In some ways the City of London investment trust is exceptional; in others quite ordinary.
Firmly in the former category is its dividend record: the payment has risen for 56 years in a row. The trust can also boast an exceptionally experienced manager in Job Curtis, at the helm for 31 years, and a very low annual charge of 0.37pc.
While income‑focused investors can hardly wish for a better fund, its overall returns are much less striking. Its total return – capital growth plus reinvested dividends – has been 95pc over the past decade, according to the Association of Investment Companies, the trusts’ trade body. That figure is within a whisker of the 96.3pc average total return over 10 years from the AIC’s “UK equity income” sector.
But there are welcome signs that the trust’s capital performance is improving. Over the past year, its total return of 9.1pc is beaten within its 22‑strong AIC sector only by Temple Bar. The average UK equity income trust has lost 1.6pc over the period.
In its most recent financial year, to June 30, City of London’s total return (on the basis of its net asset value, as opposed to its share price) was 7.5pc, which was 5.9 percentage points ahead of the FTSE All‑Share index. Some of this can be credited to the trust’s gearing, its use of borrowed money to enhance returns. But the lion’s share, 4.7pc points, was attributable to its choice of holdings, the trust said in its annual results published on Monday.
It said its performance had benefited from “the portfolio’s tilt towards large companies and dividend yield and away from highly valued growth stocks and medium‑sized and small companies”.
BAE Systems, the defence equipment manufacturer, made the biggest contribution to its gains, followed by Imperial Brands, the tobacco company. Its holdings in banks, oil companies and miners also helped.
But again the real highlight was on the income side. Dividend growth from its own holdings led to a rise in earnings per share of 21.2pc to 20.72p. The mining companies Rio Tinto, Anglo American and BHP played a big part here.
Its healthy dividend income allowed the trust to rebuild its “revenue reserves” from £37.6m at the beginning of the financial year to £43.6m at the end, or 9.5p a share.
During the pandemic, City of London had to dip into these reserves to avoid a cut in its dividend so it is welcome to see them on the rise again; it now has enough held back to meet the cost of almost half the full‑year dividend.
We can therefore be confident that the trust can continue to raise its dividend and maintain that unrivalled record of annual increases. Indeed it has already declared its first dividend for the current financial year of 5p for the first quarter or an annualised 20p, compared with 19.6p for the year to June; in practice we can hope for a little more.
While June’s dividend increase of 2.6pc is miles behind the current rate of inflation, and we cannot expect the current year’s rise to be anything like 10pc, we can take some comfort from the fact that City of London has increased its dividend by 41.2pc over the past 10 years, compared with a cumulative increase in the consumer prices index of 26.5pc.
The trust’s board said it understood “the importance of growing the dividend in real terms through the economic cycle”. Should it in fact pay 20p this year, the yield at last night’s closing price of 398.5p would be 5pc, compared with just 3.7pc from the FTSE 100.
That 398.5p share price represents a small premium to the most recent net asset value of 387.8p. The premium may put off potential buyers but the fact that City of London has often traded at a premium has allowed it to issue new shares. Doing so spreads the fund’s costs across a wider base, which in time should make the annual charge even smaller.
In summary, do City of London’s exceptional income credentials outweigh its more everyday performance in capital terms?
In Questor’s view they do: that index‑beating yield and the virtual certainty that the dividend will continue to rise each year are enormously valuable, especially for those retired savers for whom we first tipped the trust in 2018.
It may not be an obvious buy at a 2.8pc premium, but it is definitely a long‑term hold.
Questor says: hold
Share prices at close: 398.5p
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