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MRCH demonstrates strong relative performance and 42 years of consecutive dividend increases…
Merchants Trust PLC
Edison Investment Research is terminating coverage on Oxford Cannabinoid Technologies (OCTP), Britvic (BVIC), Ultimovacs (ULTI), DFR Gold (DFR), The Merchants Trust (MRCH), PB Holding (PBH) and Biodexa Pharmaceuticals (BDRX). Please note you should no longer rely on any previous research or estimates for this company. All forecasts should now be considered redundant. Previously published reports can still be accessed via our website.
The Merchants Trust’s (MRCH’s) manager, Simon Gergel at Allianz Global investors, is very excited about the number of reasonably priced opportunities available in the UK market. Also, good income generation from the trust’s portfolio of high-quality companies with robust fundamentals enabled MRCH to record another consecutive dividend increase in FY24; it now has a 42-year track record. The trust’s attractive 5.1% dividend yield is one of the highest in the 19-strong AIC UK Equity Income sector and its NAV total return over the last three, five and 10 years is superior versus the peers with a higher yield. MRCH could be seen as a good income play in a scenario of improving investor sentiment towards UK companies, which Gergel envisages given the more stable political environment (as the two main political parties’ policies are now less divergent) and signs of improvement in the UK economy.
The Merchants Trust (MRCH) manager, Simon Gergel at Allianz Global Investors, has been at the helm for the last 17 years during a variety of market environments. He has remained true to his investment process, seeking high-quality companies with solid fundamentals that are trading on reasonable valuations. The manager is very encouraged by the current valuation backdrop as, in aggregate, the UK market is trading at the low end of its 20-year range and within the market there is a wide dispersion of valuation multiples. A large proportion of UK stocks, including those of quality businesses, are trading on forward P/E multiples of less than 10x, providing Gergel with a large pond in which to fish. His approach has proved successful with mid- and long-term outperformance of MRCH’s broad UK market benchmark. With the trust’s dual mandate of income and capital growth, it offers an attractive 5.2% dividend yield and has grown its annual dividends for the last 41 consecutive years.
The Merchants Trust (MRCH) has been managed by Simon Gergel at Allianz Global Investors for the last 17 years. He describes the valuation backdrop in the UK market as ‘a stock picker’s dream’, as in aggregate, UK stocks are trading at the low end of their 20-year range, and company valuations vary significantly, thereby affording the manager opportunities to identify reasonably priced businesses that have strong fundamentals and are operating in industries with favourable dynamics. Gergel’s strategy has proved successful as MRCH is comfortably ahead of its benchmark over the last three, five and 10 years. Growing income is an important feature of the trust, and it has paid higher dividends for the last 41 consecutive years. Reflecting the board’s confidence that this trend can continue, MRCH’s first two FY24 interim dividends are 3.6% higher year-on-year, which is an acceleration in growth versus FY23, when the annual dividend was a more modest 1.1% above the level paid in FY22.
Simon Gergel at Allianz Global Investors has managed The Merchants Trust (MRCH) for the last 17 years. His disciplined fundamental investment process has proved to be a successful strategy as MRCH is ahead of its benchmark over the last one, three, five and 10 years. The trust’s NAV total returns also rank top out of 20 funds in the AIC UK Equity Income sector over the last three years. MRCH has a commendable dividend track record, having increased its annual payments for the last 41 consecutive years, and its yield is consistently above the level of the UK market. Gergel’s, and the board’s, confidence in the positive prospects for the UK market is illustrated by a higher level of gearing; the remainder of the trust’s debt facility was drawn down in November 2022.
Investec view: Our very long-standing thesis on Merchants was that a high dividend yield restricted portfolio flexibility, and the company was dependent on relatively high levels of gearing to generate income. Meanwhile, a feature of a truly horrific balance sheet was very expensive long-term debt which we once described as resembling something out of a Mary Shelley novel. Given these millstones, and what we regarded as the perils of reaching for yield, historically we struggled to recommend Merchants. However, in our 2021 report, Time to take a fresh look (here), we finally moved from our long-standing sell recommendation, although having maintained such a stance for so long, we failed to fully embrace what was a clearly a much-improved investment proposition. Given the value philosophy, Merchants has been well-placed since the long-standing value headwinds reversed sharply in Q4 2020, while the early stages of the recovery in UK equities from pariah status has also been supportive. On UK equities, we highlight the 36% valuation discount to global equities. This represents a significant margin of safety, and we are sure it’s something that has not been missed by both corporate buyers and the private equity industry, which is sat on record levels of dry powder. Looking forward, we regard a remarkable transformation of the balance sheet as a critical development, and, rather than a heavy millstone, this now represents a solid foundation. Furthermore, strong issuance in recent years is symptomatic of the significant progress made and given the most challenging of backdrops, the Board and manager deserve credit for this. The dividend yield of 4.8% is attractive and notably this was covered in the last financial year, following a strong recovery in earnings which seemed inconceivable during the onset of the pandemic. We now upgrade to Buy. A remarkable transformation of the balance sheet: Ten years ago, gearing was 23% of NAV and consisted entirely of long-term debt instruments, while the weighted average effective interest rate was 9.1%, including stepped rate and fixed rate loans with interest rates of 14.75% and 9.25% respectively. Continued overleaf
The Merchants Trust (MRCH) is managed by Simon Gergel, chief investment officer of UK equities at Allianz Global Investors (AllianzGI). He highlights that the remaining £16m of the trust’s £42m credit facility has recently been drawn down, taking gearing from c 13% to c 15%. This indicates that the manager, and MRCH’s board, see good value in the UK market, particularly in the type of stocks that fit Gergel’s disciplined investment criteria. The manager continues to seek undervalued companies with solid fundamentals, aiming to generate a high and growing level of income and long-term capital growth. MRCH has a commendable performance track record, outperforming the broad UK market over the short, medium and longer term. It also ranks highly versus its peers in the 22-strong AIC UK Equity Income sector. The trust’s annual dividend has grown for the last 40 consecutive years.
The Merchants Trust (MRCH) is actively managed by Allianz Global Investors’ highly experienced chief investment officer of UK equities/UK income, Simon Gergel. He highlights that the portfolio is very different to what it was a couple of years ago, but the manager continues to adhere to his disciplined investment process, seeking undervalued companies with solid fundamentals, aiming to generate a high and growing level of income and long-term capital growth. MRCH’s portfolio is differentiated from its benchmark and has an impressive long-term record of outperformance versus the broad UK market. Its NAV total return is ranked first among the 22 funds in the AIC UK Equity Income sector over the last one, three and five years. MRCH’s dividend has grown for the last 40 consecutive years.
The Merchants Trust (MRCH) is managed by Allianz Global Investors’ chief investment officer, UK equities, Simon Gergel. He is very pleased by how the trust’s income has recovered as companies have returned to paying dividends. With an uncertain economic and investment backdrop, which has been exacerbated by the Russian invasion of Ukraine, the manager stresses the importance of focusing on companies’ long-term prospects. Gergel considers MRCH’s balanced portfolio of attractively valued cyclical and defensive stocks, with both domestic and international businesses, is relatively well positioned for the current environment. The trust has a commendable performance track record, having outperformed its UK benchmark over the last one, three, five and 10 years, while its NAV total return now ranks first or second versus its 16 largest peers in the AIC UK Equity income sector over the last one, three and five years.
The Merchants Trust (MRCH) is managed by Simon Gergel, who is chief investment officer, UK equities, at Allianz Global Investors (AllianzGI). This firm has been engaged in environmental, social and governance (ESG) research since 2000, and a consideration of ESG factors is deeply embedded in MRCH’s disciplined investment process. While the manager is very encouraged by the trust’s improved performance following a tough period in early-2020, he is not complacent, and continues to seek high-quality businesses that are trading on reasonable valuations and can be held for the long term. MRCH consistently offers a dividend yield above that of the broad UK stock market and is on track for 40 years of consecutive annual dividend growth; its current yield is 4.9%.
The Merchants Trust (MRCH) is managed by Simon Gergel who is chief investment officer, UK equities, at Allianz Global Investors. He stresses that being a value investor does not mean buying bad businesses, and the polarised UK market is enabling him to invest in high-quality companies at reasonable prices. While the manager experienced a tough period of relative performance during the coronavirus-led market sell-off in early 2020, he adhered to his long-term, high-conviction process, which was the correct strategy as shown by the meaningful performance improvement in the chart below. MRCH consistently offers an above-market dividend yield (currently 5.3%).
Investec view: Our very long-standing thesis on Merchants has been that a high dividend yield materially restricted underlying portfolio flexibility and this would adversely impact capital performance and dividend growth. Meanwhile the company appeared dependent on very high levels of gearing to generate income, and critically, it was burdened with a horrific balance sheet with very expensive, long-term debt, a legacy of a bygone era. However, while the manager’s value-based style has been a drag on returns in a market preoccupied with growth, Merchants has spectacularly participated in the style reversal in recent months. The big question now is what comes next? While history doesn’t repeat, we highlight that Merchants experienced a similar explosive period of outperformance as markets embarked on their recovery phase in March 2009 (see p2), and this continued, albeit at a more modest rate, until the summer of 2013, when the relative performance peaked. Undoubtedly, headwinds have reversed as investors focus on the recovery; we highlight the IMF has upgraded UK economic growth forecasts to 5.3% this year and 5.1% next, while we note UK dividend growth forecasts of 30% this year. Although a dividend increase of this magnitude will not cover the FY22 dividend, the Board has said that it can see a path to a covered dividend in the medium term. It added that it will continue the progressive dividend policy, subject to no significant deterioration in the outlook for income, and will use reserves to cover any shortfall. While the revenue reserves are relatively anaemic, the company has taken the powers to pay out of capital. In our view, the critical development in recent years has been the transformation of the balance sheet. Five years ago, Merchants had total debt representing 21% of NAV with “nosebleed” weighted average interest costs of 8.5%, and most of this was long-term. However, we estimate that the long-term debt now represents 10.5% of NAV, while the weighted cost is 4.5%. For us, the final piece in the jigsaw is portfolio flexibility. Although there has been some improvement, we believe the manager does not enjoy the same flexibility as its peers (we note the manager’s unconstrained open-ended fund is ranked 4th out of 77 in the IA UK Equity Income sector). That said, a significant reduction in debt costs is helpful, while we welcome (belated) plans to invest up to 10% overseas. While there remain undoubted risks to the recovery, given a more supportive macro backdrop and a cleansed balance sheet, we now upgrade to a Hold recommendation. Continued overleaf
The Merchants Trust (MRCH) is managed by Simon Gergel at Allianz Global Investors. He suggests the company is ‘in a much better place’ compared with early 2020. The manager now has more confidence in the trust’s income prospects as dividends are resuming and in some cases being raised, and he has been able to take advantage of stock market volatility to reposition the portfolio. Gergel believes MRCH’s shareholders appreciate how the trust’s investment process remains consistent despite periods of market volatility, while the board’s progressive dividend policy provides an attractive income stream in excess of the UK market. This is reflected in MRCH’s relative performance, which has improved considerably in recent months. The trust currently offers a 5.5% dividend yield, the second highest of the 17 larger-cap peers in the AIC UK Equity Income sector.
The Merchants Trust (MRCH) has been managed by Simon Gergel at Allianz Global Investors (AllianzGI) since 2006. He is continuing to find interesting opportunities in the UK market, seeking high-quality, reasonably valued companies with attractive dividend yields. The manager says we are ‘past the worst’ in terms of dividend cuts in the wake of the coronavirus pandemic, with many companies reinstating their payments. MRCH has sufficient revenue reserves to be able to build on its record of 38 years of consecutive annual dividend growth. As shown in the chart below, the trust offers a consistently above-market dividend yield.
Background: The dividend yield of Merchants is 6.8%, significantly higher than the UK Equity Income sector average of 4.8%. Meanwhile, the company can demonstrate an enviable record of progressive dividend growth; the dividend has increased for 38 consecutive years, a period encompassing many crises, rising from just 2.1p/sh in 1982 to 27.1p/sh in the last financial year. Yesterday, Merchants announced a 1.5% increase in the first interim dividend, but warned that income will be significantly lower this year and probably next. Against this backdrop, Merchants highlights that the revenue reserves represent more than one-year’s total dividend payment and will be used to cover any shortfalls. Investec view: A very high dividend yield has generated strong retail demand for Merchants Trust and has resulted in the company trading on a premium rating in the past couple of years, at a time when many of its peers have come under pressure. This has enabled the company to issue 10.2m new shares, thereby improving marketability and reducing the ongoing charge. However, investors should be aware of the perils of reaching for yield. A high yield has been a consistent feature, but long-term dividend growth has been anaemic. Meanwhile capital performance has been poor with the NAV total return lagging the FTSE All Share by an annualised 1.8% over five years. We believe a key driver of these two shortcomings is an unrealistically high portfolio yield requirement, which impacts portfolio construction and stock selection. Also, an apparent need for high gearing levels increases the risk profile. Even before the pandemic, storm clouds had been gathering over UK equity income managers who had become increasingly dependent on an ever-decreasing number of stocks and sectors, with dividend cover increasingly threadbare. However, while the sector has been building revenue reserves for a rainy day, a super cyclone has hit. UK dividends are predicted to fall 40% this year and are not expected to recover to 2019 levels for some years, while many companies may choose to rebase dividends at more sustainable levels. IHS Markit forecast that even by 2022, UK dividends will be c23% below 2019 levels. This bleak scenario will impact all UK equity income managers, but we believe its effects are more acute for Merchants. A high portfolio yield requirement already placed significant constraints on portfolio flexibility, but this is likely to be even further restricted in this environment. Continued overleaf
The Merchants Trust (MRCH) is managed by Simon Gergel at Allianz Global Investors (AllianzGI). Aiming to continue to provide a high and growing level of income, he is adjusting the trust's portfolio in the wake of dividend cuts sparked by the negative economic effects of COVID-19. If there is an income shortfall in this financial year, MRCH is well positioned to maintain its dividend, with revenue reserves of more than 1x the last annual payment. It has not been an easy period for value managers over the last decade as growth stocks have led the charge; however, Gergel has outperformed the UK market over this period in both NAV and share price terms. The board reduced MRCH's gearing in late January 2020, which was opportune timing ahead of the recent significant stock market weakness.
The Merchants Trust (MRCH) offers investors the potential for long-term capital growth along with a high and growing level of income. Helped by the refinancing of the trust’s high-cost, long-term debt, for FY20 (ending 31 January) the board’s intention is that MRCH’s annual dividend will be at least 4.2% higher year-on-year. Manager Simon Gergel at Allianz Global Investors (AllianzGI) is optimistic about the trust’s prospects, citing a broad opportunity set due to attractive valuations in the UK stock market. He says that at some stage the deeply depressed sentiment towards UK shares should improve, which could lead to a meaningful revaluation of the domestic market.
The Merchants Trust (MRCH) is managed by Simon Gergel at Allianz Global Investors (AllianzGI). He highlights the trust’s growing income stream, long-term capital growth and above-average dividend yield. The manager notes that in FY19, MRCH’s dividend growth of 4.8% was meaningfully higher than the rate of UK inflation, and a step up in dividend growth following the debt refinancing in January 2018. He explains that revenue growth in FY19 was even stronger, allowing an addition to reserves, which can be used to smooth dividend payments in years when revenue growth is lower. Gergel says that MRCH’s portfolio continues to generate a healthy level of income, with most investee companies increasing their dividends, including Legal & General, St James’s Place and the tobacco companies.
The Merchants Trust (MRCH) is managed by Simon Gergel, chief investment officer of UK equities at AllianzGI. He says the current uptick in volatility in the UK stock market is providing a lot of opportunities for active stock pickers, with a wide divergence between the valuation of shares in companies with steady growth characteristics and those whose earnings outlook is less clear. Although MRCH’s annual dividend has increased in each of the last 36 years, growth in the years following the global financial crisis has been modest. However, the manager says the refinancing of a large tranche of the trust’s high-cost debt in January 2018, coupled with higher levels of portfolio income, means the board has increased confidence in growing the dividend at a faster rate, from a starting yield of more than 5%.
The Merchants Trust (MRCH) is managed by Simon Gergel at AllianzGI. He aims to generate a high and growing level of income, with the potential for long-term capital growth, from a portfolio of UK equities. The manager considers there are great opportunities in the UK stock market for high-yield investors, and that in aggregate UK stocks are looking attractively valued compared to global equities. MRCH has a distinguished dividend history; payouts have grown in each of the last 36 consecutive years. In FY18, the annual distribution was 2.5% higher than in FY17 – a larger growth rate than in recent years, reflecting higher dividend growth from portfolio companies, but also due to MRCH’s lower interest costs following the refinancing of a tranche of its high-cost debt in late 2017.
The Merchants Trust (MRCH) adopts a long-term approach to investing in UK equities, aiming to generate an above-average level of income along with long-term capital and income growth. The trust has announced a refinancing of its first tranche of high-cost debt, which will bring its effective cost of borrowing down from 8.5% to 6.1%, saving £2.8m in annual interest costs and locking in low-cost funding for the next 35 years. The board adopts a progressive dividend policy; annual dividends have increased for the last 35 consecutive years and the current 5.0% yield compares favourably with the average of MRCH’s peers in the AIC UK Equity Income sector.
The Merchants Trust (MRCH) aims to generate a high and growing level of income with the potential for long-term capital growth from a relatively concentrated, actively managed portfolio of UK equities. At end-January 2017, the benchmark was changed from the FTSE 100 index to the FTSE All-Share index, reflecting the evolution of the portfolio over several years towards a lower exposure to large-cap equities, giving the manager the opportunity to select from a broader range of dividend-paying companies. MRCH has a competitive yield compared to the UK stock market and also versus its peers. It has a progressive dividend policy and has increased its annual dividend for the last 35 consecutive years.
The Merchants Trust (MRCH) invests in a portfolio of primarily large-cap UK equities aiming to generate income and long-term capital growth. MRCH differentiates itself from its peers due to its high income and dividend growth – its dividend yield is consistently above the benchmark FTSE 100 index – and has 34 years of consecutive annual dividend growth. Near-term investment performance has improved; this is partly a function of rising bond yields as investors are starting to rotate away from expensive bond proxies and towards more cyclical, higher-yielding sectors of the UK stock market. MRCH is now outperforming its benchmark over five years. Gearing of up to 25% of net assets is permitted.
The Merchants Trust (MRCH) is a very well-established trust investing in UK equities, primarily in higher-yielding, large-cap companies, which aims to produce high income and long-term growth in capital and income. While recent months have been a difficult period for investing in this area, the manager sees good value in the portfolio across a range of themes. MRCH ranks highly in the AIC UK Equity Income sector in terms of dividend yield (c 6.0% vs 4.5% sector average) and the annual dividend has increased in each of the last 34 years, providing investors with an important source of total return in an environment of low earnings growth. The latest annual dividend was more than covered by income.
The Merchants Trust (MRCH) offers one of the highest yields currently available on a mainstream equity investment trust (5.9% at 11 December), as well as the potential for capital growth. Manager Simon Gergel has positioned the trust with a tilt towards mega caps in areas such as banks, where dividend growth could come back strongly as legacy issues subside. The focused portfolio of 44 stocks also has exposure to UK economic growth via the industrial and consumer services sectors, and selected holdings in resources offer recovery potential. MRCH pays dividends quarterly and has a 33-year record of annual dividend growth. The discount has widened over the year as large caps have fallen from favour, with scope for it to narrow to a level more in line with long-term averages.
The Merchants Trust (MRCH) is a concentrated portfolio of mainly larger UK companies, with a focus on producing a high income along with capital and income growth. It uses the FTSE 100 index as a performance measure, although around one-third of portfolio holdings are outside the index. Stock selection is mainly bottom-up but manager Simon Gergel assigns holdings to broad themes, including mega-caps and cyclical recovery or turnaround situations. The trust has raised its ordinary dividend in each of the past 33 years. A move from a premium to a discount over the past six months could be viewed as a buying opportunity, particularly as MRCH has one of the highest yields in the UK Equity Income peer group, at c 5%.
