Reserves

[csearle]

Does anyone know of an IT comparison that focuses on their reserves for times when the dividends of their underlying constituents fail to meet their desired payout amounts?

Thanks,
Chris

[Itsallaguess]

Does anyone know of an IT comparison that focuses on their reserves for times when the dividends of their underlying constituents fail to meet their desired payout amounts?

Hi Chris,

The AIC site shows the 'dividend cover' in years, which I think is what you're looking for.

There's a recent table here for some income-related IT's which shows that column of data, and there's some instructions at the bottom of the post to help people generate more recent data, or data covering different IT requirements, if they want to do it themselves -

https://www.lemonfool.co.uk/viewtopic.php?f=31&t=29685

Unfortunately there isn't a filter available to pick out specific levels of dividend-cover initially, but if you followed the instructions at the bottom of the post linked above, and dropped everything into a spreadsheet using the 'Print Mode' setting that's discussed, then you could of course then set up your own filters on that particular field, as required..

Cheers,

Itsallaguess

[csearle]

...

Ah yes, I'd seen that table you posted. I presume the div. cover is like a snapshot of the ratio between underlying dividends earned and dividends paid out, which I would see as a measure of the IT's ability to continue paying purely from its income. I was more thinking in terms of each IT's policy towards holding reserves. So for example a metric that allowed a comparison of cash reserves. Ideally there also would be a way of measuring the propensity of an IT to sell its capital to maintain their dividend. Or, do they all do that?

Thanks,
Chris

[Itsallaguess]

Ideally there also would be a way of measuring the propensity of an IT to sell its capital to maintain their dividend.

Or, do they all do that?

No, they don't all do that.

Cheers,

Itsallaguess

[Alaric]

So for example a metric that allowed a comparison of cash reserves. Ideally there also would be a way of measuring the propensity of an IT to sell its capital to maintain their dividend. Or, do they all do that?

IT's do not generally hold their Income Reserves in cash. Rather they keep their funds fully invested, so if they wanted to distribute more than they received, they would have to sell or borrow.

[mc2fool]

...

Ah yes, I'd seen that table you posted. I presume the div. cover is like a snapshot of the ratio between underlying dividends earned and dividends paid out, which I would see as a measure of the IT's ability to continue paying purely from its income. I was more thinking in terms of each IT's policy towards holding reserves. So for example a metric that allowed a comparison of cash reserves. Ideally there also would be a way of measuring the propensity of an IT to sell its capital to maintain their dividend. Or, do they all do that?

Ah, no, you're being confused by the term "cover" -- and it's no surprise as it is confusing!

Dividend Cover for "normal" companies is the ratio of earnings to dividends paid out, and for an IT you would think (as you have indeed) that it would be the ratio of underlying dividends earned and dividends paid out. But it's not so!

Dividend Cover for ITs is the number of years that an IT could continue paying its current dividend purely from revenue reserves, i.e. if its underlying dividends earned dropped to zero.

So, if you look at the AIC's page for Finsbury Growth & Income, https://www.theaic.co.uk/companydata/FGT, you'll see a table that has:

Dividend cover (years)  Revenue reserves (m)
          1.22               45.44

That tells you that FGT has £45.44m of revenue reserve which is enough to pay out the current dividend for 1.22 years, if all of their underlying dividends stopped coming it.

So, Dividend cover (years) is the metric that I believe you are looking for -- but be careful, 'cos while the AIC claims that this definition of Dividend Cover is IT industry standard, if you look in some IT's annual reports they use the phrase to mean the ratio of earnings to dividends paid out, just as with "normal" companies! The AIC really should move to rename that supposed industry standard to something else to disambiguate it and avoid confusion, but that's another story!

Unfortunately, AFAICS, there doesn't seem to be a way of filtering and/or sorting lists of ITs on Dividend cover (years) on the AIC site. Maybe if we ask nicely ...

Of course, the numeric metric is only part of the story. If you want to find out an IT's policy towards revenue reserves, and also if it's allowed to and its policy towards using capital reserves to prop up the dividend, then really the only sources are the horse's mouth, like their annual report or website, etc.

[csearle]

Dividend Cover for "normal" companies is the ratio of earnings to dividends paid out, and for an IT you would think (as you have indeed) that it would be the ratio of underlying dividends earned and dividends paid out. But it's not so!

Excellent and enlightening post. Thank you. C.

[UncleEbenezer]

Article that might be of interest at https://www.ii.co.uk/analysis-commentar ... y-ii520516

[Dod101]

Article that might be of interest at https://www.ii.co.uk/analysis-commentar ... y-ii520516

That is a clear and very helpful article. Of course, in many ways, the whole subject has become a little bit academic considering that many/most trusts will have realised capital reserves which are also distributable provided that the shareholders agree. Whether the dividend is supplemented by revenue reserves or by realised capital reserves, it has the same effect. It reduces the NAV because both are paid from the net assets of the trust.

I prefer that the trust pays any dividend from its current revenue stream and not from any reserve but for instance, both Scottish Mortgage and RIT regularly and as a matter of course supplement their dividend from their revenue reserves. I hold both.

Dod

[mc2fool]

I prefer that the trust pays any dividend from its current revenue stream and not from any reserve but for instance, both Scottish Mortgage and RIT regularly and as a matter of course supplement their dividend from their revenue reserves. I hold both.

RIT Capital Partners (RCP) has been paying dividends from the realised capital reserve ever since they could (2012). Indeed, it was specifically so they could pay a larger "competitive" dividend (their explanation) that they changed their constitution to allow paying it from capital, 'cos before that they could only yield around half a %.

https://www.theaic.co.uk/companydata/0P00008ZPG/overview/dividends

[Itsallaguess]

Article that might be of interest at https://www.ii.co.uk/analysis-commentary/are-investment-trust-dividend-heroes-running-out-runway-ii520516

That is a clear and very helpful article. Of course, in many ways, the whole subject has become a little bit academic considering that many/most trusts will have realised capital reserves which are also distributable provided that the shareholders agree. Whether the dividend is supplemented by revenue reserves or by realised capital reserves, it has the same effect. It reduces the NAV because both are paid from the net assets of the trust.

I prefer that the trust pays any dividend from its current revenue stream and not from any reserve but for instance, both Scottish Mortgage and RIT regularly and as a matter of course supplement their dividend from their revenue reserves. I hold both.

I recall that many of us had a quite deep and meaningful discussion around income-IT reserves some time ago now, and with your valuable input Dod, it really did help to clarify the situation with regards to income-IT investors not falling into the mindset of thinking of these 'revenue reserves' as some form of 'cash account' safety net, and clearly explaining that we can't normally 'double count' those reserves because in actual fact they form part of the overall NAV at any give time anyway, so if those NAV-based reserves are ever called on, then clearly it would affect the underlying valuation of the IT at the same time - a form of 'eating itself' in some respects, even though doing so might well be seen as being 'helpful' from a hands-off-investor's point of view, so long as it's done within a manageable window that might be 'self correcting' over any longer time period...

So on a par-to-par basis we might say that there's no free lunch in relation to the accounting of IT dividend-reserves, whilst still accepting that this particular side of things might well be less-important to income-seekers than the 'hands-off' income-smoothing and delivery mechanisms that any such reserves might then be able to deliver to those IT-holders, and I think the past 18 months might well have shown that to be worthwhile to many IT-based income-investors on these boards...

But......one thing I wanted to mention in respect to the above though, and which also came out of that longer 'IT dividend-reserve' discussion previously, is also to remind ourselves that income-IT's can sometimes be bought on a discount to their underlying NAV's, and therefore, depending on the size of that discount in relation to the size of any underlying dividend-reserve, such a discount process might well enable investors to consider some level of 'double-counting' in relation to those dividend-reserves, because they might, in some cases, consider that they're not paying for all of those reserves by way of the fact that they're sometimes getting a discount on the NAV in the first place...

So if, for the sake of a simple example, the 'years worth' of dividend reserves that an income-IT is reporting itself as 'carrying' is based on 2% of the overall NAV value, but the income-IT could, in some circumstances, be bought on a 5% discount to the underlying NAV, then I think that sometimes a case can be made for an income-investor to perhaps think that they are, in some circumstances, perhaps getting those reserves or a given portion of them for free, and they can perhaps, in some discount-enabled circumstances, be 'double-counted'....

Cheers,

Itsallaguess

[DavidM13]

Unfortunately, AFAICS, there doesn't seem to be a way of filtering and/or sorting lists of ITs on Dividend cover (years) on the AIC site. Maybe if we ask nicely ...

This is something that is currently planned for end July. We have been working on a new tool that I think is very powerful and helpful and certainly achieve your above wish.