Tekla Healthcare Investors: A Dividend Paymaster (NYSE:HQH)

Tekla Healthcare Investors (NYSE:HQH) is a close ended healthcare mutual fund, primarily investing in large and mid-cap biotechnology stocks. The fund benchmarks the performance of its portfolio against the NASDAQ Biotechnology Index. 58.3 percent of its investments are in biotechnology companies followed by 16.4 percent in pharmaceutical companies and 8.2 percent in Life Sciences Tools & Services. Another 16.7 percent of HQH’s portfolio consists of equity shares of companies engaged in the business of Medical Device & Diagnostics, Healthcare Equipment & Supplies, Managed Healthcare and Healthcare Services.

Incidentally, these companies delivered a positive price growth in the past one year. On the other hand, companies engaged in the business of biotechnology, pharmaceutical and Life Sciences Tools & Services, had a very poor year. As a result, HQH’s market price fell by approximately 13 percent, while S&P 500 recorded a growth of 17 percent over the past one year. HQH’s market price also dropped by 12 percent over the past five years, whereas S&P 500 recorded a growth of 114 percent over the same period.

An analysis of top 60 percent holdings of HQH reveals that almost 45 percent of its portfolio is invested in 12 large-cap (market capitalization over $12.5 billion) biotechnology stocks – Amgen Inc. (AMGN), Moderna (MRNA), Gilead Sciences Inc. (GILD), Regeneron Pharmaceuticals Inc. (REGN), Horizon Therapeutics Plc. (HZNP), Vertex Pharmaceuticals Inc. (VRTX), Illumina Inc. (ILMN), Biogen Inc. (BIIB), Seagen Inc. (SGEN), Alnylam Pharmaceuticals Inc. (ALNY), BioNTech SE (BNTX), and BeiGene Ltd. (BGNE). Out of these 12, only REGN and BNTX had been able to record double-digit growth. Vertex Pharmaceuticals Inc. grew by 8.13 percent, and the remaining 9 stocks (36 percent of total holdings) had a very poor year, recording huge price loss.

However, Tekla Healthcare Investors is a dividend paymaster with a current yield of 8.8 percent . It has been paying strong and steady quarterly dividends since 2000. It has recorded an annual average dividend yield of 8.3 percent, 8.9 percent and 9.3 percent over the past three, five and ten years. An income seeking investor will be extremely delighted to hold HQH for the long term and enjoy the quarterly income. However, the question is: how does HQH offer such high yield despite the stock performing poorly in the stock market.

Despite the yield being high, the dividend amount is quite low. A quarterly dividend of $0.5 per share on a share price of approximately $20, leads to 10 percent yield. Though in some years, HQH’s earnings have been negative, in other years the earnings were much more than the dividend paid. So, in some years, dividends have been paid out of retained earnings of previous years, and rarely from invested capital. So, in a sense, HQH has paid dividends out of its earnings for the past 22 years, and investors can very well expect the same trend to continue. HQH already has sufficient retained earnings, and it is increasing every year. Moreover HQH has a managed distribution policy which authorizes its management to make quarterly distributions at a rate of 2% of the Fund’s net assets. This fund currently has a net asset of $1 billion.

Thus, despite negative growth in one or two years, the strong and steady dividend payment can keep shareholders interested in HQH in the long term. Tekla Healthcare Investors has generated a price growth of approximately 30 percent over the past 10 years. If we take into account an average yield of 9.3 percent per annum during the same period, the overall return will be close to 12 percent, which is quite attractive; especially if we take into account the setbacks received by the biotechnology sector in those past ten years.

Even in the past 5 years, when HQH’s market price dropped by 12 percent, overall investors’ earnings remained positive on the basis of 8.9 percent annual average yield. Overall annual return would have been more than 6 percent in this case. Considering the pandemic related market crash and the negative performance of large cap biotechnology stocks in the past 12 months, this performance can be considered acceptable. I don’t think that any shareholder will be tempted to liquidate HQH stock under the current scenario, with the assumption that the return will become positive somewhere in the future, and till that time he/she can enjoy close to double-digit dividend yield.

Moreover, the fundamentals remain strong, despite poor price performance of HQH’s stock. Its current price multiples are a bit on the lower side, indicating an undervaluation. Macroeconomic factors played a major role in underperformance of large-cap biotechnology firms and some other stocks from life science tools & services and pharmaceutical industry. A Price/ Earnings ratio less than 15, and Price/Book of 4.25 is somewhere around the industry average. However, a Price/Cash Flow of 10 is relatively lower than industry average as well as that of the benchmark index, and investors don’t seem to be convinced yet about HQH’s potential of generating strong and steady future earnings.

In my opinion, it is the right time to invest in HQH, as the stock is trading at a discount of 6.5 percent from its Net Asset Value (NAV). However, the price may fall further down, as all the long term moving averages are placed above the short term moving averages. But that loss will not be very significant, and I don’t expect a double-digit percentage drop from the current price point. The stock is also trading at a low premium (less than 10 percent) over its 52-week low. Investors may also wait for the price to fall down further, but in such cases, they may lose out on the dividend income of one quarter, which is around 2.4 percent of the current price. Thus, in my opinion, it’ll be wise to buy units of Tekla Healthcare Investors fund, and hold it for the long haul.

About the TPT service

Thanks for reading. At the Total Pharma Tracker, we offer the following:-

Our Android app and website features a set of tools for DIY investors, including a work-in-progress software where you can enter any ticker and get extensive curated research material. 

For investors requiring hands-on support, our in-house experts go through our tools and find the best investible stocks, complete with buy/sell strategies and alerts.

Sign up now for our free trial, request access to our tools, and find out, at no cost to you, what we can do for you.