Investment trust insider on the buybacks versus dividends debate – James Carthew: ‘Investment companies’ and the dividends versus buybacks debate
Most private equity investment companies have the flexibility to choose between returning capital via dividends or buybacks – while the former have seemingly done little to close wide discounts, buybacks are not a panacea either.
Oakley Capital Investments (OCI) has just announced that it will drop its dividend in favour of share buybacks. I thought it might be worth exploring the thinking behind this move and whether other investment companies should follow suit.
To maintain its investment trust status and benefit from the various advantages this brings, a UK investment trust is required to distribute at least 85% of the income it receives to its shareholders. But this does not apply to OCI as it is a Bermudan-domiciled investment company and so is not subject to this rule. The same is true of other investment companies that are domiciled in places like Guernsey and Jersey; there are just shy of 100 London-listed investment companies that are not UK investment trusts.
In addition, like many investment companies investing in private equity, OCI does not receive much dividend or interest income from its underlying investments. Its primary objective is to beat the FTSE All-Share index over the long term, but most of OCI’s returns come in the form of capital gains. We do not get to see the split between revenue and capital returns in OCI’s accounts – again, its structure means that it is not required to produce accounts in that format. However, it seems likely that most of the dividends that it has been paying are actually distributions of capital profits.
read more here