City of London’s (CTY) objective is to provide long-term growth in income and capital. The trust has the longest track record of providing annual dividend increases in the investment trust sector. The board has stated that it intends to continue to pay a progressive dividend, which if achieved in the current financial year will represent 55 consecutive years of growth.
Job Curtis, CTY’s manager for 30 years, is a fundamental stock picker who prefers defensive companies which can deliver demonstrably sustainable cash flow to support both dividends and capital expenditure. As we discuss in Portfolio, Job has not been tempted into more cyclical areas of the market. This has resulted in a short-term relative performance headwind this financial year, but Job has a track record of adding value through stock selection in eight of the previous ten financial years.
Job continues to believe that the path back to economic normality will not necessarily be a smooth one. The UK’s dividends may have taken a significant knock, but he is positioning the portfolio for a long-haul recovery in the trust’s income. As we discuss in Dividend, the board have stated that they have adequate reserves to support the dividend for the foreseeable future, but Job is also exposed to companies like BHP which have demonstrated they are capable of significant improvements to their dividends.
City of London offers a historic dividend yield of 5.3%, representing a chunky yield premium to the UK equity market. The trust is large, liquid, and low cost (see Charges), and continues to attract demand from investors for the shares which currently trade at a premium of 3%.
In our view, investors are attracted to City of London’s high yield, the unrivalled record of dividend progression, and the low cost of the trust. This, together with the historic stability of the discount/premium, makes an attractive package in our view.
Job is a fundamental stock picker who can look back on 30 years of experience to help him navigate markets. At a time like this, we believe this is a huge asset to the trust. His cautious nature and valuation aware investment approach has seen him avoid the cyclical rally we have seen recently. However, in our view, of more interest to investors than short term out or underperformance, is the prospect of the trust’s income recovering such that it becomes covered once again.
Job has stuck to his guns and retains his preference for conservatively run and well-financed businesses. This approach has stood him well over the long term, as is shown in his track record of delivering small but steady outperformance over the years, and an enviable dividend track record. Since September, City of London’s shares have once again been in demand, and currently trade on a premium to NAV of 3%. This is slightly ahead of the five-year average premium to NAV of 1.6%. The sector beating OCF of 0.36% is another reason City of London may continue to attract strong demand from investors.
|Very low OCF of 0.36%
||Balanced, large-cap portfolio means NAV performance can underperform in some market conditions (such as the current cyclical rally)
|Consistency of manager who has delivered long term 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