BlackRock's BMEZ: A Contrarian's Opportunity Amid Dividend Cuts and Discounts

BlackRock Health Sciences Term Trust (BMEZ) has cut dividends for three of its popular funds, but the fund still yields 9.2% and trades at an 11% discount to its net asset value. This is seen as an opportunity by contrarians as dividend cuts often mark the start of opportunity. The fund's portfolio consists of biotech and medical device makers that benefit from less regulation, including Alnylam and Veeva Systems, which soared under Trump 1.0.

BlackRock Health Sciences Term Trust (BMEZ) has recently announced dividend cuts for three of its funds, including the BlackRock Health Sciences Term Trust, BlackRock Science and Technology Term Trust (BSTZ), and BlackRock Technology and Private Equity Term Trust (BTX). Despite the reductions, BMEZ continues to offer a substantial yield of 9.2%, trading at an 11% discount to its net asset value. This situation has sparked interest among contrarian investors who view dividend cuts as a potential signal of opportunity.

The dividend cuts were part of an update to the managed distribution plans of the affected funds, which will transition from floating rate distributions to level rate distributions starting in October 2025. The new distribution rates are as follows: BMEZ at $0.11 per share, BSTZ at $0.1625 per share, and BTX at $0.0525 per share. These changes aim to enhance distribution stability while maintaining competitive rates and providing potential growth in net asset value. Additionally, the changes will help manage the proportion of public and private investments within the funds.

The dividend cuts have raised concerns about the funds' ability to sustain their distributions. However, BlackRock has stated that the funds will distribute all available investment income to shareholders, with the potential to include long-term capital gains and return capital if necessary. The funds' performance over the past five years has been mixed, with BMEZ and BSTZ showing modest growth, while BTX has seen more significant gains. Despite the recent dividend cuts, the funds' yields remain attractive, making them an intriguing option for investors seeking high income.

The portfolio of BMEZ consists primarily of biotech and medical device makers, such as Alnylam and Veeva Systems, which have benefited from less regulatory oversight. These companies have shown strong performance under the previous administration, with Alnylam and Veeva Systems experiencing significant growth during the Trump 1.0 era. The focus on biotech and medical devices aligns with the broader trend of investing in innovative healthcare solutions.

Investors should be cautious when considering these funds, as the dividend cuts and potential for return of capital distributions may impact the funds' net asset value per share. Additionally, the funds' performance and distribution rates are subject to change at the discretion of the Board of Trustees. The Board may amend or terminate the plans at any time if deemed necessary for the best interest of the funds or their shareholders.

In conclusion, while the dividend cuts for BlackRock Health Sciences Term Trust and its sister funds may raise concerns, the high yield and potential for growth in net asset value make them an intriguing opportunity for contrarian investors. As always, investors should conduct thorough research and consider their risk tolerance before making investment decisions.