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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…
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.
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 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.
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.
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 Name | Ticker | Yield % @ 24/3/20 | Franking % | Divided Cover (years) | Region | Mgmt Type |
|---|---|---|---|---|---|---|
| Australian Foundation Investment Company (AFIC) | AFI | 6.64 | 100 | 4 | Australia | Long Only |
| Argo Investments | ARG | 5.9 | 100 | 3.3 | Australia | Long Only |
| Milton Corporation | MLT | 4.04 | 100 | 2.1 | Australia | Long Only |
| Carlton Investments | CIN | 7.15 | 100 | 11.1 | Australia | Long Only |
| Whitefield | WHF | 5.46 | 100 | 7.1 | Australia | Long Only |
| Australian United Investment | AUI | 5.53 | 100 | 3.6 | Australia | Long Only |
| Ironbark Capital Limited | IBC | 9.7 | 100 | 1.1 | Australia | Absolute Return |
| Templeton Global Growth | TGG | 7.25 | 100 | 0.9 | Global | Long Only |
| Concentrated Leaders Fund Limited | CLF | 10.8 | 100 | 4.5 | Australia | Long Only |
| Diversified United Investment | DUI | 4.57 | 100 | 2.1 | Australia | Long Only |
| Platinum Capital Limited | PMC | 8.33 | 100 | 2.8 | Global | Absolute Return |
| Djerriwarrh Investments | DJW | 9.71 | 100 | 1.7 | Australia | Long Only |
| WAM Capital | WAM | 10.4 | 100 | 0.5 | Australia | Absolute Return |
| AMCIL | AMH | 9.79 | 0 | 1.7 | Australia | Long Only |
| Flagship Investments Limited | FSI | 5.89 | 100 | 4.2 | Australia | Long Only |
| Mirrabooka Investments | MIR | 11.63 | 100 | 3.8 | Australia | Long Only |
| WAM Research Limited | WAX | 10.43 | 100 | 2.9 | Australia | Long Only |
| BKI Investment Company Limited | BKI | 9.1 | 100 | 0.9 | Australia | Long Only |
| Australian Leaders Fund Limited | ALF | 5.45 | 72.22 | 0 | Australia | Absolute Return |
| Clime Capital Limited | CAM | 8.13 | 100 | 3.1 | Australia | Long Only |
| NAOS Small Cap Opportunities Company Limited | NSC | 10.43 | 100 | 1.2 | Australia | Long Only |
| Pengana International Equities Limited | PIA | 9.15 | 83.57 | 6 | Global | Long Only |
| MFF Capital Investments Limited | MFF | 1.47 | 100 | 44.2 | Global | Long Only |
| Cadence Capital | CDM | 11.36 | 100 | 1 | Australia | Absolute Return |
| WAM Active | WAA | 7.2 | 100 | 0.8 | Australia | Absolute Return |
| Ozgrowth Limited | OZG | 4.55 | 100 | 12 | Australia | Absolute Return |
| Westoz Investment Company Limited | WIC | 10.26 | 100 | 4.9 | Australia | Long Only |
| NAOS Emerging Opportunities Company Limited | NCC | 9.06 | 100 | 2.2 | Australia | Absolute Return |
| Sandon Capital Investments Limited | SNC | 14.29 | 100 | 0 | Australia | Long Only |
| PM Capital Global Opportunities Fund Limited | PGF | 4.87 | 100 | 7 | Global | Absolute Return |
| Thorney Opportunities Limited | TOP | 1.81 | 100 | 24.1 | Australia | Long Only |
| Acorn Capital Investment Fund Limited | ACQ | 8.86 | 100 | 4.8 | Australia | Long Only |
| PM Capital Asian Opportunities Fund Limited | PAF | 5.74 | 100 | 3 | Asia | Absolute Return |
| Blue Sky Alternatives Access Fund Limited | BAF | 8.33 | 65 | 1.1 | Australia | Long Only |
| Global Value Fund Limited | GVF | 7.03 | 84.38 | 1 | Global | Long Only |
| QV Equities Limited | QVE | 6.47 | 100 | 1.6 | Australia | Long Only |
| Future Generation Investment Fund Limited | FGX | 5.8 | 100 | 0 | Australia | Long Only |
| Ellerston Global Investments Limited | EGI | 3.9 | 100 | 2.2 | Global | Long Only |
| NAOS Ex-50 Opportunities Company Limited | NAC | 8.08 | 100 | 0.8 | Australia | Absolute Return |
| Perpetual Investment Company | PIC | 10.16 | 100 | 1 | Australia | Long Only |
| Argo Global Listed Infrastructure Limited | ALI | 4.06 | 100 | 6.5 | Global | Long Only |
| Future Generation Global Investment Company Limited | FGG | 2.5 | 60 | 1.3 | Global | Long Only |
| Ellerston Asian Investments | EAI | 1.18 | 100 | 3.7 | Asia | Long Only |
| Platinum Asia Investments Limited | PAI | 4.37 | 100 | 3 | Asia | Long Only |
| Absolute Equity Performance Fund Ltd | AEG | 6.12 | 100 | 1.9 | Australia | Absolute Return |
| WAM Leaders Limited | WLE | 7.02 | 100 | 2.3 | Australia | Absolute Return |
| Antipodes Global Investment Company Ltd | APL | 5.42 | 50 | 1.9 | Global | Absolute Return |
| Plato Income Maximiser Limited | PL8 | 11.25 | 100 | 1.1 | Australia | Long Only |
| WCM Global Growth Limited | WQG | 2.04 | 0 | 13.3 | Global | Long Only |
| WAM Microcap Limited | WMI | 7.26 | 100 | 4.2 | Australia | Long Only |
| Evans & Partners Global Disruption Fund | EGD | 1.83 | 0 | 0 | Global | Long Only |
| Spheria Emerging Companies Limited | SEC | 5.94 | 100 | 2.6 | Australia | Long Only |
| WAM Global Limited | WGB | 1.42 | 100 | 2.2 | Global | Long 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.
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.
Some of those dividend yields are WRONG. For example Mirrabooka’s annual ordinary dividends for years has been 10c per share. It has been boosted by special dividends which have been paid in most of the past few years. But in calculating current dividend yield it is ridiculous to include special dividends which will obviously not be paid this year or next year. Thus using their ordinary dividends of 10c per annum the current yield is a bit over 5%. To state the yield is now 11% is absurd. Likewise AFI ordinary annual dividends for numerous years has been 24c per… Read more »
Good pickup Carlos. Unfortunately our dividend data feeds do not split out special dividends from ordinary dividends so we can only report on the actual dividends paid.
When you look at the portfolio of a lot of LICs like ARO or AFIC, they are the major shareholders of the big banks. Recent announcements from NZ central bank suggest banks will stop pay dividends in NZ. I will not be surprised at some stage, the big 4 banks in Australia will suspend, cut or even cancel dividends. If that is the case, very likely dividends from LIC will be impacted. That is my personal view anyway.
Absolutely, the dividends the LICs receive will reduce, however if the LIC has enough retained profit reserves they may be able to ride it out.
Emily , AFI received less dividends during the GFC years also but still continued to pay 24c per share dividends due to retained profits from past years. Unlike ETFs, LICs can retain some profits for a rainy day rather than just paying it all out every year.
In the GFC the banks still paid some healthy dividends but there is a real risk this year that they might pay none, as demanded in New Zealand.
So there is a higher chance of LIC dividends reductions than in the GFC.