The Edinburgh Investment Trust Plc Annual Financial Report 2022 - Flipbook - Page 8
6 / OVERVIEW / THE EDINBURGH INVESTMENT TRUST PLC
Chairman’s Statement / continued
portfolio may produce a negative absolute return and/or lag the
index. However, longer time periods enable more meaningful
assessments of manager skill. By this time next year for example
we will have a three year track record: a more significant period
over which to make informed judgements. For now, it remains the
case that under the new Portfolio Manager we have made a very
encouraging start.
DIVIDENDS
The Company’s second objective is to grow the dividend in excess
of inflation. In the short term, the Board has the ability to decide
on the level of the dividend – by paying dividends out of revenue
or capital reserves if appropriate. But in the medium term dividend
progression is a function of the Company’s finances. An important
aspect of this is the Company’s income from dividends paid by
companies held in the portfolio, after the deduction of expenses.
This year, the Company’s income does not cover the cost of
dividends to shareholders. And it was the same last year. This
reflects, as I explained in my report to you last year, the difficult
environment that companies in the market have faced over
several years, culminating in reduced dividend payouts during
the COVID crisis. As James explains in his Portfolio Manager’s
Report, things are getting better and portfolio income continues
to improve after the lows of the pandemic. Furthermore, James
believes that the stocks he holds in the portfolio have strong
economic advantages, such as pricing power, that should provide
some additional inflation protection to the Company’s revenues.
This strengthening position in the Company’s finances is important
in the Board’s view and was behind the Board’s decision to
increase the third interim dividend and to recommend the same
increased payout in the final dividend.
In making its recommendations for the final dividend, the Board
has also taken into account the strength of the Company’s
financial position: the refinancing of the Company’s borrowings
last year at a much lower cost will allow the interest expense
to fall in future years, creating further capacity to support the
dividend. And on top of this, the Company’s balance sheet has
a healthy ‘revenue reserve’ of £50.8m which can be distributed
by way of dividend. This should allow the Board to address any
shortfall in dividend cover in the short term. Shareholders should
note that these revenue reserves are an accounting record and
are not, in any actual sense, ring fenced cash.
Our approach to dividends is consistent with the Portfolio
Manager’s investment approach. This approach, remember, seeks
to maximise total return, whether that return comes from capital
growth or dividend payouts. This means that while we expect the
Company’s income typically to finance dividend, there may also be
periods (years) when capital returns are more important.
Overall, a healthy combination of income and capital growth over
the medium term should support a dividend that grows faster
than inflation. We have returned to a growing dividend this year
– albeit not at the rate of the current elevated level of inflation –
and believe this is a platform from which it will increase ahead of
normalised inflation over time.
SHARE PRICE DISCOUNT TO NET ASSET VALUE
The Board keeps the Company’s share price discount under
careful review. The level of the discount has slightly widened in
the last twelve months, from 4.5% to 7.7%. At 23 May 2022, the
last practical date before signing this report, the discount was
8.3%. To be clear, the rest of the Board and I would like to see
the Company’s share price much closer to Net Asset Value. An
important part of this process is the rebuilding of the Company’s
profile in the savings market, to which Liontrust are committed.
While the profile has improved in the last two years, there is more
to do. Building an impressive three year track will, for example,
be part of this. In the meantime, the Board will do what we can to
help the discount. One tangible action is to buy back shares. We
restarted a buyback programme in early 2022. As a result, in the
financial year we have bought back 1,104,800 shares.
Ultimately, we would like to return the Company to a position
from which it can issue shares at a small premium to asset value.
This would enhance net asset value per share and enable the
Company’s fixed costs to be spread across a larger asset base.
BORROWINGS
The Company’s borrowings currently comprise a £100m debenture
repayable in September this year, a loan note of £20m repayable
in 2051, and a revolving credit facility which is currently undrawn.
As the table on page 15 illustrates, the borrowings have enhanced
shareholder returns.
As we announced last autumn, we took advantage of the low
interest rates then available to arrange refinancing for the
debenture. £100m of new debt was prearranged and will
be available to replace the debenture when it matures this
September. This new debt, combined with a new additional £20m
tranche that was taken out last October, has a blended average
interest rate of 2.44%. Our debt markets adviser is of the opinion
that raising the same sums today would incur an equivalent
annual cost of c. 3.51%, which when fully drawn would be an
increase of 44% or c. £1.3m per annum compared with the actual
cost agreed last autumn. As a reminder, the annual cost of the
outgoing debenture is 7.75%. A more efficient debt structure is
clearly attractive in its own right. More importantly, the refinanced
borrowings should provide a structure to enhance shareholder
returns over time.
The revolving credit facility, which has not been used in the last
financial year, will expire this June. We do not intend to renew it. This
means that all remaining borrowings will be long-term in nature.
At the end of March, net gearing (borrowing less cash balances) was
4.4%. Had all cash balances been invested, net gearing would have
been 10.3%. The Portfolio Manager expands further on his approach
to using the gearing facility in his report on the following pages.