Cornerstone Strategic Value Fund

Stock: CLM

Rating: Sell

Author: Waleed M. Tariq

Overview

  • The company invests in equity assets to optimize long-term capital appreciation.
  • Over 95% of the fund’s assets are in U.S. companies, with the rest worldwide.
  • The corporation invests in numerous industries, as mentioned below:
S No.SectorPercentage of Net Assets
1Information Technology22.2
2Healthcare12.4
3Consumer Discretionary11.7
4Financials11.2
5Consumer Services10.6
6Closed-End Funds8.4
7Industrials7.8
8Consumer Staples5.0
9Exchange-Traded Funds3.9
10Utilities2.3
11Real Estate1.6
12Material1.5
13Energy0.7
14Other0.7
Total100
Table Source: CLM

Bullish

  • CLM offers a diverse, promising portfolio of securities.

Bearish

  • The fund’s distribution is financed by unsustainable Cashflow, not dividend and interest income.
  • A 35% NAV premium doesn’t have enough long-term sustainability.
  • The company’s dividend has dropped 20.34 percent in the past three years, which should concern investors.

The Business Model

  • Rather than focusing on CEF stock capital returns, investors should analyze NAV returns (change in fund or ETF net asset value).
  • NAV per share = Assets-Liabilities / Outstanding Shares. ($1,221,650,433/117,878,707) $14 per share NAV premium implies a positive outlook on the fund’s securities.
  • The fund’s average yearly NAV return was 17.8%, while its payout policy was 21%, eliminating 3% of its NAV. If a CEF’s NAV yield is higher than its NAV returns, dividends and/or NAV will decline.

What’s the Problem?

  • 10% of payouts come from dividends, the remainder from capital gains and ROE (ROC). The fund buys stocks with deposited money, sells them, and pays dividends. This method provides dividend cash but doesn’t grow net assets.
Image Source: Screener.fidelity
  • The company’s 21 percent NAV distribution policy will stand. 2022 yields $0.1808/month. If overpaid dividends continue without an increase in NAV, the company will sell securities or reduce payouts to balance its books.

Conclusion

  • Unless the fund reverses its decline or takes a NAV discount instead of a premium, income stock investors have better options.