"Excuse me sir, but do you really think you should be driving yield in your portfolio with this stock?"
This past Friday, I attended Superior Plus's fifth annual investor day. The room was largely filled with analysts and institutional investors like High Rock. There were four 70-something investors sitting together, chomping at the bit to get a hold of the microphone to tell management just how upset they were with a recent 50% cut to their dividend. Two of them spoke for the others. Well, during a break, I just could help myself - and wanted to help them. I approached cautiously and apologized in advance for saying, "excuse me sir, but do you really think this is how you should be driving yield in your portfolio at your age?" I went on to tell him that although management refuses to admit it, the reason for the dividend cut was that the senior unsecured bond (which we own) has a Restricted Payment limitation which effectively forced the dividend cut to make room in that restricted payments basket so they could upstream cash to the holding company where this troublesome near term convertible bond was issued from. If that covenant didn't exist, no way would they have cut their dividend, I then went on to say that, in my view, a highly levered company like Superior Plus (5.2x Leverage) in an economy growing at 1.5% is not the type of equity investment that a 70-somehting investor should be assuming for yield. The same senior unsecured bond, with such protective covenants, yields about 9%. Why on earth would an aging investor look to the very bottom part of the capital structure of Superior Plus for yield? Crazy. The good news is that those investors understood what I was saying very quickly. There are a lot of Superior Plus situations out there - and a lot of investors still looking to equities to drive yield in their portfolio....but that is changing as per recent fund flows.