2023-08-18 08:58:32 ET
Summary
- Central Securities Corporation is a closed-end investment company with a high dividend yield and a history of outperforming the S&P 500.
- CET's top holdings include Plymouth Rock Corporation and Progressive Corp, with close to 27% of its assets tied to the insurance industry.
- Despite outperforming markets in the long run, CET trades at a deep discount to its assets.
Central Securities Corporation (CET) is a closed-end investment company (could also be considered a closed-end mutual fund) that's been around since 1929. The fund invests in stocks, bonds, real assets and private companies. You can think of this company like a mini Berkshire Hathaway (BRK.A)(BRK.B) which also happens to have a high dividend (distribution) yield.
When we look at CET's top holdings, we see that 22% of its assets are tied to Plymouth Rock Corporation. You might be wondering what this company is, why it doesn't have a stock ticker and why it makes up such a large chunk of CET's total assets. This is actually an insurance company that is partially owned by CET. It was founded about 40 years ago by investing about $1 million in assets and now it's worth about a billion dollars. Since CET owns about a quarter of this company, it generates a good portion of CET's profits and growth. Think of it like a version of Berkshire's GEICO holding. CET also receives dividends from Plymouth which it pays to investors in its own distributions.
CET's Top Holdings (Seeking Alpha)
It's interesting to note that in addition to Plymouth, one of CET's largest holdings is Progressive Corp ( PGR ) which is another insurance company. Thus, between Plymouth and Progressive, close to 27% of CET's assets are tied to the insurance industry. Other than this, CET is overweight in financials and semiconductor industries but rather underweight in industrials, real estate and retail.
Last year was actually a very challenging year for Plymouth Rock because it reported a loss for the first time since 1984. This loss was caused by multiple factors coming together. First, there were more claims than before due to increased weather events and disasters as compared to past periods. Second, high inflation rate and worker shortage caused these claims to become costlier than they would have normally been since some claims required major home repairs. Third, the company's asset base also suffered losses due to a bear market in bond and stocks that we experienced last year (one could say that the bond bear market is still ongoing). Since last year the company raised its premiums to address higher claims and rising inflation so its results should be a bit better moving forward.
Despite having limited exposure to hypergrowth stocks, CET has outperformed overall markets in the long run. Annually, CET resulted in total returns of 12% versus S&P 500's ( SPY ) annual returns of 10% during the same period but this 2% outperformance actually adds up to a pretty sizeable difference in the long term when you consider effects of long term compounding.
The company makes semi-annual dividend distributions depending on how much money it earns from its investments. Most of the dividends are considered qualified dividends for tax purposes, so they should have a lower tax bill. Typically, the first dividend distribution of the year (mid-year) consists of the company passing on the dividends it received from its holdings and the second and the last dividend distribution of the year consists of the capital gains booked by the company at the end of each year. Having said that, the company's dividend history is a bit erratic. Over the years, the company's dividend payments fluctuated widely but generally trended higher more often than not. In a typical year the company has a dividend yield around 7% but there are no guarantees about where it will be in the future. Investors who like consistent and predictable dividends won't be happy with this kind of an arrangement but I wouldn't complain too much about a fund that's been beating S&P 500 in total returns for decades.
You would think that a company (or fund) that's been around since 1929, survived so many bear markets and crashes, beat overall market returns for decades would trade at a premium against its NAV but CET is actually trading at a deep discount of -19% against its assets. Since some of the company's assets (such as Plymouth Rock) are not publicly traded, we have to trust the company's assessment of valuations for those assets but even then this discount seems a bit too deep for a fund that's been performing so well. When I go back the last 5-10 years I can't find a single time period when CET traded at a premium. It looks like this company is one of those companies that chronically trade at a double-digit discount. The only major implication for this will be that for every $1 the company receives in dividends from its holdings, it can pay about $1.18 to its investors which is a good boost.
Sometimes the company buys its shares back to take advantage of this deep discount but it typically happens in small batches and it's unlikely to have a significant impact on its earnings or dilution status. Still, it helps more than it hinders the fund's performance.
All in all, CET is a good investment asset with its history of beating S&P 500, decent (but erratic) dividend distribution yield, deep NAV discount, conservative management and relatively low expense ratio of 0.5%. This is one of those "buy and forget" investments where you don't want to do much trading but enjoy holding for many years while reinvesting dividends and watching your money grow. If you are bearish on the overall market you might want to wait until there is a better entry point though. We might get an exceptionally good entry point if the overall market continues declining like it's been doing for the last couple weeks.
For further details see:
Central Securities Corporation: 30+ Years Of Outperformance Makes It Worth A Look