Income Rating: City of London
Disclosure – Non-Independent Marketing Communication. This is a non-independent marketing communication commissioned by City of London. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
CTY’s dependable track record of dividend growth continues, but it has slipped to a rare discount…
City of London’s (CTY) objective is to provide long-term growth in income and capital. CTY has the longest track record of providing annual dividend increases in the investment trust sector, which now has 54 consecutive years of growth since 1966.
The COVID-19 crisis and market sell-off has left CTY underperforming the market over the short term.
However stock selection remained positive in the financial year to 30/06/2020 – as it has been for eight out of the past ten financial years. Being geared in a falling market was the main culprit.
Job Curtis, CTY’s manager for nearly 30 years, has reacted swiftly to events by repositioning the portfolio to reflect today’s new reality. He is a fundamental stock picker first and foremost, looking for defensive companies which can deliver demonstrably sustainable cash flow to support both dividends and capital expenditure.
As we discuss in Portfolio, he has increasingly been looking abroad to find companies that suit his criteria. Job has also significantly reduced exposure to sectors such as travel & leisure and energy, in our view making the portfolio a more defensive.
There are clearly no quick fixes to COVID-19, and its impact will likely be felt for years to come in company earnings and dividends. CTY has drawn on revenue reserves to bolster the dividend for the last financial year. Despite the very difficult environment, the board has reaffirmed its commitment to growing the dividend for the current financial year ending 30/06/2021.
Yet, as discussed in Discount, CTY is now buying shares back on a discount of 2%, having typically traded on a premium for the past five years.
In our view CTY continues to be a low-cost poster child of the UK equity income sector.
Job’s preference for conservatively run and well-financed businesses clearly lends itself well to the mandate; he has consistently added value through stock-picking in eight years out of the past ten.
Job has proven he can outperform the FTSE All Share, whilst delivering rising dividends over the medium to long term. Its statistics (see Performance section) show how powerful CTY is as a package, which perhaps explains why the trust has been able to grow so consistently over the past decade.
With an OCF of 0.36% the trust is extremely competitive in terms of cost. The fact that shareholders have historically benefitted from share issuance at a premium means that the effective ownership cost, in some years, is significantly lower than this figure.
The historic solidity of the dividend (see Dividend section) is a key selling point, in our view, which is backed up by the board’s statements of intent – and its not inconsiderable reserves. CTY’s yield is attractive relative to most equity income products, offering a historic yield of 6.1%, with the board signaling that it intends further growth in the current year.
CTY delivers on its promises with exceptionally low charges, and has a strong and consistent manager with extensive experience. Now that the trust is on a rare discount of 2%, we view the shares as even more attractive.
|Very low OCF of 0.35%||Core approach means NAV performance unlikely to deviate far from peer group|
|Consistency of manager who has delivered outperformance of the FTSE All Share in capital and income terms||Income track record highly attractive, so manager might risk long-term capital growth in trying to maintain it|
|Fifty-four year track record in progressive dividend increases||Structural gearing can exacerbate the downside|
This trust is rated by Kepler Trust Intelligence as an outstanding option for investors seeking income…Find out more
Click to visit:
This report has been issued by Kepler Partners LLP. The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.
Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.
Kepler Partners is not authorised to make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.
The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.
The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.
This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.
Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s Conflict of Interest policy is available on request.