BST May Need to Reduce Payout If Tech Stocks Fail to Rebound Soon
The BlackRock Science and Technology Trust (BST) invests primarily in growth-oriented technology stocks, including industry titans Apple (7% of portfolio), Microsoft (6%), and credit card giants Mastercard and Visa (5%).
These investments boomed during the pandemic as investors drove valuations to lofty levels, assuming interest rates would remain low and growth unabated.
As BST's net asset value (NAV), or the value of the fund's investment assets net of any liabilities, swelled, management increased the distribution by just over 50% compared to pre-pandemic levels.
But almost as fast as BST's value spiked, nearly all of the pandemic gains have been erased this year, and the fund's NAV per share now sits near levels last seen in April 2020 despite the payout remaining 50% higher.
Source: Simply Safe Dividends
As a result, the fund is now distributing almost 10% of its NAV yearly to shareholders. This distribution rate is the hurdle BST's total returns need to exceed going forward to cover the distribution and stop NAV from eroding further.
Before the pandemic, BST's distribution rate sat below 6% of NAV. Barring a quick recovery in growth stocks, which may be unlikely as the Fed appears intent on keeping interest rates high to fight inflation, BST may find it prudent to return its distribution rate to pre-pandemic levels.
Cutting the payout by 35% would move BST's distribution rate to about 6.5% of NAV. This would create a more sustainable distribution based on the fund's long-term performance and recognizes that future returns could be higher whenever the market recovers, though unlikely to return to 2021's frothy valuations.
Recognizing the fund's increased pressure to rebase the payout assuming the fallout in growth stocks persists with higher interest rates, we are downgrading BST's Dividend Safety Score from Borderline Safe to Unsafe.
Since launching in 2014, BST has never reduced the distribution, and we expect cutting the payout will be a hard decision for management. As such, the fund seems more likely to issue a one-time material reduction rather than a series of minor cuts.
Should that be the outcome and result in a more sustainable distribution rate, we might consider upgrading BST back to Borderline Safe, given the fund's commitment to a stable payout.
That said, if we held shares of BST, we would consider reallocating those funds into a CEF with a safer distribution and less exposure to the pressures imposed by rising interest rates.
Investors desiring lower-risk tech exposure could consider Columbia Seligman Premium Technology Growth Fund (STK), which yields 7%, has paid uninterrupted distributions since 2010, and writes call options on half of its positions to reduce downside volatility.
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