THE MERCHANTS TRUST: Fund on course to deliver 40th year of dividend increase, to delight of shareholders
Investment trust Merchants is well on course to delivering its 40th year of dividend increase, much to the delight of shareholders.
Although its financial year does not end until early next year, the trust’s board has already indicated its determination to improve upon the 27.2p a share that was paid in the previous 12 months. With the fund sitting on income equivalent to just over 18p a share and a sharp recovery in dividends paid by most UK companies – the fund’s target market – investment manager Simon Gergel says the income outlook is positive.
‘Back in April, when the trust’s financial results were released for the year to the end of January, the board emphasised the fund’s progressive dividend policy,’ says Gergel. ‘But six months on, the outlook for dividends and the fund generally has much improved. The trust has benefited from takeovers within its portfolio which in turn has boosted the fund’s value and given us the opportunity to invest in new companies.’
The results are clear to see. Over the past year, the £688million trust has comfortably outperformed both the FTSE All-Share Index and most of its rivals, generating an overall return of 65 per cent compared with 30 per cent for the index and 43 per cent for the average UK equity income trust. The quarterly income it pays shareholders – 6.8p a share for each of the first two quarters – is equivalent to a dividend yield of five per cent.
‘Over the past 12 months, the trust has benefited from a strong portfolio,’ says Gergel. ‘This has meant we have been able to sell at a profit some holdings which we thought were beginning to look fully valued – the likes of BT, building materials company CRH and digital transformation business Kin and Carta.
‘We have then invested the proceeds in companies which we feel have good and better growth prospects – for example, analytics specialist RELX, French pharmaceuticals company Sanofi, and Tesco which has had a better pandemic than store based rivals such as Aldi and Lidl.’ The trust’s rules permit overseas holdings of up to 10 per cent of the portfolio’s assets.
Holdings that have gone on to be bought by rival businesses include drinks group Stock Spirits (acquired by private equity giant CVC) and insurer RSA (taken over by insurers Intact (Canadian) and Tryg (Danish). It also made money from a big holding in UK aerospace manufacturer Meggitt, which is being bought by US rival Parker-Hannifin, subject to clearance from the Competition and Markets Authority.
Gergel remains confident about the prospects for the UK economy, despite inflationary fears, the possibility of higher interest rates in the near future, forthcoming tax rises and business bottlenecks.
He believes many UK consumers still have a lot of disposable income in reserve as a result of savings banked during lockdown. ‘It’s quite a confused situation,’ he says, ‘but I’m not negative about the economic outlook. The economy should grow, although you have to acknowledge there are challenges and threats ahead.’
The trust has £93million of borrowings, the proceeds of which are invested in the market. The average cost of this debt is 3.6 per cent which means Gergel must generate a return better than this for shareholders to benefit. Over the long-term, he is confident he can do this.
The total annual charges are around 0.61 per cent, although this figure will come down as the trust’s size expands. The stock market identification code is 0580007 and the ticker is MRCH.