CTY - How safe is the dividend?

[monabri]

Perhaps one needs to factor in Job Curtis' tenure into the equation? Surely he will want to retire "not out".

[mc2fool]

Haven't the accounting barriers between Revenue and Capital been lifted a bit, so dividends can in extremis be paid from the Capital Account?

It's the capital reserve account, but only if the shareholders have already agreed to that being allowed, by means of passing a resolution at a general meeting, and in CTY's case that must have happened at some point 'cos note 1(m) in their 2019 annual report (on page 47, as numbered) says:

"m) Distributable reserves
The Company’s capital reserve arising on investments sold and revenue reserve may be distributed by way of a dividend."

[Dod101]

Certainly nowadays investment trusts may use their realised capital reserves to pay part or all of their dividend. They were decreed as distributable reserves a few years ago, but usually it will go to a resolution at the AGM first. I do not know if that is a requirement or not, but the result is that all the argument about Revenue Reserves is a little less important nowadays. Quite a number of ITs invested in low yielding shares use the capital reserves in this way, including Scottish Mortgage, RIT Capital Partners and I think Personal Assets.

mc2fool is just ahead of me on that one. I understood that by investment company law, the realised capital reserves are distributable but whether or not the Directors choose to do so maybe has to go to an AGM first. Most IT accounts now highlight the fact that realised capital reserves are distributable.

Dod

[mc2fool]

I understood that by investment company law, the realised capital reserves are distributable but whether or not the Directors choose to do so maybe has to go to an AGM first.

Prior to the 2012 law change, ITs had to have a prohibition in their Articles of Association on using capital profits to pay dividends in order to have IT status.

That requirement was removed by the 2012 law change but that didn't change any existing Articles, so if an IT wanted to have the ability to distribute capital profits they'd need to change their Articles to remove the prohibition, and changes to a company's constitution (Articles or Memorandum) require shareholder approval.

https://www.theaic.co.uk/sites/default/files/uploads/files/AICDividendsoutofcapitalprofitsQandA22May12.pdf

[Dod101]

I understood that by investment company law, the realised capital reserves are distributable but whether or not the Directors choose to do so maybe has to go to an AGM first.

Prior to the 2012 law change, ITs had to have a prohibition in their Articles of Association on using capital profits to pay dividends in order to have IT status.

That requirement was removed by the 2012 law change but that didn't change any existing Articles, so if an IT wanted to have the ability to distribute capital profits they'd need to change their Articles to remove the prohibition, and changes to a company's constitution (Articles or Memorandum) require shareholder approval.

https://www.theaic.co.uk/sites/default/files/uploads/files/AICDividendsoutofcapitalprofitsQandA22May12.pdf

Thanks for that. I did not know that that was the way it was changed so provided the IT has changed its Articles they can go ahead and distribute these profits on the decision of the Board. It is actually the other way round from what I was thinking but makes perfect sense now that I think about it.

Dod

[Alaric]

That is if you believe CTY's yield going forward to be sustainable.

Depends what "sustainable" means. By the accounting rules governing ITs, they can "sustain" the dividend payouts by first exhausting the Income Reserve (being dividends received in the past but not distributed) and then the Capital Reserve (being realised gains).

As noted earlier in the thread, if they do this, the published NAV will suffer and with it probably the share price.

[Dod101]

That is if you believe CTY's yield going forward to be sustainable.

Depends what "sustainable" means. By the accounting rules governing ITs, they can "sustain" the dividend payouts by first exhausting the Income Reserve (being dividends received in the past but not distributed) and then the Capital Reserve (being realised gains).

As noted earlier in the thread, if they do this, the published NAV will suffer and with it probably the share price.

I doubt that even City of London would go as far as start using the Realised Capital Gains. I think they would probably admit defeat before that because that would be a few years down the line.

Dod

[kempiejon]

This is a new insight for me into how Investments Trusts behave that this massacre of dividends has highlighted to me. Dividends can be propped up with income reserves and gains and even borrowing; assuming (hoping) that dividends in UK shares that have been stopped or reduced can be recovered to normal levels CTY and other ITs can maintain their income record. Much like I can use my cash buffer or sell holdings to supplement my shortfall in dividend income this year or next or stick some of my spending on credit cards.
As was mentioned up thread though this'll probably feed into the CTY NAV won't it. If it takes a couple of years for normal dividends to be resumed hopefully CTY can reposition some of their holdings to maximise secure output and even see holding increase in value so it'll all be OK.

[88V8]

As noted earlier in the thread, if they do this, the published NAV will suffer and with it probably the share price.

The share price... thus generating another buying opportunity for us long-term investors.

V8

[Dod101]

This is a new insight for me into how Investments Trusts behave that this massacre of dividends has highlighted to me. Dividends can be propped up with income reserves and gains and even borrowing; assuming (hoping) that dividends in UK shares that have been stopped or reduced can be recovered to normal levels CTY and other ITs can maintain their income record. Much like I can use my cash buffer or sell holdings to supplement my shortfall in dividend income this year or next or stick some of my spending on credit cards.
As was mentioned up thread though this'll probably feed into the CTY NAV won't it. If it takes a couple of years for normal dividends to be resumed hopefully CTY can reposition some of their holdings to maximise secure output and even see holding increase in value so it'll all be OK.

No, not borrowing. You must differentiate between accounting conventions and cash management. Dividends can only be accounted for through actual current revenue obviously, by using Revenue Reserves or by using Realised Capital Reserves. These are all accounting conventions. They have nothing to do with the actual cash availability (accounting is a weird, very weird business)

To find the cash is quite another matter. As I have said earlier in this thread, there will be dividends from investee companies but there will also be cash sloshing around from buys and sells of shares and in the case of City of London they have just repaid a Debenture and have another coming up for repayment next year so they need to plan for that cash requirement. They have a big mostly unused overdraft facility with HSBC and that will no doubt come in to play. Be in no doubt, the managers will have planned cash management quite thoroughly over the next year or so.

This will all of course feed in to the NAV but if their priority is to maintain their dividend record then the NAV will obviously take second place. They will be hoping, like the rest of us that dividends will soon be reinstated. I would not count on that.

Dod

[flint]

If there are folk to whom a cash dividend is more important than total return, surely JGGI are a better bet.
Their policy is to pay 4% of the previous year end NAV regardless of what income they receive.
The big difference with CTY is that they invest in growth companies.
Please note that am invested in JGGI.

[nmdhqbc]

If there are folk to whom a cash dividend is more important than total return, surely JGGI are a better bet.
Their policy is to pay 4% of the previous year end NAV regardless of what income they receive.
The big difference with CTY is that they invest in growth companies.
Please note that am invested in JGGI.

I'm not sure I follow the logic here. So for JGGI the dividend will fluctuate lagging the NAV. So could be up down a lot following the market. No attempts to keep it high in down years. Surely that's something that would be in the con list for investors more focused on dividends.

[JuanDB]

I believe a number of the JP Morgan ITs have adopted the “percentage of NAV” approach to calculating dividends. This approach does seem to give up one of the key benefits of ITs to be able to provide a smoothed income for their holders. If you’re happy to take what the market gives I do wonder if it’s better to just avoid the charges associated with ITs and go with lower cost ETFs. VHYL for example will give you a similar yield.

I hold CTY as a core holding and at present I do have faith that the board will navigate this period, as they have done in the past. I am however treating this as a bit of an acid test for my Income IT portfolio strategy in general. If the income level I have built is impacted then some soul searching will be needed.

I know JGGI it OT but it’s one I am looking at, especially with the recent price drops upping the yield. It wouldn’t ever be a core holding in my income IT portfolio because of the planned variability of the dividend.

Cheers,

Juan.

[swill453]

I guess this is an indication of what Investment Trusts are having to deal with right now: iShares FTSE 100 tracker ETF dividend down 60% for the quarter, and the FTSE 250 tracker ETF dividend down over 65%.

viewtopic.php?f=55&t=23747

Scott.

[Julian]

Some interesting and useful data here about the resources potentially available to CTY to prop up an uncovered dividend distribution from reserves and existing unused borrowing facilities, and after that as already mentioned there is at least the theoretical possibility of selling holdings in the core portfolio(*) to release capital to continue to prop up an uncovered dividend. I say theoretical because we clearly don't know whether CTY would go there if that decision was necessary and, as a major CTY holder, I hope I never need to find out the answer to that.

My view is that CTY management will be desperate to jump a chasm, the chasm being the time during which the divis it pays to shareholders are uncovered by income from the underlying portfolio while not only not cutting the divis but actually continuing to increase them year on year. That chasm is also not of known width (duration), assessments will constantly need to be made by CTY management about how far they still have to go in getting to the other side, the other side being the point of "recovery" when income from the portfolio is again covering the then-current dividend distributions. CTY management will probably see a constantly changing view of "how far do we have to go?" and hence "can we make it to the other side?" as the recovery unfolds, fails to meet predictions, exceeds expectations, etc.

With CTY's massively long history of unbroken divi rises, unsurpassed I believe by any UK income IT, my view is that the management will not want to let that record evaporate lightly (and a single year of failing to deliver an increase would reset the clock back to zero) so will use every tool available, definitely all the reserve and in my view also the full borrowing facility and, if at that point the current management assessment is that they are tantalisingly close to crossing the chasm, even sales within the core portfolio, in order to get across that chasm.

To try and make their resources last as long as possible my suspicion is that CTY will go into (in fact has already gone into) a survival mode whereby its divis will show extremely small token increases year-on-year, a fraction of a percent increase perhaps, so that it can at least truthfully continue to quote those ever more impressive years of unbroken divi rises figures in its marketing once it is on the other side of the chasm.

If I'm anything like correct one interesting aspect might be how long CTY stays in survival mode once it gets to the other side to allow it to rebuild a decent reserve and get its borrowing back within whatever limits the management feels is acceptable. That is to some extent constrained by an IT's requirement to pay out at least 85% of its income as dividends but once income does exceed payouts, i.e. cover hits 1.0, I suspect that won't be the point when CTY exits "survival mode" and goes back to more inflation-like levels of divi increases. I suspect that CTY management will want to stick with it's survival-mode token increases for at least a year, maybe quite a few years after the point at which the distributions are covered, in order to rebuild its financial buffers.

So for me the bottom line is that I don't expect to see CTY cut it's dividend even if this crisis takes 5 years to resolve(**) although hopefully it won't come to that, I do however expect to see token <1% year-on-year divi increases for quite a few years to come now in order to cross the chasm and then rebuild reserves & maybe also need to reduce borrowing afterwards.

- Julian

(*) Yes, I know the reserve and core portfolio are essentially the same investment pool simply stated separately in the accounts but there is still the point at which sales have depleted the reserve slice of the pie and start eating into the rest.

(**) Assuming there isn't some absolutely catastrophic systemic across the board drop of dividends of 50% or more for an extended period.

[Hariseldon58]

A pretty fair summary by Julian, the dividend is likely to be increased yearly by a minimal amount for the foreseeable future.

Plenty of scope to pay money out, I held an M&G equity income unit trust, many years ago, they maintained the dividend in a difficult period, not having the methods of an IT, they did what they could, by buying shares just before they went ex-div and selling immediately afterwards...

Personal preference is total return and use cash/bond and equity sales to fund income.

[moorfield]

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.

I just had a quick look at the 2020 report monabri posted on the other thread (viewtopic.php?p=378695#p378695) and thought I had reply to my own comments here.

https://cdn.janushenderson.com/webdocs/ ... rt2020.pdf


Note 3, page 67.

Income from investments held at fair value through profit or loss, 2020 £67m, 2019 £77m.

Borrowings, page 27.

The Company has a borrowing facility of £120.0 million
(2019: £120.0 million) with HSBC Bank plc, of which
£20.9 million was drawn at the year end (2019: £8.2 million).
The Company also has a debenture totalling £30.0 million

I think we can infer how CTY is holding it's dividend.

[88V8]

I think we can infer how CTY is holding it's dividend.

And if you had a 55 year moat, you'd hold it too.
That sort of record brings out the Micawber in the BoD.

V8

[Dod101]

I think we can infer how CTY is holding it's dividend.

Yes but so what? Either it increases its borrowings or it sells some shares to cover the cash requirements of its dividend distribution. The cost of borrowing is very modest, presumably less than they calculate they will lose by selling some of their investments. That is fundamentally the cost of using their Revenue Reserves to keep shareholders happy and to preserve their 54 year record. If the shortfall lasts only for the one year it is a non event and even for longer it is not very significant.Beyond that they might think again, but they are a long way from that.

Dod

[Vince]

The last div. increase was May 2019 pay out, its been held at 4.75p since then. As more companies reinstate their dividends or raise them after cuts, I suspect CTY will return to a normal small percentage increase yearly.

Its been a difficult time for all companies and CTY aren't shielded from these events, the fact that they have managed their dividend history to such an extent is admirable and what makes the Investment a favourite for income seekers. I wouldn't judge it over the short term, that's not to say that the question shouldn't be asked, it's healthy to understand the way in which dividends are constructed.

Vince