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What happened
Shares of PIMCO High Income Fund (PHK 0.63%) are down by about 10% as of 11:00 a.m. EST after the closed-end fund slashed its monthly distribution by 22%.
So what
PIMCO High Income Fund has maintained a sky-high yield primarily by paying out an unsustainable distribution. In its fiscal 2016 year, the fund paid out $149 million in distributions despite earning just $94 million in net investment income, or operating income.
|
Prior monthly distribution |
New Monthly Distribution |
Change |
|---|---|---|
|
$0.10346 |
$0.080699 |
(22%) |
Investors haven't seemed to care about paying steep prices for a lofty dividend, as the closed-end fund continuously trades at one of the largest premiums to net asset value, or book value. The only problem is that with each distribution, PIMCO High Income Fund's asset base and earnings power erode.
After today's decline, shares are trading at a premium of 36% to net asset value.
Now what
PIMCO High Income Fund's latest distribution cut may have better aligned its payouts with recurring earnings, but it may not have been deep enough. Morningstar estimates suggest that the fund is generating about $0.062 per share every month in income, well below its new distribution rate of roughly $0.08 per share each month.