Electra special dividend

[woolly]

Electra Private Equity (ELTA) has been one of those shares that I have watched rise and rise in recent months with a mixture of incredulity and satisfaction, after a period of turmoil last year when "activist investor" (as far as I can tell in this case a synonym for shark) Edward Bramson and his gang forced their way onto the board and elbowed out the long-standing, rather conservative management. Just recently the price topped the 5000p mark, making me wonder when the rise was going to peter out and allow a breather to bank a few profits before the CGT consequences became too onerous.

Oops! Today the board announced a special dividend of 2,612p per share, to be paid on 5 May 2017 to shareholders on the register of members at the close of business on 7 April 2017 - yes, a special divi of more than half the share price. Is this normal in the land of ITs?

As the ramifications of the announcement sank in my reaction followed the share price movement over the day almost perfectly - after an initial burst of enthusiasm it gradually dawned that I was going to be walloped with an unwanted and rather large tax bill on the dividend... Evidently a few others have been thinking the same thing - while the price was up 2.5% this morning it tanked this afternoon and has ended the day down 2.5%.

Since all my holding is sadly outside an ISA am I correct in thinking that the most tax-efficient way to handle this divi is to simply sell before April 7 and pay the CGT hit? The divi alone will catapult me well into the higher tax rate, never mind any other income, while the CGT (if I understand HMRC correctly) will max out at a more bearable 20%.

Naturally I am more than thankful to have such a nice problem, but any suggestions would be more than welcome...

[Kantwebefriends]

Perhaps next tax year is one in which to make a large pension contribution? Or several years' worth of charitable contributions.

[UncleEbenezer]

April 7th sounds like they're being helpful to people like you. You can sell one tranche this tax year and one next tax year to take advantage of two years' CGT allowance. And optionally keep a tranche.

Hmm. I wonder if this could be an interesting short-term buy for spare cash in an ISA or SIPP? Alas, not on the scale to compare with someone who has your problem.

[woolly]

Thanks for your suggestions - I'll certainly sell as much as I can (and my spouse and others can expect a large gift...)

I'm interested to know in what way it would be an interesting short-term buy for an ISA or SIPP - forgive my ignorance, but presumably if you buy the shares and then receive the dividend, the remaining shares would then be re-priced to reflect the massive chunk of capital returned to shareholders. Given frictional costs wouldn't you be marginally worse off than if you just waited and then picked up some ELTA after April 7, when the price will no doubt be substantially lower (assuming you wish to end up with some ELTA in your portfolio)?

[UncleEbenezer]

Thanks for your suggestions - I'll certainly sell as much as I can (and my spouse and others can expect a large gift...)

I'm interested to know in what way it would be an interesting short-term buy for an ISA or SIPP

If people like you push the price down by selling, that cheapens the price without affecting the value.

As for the value? Inside an ISA or SIPP, the dividend is tax-free. So on a pure efficient-market basis, those shares are worth more to me (in a tax shelter) than to you incurring 20% or 40% tax.

[Cantango]

The record date for holders to qualify for the special divi is 7 April.
The ex-div date is usually set for two business days before the record date.
So it looks to me as though anyone planning to sell on 6 April (to take advantage of the new tax year CGT allowance) will in fact be selling ex-div and will still receive the divi.
As private investors hold only 5% of Electra shares, our I/Tax or CGT 'problems' are of no concern to the big boys.

[Cantango]

Further research indicates that the ex-d date will indeed be 6 April.

[tjh290633]

The ex-div date is usually set for two business days before the record date.

Not any longer. Record date is the Working Day after XD now. XD is usually a Thursday.

TJH

[flint]

Electra has announced the sale of Treetops for £93m.
This increases the Electra NAV by 107p.

[rthak]

I would appreciate this board's thoughts on this...

I have not used any of this year's ISA allowance yet and would like to gain some exposure to private equity. I would buy ELTA at today's price of c.4,950 which is an approximate discount of 8.3% of last published NAV (according to http://www.hl.co.uk/shares/shares-searc ... 25p-shares).

I would then receive a dividend of 2,612 in May (tax free as within an ISA) bringing my purchase price down to 2,338. However, assuming the price also fell by the same amount (i.e. you could, immediately following the XD date, buy ELTA for 2,338) the discount to NAV would be c.16%.

According to here (http://citywire.co.uk/money/investment- ... undID=2900) 16% is almost the largest discount this IT has been at since the end of 2014.

I appreciate no return is guaranteed but this looks like a good way to get into this investment trust at a significantly lower discount to NAV than it is currently trading at.

rthak

[mc2fool]

I would then receive a dividend of 2,612 in May (tax free as within an ISA) bringing my purchase price down to 2,338. However, assuming the price also fell by the same amount (i.e. you could, immediately following the XD date, buy ELTA for 2,338) the discount to NAV would be c.16%.

Net Asset Value usually includes cash, so when they pay out the dividend, ceretis paribus, the NAV should also drop by that amount.

[flint]

rthak - I have bought ELTA for the reasons you have suggested.

mcfool2 - I am not sure you are correct, as both the NAV and price will be reduced by the dividend of 2612.( unless the price increases to maintain the current discount ). The NAV will be c.2700 and the price c.2300. i.e a discount of c.15%.

As an aside ( not key to the above ) I think that the HL estimate of NAV (5334) may be a little understated. I do not think it was changed to reflect the Treetops sale.

[mc2fool]

mcfool2 - I am not sure you are correct, as both the NAV and price will be reduced by the dividend of 2612.

That is exactly what I said.

[UncleEbenezer]

I would appreciate this board's thoughts on this...
rthak

I have thought along the same lines as you describe. It might be reasonable to suppose the post-div discount might lie somewhere between the same percentage as now and the same monetary value as now.

Of course it's not as easy as that: there's context. Probably most interesting is the fundamentals: what has driven it up over the past year or thereabouts? Is it likely to continue or reverse?

Worth noting, big divis are not unusual in Private Equity and Venture Capital, so there are precedents. A recent instance is British Smaller Companies VCT, whose price went from 106.5p to 88.0p on a 16.5p dividend just three months ago. Their price is now 77.5p with no significant news since the big divi. A month or so earlier, Octopus Apollo VCT - whose discount is tightly managed - paid 19p and went from 77.5p to 59.2p.

I've decided against buying into this one pre-divi. I don't know the fundamentals, so it would be a gamble, and the idea of paying twice the amount of stamp duty on my purchase lacks appeal.

[BobbyD]

Something of a jump move, glad all mine are in an ISA for CGT protection, although after this I wouldn't hold them anywhere else.

The question I'm left with is whether to put any of the cash back in to Electra, or wait and see how the situation develops.

[Rooky102]

Surely the discount should increase after the cash distribution.
Say a trust, which has made clear its intention to distribute cash, currently has £50 million in cash and £50 million in unquoted equities, and runs on a 5% discount.
That 5% discount reflects the market’s nervousness about the valuation of the equity (i.e. may be only worth £45 million), not the valuation of the cash, where £50M actually is £50M.
So, send out the cash and the discount should double if the market is going to behave in a logical way (Yes, I know...). Particularly true where the most sellable assets have gone and the sticky ones are left.

[flint]

mc2fool - " That is exactly what I said."

Mea culpa, indeed it was.

I did not read it properly and wrongly assumed you were not in agreement with rthak.

It looks as if we all agree on the effect the dividend will have on the discount, ceretis paribus.

Roll on April 7th!

[woolly]

Thank you all for the discussion - half my holding is now gone, the other half jointly held. I may buy back in within an ISA, but whether to do that before or after the xd date?
It's hard to know exactly where ELTA will go from here. Having just quietly paid dividends and increased its capital value over the years it's certainly been one of my more successful investments.

But where to now? Bramson only managed to batter the door down after a long campaign, so he must have seen something hidden of value to him. The question is, is he just eviscerating the company before moving on, or is this marked change of direction the start of a long and even more glorious future? The arguments he put forward during his campaign seemed to indicate the latter, but the sentiment on various forums seems to go with the former.

Here's an article from the Standard from a year ago that kind of sums up the feeling at the time - http://www.standard.co.uk/business/anthony-hilton-edward-bramsons-victory-over-exposes-our-system-s-flaws-a3260486.html
The image in the article is quite telling - if someone like this showed up with bags of cash wanting to run your company, would you feel he had your best interests at heart?

Moderator Message:
image deleted. See "rules" on posting images. Raptor.

I seem to recall I voted against his election both times...

[swill453]

The image in the article is quite telling - if someone like this showed up with bags of cash wanting to run your company, would you feel he had your best interests at heart?

The image tells me nothing at all. It's just a person. To see any more requires prior knowledge or prejudice.

Scott.

[BobbyD]

I may buy back in within an ISA, but whether to do that before or after the xd date?

Well that choice is made, if you haven't you didn't...

It does appear that the choice may have been between a company which was rather good at what it did but not so efficient at getting that reflected in shareholder returns (although god knows the returns weren't lacklustre) and wringing every available cent out of accrued value out of company at the probable expense of future developments. As a long term holder in for capital gain not income I was quite happy with the status quo and opposed Bramson's incursion, but ultimately if we are going down the break up route his 30% holding makes him just as attached to gaining good returns on the sales as my overweight holding makes me.