Wilson Asset Management Ltd (ASX: WAM, WAMO)

WAM is a long-standing, popular and successful Listed Investment Company (LIC). A common strategy used by LIC's to raise more funds is to offer 'free' options: the usual format is one free option for each new share bought. The option gives the shareholder the right to buy another share at a certain price by a certain date. 

In its latest round of capital raising, WAM issued options with a strike price of $1.60 and the expiry is 31/7/13. These options are listed under the code WAMO. 

Here is the current prices of WAM, WAMO and other relevants facts: 

• WAM share price: $1.71
• WAMO share price: $0.10
• WAMO exercise price: $1.60
• WAM NTA (31/3/13, post tax): $1.82
• Estimated WAM NTA assuming 100% exercise of options: $1.79*
• Next Dividend Ex Date: September 2013

*Estimation only. There is likely to have been more growth in the portfolio since 31/3/13 however a 6c dividend was also paid. 

WAM has an excellent track record of paying a growing level of fully franked dividends. The rolling 12 month dividend is 11.5c or 16.4c including franking credits. Based on the current share price, the historic  dividend yield is 9.6% p.a. To provide some points of reference, that yield is a) three times the RBA Cash Rate (3% p.a.), b) the current grossed-up yield on the ASX equivalent of the Dogs-of-the-Dow is 6.8% p.a. and c) the current yield on a selection of hybrids I follow is 7.2% p.a. 

The yield based on the exercise price of $1.60 is 10.25% p.a.

The graph below is a recent history of the share price v post-tax NTA: 

There has been a disconnect with the share price and NTA in the short-term. This is not common for WAM but has been a big problem for other LIC's. 

Obviously a few things can happen from here: 

• The NTA sinks - depending on how far the NTA sinks, the share price may stay roughly where it is or also sink
• The share price rises to close the gap to NTA
• The disconnect continues  

To lose money on the options, they must expire worthless: ie the share price must drop to $1.60 over the next few months. This could happen. Either the NTA gets smacked or the disconnect in the share price just continues and for some reason drops to $1.60. The former scenario is more likely. As noted, the historic dividend yield on $1.60 is 10.25% p.a. 

The upside is the market remains stable and the share price may wander back up to the NTA and if investors are lucky, the NTA keeps moving up giving a double-win. 

Kristian 

Disclosure: long WAMO, strictly as a leveraged way to buy shares in WAM.