Is nbi another income star?
Three months back, I nominated five great income stocks from a variety of sectors in ‘Five star ASX dividend stocks from reporting season’. This was on the basis that the company had reported well during earnings season, there was a strong expectation that the company could maintain and possibly increase its dividend in the next financial year, and the current dividend yield was satisfactory.
Most importantly, the companies met my expectations of an income stock. That is, not too much risk of capital loss, less volatile, and high confidence regarding the payment of the dividend. Annuity like. Some might say boring.
The stocks I nominated were:
- APA Group (APA) - forecast yield on 22 February of 4.7%;
- Coles (COL) – forecast yield on 22 February of 4.9%;
- Medibank Private (MPL) – forecast yield on 22 February of 4.6%;
- Transurban (TCL) – forecast yield on 22 February of 4.7%; and
- Woodside (WPL) – forecast yield on 22 February of 5.6% but less expected for FY20.
LNG producer Woodside was the “odd stock” out and didn’t really meet the criteria set out above. However, I explained: “I think Woodside is an exception, given its strong cash flow, balance sheet and commitment to sell down stakes in key development projects”.
So how have they performed? Quite remarkable – each stock is higher – with an average gain in price of 7.1% and a total return of 7.5%.
Importantly, I didn’t pick the stocks for capital gain. It wasn’t my objective. Nor was I expecting the shift in sentiment about interest rates from an “on hold” scenario to “possible rate cut”, which has driven in part this thirst for yield.
But with bank stocks on the nose, some investors are now paying crazy prices for income stocks. Transurban, for example, hit an all-time high on Friday and is trading on a prospective yield of just 4.2%. Many property trusts are trading at sizeable premiums to their NTAs (net tangible assets).
I think equity income stocks have become quite expensive and am increasingly considering opportunities in other asset classes. For the “risky fixed interest” portion of my portfolio (this doesn’t mean it is risky per se but rather it is not “capital secure” fixed interest, such as a government guaranteed bond or bank term deposit), one ASX-listed security that stands out is the NB Global Corporate Income Trust (NBI:ASX).
The NB Global Corporate Income Trust
NBI invests in a portfolio of actively managed global high-yield bonds. It aims to provide investors with a consistent and stable income stream paid monthly, while achieving an attractive level of total return (income plus capital) over a market cycle. The current target distribution (net of fees) is 5.25% pa, paid monthly.
Within the global high yield market, it focusses on larger companies with more liquid issues, and targets an average credit grade rating between BB and B (below investment grade). The portfolio typically consists of 250 to 300 bonds issued by large, liquid global companies and diversified across countries, industries and credit quality. The portfolio is aligned to the global high yield market, with approximately 60% in US high yield corporate bonds, 20% in European high yield corporate bonds and 20% in emerging market US dollar denominated high yield corporate bonds.
Neuberger Berman, a New York based independent, employee owned global asset management firm, is the investment manager. It manages or advises on approximately A$465 billion of assets.
The manager has a 21-year track record in high yield corporate bond management. The investment team, which comprises 55 investment professionals, utilises a defensive investment approach that places a strong emphasis on capital preservation. This has contributed to the team’s strong track record of only experiencing one defaulting bond in all its high yield strategies since 1997.
The manager is entitled to a fee of 0.85%, comprising a management fee of 0.7% and expenses of 0.15%. The trust is not leveraged and exposures are hedged back into Australian dollars.
A key consideration for potential investors include understanding high yield bonds, which carry a higher risk of default than government and investment grade debt. Other risks to consider include interest rate risk, underperformance risk and the possibility that NBI’s share price may deviate from its net tangible asset value.Entitlement offer to raise $476.3m
When listed on the ASX last September, the trust raised about $414 million from the issue of 207 million units at an issue price of $2. The NTA of those units (as at 16 May) is $2.03. Since listing, it has paid 7 monthly distributions of 0.88 cents each (6.16 cents in total).
NBI is now seeking to raise an additional $476.3 million via the issue of 238.2 million units at $2 each. This comprises a 1:1 entitlement offer for existing unit holders (1 new unit for every 1 existing unit at $2 per unit), plus an additional offer to the clients of particular private brokers.
The entitlement offer is due to open on 5 June and close on 26 June. It is not renounceable, with any shortfall to be made available to existing unit-holders via oversubscription bids and/or to the clients of the private brokers.
Entitlements will be determined on 31 May, with units trading on an ex-entitlement basis on Thursday 30 May (that the means that the last day to purchase on the ASX with entitlement is Wednesday 29 May).
The brokers involved are Evans Dixon, Morgans, Ord Minnett, Bell Potter, Pattersons, Shaw and Partners and Wilsons.
NBI closed on the ASX on Friday, 17 May 2019 at $2.05 (compared to an estimated NTA of $2.03). You can access the product disclosure statement on Neuberger Berman’s Australian website.
Disclosures: Paul Rickard’s SMSF owns units in NBI. National Australia Bank Limited was among Joint Arrangers and Joint Lead Managers for the NB Global Income Trust Initial Public Offering in 2018.