GGT - GGT:  Telecom And Media Equity CEF 15% Dividend Yield

2023-05-08 08:00:16 ET

Summary

• The Gabelli Multimedia Trust is an equity closed end fund.
• The CEF takes leveraged positions in Telecom and Media equities.
• The fund has an unusually high leverage ratio of 42%, and a premium to net asset value of 33%.
• The fund is down only -20% in the past year, the negative portfolio performance being buffered by an increase in the fund's premium to NAV.
• The CEF has seen a NAV reduction of over 50% in the past decade on the back of an unsupported dividend yield.

Thesis

The Gabelli Multimedia Trust ( GGT ) is an equity closed end fund. As per the vehicle's literature:

The Fund seeks opportunities for long term growth within the context of two main investment universes: companies involved in creativity, as it relates to the development of intellectual property rights (copyrights); and companies involved in distribution as it relates to the delivery of these copyrights. Additionally, the Fund will invest in companies participating in emerging technological advances in interactive services and products.

This CEF stands out in the equity space due to its large leverage ratio of 42% and very high premium to NAV of 33%. We think both aspects are negatives for the fund. A high leverage ratio for a vehicle during a downturn will only serve to magnify losses, and the fund is indeed down -20% on a 1-year basis, versus only -3% for the unleveraged ETF in the space, the Communication Services Sector ETF ( XLC ).

The CEF has a quasi-fixed funding structure, relying mostly on preferred share issuance:

In a rising rates environment, a fixed form of funding is beneficial for the CEF equity holders, all else equal. The preferred shares are attractive in their own right, with yields that exceed 5.5% currently. They are traded, and a retail investor can take a view on this CEF via its preferred shares. That would represent more of a rates play rather than equity risk.

As a rule of thumb, during market turbulence or downturns, a retail investor should strive to avoid leveraged vehicles in the equity space, since they tend to magnify negative moves. During a bull market the opposite occurs, with positives being boosted.

We also do not think the premium for this CEF is warranted. The CEF has a 33% premium to NAV which is not supported by an extraordinary historic performance or a 'real' dividend yield:

Long term, supported dividend yields result in fairly stable NAVs. Not here. There is a very clear downtrend for this CEF, with the fund having lost more than 50% of NAV value in the past decade.

We believe we are going to witness another leg down in the equity markets in 2023. The leg down will be amplified for GGT by the fund's leverage, and will also result in its premium to NAV to contract further. There are only negatives on the horizon for this CEF, hence we are a Sell here for this name.

Analytics

• AUM: $0.154 billion
• Sharpe Ratio: 0.27 (3Y).
• Std. Deviation: 30 (3Y).
• Yield: 15.7%
• Premium/Discount to NAV: 33%
• Z-Stat: -0.7
• Leverage Ratio: 42%
• Composition: Equity - Media/Telecom
• Duration: n/a

Holdings

The fund has a composition which is overweight the Entertainment and Cable sectors:

From an individual name perspective, the largest equity holdings in the fund are:

• Sony Corp. - 5.4%
• Alphabet - 3%
• Apple - 2.5%
• Meta - 2.3%
• Comcast - 2.1%
• Rogers Communication - 2%
• Madison Sq Garden - 1.9%
• Liberty Media Corp. / Liberty Braves - 1.9%

The portfolio holdings have an average P/E ratio of only 15.5 versus a category average of 23, making the fund fairly conservatively allocated from a valuation standpoint.

Performance

The CEF has underperformed the unleveraged ETF in the communications sector in the past year:

We can see how the Communication Services Sector ETF has rallied substantially in 2023 versus GGT's performance.

Longer term XLC also still outperforms:

Kindly keep in mind the above graph represents a total return graph, meaning that the GGT dividend distribution is included. That makes the comparison 'like for like' with an ETF that does not have a high dividend yield.

Ultimately, an investor who is dividend agnostic should pick XLC here since it offers a better net total return.

Premium/Discount to NAV

This fund has started to trade with a large discount during 2022:

This is unusual given the fund's historical premium to NAV, and we expect for the premium to keep narrowing down to more palatable historic levels.

Conclusion

GGT is a closed end fund focused on equities. The CEF has a high Telecom and Media equities concentration, with a very large leverage ratio of 42%. While most of the funding is done via fixed rate preferred equities, the CEF just serves to magnify negative moves in a downturn. The CEF is down only -20% in the past year, its performance having been buffered by its increased premium to NAV. We feel retail investors get interested in the fund due to its high dividend yield of 15%, dividend which is unsupported though. The fund's NAV has lost more than 50% in the past decade due to this unsupported dividend policy, and is set to fall even more due to a structural underperformance in the underlying equities. We can see the negative effects of the leverage in the CEF's 1- and 5-year total returns, especially when benchmarked against the unleveraged fund XLC. We expect another leg down in this market, which will bring the CEF's performance still lower, and also we expect the premium to NAV to fall further down. Both are negatives for the shareholders, thus our Sell rating at this time.

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