By and large, UK stocks continue to strike me as a pretty good long-term deal right now. I know folks have probably been reading something similar for a while now, but the headline numbers do look reasonable. I mean, looking at some ETF data suggests that London-listed firms trade on a PE of around 12 right now. Meanwhile, across the pond the S&P 500 currently trades for around 22x earnings. Are there caveats? Yes, almost certainly. There is probably a significant quality difference between the two, and that would definitely go some way to explaining things. A larger domestic tilt toward natural resource stocks also muddies the water a bit. And that’s before talking about earnings growth and so on too.
With that said, I think investors could do a lot worse right now than to simply look at the universe of investment trusts with a UK equity income mandate. City of London Investment Trust (CTY) is one such example, and featured here back in February. At the time, the company was obviously coming off the back of a very tough calendar year 2020. The UK was home to some of the world’s largest dividend payers pre-COVID, but these payers also happen to be very sensitive to macro conditions. Companies like HSBC, Shell, BP and the miners Rio Tinto and BHP spring to mind.
Unsurprisingly then, dividends from City of London’s investments were slashed left, right and centre last year. That had shown up in its financials, with net revenue return – essentially dividend income from its portfolio holdings less expenses – coming in at just 15.7p per share in fiscal 2020. That was around 20% lower than before the pandemic. It was also some way below the 18.6p per share pre-COVID (FY 2019) dividend, with the company having to make up the shortfall to investors with respect to its own dividend.
UK Dividends Recover
Fiscal 2021 saw an expected rebound as payouts from UK-based firms like home builder Persimmon and insurer Direct Line recovered. Defensive names that held up during the pandemic, like British American Tobacco, also chipped in with modest dividend growth. Net revenue return duly rose around 9% year-on-year (to 17.1p per share) in fiscal 2021, albeit that was still below the 19.1p per share annual dividend. The company raised its dividend in both 2020 and 2021, bringing the dividend growth streak to 55 years and counting. Revenue reserves fell to £37.6m in FY 2021 (8.4p per share) versus £58.1m (15.4p per share) in FY 2019.
The situation should carry on improving as we head deeper into fiscal 2022. Most obviously there has been a big recovery with respect to its core energy holdings – BP and Shell. The latter has now raised its dividend some 50% versus 2020 levels thanks to higher oil prices and improved conditions downstream and in the chemicals business. BP raised its dividend 4% back in the summer. Those two constitute around 5% of the portfolio’s equity holdings if my sums are right – call it around £100m worth of stock – so the extra dividend cash isn’t exactly trivial. Elsewhere, the company’s bank holdings constitute a similarly sized block. They were barred by the BoE from paying dividends during the pandemic, but payments at all three (Lloyds, HSBC and Barclays) resumed earlier in the calendar year. Dividends there also remain well below pre-COVID levels but should continue to improve going forward.
As I mentioned in the last piece, City of London also holds a small contingent of overseas shares. I can see that being an attraction given the quality of some of the names in question – with Microsoft, Nestlé, Coca-Cola and Johnson & Johnson being a few obvious examples. Indeed, that (and the sub-40 basis points expense ratio) was partly why I chose City of London to begin with. Anyway, those four names constituted a circa £65m block of stock here at last count, and they will surely pay out more this year than in 2021 and 2020 given the nature of their dividend streams. All said and done, fiscal 2022 should be a much better one for City of London’s dividend income.
Shares Remain Relatively Cheap
City of London shares trade around the 390p mark – a slight discount to NAV. They have returned around 15% since that February piece assuming reinvested dividends, but I still think the stock is cheap. While its holdings are naturally stodgy, it’s not like investors need much growth here for things to work out okay. I mean, the underlying portfolio trades on a PE of around 12 – so roughly in line with the wider market average. The current dividend yield is around 4.95% based on the 19.2p per share annualised payout. Mid-single-digit annualised growth still does the trick here, which isn’t too taxing given the implied level of retained earnings generation. I maintain the view that City of London Investment Trust will do fine for long-term investors.
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