‘Experienced. Disciplined. Determined. All you want from a hero.’ – Merchants Trust outperformed the All-Share, its benchmark index over the year to the end of January 2018. Its NAV total return was +14.5% with debt at market value, outperforming the benchmark total return of +11.3%. This investment return placed the company 6 out of 25 funds in its peer group. Gearing helped the NAV performance for the year, adding a net 2% to total return, after taking account of the cost of finance and movements in the value of debt. The company’s share price rose by 7.8% over the year, from 452.5p to 488.0p. On a total return basis (which includes net dividends) the value of the shares increased by 13.3%. The total dividend for the year to rises to 24.8p (2017: 24.2p), an increase of 2.5%. This will be the 36th consecutive year in which they have grown the dividend – they are a member of the AIC’s ‘Dividend Hero’ club.
Debt refinancing
Merchants Trust is one of the most highly geared trusts in its sector; it has long term debt amounting to GBP112 million. Gearing averaged 19.7% throughout the year, compared to 22.7% last year. At the end of the year, the gearing level was 18.1%. Towards the end of the financial year they refinanced a debenture taken out in 1987 (when the Bank of England base rate stood at 8.375%) with new borrowing at a much lower interest rate (2.96%). This replacement of the expensive debenture with lower cost borrowing is significant for the company. Not only does it reduce interest payment costs significantly (the weight average cost of debt decreased from 8.5% to 6.1%), enhancing the revenue earnings per share, but it also reduces capital costs and presents the possibility of growing the dividend faster in the future. The board says that the debt refinancing allows the investment manager to invest with a long-term view. Having secured the new borrowing for the next 35 years at an interest rate of just under 3%, the investment manager is able to invest in a selection of higher yielding stocks listed on the All-Share Index, whose average dividend yield is 4% currently.
Marketing
The Merchants Trust marketing programme includes electronic communications with existing and potential investors and substantial liaison with national and industry journalists. Targeted online and print advertising is also undertaken on a very selective basis, where the potential benefits are judged to merit the cost. The most recent campaign has focused on the company’s ‘Dividend Hero’ status, with the following strapline: ‘Experienced. Disciplined. Determined. All you want from a hero.’
MRCH : ‘Experienced. Disciplined. Determined. All you want from a hero.’