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IC: Investment trusts & div cover

Closed-end funds and OEICs
yorkshirelad1
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IC: Investment trusts & div cover

#404979

Postby yorkshirelad1 » April 17th, 2021, 6:20 pm

There's an article in yesterday's Chronic Investor (Fri 16 April 2021) about dividend cover and investment trusts by Mary McDougall based on a report by brokerage Stifel suggesting that investment trusts don't do enough to publish dividend cover figures in their annual reports. The article seems to be aiming at the provision of a dividend cover figure, more than a dividend cover policy.

"Investment trusts need more transparency on dividend cover"
https://www.investorschronicle.co.uk/news/2021/04/12/investment-trusts-need-more-transparency-on-dividend-cover/
(paywalled, but via Google: https://www.google.co.uk/search?q=%22Investment+trusts+need+more+transparency+on+dividend+cover%22 )

IMHO
  • it's not often that you find a figure for dividend cover in annual reports for any of the FTSE100 companies
  • if I want a figure for dividend cover, I can usually find it at lse.co.uk or one of the usual suspects
Based in the article, I found dividend cover figures for Murray International and Law Debenture in about 0 minutes

https://www.lse.co.uk/share-fundamentals.asp?shareprice=MYI&share=Murray-International
https://www.lse.co.uk/share-fundamentals.asp?shareprice=LWDB&share=Law-Debenture

so what's all the fuss about? Sounds like "teddy" & "pram".
Frankly, I'd rather take a figure for dividend cover from a third party source or two (one of the usual suspects) than from a company's annual report (which can be ...... "improved")

forrado
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Re: IC: Investment trusts & div cover

#404986

Postby forrado » April 17th, 2021, 6:56 pm

Similar to the period that followed the global equity market shocks of 2009, I tend to view such opinions as just further anecdotal evidence of the time needed by ITs to rebuild depleted revenue reserves. That’s why I believe meaningful payout increases will be hard to come by for IT income investors over the coming years as the rebuilding process takes place.

mc2fool
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Re: IC: Investment trusts & div cover

#404989

Postby mc2fool » April 17th, 2021, 7:29 pm

yorkshirelad1 wrote:"Investment trusts need more transparency on dividend cover"
https://www.investorschronicle.co.uk/news/2021/04/12/investment-trusts-need-more-transparency-on-dividend-cover/
(paywalled, but via Google: https://www.google.co.uk/search?q=%22Investment+trusts+need+more+transparency+on+dividend+cover%22 )

IMHO
  • it's not often that you find a figure for dividend cover in annual reports for any of the FTSE100 companies
  • if I want a figure for dividend cover, I can usually find it at lse.co.uk or one of the usual suspects

Oh dear oh dear! My immediate reaction to reading your first bullet item above was to ask if you do understand that dividend cover has a totally different meaning for investment trusts than it does for "normal" companies. But as I hadn't got to that article in my IC yet I thought I'd just read it first -- and lo and behold the author doesn't understand that dividend cover has a totally different meaning for investment trusts! :roll:

"Dividend cover is useful because it gives a clear indication of how easily a trust can pay its dividend. If the dividend cover is 1 that means all the dividend has been paid out of earnings for the year – but if it dips below, it has been paid out of reserves." -- WRONG!

"Unhelpfully, few investment trusts directly show this – but you can normally work it out by looking at the income statement and dividing the revenue earnings per share by the dividend paid." -- WRONG!

Those describe normal companies' dividend cover, which is the ratio of earnings to dividends. However for Investment Trusts dividend cover is:

"The number of years that the current revenue reserves can provide the current financial year of dividends". https://www.theaic.co.uk/aic/glossary/d

The reason for the difference is that as ITs have to pay out at least 85% of their earnings as dividends, that means that the "normal" company style dividend cover will never be greater that 1.18 (100/85), and so is only of limited use. What's considered more useful is for how long they could keep paying out from what they've got "stashed" in revenue reserves*, even if earnings drop to zero. (No, I don't know why they don't call it something different to avoid the likely confusion!)

So, e.g. LWDB has a dividend cover of 1.1, meaning that it could pay out the same amount as last year's dividend again for another 1.1 years, even if it had zero earnings.

(* revenues reserves are actually just an accounting measure, but it's easier for this purpose if you think of it as a "stash" ;) )

The AIC shows the "proper" dividend cover for each IT, e.g.
https://www.theaic.co.uk/companydata/MYI
https://www.theaic.co.uk/companydata/LWDB

@DavidM, maybe the AIC would like to write to the author and set her straight?!

Urbandreamer
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Re: IC: Investment trusts & div cover

#404994

Postby Urbandreamer » April 17th, 2021, 8:26 pm

I had a few issues with the article, however there is an important point.

KNOW what you are invested in rather than make assumption. Ok I'm sure that most here actually pay attention to what they invest in, but it isn't universally true. Indeed some investors are at the start of their journey and need some gentle advice about things to think about.

Personally I have no issue if a IT pays it's dividend out of cash received, reserves or for that matter capital (eating itself). It is however a good idea to know what it's doing and form an opinion of if it is sustainable.

I own both CTY and IBT, both paying dividends. Currently neither have enough income to cover the dividend that they pay. The difference is that CTY intends that the dividend be covered from income and is going through a bad patch. IBT invests in companies not known for paying dividends, so liquidates capital to pay its dividend and will never have a "covered" dividend. I have more concerns about CTY than IBT.

yorkshirelad1
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Re: IC: Investment trusts & div cover

#405063

Postby yorkshirelad1 » April 18th, 2021, 10:26 am

Thank you, mcfool: instructive posting, clearly enjoyed by others as well.
I hadn't looked precisely at the difference, but had observed that the figures for div cover for ITs are different from e.g. FTSE100 companies.
TBH, the jist of the IC article that I took away was the actual reporting of a figure in company reports i.e. printing a figure, not how it's calculated (which can vary anyway, whoever the company), i.e. better information.
Personally, I tend to look at the run-rate over a number of years (which is why something like lse.co.uk is useful as it usually gives 5 years data) to see if there's been a marked change that might warrant further investigation.

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Re: IC: Investment trusts & div cover

#405313

Postby DavidM13 » April 19th, 2021, 11:50 am

Bit late to the party but mcfool has covered the fact that there are two ways of looking at or calculating cover. On a year by year basis (good at seeing how a company behaved on any given year. e.g. a downturn) or the AIC method which looks at the reserves. This is more helpful for understanding how much has been built up in reserves over time which in turn is available for dividend payments in years where the company hasn't received as much income as usual.

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Re: IC: Investment trusts & div cover

#405331

Postby mc2fool » April 19th, 2021, 12:28 pm

DavidM13 wrote:Bit late to the party but mcfool has covered the fact that there are two ways of looking at or calculating cover. On a year by year basis (good at seeing how a company behaved on any given year. e.g. a downturn) or the AIC method which looks at the reserves. This is more helpful for understanding how much has been built up in reserves over time which in turn is available for dividend payments in years where the company hasn't received as much income as usual.

Hi David. Is it just the AIC that uses that method? I always thought it was IT industry standard.

In either case, how about you have a chat with your colleagues about calling it something else to avoid the confusion? This isn't the first time and I'm sure it won't be the last ... ;)

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Re: IC: Investment trusts & div cover

#405348

Postby DavidM13 » April 19th, 2021, 1:03 pm

mc2fool wrote:
DavidM13 wrote:Bit late to the party but mcfool has covered the fact that there are two ways of looking at or calculating cover. On a year by year basis (good at seeing how a company behaved on any given year. e.g. a downturn) or the AIC method which looks at the reserves. This is more helpful for understanding how much has been built up in reserves over time which in turn is available for dividend payments in years where the company hasn't received as much income as usual.

Hi David. Is it just the AIC that uses that method? I always thought it was IT industry standard.

In either case, how about you have a chat with your colleagues about calling it something else to avoid the confusion? This isn't the first time and I'm sure it won't be the last ... ;)


Yes it is industry standard across the investment trust industry. So we wouldn't want to change the well known name of the data point. We have a hover definition on the data point on the AIC website to minimise confusion.

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Re: IC: Investment trusts & div cover

#405352

Postby mc2fool » April 19th, 2021, 1:10 pm

DavidM13 wrote:
mc2fool wrote:
DavidM13 wrote:Bit late to the party but mcfool has covered the fact that there are two ways of looking at or calculating cover. On a year by year basis (good at seeing how a company behaved on any given year. e.g. a downturn) or the AIC method which looks at the reserves. This is more helpful for understanding how much has been built up in reserves over time which in turn is available for dividend payments in years where the company hasn't received as much income as usual.

Hi David. Is it just the AIC that uses that method? I always thought it was IT industry standard.

In either case, how about you have a chat with your colleagues about calling it something else to avoid the confusion? This isn't the first time and I'm sure it won't be the last ... ;)


Yes it is industry standard across the investment trust industry. So we wouldn't want to change the well known name of the data point. We have a hover definition on the data point on the AIC website to minimise confusion.

Well, I think even more obviously, the dividend cover section is labelled "(years)" -- but that (and the hover definition) is only useful if one looks at the AIC website, which obviously the IC writer didn't do, and has so spread confusion!

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Re: IC: Investment trusts & div cover

#405363

Postby Dod101 » April 19th, 2021, 1:45 pm

The article in the IC was unhelpful to say the least and it is good to see the matter fully explained by mc2fool as the term 'dividend cover' normally applies to investment trusts. It has been accepted for years that most ITs will only pay out not more than their earnings in the year, and not less than 85% of those, so there has been no great need to emphasise the amount of Revenue Reserves since they have seldom been needed until this last year. Now of course they have suddenly become very relevant, although not as much as they once were since ITs can now distribute dividends using realised capital reserves as well, if their shareholders agree. Either way, they are dipping into capital to maintain or increase the dividend and so affecting the calculation of NAV but I have seen it argued, not incorrectly I think, that paying any dividend affects the calculation of NAV.

I am beginning not to mind I think. I used to be very much of the view that ITs should only distribute not more than they earned in the Revenue Account in any one year but a trust like RIT for instance, pays almost all of its modest dividend from realised capital reserves and so far the roof has not fallen in, but it is primarily a growth trust. I would be a bit more concerned about City of London because its share price has not done much much for a long while and now its revenue earnings are also under pressure. Being a dividend hero is all very well............

Dod

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Re: IC: Investment trusts & div cover

#405366

Postby nmdhqbc » April 19th, 2021, 1:52 pm

If we were to start again with defining the terminology we would not have this double use of the same phrase meaning different things. So for me... "Revenue Reserves" makes sense for revenue reserves - they are the same words. Just choose "£" or "years" for the units depending on how you want to communicate it. For me both measures are important for IT's how well the current years dividend is covered by the current years revenue is important as well as how many years revenue reserves there are. So just a case of getting everyone to use the same terminology. Easier said than done.
Edit: I notice HL use "Dividend Cover" to mean that years cover not the revenue reserve.

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Re: IC: Investment trusts & div cover

#405520

Postby Dod101 » April 20th, 2021, 8:32 am

nmdhqbc wrote:If we were to start again with defining the terminology we would not have this double use of the same phrase meaning different things. So for me... "Revenue Reserves" makes sense for revenue reserves - they are the same words. Just choose "£" or "years" for the units depending on how you want to communicate it. For me both measures are important for IT's how well the current years dividend is covered by the current years revenue is important as well as how many years revenue reserves there are. So just a case of getting everyone to use the same terminology. Easier said than done.
Edit: I notice HL use "Dividend Cover" to mean that years cover not the revenue reserve.


I agree entirely with this and have this morning taken the trouble to look up the Murray International Annual Report which contains the definition of 'dividend cover' (page 98), which is of course Revenue per Share divided by Dividend paid per share. For the year 2020. these numbers are 46.6p and 54.5p for Murray, hence the cover of 85.5% indicating that they are using their Revenue Reserves so, on further consideration, I think it is a bit unfair to say that the author of the article in the IC is wrong. She is using the term 'dividend cover' in its traditional meaning and if you take that on board her comments are perfectly reasonable and make sense.

Mind you this definition of Dividend Cover is not very meaningful for an IT, except that it gives an indication of how much (or not) they are depending on their Reserves to pay the dividend, but since they need to pay out at least 85% of their income anyway it is never going to be a show of strength. It is though an indication of how much they depend on their Reserves to pay their dividend.

Dod

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Re: IC: Investment trusts & div cover

#405542

Postby 88V8 » April 20th, 2021, 9:59 am

Dod101 wrote:... this definition of Dividend Cover is not very meaningful for an IT, except that it gives an indication of how much (or not) they are depending on their Reserves to pay the dividend....

Agree.
What is important to me is how long they could keep paying, ie the number of years in hand, as this is surely a key indicator in determining whether they would use those reserves as a bridge over dry waters.

V8

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Re: IC: Investment trusts & div cover

#405553

Postby nmdhqbc » April 20th, 2021, 10:18 am

88V8 wrote:
Dod101 wrote:... this definition of Dividend Cover is not very meaningful for an IT, except that it gives an indication of how much (or not) they are depending on their Reserves to pay the dividend....

Agree.
What is important to me is how long they could keep paying, ie the number of years in hand, as this is surely a key indicator in determining whether they would use those reserves as a bridge over dry waters.

V8


I like to see how much of a boost next years revenue might get from the holding back of revenue as well as the organic growth of the underlying holdings dividends. Gives me a feeling for how good the next years dividend rise might be. Also in bad times it can indicate how much of a job they've got the get the dividend covered again. For instance if last years dividend cover was 1.14 (BRSC) and the dividends were to fall by 40% this year their cover would fall to 0.6*1.14 = 0.684. If that cover had been 1.00 they'd have dividend cover of 0.60 this year. So BRSC has a little head start on getting the divi covered again. As always it does not really effect total performance if BRSC has just paid all the revenue out last year.


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