FCT: 11% Yield, Monthly Payer

With the latest inflation report putting up an obstacle to the idea of the Fed cutting rates in June, income investors may want to hang onto their floating rate income vehicles longer.

We took a look at the First Trust Senior Floating Rate Income Fund II (NYSE:FCT), a closed-end fund, or CEF, operating in this arena.

Fund Profile:

The primary investment objective of First Trust Senior Floating Rate Income Fund II is to seek a high level of current income with capital preservation as a secondary objective. The Fund pursues its investment objectives by investing primarily in a portfolio of senior secured floating-rate corporate loans (“Senior Loans”). Under normal market conditions, at least 80% of the Fund’s Managed Assets are generally invested in a diversified portfolio of Senior Loans. (FCT site.)

FCT began on 5/25/04. The fund’s managers use 19.2% leverage to increase returns. It has 155 holdings, with average daily volume of 102K, and a 2.08% expense ratio.

Dividends:

FCT pays monthly distributions. Its most recent increase was in May 2023, when the monthly payout was raised from $.092 to $.097.

At $10.30, FCT’s dividend yield is an attractive 11.30%. It tends to go ex-dividend at the start of the month, with a mid-month pay date.

FCT has a strong 10.37% 5-year distribution growth rate, with its largest increases coming in 2020 and 2023.

In FCT’s fiscal year ended 5/31/23, NII covered 87% of its distributions, whereas in the 6 months ending 12/31/23, NII covered ~80%:

Taxes:

As of 3/25/24, FCT’s distributions were estimated to come from 79.55% NII, and 20.45% Return of Capital, ROC. ROC offers investors a tax deferral advantage, but it does decrease your tax basis.

Holdings:

As of 2/29/24, FCT’s biggest industry exposures were Software, at 19.81%, and Insurance, at 18.62%. Media and Healthcare both comprised over 8% of its holdings; while, with Hotels/Restaurants & Leisure and Health Care Providers & Services comprising ~6% each.

FCT’s top 10 holdings comprised ~19.5% of its portfolio, as of 2/29/24.

As of 4/10/24, the weighted average maturity was 4.37 years, with a weighted average yield to maturity of 9.44%. ~49% of FCT’s assets had interest rate floors.

Performance:

FCT has outperformed the CEF debt industry on a price and total return basis over the past year, and so far, in 2024. It has trailed the broad Financial sector over the past year and year-to-date, but has outperformed them in the past month.

FCT has a return on NAV of 4.52% since inception. With interest rates rising since 2022, its 1-year NAV return of 11.64% far outshines its 5- and 10-year returns:

Valuations:

Since NAV/Share is calculated at the end of each trading day, you have to look at the most recent closing values to determine the current NAV discount or premium. Buying CEF’s at a deeper discount than their historical average discounts/premiums can be a useful strategy, due to mean reversion.

At its 4/10/24 $10.22 closing price, FCT was trading at a 7.18% discount to NAV, a higher discount than its 3-year 6.56% discount, but lower than its 1-year and 5-year discounts of 10.4% and 8.47% respectively.

FCT looks cheaper than the CEF Debt industry average for P/Sales, and is roughly in line with the industry on a P/Book basis. It does have a much higher than average dividend yield.

Parting Thoughts:

With all the speculation and confusion surrounding the timing of the Fed’s future interest rate cuts, FCT might hold up well enough to offer investors a place to gain some attractive income in the coming months.

We rate FCT a speculative, short-term Buy. Interest rate cuts may come later than expected, which benefits floating rate income vehicles.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.