Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Brunner. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
If the last year has taught income investors anything, it might be that consistency is key. Whatever the application of your income, being able to rely on it being relatively reliable is valuable for many investors, with immediate needs like school fees or simply day-to-day living costs not abating regardless of the economic climate.
The challenges of sourcing reliable income were laid bare in 2020. Many companies slashed their dividends as the COVID 19 pandemic prompted governments to lockdown entire economies, leaving revenues uncertain. This had a clear knock-on effect for many investors, particularly in the UK, where prior to the crisis 37% of all dividends came from just five companies and 51% from ten.
The income advantage
Investment trusts are uniquely well-positioned to offer investment income. Their closed-end structure means they are unaffected by daily inflows and outflows allowing their managers to confidently invest for the longer term. Their boards are also able to hold back some of their investment profits and income from distribution each year. This in turn enables them to ‘smooth’ payouts in years when income falls, similar to the experience of many last year.
As a result, investment trusts are some of the most reliable income payers accessible to investors, with a select group – the AIC’s Dividend Heroes – achieving record-breaking runs in terms of consistent dividend growth, running over multiple decades.
One such trust is Brunner (BUT), which has a combined growth and income mandate, and has increased its dividend for 49 consecutive years including in 2020, putting it amongst the top ten trusts with the longest-running consecutive dividend increases. Underpinning this track record is a strong and proven investment philosophy which should safeguard this record into the future.
Investing for income (growth)
Brunner has deep revenue reserves, which we estimate sit at around 1.2x its 2020 full year dividend. Nonetheless the trust’s managers, do not depend on these reserves and actively seek to increase the trust’s own income and capital returns year-on-year, building these reserves over time.
Crucially, the team takes a balanced approach to investing through the cycle, seeking to achieve both an income and capital growth from their underlying portfolio. This means that they do not need to invest in the world’s highest dividend payers – which often lack growth prospects - in order to meet their income obligations.
Instead, the team focuses on identifying high quality companies with established and profitable business models that have scope for further growth , typically with very robust balance sheets. The strength of this approach was demonstrated in 2020. Although the trust did ultimately have to dip into its reserves to pay its dividend, the managers say its underlying income has held up well and importantly is already recovering strongly. Crucially, the focus on quality and balance sheet strength steered the portfolio away from most of the really painful dividend cuts.
At the same time, by focusing only on established and highly profitable companies, the team have avoided the more speculative stocks that have seen significant selloffs in the latter quarter of 2020 and opening months of 2021.
Dividends at a discount
Brunner’s consistency – and its truly differentiated portfolio – already make it an interesting proposition. However, it also currently sits on the fourth-widest discount in the AIC Global sector, despite posting credible share price returns over one and five years, and a solid mid-table dividend yield.
This combination of a healthy dividend yield and robust share price returns is unusual within the sector and means that investors can access a one-stop global investing stock at a fraction of its true value.
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