Merchants Trust grows dividend for 39th year and issues new shares over 2020

Merchants Trust (MRCH) has reported final results to 31 January 2021. The UK equity income trust’s NAV total return with debt at market value fell by 12.4% compared with a 7.5% decrease in the benchmark FTSE all-share index. Around half of the difference was the result of portfolio gearing, which exacerbates market movements, in either direction. This did not stop MRCH from growing over the financial year, with new shares issued amounting to 7.2% of the issued share capital during periods when the fund was trading at a premium. MRCH has been able to issue new shares post the financial year-end too.

The results release makes the point that while 2020 was a year of relative underperformance, it outperformed the benchmark by 8% in total returns terms in 2020.

’39 consecutive years of dividend growth at an annualised growth rate of just under 7%’

The chairman of MRCH, Colin Clark, noted the following: “In a very challenging year, the investment manager has continued to follow a consistent and disciplined value-based investment approach, looking only for quality companies with solid prospects, on reasonable valuations. The market has for several years favoured so-called growth companies, leading to what the investment manager notes is an extreme polarisation in valuations. However, this disciplined investment style has enabled our investment manager to deliver positive stock selection results above the benchmark return, over the medium and long term, in a period where their style has been out of favour.

The continuing structural preference by investors for growth stocks over value stocks has provided both tailwinds and headwinds for the portfolio – in a positive sense there are more opportunities that the manager is able to find where the valuation does not reflect the intrinsic value of the company. On the negative side, this style bias means that stocks may be slower to make progress towards a fair valuation if indeed they can attain that at all under such conditions and the valuation polarisation in the market remained high at the year-end.

As noted, the year saw a large number of dividend cuts in the market and this has inevitably impacted earnings per share which are down more than a third to 18.5p. The board recognises the importance of a growing dividend to shareholders. We can see a path to a covered dividend in the medium term. Absent any significant further deterioration in the outlook for income, the board plans to continue with its progressive dividend policy and is willing to consider utilising reserves, built up over many years, to cover any shortfall from earnings. We propose a final quarterly dividend for shareholder approval of 6.8p which means for 2020 an increased full-year dividend of 27.2p. This includes a contribution from reserves of 9.9p, leaving 18.3p in reserves at the year-end. Whilst this dividend represents a nominal increase of 0.4% over the 2019 dividend of 27.1p, close to but not in excess of the 2020 rate of inflation, we have now grown the dividend for 39 consecutive years at an annualised growth rate of just under 7%, well above the rate of inflation over that period which stands at 3.4% annually as measured by the Consumer Prices Index (CPI).

The ability to accumulate revenue reserves for use in just such a ‘rainy day’ remains one of the key features of an investment trust and one that the board is happy to consider using prudently on behalf of shareholders.

We are very pleased therefore to, once again, retain our AIC Dividend Hero status. 2021 has seen us continue to provide one of the highest yields in our peer group as part of an attractive total return for investors. We remain as focused on dividends as you are.

Last year I signed off by noting the impact of the pandemic was a very present shadow. Unfortunately, a year on, while there is some light at the end of the tunnel, we are not yet completely free of that shadow. We are seeing the signs of recovery and advancing vaccination programmes will undoubtedly spur that along. However, we have already seen the demonstration of how setbacks can occur, particularly with emerging mutant strains of the virus.

Even as the recovery progresses, many factors will be in play – enlarged government debt may require taxes to be raised, economic stimulus will not simply be quickly removed and increasing inflation is also a possibility. The road ahead is unlikely to be smooth.

We have at least seen an end to uncertainty surrounding post-Brexit trading agreements with the EU – some finer points are still manifesting themselves, but the main elements of the relationship are clear in outline and give the markets much-needed clarity. Uncertainty can have a much more negative impact on markets than the actual trade arrangements ever would have done regardless of direction once the market can digest. The hope is that in time this will make the UK more investible once again, and therefore drive a re-rating of many undervalued stocks.”

MRCH portfolio holdings at the FY-end

MRCH: Merchants Trust grows dividend for 39th year and issues new shares over 2020