PIMCO Cuts A Couple Of Distributions, Who Could Be Next?

2025-01-06 18:20:01 ET

Summary

• RCS and PCM recently announced distribution cuts, and they were simultaneously trading at some hefty premiums to their NAV per share.
• We saw the usual outcome, which is a drastic sell-off as is often the case with the dangerous combination of elevated NAV distribution rates and premiums are mixed.
• We are looking at two more names to warn about in the future, but predicting distribution cuts is incredibly difficult as funds can pay out what they'd like.

Written by Nick Ackerman, co-produced by Stanford Chemist

In the closed-end fund space, it can be truly hard to predict distribution cuts because they can pay out what they'd like until net assets reach zero. This is a little bit different in an operating company, where one can watch free cash flow and earnings per share to get a better idea if a cut is needed. For periods of time, companies can pay out more than they earn and do so if they believe a slowdown is temporary.

However, eventually, if they continually pay out more than they earn, a cut in their dividend will be required. They could alternatively start selling off business segments and assets to support continuing to pay their distributions, but that ultimately ends badly as it would result in lower and lower earnings in the future....

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