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Edinburgh sounds cautious note on dividend

Edinburgh sounds cautious note on dividend – Over the year ended 31 March 2020, Edinburgh Investment Trust returned -26.7% in NAV terms and -29.4% in share price terms, both a lot lower than the -18.5% return generated by the All-Share Index.

Revenue per share fell to 27.8p from 28.7p but the dividend was increased from 28p to 28.65p, using revenue reserves to top up the distribution.

Buybacks added about 1.3% to the NAV but it cost about 0.5% to transition the portfolio from the one that Mark Barnett had created at Invesco to the one James de Uphaugh wanted at Majedie. At 31 March, about 1% of the fund was still in legacy positions.

The company’s £100m debenture provides relatively expensive gearing, with a coupon of 7.75%. This matures in September 2022, however.

The board say that the latest results reflect the fact that UK domestic-focused stocks continued to be out of favour for most of the year, a number of stock specific issues and the sharp falls in markets following the onset on the COVID-19 crisis and the associated lockdowns. In the managers report, James de Uphaugh comments that while the market sell-off was widespread, there was a disproportionate impact on UK domestic stocks. Prominent negative contributors included Burford Capital, Amigo and the tobacco holdings. It should also be noted that while the NAV underperformed the benchmark by 8.2% over the year, 7.7% was in the first six months which was under Invesco’s rather than Majedie’s management.

Lower management fees

Invesco charged an investment management fee of 0.55% per annum of the market cap. As part of the new arrangements, the board has agreed with Majedie a lower fee for investment management services of 0.48% on the first £500 million of market cap and 0.465% on amounts above £500 million, as well as a three month fee waiver to help with the costs of the transition. This excludes the cost of company secretarial services which will now be provided by PraxisIFM Fund Services (UK) Limited, for which the company will pay a fixed fee separately. The board says that, overall, this should mean future costs should be lower as a percentage of net assets. At the company’s year-end, the annual ongoing charges ratio was 0.55%, compared with 0.56% over the prior twelve months and is anticipated to be 0.51% for the current year.

Possible rebasing of the dividend

There is a section in the chairman’s statement and a more expansive one in the manager’s report that, to us, alludes to a possible dividend cut. We have reproduced the latter one here so that you can make your own minds up.

Another consequence of less efficient balance sheets, and a greater emphasis on ready liquidity to see companies through crises, is that corporates will have less money available to pay out to their shareholders. This, plus the broader economic consequences of the abrupt halt to many parts of the economy, means that the UK’s 2020 dividend payments could be down by about 40% compared to 2019. We think such a decline is a reasonable working assumption for the Company’s holdings too. There is pressure on dividends on other fronts, too. For example, the Bank of England has instructed UK-listed banks to withhold dividends this year and put a shot across the bows of the major insurers.

More broadly, we view dividends as an output of profitability not as a payment that should be maintained at a cost to the long-term fabric of a business. Clearly in the current crisis, with corporates facing an unprecedented array of “unknown unknowns”, many have decided to cancel or defer their dividend decisions. Layered on this there is also a societal dimension: those companies that either access government employment support schemes, or access or are deemed to be beneficiaries of government credit facilities, are expected to pass on paying their dividends.

Thus the medium term outlook for dividends remains uncertain. Much will turn on the rate at which economies recover. While we expect the companies in the portfolio to emerge from this crisis stronger, it is unclear at what rate their dividends will grow. We do not underestimate the economic damage of the COVID-19 recession, which sadly is likely to be far ranging and severe. In such an environment, even the strongest of companies will, sensibly, seek to preserve cash even if that means reducing or cancelling dividends. Your Company’s dividend income will also be under pressure compared with historic norms. While we have some short-term flexibility to support dividends through use of its distributable reserves, we will be working with the Board in the months ahead to help the Board decide what might be a sustainable level payout for shareholders. We expect to be able to say more about this by the time of the Interim results in November.”

[QD comment: From a performance perspective, the timing of Majedie taking over the investment management contract on 4 March is unfortunate, as it captures the worst of the covid-19 related falls (the UK market bottomed on 23 March). It appears that most of the portfolio adjustments has been completed by the time the market collapsed, and investors will now have to see how it performs from here. While it is hard to read through the current disruption, this could ultimately suit Majedie’s long-term investment style.]

EDIN : Edinburgh sounds cautious note on dividend

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