It seems apt to kick off the site’s single stock coverage with a look at the JPMorgan Claverhouse Investment Trust (JHC). I say that for two reasons really. Firstly, the fund’s balance sheet is loaded with around £500m worth of British blue chip stocks — a perfect fit for the type of people who will read this site. Secondly, Claverhouse’s dividend record is second to none. At time of publication it has chalked up almost fifty years of consecutive annual distribution growth. That makes it one of the AIC’s Dividend Heroes, as well as a bonafide UK Dividend Aristocrat.
JPMorgan Claverhouse Investment Trust
The most obvious place to start is with the portfolio. The company’s name doesn’t give too much away, but as I said in the introduction this is basically a UK equity income fund. High-yielding stalwarts like Royal Dutch Shell, GlaxoSmithKline, HSBC, Rio Tinto and BP all make the top-ten holdings. Between them, those five actually made up around 23% of the fund as things stood at the end of 2019. Unilever and Diageo — two of the highest quality shares in the FTSE 100 in my view — currently take up a further 6% of the company’s assets on a combined basis.
It’s worth noting that shareholder returns here have come in well ahead of the benchmark FTSE All-Share Index over the past decade. Given interest rates have been at record lows for years now that probably shouldn’t come as all that much of a surprise. Claverhouse has pumped out over £5,000 in dividend income for every £10,000 invested ten years ago. For yield starved investors I can imagine the attraction of that and the dividend growth record.
The dividend also provides an obvious opening to talk about the investment trust structure in general. Although Claverhouse is legally required to pay out most of its investment income to shareholders by way of dividends, it is allowed to retain up to 15% in reserve. The company can obviously then use that cash to smooth out distributions in lean years.
To see how that has worked in practice just have a look at what happened in 2009. Over the course of the year the company reported retained revenue of just over £8m. As you’d expect, that mostly arrived in the form of dividend cash received from UK-listed companies. Anyway, investment income had clocked in over 30% higher in the previous year. No real surprises there given the world was falling apart at the time.
In terms of its own dividend, Claverhouse was on the hook for over £11m in 2009 (including a special dividend declared in 2008). The firm dipped into its £18m reserve fund to the extent that shareholders actually saw their annual dividend income rise by 3% on a per-share basis. All said and done the company exited 2009 with over £15m still in the reserve tank.
Needless to say those reserves have fully recovered amidst the wider recovery in corporate profits over the past decade. Claverhouse reported around £24m in its revenue reserves pot at the end of last June. By my count that gives it well over a year’s worth of dividend cover. It shouldn’t really have any serious problems meeting its stated goal of consecutive annual dividend growth.
Like the company’s management team I probably have a more optimistic view on equities than most. I mean relative to bonds, the situation is a no-brainer. 10-year UK government debt yields under 0.6% at time of writing. It kind of goes without saying but the outlook from that looks bleak in real terms.
Compare that to what’s on offer with Claverhouse. Its shares trade for around 770 pence right now on the back of a 29 pence per share prior year dividend. Call that a 3.75% yield based on last year’s dividend, and probably around 4% on a forward basis.
The per-share dividend has grown at an average rate of around 5.55% per annum here over the past decade. Given the kind of assets that make up the fund’s portfolio, I don’t think it’s too much of a stretch to say it could produce future long-term dividend growth at much the same rate.
Let’s say we’re looking at a 4% dividend yield for 2020. Assuming 5% average annual growth on top of that returns high single-digits per annum, all other things being equal. The implied long-term post-inflation returns strike me as quite reasonable. Overall I think the fund remains a solid pick for those conservative investors with a sufficiently long-term outlook.