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Which LICs are best placed to retain dividends in the current environment?

Five weeks in to the Coronavirus crash, share markets are down in the vicinity of 35%, whole countries are in war time style lockdowns & Fiscal stimulus and monetary policy dwarfing the efforts of the GFC are being announced globally. All but a few industries will feel the pain of the Coronavirus crisis. The extent…

By ETF Watch - Mar 24, 2020

Five weeks in to the Coronavirus crash, share markets are down in the vicinity of 35%, whole countries are in war time style lockdowns & Fiscal stimulus and monetary policy dwarfing the efforts of the GFC are being announced globally.

All but a few industries will feel the pain of the Coronavirus crisis. The extent of the pain is still unknown. Stimulus measures and breakthroughs in treatment of the virus may see economies bounce back quickly, alternatively continued country wide lock downs and hangovers in consumer sentiment may send global economies enter a drawn out depression. ‘Expert’ economists are sitting at all ends of the spectrum currently, as this once in a lifetime event plays out in front of them.

Dividends will be impacted

If there is a certainty, it is that dividends will be impacted in at least the short term. There’s barely an industry that hasn’t been impacted even at the early stages of this crisis.

Banks are under pressure as bad debts look certain to rise, retailers are suffering from reduced foot traffic, builders will soon see new builds cease as what’s in store for the property market remains uncertain. Coles, Woolies, medical supply manufacturers and video conferencing tools look to be the only winners out of the crisis.

LICs can push through and retain their dividend

LICs operate in a unique structure compared to traditional managed funds and ETFs. As a company, their board of directors can approve how much they pay out as dividends each year to investors. This differs from ETFs & managed funds which must pay out all their earnings each year.

As a result, even if dividends paid by the companies that the LICs invest in fall of a cliff, some LICs will be able to retain their current dividend payout. This is good news for investors seeking stable income, and also means for new investors that they may be able to invest now and receive a high yield, since the share prices of most LICs have fallen by 30% or more since the crisis.

Which LICs escaped the GFC with dividends intact?

There are 25 LICs that we follow which were available in 2006, the year before the GFC started. Just four managed to make it through the GFC without needing to cut their dividends, Australian United Investment (AUI), Diversified United Investment (DUI), Australian Foundation investment Company (AFI) and Carlton Investments (CIN). All have had 40%+ falls as a result of the Coronavirus crisis at the time of writing.

Some LICs such as popular LIC ARGO (ARG) saw a year or two of falls during the GFC before having their dividend quickly be restored, others took much longer to restore their dividends to pre GFC levels.

Profit reserve is the key

Dividends can be paid from a company’s retained profits. As a LIC can retain profits (like saving them for a rainy day, or reinvesting them to other investments), the amount of profit reserve the LIC holds is key to their likelihood of retaining their dividends.

In the below table we outline each of the LICs currently paying dividends and their profit reserve as a ‘years of dividend cover’. Essentially, a dividend cover of 1 means that a LIC could pay their latest annual dividend for 1 year before running out of profit reserve, 2 means 2 years and so on.

We should note that a high dividend cover amount should not assure investors that a dividend will be retained. Paying of dividends is discretionary by the company, and they may believe their profits are better served by re-investing if they see opportunity. Cynics would also say that some LICs may decide to reduce their dividends to better support their income, as falls in markets reduce their fees. However, for many LICs, their high and consistent dividend is one of their biggest selling points with investors and they are better placed to retain this then cut dividends and risk their fund falling to a large discount to NAV as investors dump their shares.

Yields below are based on the previous 12 months dividend and the closing price of each LIC on 24/03/2020. For reference in this fast moving environment, the S&P/ASX 200 was at 4,736 points. Yields exclude the impact of franking credits, with the proportion of the latest 12 months dividend that was franked shown separately.

Fund NameTickerYield % @ 24/3/20Franking %Divided Cover (years)RegionMgmt Type
Australian Foundation Investment Company (AFIC)AFI6.641004AustraliaLong Only
Argo InvestmentsARG5.91003.3AustraliaLong Only
Milton CorporationMLT4.041002.1AustraliaLong Only
Carlton InvestmentsCIN7.1510011.1AustraliaLong Only
WhitefieldWHF5.461007.1AustraliaLong Only
Australian United InvestmentAUI5.531003.6AustraliaLong Only
Ironbark Capital LimitedIBC9.71001.1AustraliaAbsolute Return
Templeton Global GrowthTGG7.251000.9GlobalLong Only
Concentrated Leaders Fund LimitedCLF10.81004.5AustraliaLong Only
Diversified United InvestmentDUI4.571002.1AustraliaLong Only
Platinum Capital LimitedPMC8.331002.8GlobalAbsolute Return
Djerriwarrh InvestmentsDJW9.711001.7AustraliaLong Only
WAM CapitalWAM10.41000.5AustraliaAbsolute Return
AMCILAMH9.7901.7AustraliaLong Only
Flagship Investments LimitedFSI5.891004.2AustraliaLong Only
Mirrabooka InvestmentsMIR11.631003.8AustraliaLong Only
WAM Research LimitedWAX10.431002.9AustraliaLong Only
BKI Investment Company LimitedBKI9.11000.9AustraliaLong Only
Australian Leaders Fund LimitedALF5.4572.220AustraliaAbsolute Return
Clime Capital LimitedCAM8.131003.1AustraliaLong Only
NAOS Small Cap Opportunities Company LimitedNSC10.431001.2AustraliaLong Only
Pengana International Equities LimitedPIA9.1583.576GlobalLong Only
MFF Capital Investments LimitedMFF1.4710044.2GlobalLong Only
Cadence CapitalCDM11.361001AustraliaAbsolute Return
WAM ActiveWAA7.21000.8AustraliaAbsolute Return
Ozgrowth LimitedOZG4.5510012AustraliaAbsolute Return
Westoz Investment Company LimitedWIC10.261004.9AustraliaLong Only
NAOS Emerging Opportunities Company LimitedNCC9.061002.2AustraliaAbsolute Return
Sandon Capital Investments LimitedSNC14.291000AustraliaLong Only
PM Capital Global Opportunities Fund LimitedPGF4.871007GlobalAbsolute Return
Thorney Opportunities LimitedTOP1.8110024.1AustraliaLong Only
Acorn Capital Investment Fund LimitedACQ8.861004.8AustraliaLong Only
PM Capital Asian Opportunities Fund LimitedPAF5.741003AsiaAbsolute Return
Blue Sky Alternatives Access Fund LimitedBAF8.33651.1AustraliaLong Only
Global Value Fund LimitedGVF7.0384.381GlobalLong Only
QV Equities LimitedQVE6.471001.6AustraliaLong Only
Future Generation Investment Fund LimitedFGX5.81000AustraliaLong Only
Ellerston Global Investments LimitedEGI3.91002.2GlobalLong Only
NAOS Ex-50 Opportunities Company LimitedNAC8.081000.8AustraliaAbsolute Return
Perpetual Investment CompanyPIC10.161001AustraliaLong Only
Argo Global Listed Infrastructure LimitedALI4.061006.5GlobalLong Only
Future Generation Global Investment Company LimitedFGG2.5601.3GlobalLong Only
Ellerston Asian InvestmentsEAI1.181003.7AsiaLong Only
Platinum Asia Investments LimitedPAI4.371003AsiaLong Only
Absolute Equity Performance Fund LtdAEG6.121001.9AustraliaAbsolute Return
WAM Leaders LimitedWLE7.021002.3AustraliaAbsolute Return
Antipodes Global Investment Company LtdAPL5.42501.9GlobalAbsolute Return
Plato Income Maximiser LimitedPL811.251001.1AustraliaLong Only
WCM Global Growth LimitedWQG2.04013.3GlobalLong Only
WAM Microcap LimitedWMI7.261004.2AustraliaLong Only
Evans & Partners Global Disruption FundEGD1.8300GlobalLong Only
Spheria Emerging Companies LimitedSEC5.941002.6AustraliaLong Only
WAM Global LimitedWGB1.421002.2GlobalLong Only

Many years of strong market conditions and low interest rates have been kind to a lot of LICs and allowed them to build a large profit reserve. Some of the largest LICs such as AFIC and ARGO have dividend cover in the 3-4 year mark. Assuming the crisis does not carry on for many years, one would expect low risk of them cutting dividends.

Other popular LICs such as the Wilson Asset Management LICs tend to hold lower retained profits, making them more susceptible to dividend cuts as until earnings return. However, with more active portfolios, they may continue to make trading profits which can be passed to investors as dividends.

Yields looking attractive

Share price falls put backwards looking yields in the 5-6% range for many popular LICs, with some up to an astonishing 10%. For those LICs that are able to sustain their dividends throughout the crisis, there are certainly attractive looking dividend plays available to investors, regardless of what share prices do from here.

 

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