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Adams Diversified Equity Fund, Inc. (NYSE:ADX) invests in equities of large-cap companies across diversified sectors in the U.S. market. It is an internally managed closed-end equity fund (“CEF”) that has a committed annual dividend distribution rate of at least 6 percent. While selecting stocks for its portfolio, ADX emphasizes seven major factors – growth in its earnings, strength of balance sheet, capital allocation, ability of generating steady cash flow, macroeconomic condition, market competition, and profitability of the entity. As the fund invests in highly traded large-cap stocks, it is expected that performance of this fund will be in sync with that of the broader market.
Adams Diversified Equity Fund Outperformed S&P 500 in the Long Run
Adams Diversified Equity Fund, Inc. was founded in 1840, and was formerly known as Adams Express Company. ADX benchmarks its performance against the S&P 500 Index (SP500), which in other words is the representative index for the broader market. Historically, this fund generated strong returns. Between 2012 and 2021, the fund generated positive total return in 9 out of 10 years. Average annual return stood close to 18 percent during that period. ADX is one rare fund that has been able to outperform the S&P 500 over the long term. S&P generated around 17 percent average return over the same period.
As ADX has a committed annual dividend distribution rate of at least 6 percent, a double-digit average annual total return is not something very surprising. The annual average yield for the past 10 years has been 8.5 percent, and it has been able to successfully declare quarterly dividends for more than 30 years. ADX currently trades at a 16 percent discount to its net asset value (“NAV”) and has an annual expense ratio of 0.56 percent. It’s a relatively large fund with an asset under management (“AUM”) of $2.18 billion, and market capitalization of $1.83 billion. All these makes Adams Diversified Equity Fund quite attractive.
Performance of Technology Stocks in ADX’s Portfolio Pulled Down this Fund
Almost 2/3rd of its assets are invested in three sectors: Information and communication technology (ICT), financial, and healthcare. Not surprisingly, the most renowned technology stocks like Microsoft Corporation (MSFT), Apple Inc. (AAPL), Alphabet Inc. (GOOG, GOOGL), Amazon.com, Inc. (AMZN), Meta Platforms, Inc. (META) and Tesla, Inc. (TSLA) also constitute among the top holdings of Adams Diversified Equity Fund, Inc. Although AMZN and TSLA are not ICT companies, I consider these as technology stocks, as technology has become the major driver behind the growth of these companies. ADX has invested a quarter of its entire assets in these six stocks.
As technology stocks had a poor year in the equity market, ADX also made huge losses. GOOGL fell by 31 percent, AMZN fell by 45 percent, TSLA lost almost 51 percent, and META lost 63.5 percent. Prices of AAPL and MSFT also fell between 19 to 24 percent. As a result, ADX suffered a year-to-date (YTD) price loss of 21 percent and total return of negative 15 percent. Significant investments in the healthcare sector, however, generated much better price return. During the past six months, UnitedHealth Group Incorporated (UNH), CVS Health Corporation (CVS) and Health Care Select Sector SPDR (XLV) grew between 7 to 10 percent. However, these 3 stocks accounted for only 6 percent of its entire portfolio. Thermo Fisher Scientific Inc. (TMO), another significant investment in healthcare grew by 0.4 percent during the same period.
A good number of financial stocks are listed among the top 20 equity investments of Adams Diversified Equity Fund. The fund has invested almost 15 percent of its entire fund in 10 financial stocks such as Mastercard Incorporated (MA), Bank of America Corporation (BAC), Wells Fargo & Company (WFC), Visa Inc. (V), The Charles Schwab Corporation (SCHW), Berkshire Hathaway Inc. (BRK.B), MetLife, Inc. (MET), Morgan Stanley (MS), American International Group, Inc. (AIG), and Centene Corporation (CNC). Barring BAC, all other stocks recorded positive growth during the past 6 months. SCHW and MET generated high double digit growth between 15.5 to 17.5 percent. Due to better performance of healthcare and financial stocks, ADX was able to post a better return. During this period, ADX’s loss was 6.5 percent.
Investment Thesis
Adams Diversified Equity Fund has a committed dividend distribution of 6 percent, whereas the actual yield is even higher. More importantly, the total return is not limited to its yield. The fund generated a long term return of almost 18 percent, which is better than the return of S&P 500. Due to poor performance of the broader market, and especially the technology stocks, price performance has been poor this year. As a result, the total return is negative 15 percent, but this again means the fund is available at a steep discount. In that sense, this is the right time to buy this fund.
Long-term investors should make the most of the discount and accumulate more units of ADX. The market may decline even further, but that should not bother such long term investors, as the kind of portfolio ADX has, is bound to generate strong double digit returns over the long term.
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