City of London Investment Trust (CTY) has recently published its annual results, providing further detail on the financial year to 30 June 2021. As we discuss in the Dividend section, the results show that in the past financial year, revenues have improved significantly and Job seems optimistic on the prospects of continued recovery in the current financial year.
CTY’s reliable income is a key attraction for investors, which is reflected in its premium rating and steady issuance of shares over past years. Mindful of this, when we met up with Job recently it was clear that he has been focussing on the revenue generating capabilities of the portfolio.
As a result of changes to the portfolio, as well as the banks and oil stocks having restarted dividend payments, only 1% of the portfolio is now non-dividend paying. Job has gently shifted away from the FTSE 100, towards mid-caps, but with the mid-cap and overseas markets generally offering lower yields, he commented that it has been hard to build up the portfolio in these areas whilst balancing the need to generate income. As the revenue account improves and the trust is once again able to pay a covered dividend, Job intimated that he would like to add to these parts of the portfolio.
As we discuss in Gearing, net gearing is at the bottom of the historic range, at 6%, reflecting Job’s caution around certain areas of the market and his wish to have capital to tactically deploy in any periods of volatility.
CTY is a ‘dividend hero’ and has the longest track record of consecutive dividend increases in the sector. This is one of the key attractions of the trust in our view. Job takes a cautious approach to the management of City of London, aiming to provide long-term growth in income and capital. As we discuss in Portfolio, a key focus in the past year for Job has been rebuilding the trust’s dividend cover, and as we discuss in Dividend, this appears to be paying off.
Whilst CTY has outperformed over the long term, from a total return perspective, CTY has modestly underperformed in total return terms over the shorter term. That said, no other trusts can touch its record of the number of years of progressive dividend growth. The dividend is still uncovered, but Job’s length of experience, portfolio diversification, remaining revenue reserves, and the apparent strength of the board’s intent mean that CTY looks likely to continue to extend this track record into the future.
As a package, CTY’s low-cost active management geared towards providing long-term growth in income and capital remains attractive. The present trend of dividend payment recovery in the UK market, the manager’s prudent and income focussed approach, and the board’s commitment to providing shareholders with income all indicate that CTY’s half century plus of dividend growth still has legs.
|Very low OCF of 0.38%
||Cautious approach means NAV performance can underperform in some market conditions
|Consistency and experience 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
|55 year track record in progressive dividend increases
||Structural gearing can exacerbate the downside