Hunting ELKS for a 10%-Plus Yield
By: Carla Pasternak
Editor
High-Yield Investing, High-Yield International
Published: August 4, 2008

Citigroup (NYSE: C) is the big name behind ELKS, an acronym for "Equity-LinKed Securities." ELKS are structure product based on an underlying common stock. They have a maturity date (usually a year from the issue date) and offer either cash or the underlying shares back at maturity. Typically, ELKS pay quarterly or semi-annual dividends to investors. One of the ELKS I particularly like is Citigroup ELKS 11% Linked to Celgene (AMEX: EHC, $10.60).

Snapshot:
These ELKS are based on the common stock of biotech giant Celgene (Nasdaq: CELG). Citigroup issued 2.96 million shares of EHC in March 2008 at $10 a piece, raising $29.6 million. The security matures in April 2009, at which point you will either receive your principal back, or shares of Celgene.

Dividend and principal payments are secured by Citigroup's investment-grade rating of "A1" from Moody's and "A" from Standard & Poor's. The ELKS rank as senior unsecured debt, and debt holders have a claim on Citigroup's assets before equity holders in case of insolvency. Although the bank has been under pressure from bad mortgage loans, it has more than $2 trillion in assets and is generally considered well-capitalized.

Dividend: EHC pays a total dividend of $1.1275, divvied up into two payments -- one on October 6, 2008 and the second on April 6, 2009. At today's share price, that equates to a yield of 10.6%. To capture the payments, you'll need to own the shares before they go ex-dividend, usually five business days before the payment dates.

The payments consist of $0.8226 a share coming from option premiums (fees from option sales), which are treated as short-term capital gains and taxed as regular income. The balance of $0.3049 is paid as interest, which is also taxable at your ordinary income tax rate. Thus, the shares are suitable for a tax-deferred account.

Outlook: The "downside threshold price" for shares of Celgene is $36.17. That means so long as CELG shares stay above that price during the next nine months, you'll get back $10 in cash as principal repayment for every equity-linked security you own. If you'd prefer to receive Celgene stock, you can use these ELKS like warrants and opt to get the equivalent value in shares instead.

In the unlikely event the shares fall to the threshold price or below, you'll get 0.16589 shares of Celgene for each ELKS. If Celgene's shares were to go down below the threshold price of $36.17 and stay there, at maturity you would receive less than your original principal in equivalent CELG shares. Say Celgene declined to $36.17 a share. At the 0.16589 exchange rate, you would receive just $6 worth of Celgene shares for each ELKS ($36.17*0.16589).

The risk of that happening appears low at this time. Selling today at $73.92, the shares have traded above $40 since early 2006. Over the past year they've defied gravity, gaining more than +20% while the S&P 500 has lost close to -13%.

Looking ahead, Celgene's future appears bright. It has a blockbuster blood cancer drug Revlimid and a dynamic pipeline of psoriasis and cancer drugs that should ensure future growth.

With the shares trading near their $10 par value, we see little downside and good upside in EHC. Since only 2,200 shares change hands daily, interested investors may want to consider buying small lots over several days, so as not to move the price.


Good Investing!



Carla Pasternak
Editor
High-Yield Investing

About High-Yield Investing

High-Yield Investing is a monthly investment newsletter that brings you a wealth of information on the market's leading income stocks and funds, as well as a host of relatively unknown investment options that you probably won't find coverage of anywhere else. Many of these securities provide investors with annual dividend yields of 10%, 15%, even 20% or more. The newsletter not only provides subscribers with investing ideas that produce incredibly high dividend yields, but the kicker is that these high-yield investments have also consistently outperformed the major market averages. (Learn More)

About Carla Pasternak

Editor of StreetAuthority.com's High-Yield Investing newsletter since its inception in May 2004, Carla Pasternak draws on a variety of financial backgrounds to make profitable calls on income-generating stocks for her readers.

Carla has been employed in the investment industry for more than two decades. In addition to her work as a writer for several nationally recognized financial publishers, her previous experience includes a position as president of a well-respected investor relations firm. She has also been writing shareholder reports for public companies since 1980.

A highly successful investment analyst, Carla specializes in high-yield, income-paying stocks. In that pursuit, she's always mindful to select companies that not only pay rich dividends, but that also deliver strong long-term capital gains. Furthermore, Carla's experience in writing SEC filings gives her the added insight required for her to truly understand a company's current and future financial health.

On the educational front, Carla holds BA, MA, MBA and Ph.D. degrees. When she's not watching the market, she's teaching business courses at the college level and managing millions of dollars in portfolio assets.

To learn more about Carla Pasternak's premium income investing newsletter -- High-Yield Investing -- please visit this link.



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