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Tekla: Healthcare at a Discount
08/12/2020 5:00 am EST
Tekla Healthcare Investors (HQH) has been a holding of ours for more than four years, and in April we upgraded it to a "Must Own" in the midst of the COVID-19 outbreak, observes income expert Rida Morwa, editor of High Dividend Opportunities.
Looking at the closed-end fund’s top holdings we still see lots of investments we like. Gilead (GILD) has enjoyed recent success with its Remdesivir. Other top holdings like Amgen (AMGN) and Vertex (VRTX), continue to see an increased demand for their products during this pandemic.
Biotechnology is a focus area for HQH representing over 60% of the fund’s investments. Pharmaceuticals also make up a significant portion of the fund’s portfolio with a 17% share.
We continue to think these two areas will see a lot of resources devoted to them both to deal with the current crisis and as future research efforts change in response to this crisis.
Note that HQH also invests in promising small emerging biotech companies by funding them. This also opens the door for new medical discoveries, and not just a cure/vaccine for COVID-19.
Some investors might wonder if, given the price increases from both the March lows and the beginning of the year, it might be too late to invest in HQH.
But looking at the year-to-date total returns (price appreciation plus dividends) vs. the returns based on NAV (NAV appreciation plus dividends), the underlying value of the fund’s portfolio has increased more than the market price of HQH.
So even though the price has gone higher, an investor is still getting a proportionally more valuable basket of assets due to a higher discount to NAV. Investors are buying all these great healthcare stocks at a discounted price of 13%! So now remains a good time to buy HQH.
The dividend policy of HQH is somewhat different. It pays a variable, managed distribution each quarter that's 2% of the NAV at the end of the previous quarter.
For example, the NAV on March 31 was used to calculate the distribution amount that was paid out on June 30. So investors get a hefty cash flow distribution each quarter, which can grow as healthcare stocks outperform.
Note that, unless you elect otherwise, the distribution is paid out in shares — more stock of HQH — and the share issue price is determined about a week before the pay date. So as long as HQH trades at a discount, you will be better off getting paid in shares rather than in cash as you get more of this discounted basket of healthcare stocks.
Our current "Buy Under" price for HQH is $22. Given the likely distribution increase of $0.48 to be paid in September, now is the time to buy more shares or initiate a position.
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