for a burgeoning debt load; total debt now stands at nearly $1.4B, almost double the $773M the company held in 2014. This is due to the fact that capital expenditures have massively outstripped operational cash flow over the past five years. Operational cash flow totaled $1.2B in the 2010-2014 period; capital expenditures totaled $1.8B. This out-of-balance is before factoring in dividends, which totaled another $350M. This is not what you want to see from a utility. By comparison, Calpine Corporation (NYSE: CPN ), which I own, has seen nearly $3.8B in operational cash flow versus $2.8B in capital expenditures over the same timeframe. This falls back to the cost of running and maintaining coal-fired plants. Calpine primarily operates extremely new, high-technology natural gas plants, the direct opposite of ALLETE’s current portfolio. Management is guiding these costs to fall over the next five years, capital expenditures are guided to average $250M/year versus the prior five-year average of $360M. Even with those decreases, ALLETE may continue to run into a situation where they must raise more debt to fund all their obligations. Conclusion While investors might be tempted by the 4% dividend yield, investors should keep in mind the five-year average dividend growth rate has only been 2.2% and this is unlikely to change. No large catalysts exist for substantial earnings per share and dividend expansion in my opinion. Total shareholder returns are likely to lag a broader utility index and investors would likely be better off in other names with more opportunity. Larger peers like American Electric Power (NYSE: AEP ) or prior-mentioned name AES Corporation present more compelling stories for stable dividend growth. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

ETF Deathwatch For August 2015: 330 And Climbing

Eleven ETFs and ETNs came off of ETF Deathwatch this month because they are no longer with us. Five more escaped because they were able to show a sustained improvement in their health, although the two iShares ETFs in this category are scheduled to close in August. Even with these sixteen departures, the overall list has four more members than last month. The reason for this growth is the twenty new names being added. The ETF Deathwatch for August consists of 330 products (240 ETFs and 90 ETNs). Historically, the number of ETFs and ETNs on Deathwatch have shown strong correlation to new ETF launch activity. The theory behind this is simple: a large number of new ETFs coming to market must compete against the other new products as well as the established base. Even the above-average performers may fail to attract attention, as investors find it more and more difficult to stay abreast of current offerings. As launch activity dwindles and overall ETF assets grow, many of the better products begin to take hold and weaker ones close, forcing the quantity of products on Deathwatch to decrease. As with many economic realities, it comes down to supply and demand. If this historical relationship holds, then I expect the size of the ETF Deathwatch list to continue growing in 2015 since launch activity is on pace to be the third strongest year ever. Meanwhile, closure activity is on pace to set a new record, and hundreds more are not profitable for their sponsors and should be closed. I expect the next large wave of additions to ETF Deathwatch will be many of the recently hatched currency-hedged ETFs. As detailed in ETF Stats for July 2015 – Currency Hedging Jumps The Shark , the quantity of currency-hedged ETFs surged from 16 to 57 since the beginning of 2014. By the time August comes to a close, the number will be even higher. I suspect many of these funds will find their way to Deathwatch due to either lack of investor awareness or lagging performance when the dollar rally fades. The average asset level of products on ETF Deathwatch decreased from $6.9 million to $6.8 million, but the quantity of products with less than $2 million in assets rose from 57 to 62. The average age fell from 50.3 months to 49.7 months, although the number of products more than five years old increased from 105 to 110. Here is the Complete List of 330 Products on ETF Deathwatch for August 2015 compiled using the objective ETF Deathwatch Criteria . The 20 ETPs added to ETF Deathwatch for August: ALPS Emerging Sector Dividend Dogs ETF (NYSEARCA: EDOG ) Arrow DWA Tactical ETF (NASDAQ: DWAT ) Deutsche X-trackers Muni Infrastructure Revenue Bond ETF (NYSEARCA: RVNU ) Direxion Daily FTSE Developed Markets Bull 1.25x (NYSEARCA: LLDM ) Direxion Daily FTSE Emerging Markets Bull 1.25x (NYSEARCA: LLEM ) Direxion Daily S&P 500 Bull 1.25x (NYSEARCA: LLSP ) Direxion Daily Small Cap Bull 1.25x (NYSEARCA: LLSC ) ETFS Diversified-Factor Developed Europe (NYSEARCA: SBEU ) ETFS Diversified-Factor U.S. Large Cap (NYSEARCA: SBUS ) ETFS Zacks Earnings Large-Cap U.S. (NYSEARCA: ZLRG ) ETFS Zacks Earnings Small-Cap U.S. (NYSEARCA: ZSML ) ETRACS Wells Fargo MLP Ex-Energy ETN (NYSEARCA: FMLP ) iPath US Treasury 2-year Bear ETN (NASDAQ: DTUS ) iShares Global Inflation-Linked Bond (NYSEARCA: GTIP ) iShares MSCI International Developed Momentum Factor (NYSEARCA: IMTM ) iShares MSCI International Developed Quality Factor (NYSEARCA: IQLT ) Master Income ETF (NYSEARCA: HIPS ) ProShares Managed Futures Strategy (NYSEARCA: FUTS ) QuantShares Hedged Dividend Income (NYSEARCA: DIVA ) SPDR Barclays International High Yield Bond (NYSEARCA: IJNK ) The 5 ETPs removed from ETF Deathwatch due to improved health: UBS ETRACS Monthly Pay 2x Leveraged S&P Dividend ETN (NYSEARCA: SDYL ) Guggenheim BulletShares 2022 HY Corp Bond (NYSEARCA: BSJM ) iShares MSCI Emerging Markets Value Index ETF (NASDAQ: EVAL ) iShares MSCI Hong Kong Small-Cap (NYSEARCA: EWHS ) PowerShares KBW Property & Casualty Insurance (PBWP) The 11 ETPs removed from ETF Deathwatch due to delisting: CS X-Links 2x Monthly Merger Arbitrage ETN (NYSEARCA: CSMB ) CS X-Links HOLT Market Neutral Global Equity ETN (NYSEARCA: CSMN ) RBS China Trendpilot ETN (NYSEARCA: TCHI ) RBS Global Big Pharma ETN (NYSEARCA: DRGS ) RBS Oil Trendpilot ETN (NYSEARCA: TWTI ) RBS Rogers Enhanced Agriculture ETN (NYSEARCA: RGRA ) RBS Rogers Enhanced Commodity Index ETN (NYSEARCA: RGRC ) RBS Rogers Enhanced Energy ETN (NYSEARCA: RGRE ) RBS Rogers Enhanced Industrial Metals ETN (NYSEARCA: RGRI ) RBS Rogers Enhanced Precious Metals ETN (NYSEARCA: RGRP ) RBS US Large Cap Alternator ETN (NYSEARCA: ALTL ) Disclosure: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned. Share this article with a colleague