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Disclosure – Non-substantive Research

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Overview
Overview

Law Debenture (LWDB) is a storied trust, having recently celebrated the 132nd anniversary of its launch in 1889. The Portfolio of LWDB is made of two distinct parts: shares in a single private business, Independent Professional Services (IPS), and a diversified investment portfolio of predominately UK listed equities, managed by James Henderson and Laura Foll of Janus Henderson. The objective of the trust is to achieve long-term capital growth and a steadily increasing income for shareholders.

IPS is a pensions, corporate trust and corporate services business. As a professional financial services business, it enjoys high ROIC and net margins. As at the end of June 2021, IPS constituted c. 16% of the trust’s NAV but over the three years before 2020 generated over a third of the trust’s portfolio income, providing James and Laura increased flexibility in their portfolio construction and stock selection. This flexibility has allowed James and Laura to outperform their benchmark and peers over the long term and in different market conditions.

The combination of IPS as a private, growing, cash generative business and a flexibly managed portfolio of UK stocks combining thematic, growth companies and more traditional dividend payers is a highly differentiated proposition in the UK Equity Income sector. The attractiveness of this offering is reflected in the Discount, with LWDB having traded a premium for extended periods in 2021. Although the current yield of 3.5% is at the lower end of the peer group, the dividend is currently growing substantially and is supported by revenue reserves, low costs, strong underlying portfolio performance, the growth of IPS and the use of structural Gearing.

Kepler View

As noted in our recent article, UK equity income investors have had a difficult couple of years, with UK companies slashing or halting dividends during the pandemic and the UK generally underperforming global peers. However, shareholders in LWDB have had a much better experience, receiving steady and growing dividends plus enjoying substantial outperformance versus the FTSE UK All-Share Index and peers over the pandemic period. This has enhanced the already solid long term track record that James and Laura had built up since James took the reins of the investment portfolio of the trust in 2003.

James and Laura have taken full advantage of the flexibility afforded in portfolio construction by the revenues generated by IPS, investing in low or zero yielding sectors such as alternative energy developers to provide diversification and a source of capital growth that other UK equity income managers might not be able to access due to their income targets. The diversification in sector and style versus peers has likely contributed to LWDB being one of the most consistent performers versus the FTSE UK All-Share Index in the peer group over the last five years.

Although the current yield is at the lower end of the range of the peer group, LWDB’s dividend is one of the fastest-growing, and in our view, the board will likely be in a position to be able to continue to enhance the dividend in the foreseeable future.

bull bear
Dividend supported by revenues generated by IPS business
Currently has a lower yield than many peers, albeit dividend is growing
Strong performance track record over long and short term
Future dividends highly dependent on success of IPS business
One of the most cost-effective trusts in the UK Equity Income sector
Structural gearing can exacerbate downside as well upside
Continue to Portfolio

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