CTY - How safe is the dividend?

[TUK020]

Or perhaps a more constructive way to pose the question:
- under what circumstances/scenarios would they be likely to cut/rebase the dividend,
- what is the likelihood of this happening,
- what would the likely effect be?

I think CTY have a venerable dividend history which they will take great pains to preserve (although you could have said the same about Shell until very recently).
If the FTSE dividend drought is short lived to recovery, CTY probably have revenue reserves that will enable them to 'ride through' the downturn. However, as others have pointed out on this board, reserves are an accounting device, not cash reserves, and covering the shortfall in dividend income would entail either increased borrowing, sales of assets at depressed prices, or a combination of the two.

Right now, CTY seem an attractive home for top up moneys for those investing for income, given the intent to keep paying dividends, and their current yield.

Given the plausibility of further economic pain/unemployment/house price crash/depression, what is the defensive interval that CTY could ride out and still give a reasonable dividend? At what point would they be forced to cut? And what would the market reaction be? Would this be priced into the NAV? or would they suddenly incur a massive discount? And would the rest of the market have tanked so much at that point, that CTY would still represent a 'not too bad alternative' to a hyp portfolio?

Lots of big questions that I would very much appreciate TLF thoughts and perspectives on

[swill453]

I take it you noted their statement at the last dividend declaration in April?

Philip Remnant, Chairman, said: "In our Interim Report in February, I said that the Board was confident that it would be able to increase the dividend for a 54th consecutive year. Since then, a number of companies in which we are invested have cancelled their dividends. We continue to recognise the importance of dividend income to our shareholders. Over the last 10 years, we have set aside over £30 million into revenue reserves to underpin future dividends in circumstances such as we face now. Those reserves stood at £58.3 million at 30 June 2019, our last financial year end. If in July we need to draw on those reserves to maintain our unique record of annual dividend growth, then it is our intention to do so."

https://www.theaic.co.uk/companydata/0P ... 3A59/6379I

Scott.

[TUK020]

I take it you noted their statement at the last dividend declaration in April?

Philip Remnant, Chairman, said: "In our Interim Report in February, I said that the Board was confident that it would be able to increase the dividend for a 54th consecutive year. Since then, a number of companies in which we are invested have cancelled their dividends. We continue to recognise the importance of dividend income to our shareholders. Over the last 10 years, we have set aside over £30 million into revenue reserves to underpin future dividends in circumstances such as we face now. Those reserves stood at £58.3 million at 30 June 2019, our last financial year end. If in July we need to draw on those reserves to maintain our unique record of annual dividend growth, then it is our intention to do so."

https://www.theaic.co.uk/companydata/0P ... 3A59/6379I

Scott.

Thank you Scott for the relevant quote.
The point I was making was that the 58m was not a cash reserve, and is probably worth a fair bit less now. To dip into this would require selling assets at depressed market prices. When is the point that they will need to start borrowing to shore up their dividiend payout? When is the point that they start consuming themselves to maintain the divi, or alternatively decide to cut it? How long can they ride out a major drop in divi income from their portfolio?

[johnhemming]

I tried to understand the CTY accounts and found it was going to take longer than I was willing to spend on it.

[JuanDB]

As of the last report the revenue reserves were listed at 15.4p per share. On the current number of share in issues (415m) this would suggest reserves of 63.9m whereas the AIC lists reserves of 58.26m. I wonder if they already tapped the reserve with the last dividend?

[moorfield]

The point I was making was that the 58m was not a cash reserve, and is probably worth a fair bit less now. To dip into this would require selling assets at depressed market prices. When is the point that they will need to start borrowing to shore up their dividiend payout? When is the point that they start consuming themselves to maintain the divi, or alternatively decide to cut it? How long can they ride out a major drop in divi income from their portfolio?

I tried to understand the CTY accounts and found it was going to take longer than I was willing to spend on it.

Remnant is quoting the shareholders' Revenue Reserve on the balance sheet, £58.3m in the 2019 report. Which is a little misleading, since there is no Cash or Cash Equivalent listed, so "drawing on those reserves" to hold the dividend means selling down holdings, or borrowing. I think it would be the latter first, because it has a £120m borrowing facility from HSBC, of which only £8.2m has been drawn. Income received from its portfolio was £77m, and it paid £67m on to its own shareholders.

This is finger in the air stuff, but let's assume it's lost 33% of income from its portfolio this year, ie. receiving an income of £51m for the forseeable future while it continues to hold the dividend. A shortfall of £16m would have to be found each year, which would take 6 years to exhaust the borrowing facility before it needs to start selling the furniture.

[TUK020]

Remnant is quoting the shareholders' Revenue Reserve on the balance sheet, £58.3m in the 2019 report. Which is a little misleading, since there is no Cash or Cash Equivalent listed, so "drawing on those reserves" to hold the dividend means selling down holdings, or borrowing. I think it would be the latter first, because it has a £120m borrowing facility from HSBC, of which only £8.2m has been drawn. Income received from its portfolio was £77m, and it paid £67m on to its own shareholders.

This is finger in the air stuff, but let's assume it's lost 33% of income from its portfolio this year, ie. receiving an income of £51m for the forseeable future while it continues to hold the dividend. A shortfall of £16m would have to be found each year, which would take 6 years to exhaust the borrowing facility before it needs to start selling the furniture.

Moorfield,
thank you, that helped put it in perspective
So CTY should be able to ride out 6 years at 1/3 loss of income, or 4 years at 1/2 loss, assuming they were to use the whole borrowing facility. If they were to do so, the NAV would also decline by the same amount.
tuk020

[OllyDrod]

Remnant is quoting the shareholders' Revenue Reserve on the balance sheet, £58.3m in the 2019 report. Which is a little misleading, since there is no Cash or Cash Equivalent listed, so "drawing on those reserves" to hold the dividend means selling down holdings, or borrowing. I think it would be the latter first, because it has a £120m borrowing facility from HSBC, of which only £8.2m has been drawn. Income received from its portfolio was £77m, and it paid £67m on to its own shareholders.

This is finger in the air stuff, but let's assume it's lost 33% of income from its portfolio this year, ie. receiving an income of £51m for the forseeable future while it continues to hold the dividend. A shortfall of £16m would have to be found each year, which would take 6 years to exhaust the borrowing facility before it needs to start selling the furniture.

Moorfield,
thank you, that helped put it in perspective
So CTY should be able to ride out 6 years at 1/3 loss of income, or 4 years at 1/2 loss, assuming they were to use the whole borrowing facility. If they were to do so, the NAV would also decline by the same amount.
tuk020

That's interesting TUK020 - could you possibly expand a little on how the Revenue Reserve figs on the balance sheet at typically presented and how the RR is held? My understanding was that the RR wasn't generally held in cash, but that most ITs invested it with the rest of the pot and that "drawing on those reserves" typically involves selling down holdings (although, presumably, an IT with net cash could use that).
- OllyDrod

[Alaric]

My understanding was that the RR wasn't generally held in cash, but that most ITs invested it with the rest of the pot and that "drawing on those reserves" typically involves selling down holdings (although, presumably, an IT with net cash could use that).

Selling down holdings is an approach, but the earlier discussion is suggesting that ITs can also use their borrowing powers to raise the cash to finance dividends.

OEICs don't have either option available to them. There may be something of a storm in the financial pages if or perhaps when cuts start coming through.

[Dod101]

From the latest Balance Sheet, the Revenue Reserves were £58 million and the cost of the dividend was £69 Million, with actual revenue for the year £72 million.

They must distribute at least 85% of their revenue to maintain IT status. They are actually distributing about 95% of it so there is not much of a margin before they will need to dip into their Revenue Reserves if they are to increase their own dividend again even if the actual Revenue income is maintained, It will not be of course, so they will almost certainly need to dip into their reserves even to maintain the current dividend. Depends of course what happens to their own dividend income.

The Revenue Reserve is not held in cash, and I would think it most likely that they will in effect sell some of their investments to find the cash but cash will be flowing in and out all the time, dividends, sales of investments to make adjustments to the portfolio and so on. I would have thought that increasing borrowings for that purpose might form part of the required cash income but not a lot surely unless they deliberately decide to increase the gearing. They are repaying some debentures this year and next anyway but have a very large overdraft facility so I think supplementing the dividend payments is a small matter in the overall scheme of things for them.

On the basis of the Chairman's comments the dividend is surely safe for 2020 and possibly 2021 as well but I am sure they would not want to commit themselves indefinitely.

Dod

[Dod101]

Incidentally I was not meaning to undermine moorfield's post, just to clarify it from my own perspective and put a bit more flesh on the bones.

Dod

[TUK020]

That's interesting TUK020 - could you possibly expand a little on how the Revenue Reserve figs on the balance sheet at typically presented and how the RR is held? My understanding was that the RR wasn't generally held in cash, but that most ITs invested it with the rest of the pot and that "drawing on those reserves" typically involves selling down holdings (although, presumably, an IT with net cash could use that).
- OllyDrod

OllyDrod,
I think Dod answered your question
tuk020

[moorfield]

Incidentally I was not meaning to undermine moorfield's post, just to clarify it from my own perspective and put a bit more flesh on the bones.

Dod

Not at all, I think you're right it would be a mixture of selling ("topslicing" hopefully) and borrowing, which could stretch the ride out further. My figures of £77m,£67m were taken from Notes 3,10 in the accounts btw.

[flint]

If CTY pay out dividends that are greater than their income, the shortfall will be paid out of the NAV.
In other words your asset value will decrease by the amount of the shortfall.
CTY have been a poor performer in recent years holding a lot of high yielding cash cows - notably Shell.
I sold my CTY after Shell announced their dividend cut, as I think it will be a long time before the
income of CTY can be restored to previous levels

[moorfield]

I sold my CTY after Shell announced their dividend cut, as I think it will be a long time before the
income of CTY can be restored to previous levels

Humour us flint - how long do you think that will be, based on your reading of the accounts ?

[mc2fool]

If CTY pay out dividends that are greater than their income, the shortfall will be paid out of the NAV.
In other words your asset value will decrease by the amount of the shortfall.

No, your asset value will decrease by the amount of the dividend, and that's always true, irrespective of whether there's a shortfall or not.

Ceteris paribus, the price always drops by the amount of the dividend on the ex-div date.

[flint]

Humour us flint - how long do you think that will be, based on your reading of the accounts ?

Best guess - at least 2 years.

It will be interesting to see if CTY take action to replace the lost income or sit on their hands and wait
for the dividend cutters to restore the previous dividend levels, my best guess on this one - is the latter.

[richfool]

CTY was holding a lot of cutters, not least banks and Shell, so its dividend income is going to come under pressure.

[Dod101]

It mighty cheer up holders to some extent anyway to remember that CTY has just repaid a debenture on which the interest was 10.25% and another is due for repayment on 31 January 2021 on which the interest is 8.5% These totalled about £40 million. There will be a cost saving with whatever they replace these borrowings with but the bad news seems to be that they only charge about 1/3rd of the interest cost to the Revenue Account, the balance to capital.

Dod

[Alaric]

There will be a cost saving with whatever they replace these borrowings with but the bad news seems to be that they only charge about 1/3rd of the interest cost to the Revenue Account, the balance to capital.

Haven't the accounting barriers between Revenue and Capital been lifted a bit, so dividends can in extremis be paid from the Capital Account? Income seeking investors may tolerate this if their alternative was to be forced sellers of CTY to meet their income needs.