THQ - THW: Just For Now Let's Ignore The Price Lag And Enjoy The Yield

Summary

• THW is still continuing with a steady monthly payout and generating close to double-digit yield, and it is relatively better protected from market risk.
• THW failed to grow during the past six months, as its major holdings failed to generate price growth. However, total return is relatively healthy.
• THW’s steady payout and strong yield delivered a total return of 8 to 9 percent over the medium term, a trend that is expected to continue.

In my last coverage in May, 2022, I was bullish about Tekla World Healthcare Fund ( THW ) for various reasons. I gave a list of ten reasons to like the stock:

i) close to double digit yield, ii) monthly dividend unchanged for the past 80 months, iii) a rare exception to healthcare funds that grew in April 2022 as well as in past three months, iv) relatively better protected from market risk, v) wise stock selection vi) major investments generating strong returns when the overall healthcare sector is in a downward rally, vii) almost guaranteed positive total return, viii) successfully overcoming covid-19 pandemic related market crash ix) strong enough performance during the past 3 years, and x) extended buyback program expected to resist any price loss.”

Six months hence, I’d like to find out how many of the above-mentioned reasons still exist.

Tekla World Healthcare Fund & its Globally Diversified Portfolio

THW is one of the four closed-ended healthcare mutual funds ("CEFs") launched and managed by Tekla Capital Management LLC. The other three are Tekla Healthcare Investors ( HQH ), Tekla Life Sciences Investors ( HQL ), and Tekla Healthcare Opportunities Fund ( THQ ). All these funds invest primarily in public equity shares of companies operating in the healthcare sector. However, Tekla World Healthcare Fund also invests in corporate debt securities in order to balance its portfolio in terms of risk and return. THW diversifies its investments within various sub-segments of the healthcare sector, with almost 40 percent investments in pharmaceuticals.

Another 36 percent is invested in the stocks of Managed healthcare services providers, and medical devices & healthcare equipment manufacturers. THW invested less than 1/5th of its total assets in life sciences tools & services, biotechnology, and healthcare real estate investment trusts ("REITs"). Stocks of these three sectors are most volatile among the healthcare industry. Going by the distribution of investment avenues, the fund, in my opinion, has invested in the right kind of stocks - something I am consistently advocating. THW also has invested a quarter of its assets outside the equity market of the United States. This allows Tekla World Healthcare Fund to have some cushion in case the U.S. markets fail to perform as expected.

The portfolio of Tekla World Healthcare Fund derives its strength from its global diversification and strong growth of its top investments. As I discussed in May, 2022:

“THW’s top five investments - UnitedHealth Group Inc. ( UNH ), Roche Holding AG ( RHHBY ), Pfizer Inc. ( PFE ), AstraZeneca PLC ( AZN ) and Thermo Fisher Scientific Inc. ( TMO ) - have positive returns in the range of 11 percent to 28 percent during the past one year. If a healthcare fund’s top 25 percent investments deliver such high growth at a time when the overall healthcare sector is in a downward rally, the fund can be trusted to produce good returns.”

Tekla World Healthcare Fund is Meant for Income Seeking Investors

Tekla World Healthcare Fund generates strong dividend yield. It generated an annual average yield of almost 10 percent over the past 5 years. The dollar value of the monthly payout has remained almost static for the past 87 months despite the covid-19 pandemic, inflation, interest rate hikes, and economic uncertainties resulting from Russia’s invasion of Ukraine. Such a strong yield has enabled THW to maintain healthy, if not positive, total return. Otherwise, the market price fell by almost 14.3 percent over the past 6 months. This happened due to the poor price performance of its top holdings. 10 out of its top 15 holdings failed to generate positive price growth during that period. Then again, this was among the worst periods in biopharma.

RHHBY, PFE, AZN, and TMO - all generated negative price growth. In addition to these, Johnson & Johnson ( JNJ ), AbbVie Inc. ( ABBV ), Abbott Laboratories ( ABT ), Novo Nordisk A/S ( NVO ), Novartis AG ( NVS ) and Stryker Corporation ( SYK ) also failed to generate price growth. Stocks like UNH and Bristol-Myers Squibb Company ( BMY ) also had low (though positive) price growth during the same period. At present, almost 47 percent of THW’s assets are invested in these 12 stocks. For obvious reasons, investors have had to suffer capital loss during the past six months. But there is a high probability that they might have bought THW at a price lower than the current market price. THW traded at a price lower than $14 for a significant period during this year. In such a case, the double-digit yield surely is lucrative for investors of THW.

My rationale behind backing this stock remains the same from the very beginning. As mentioned during my February coverage:

“[T]here are various other metrics, like our aging demographics, recovery from the pandemic and so on that make me bullish on its major investment stocks. Doubtless, this fund is meant for income seeking investors. However, in addition to strong dividend performance since September 2015, positive price performance since March 2020, and intelligent diversification of its funds, Tekla World Healthcare Fund can also be considered a wise investment in the current scenario.”

Since my last coverage, the fundamentals remain the same, i.e., the stock is as attractive as earlier. The price loss is very much relative, and provided investors have bought this fund at a low price, there is no reason not to be optimistic about Tekla World Healthcare Fund.

Investment Thesis

So, THW is still continuing with a steady monthly payout and generating close to double-digit yield. The stock is relatively better protected from market risk due to its global diversification and also investing in various segments of the healthcare sector. However, it failed to grow during the past six months, as its major holdings failed to generate price growth. But, due to such a strong yield, the total return is relatively healthy, and is almost 8 to 9 percent over the medium term. Overall, THW’s performance during the past 3 to 5 years can be termed above-average. I expect this trend to continue for another 2 to 3 years, while the fear of recession and economic uncertainties are present.

In an earlier coverage during February, 2022, I mentioned that:

“Even in the worst-case scenario, if the fund reaches a new bottom in the short run, in the long run , it will bounce back (due to its wise stock selection) to at least the current price level of approximately $14. And as I mentioned earlier, with such steady monthly dividend payment and relatively higher dividend yield, investors can easily reap the benefits of this fund.”

In my opinion, this stock has the essential elements that income seeking investors look for - just ignore the price growth and enjoy the yield. And as the current price is somewhere near my expected long-term bottom price, I believe it's the right time to accumulate some more units of Tekla World Healthcare Fund.

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