The Dividend Machine Rolls On: 43 Years and Counting
Let’s start with the headline act: Merchants Trust has just notched up its 43rd consecutive year of dividend growth. In an era where yield-starved investors scramble for reliable income, this track record isn’t just impressive – it’s the investment equivalent of a Shakespearean sonnet recited flawlessly by a caffeinated parrot. The final dividend of 7.3p brings the total payout to 29.1p per share, a 2.5% uplift from last year. For context, that’s roughly 14 consecutive World Cups worth of annual dividend increases.
How They Did It: The Art of Income Juggling
- Revenue per share dipped slightly to 29.4p (from 30.5p in 2024)
- But reserves – that trusty financial airbag – cushioned the blow, ending at 18.8p per share
- Dividend cover maintained at 1.01x (barely breathing, but still alive)
This is where the investment trust structure shines brighter than a London stockbroker’s Oxfords. By smoothing payouts through reserves, Merchants has navigated everything from COVID chaos to the current “will-they-won’t-they” rate cut drama.
Performance: When Value Investing Plays the Long Game
The Trust delivered a respectable 13.5% total return – solid in absolute terms, but trailing the FTSE All-Share’s 17.1% surge. Before the groans commence, let’s dissect why:
The Good, The Bad, and The Cyclical
- The Headwind: Mid/small-cap bias (38% of portfolio) vs market’s large-cap love affair
- The Pain Point: Domestic cyclicals underperformed as investors fled to mega-caps
- The Silver Lining: This value approach has outperformed over decades – patience, grasshopper
Portfolio manager Simon Gergel’s commentary (page 16 for the keen beans) essentially says: “We’re not chasing fashion. Your grandchildren will thank us.”
The Discount Dilemma: Opportunity or Omen?
Shares recently slipped to a discount after years trading at premium – currently 572.6p NAV vs market price around 545p (at time of writing). Cue investor anxiety. But let’s contextualise:
Why the Market’s Being a Grumpy Gus
- Short-term underperformance vs benchmark
- UK equity apathy (see: £23bn pulled from UK funds in 2024)
- Structural shifts towards passive/index-hugging strategies
The Board’s response? A two-pronged attack: ramping up marketing and keeping buybacks “in the locker” if needed. For contrarians, this discount might smell like opportunity – like catching a whiff of fresh coffee in a bear pit.
Gearing: The Double-Edged Sword Gets Sharper
Merchants’ 11.9% gearing sits comfortably within its 10-25% target range. The recent refinancing play deserves a nod:
- £50m raised via 15-year private placement notes at 5.91%
- Debt duration extended from 10.6 to 16.4 years
- Average borrowing cost maintained at 5.2%
In English? They’ve locked in longer-term debt before potential rate cuts – a slick move worthy of a City boy’s self-congratulatory pub anecdote.
The Portfolio: Global Britain in Action
Top holdings read like a who’s who of UK plc with international swagger:
- British American Tobacco (4.9%) – global nicotine purveyor
- GSK (4.9%) – pharma giant with 83% overseas sales
- Shell (3.7%) – because the world still runs on hydrocarbons
The kicker? Over 70% of portfolio revenues come from outside Britain. This isn’t a UK trust – it’s a global equity fund wearing a bowler hat and sipping Yorkshire Tea.
Looking Ahead: Storm Clouds and Silver Linings
The outlook reads like a particularly tense season of House of Cards:
- New Labour government finding its fiscal feet
- US election aftermath and trade policy shifts
- Ongoing geopolitical poker games (Ukraine, Middle East)
Yet Merchants’ team remains bullish on UK valuations. As they note: “The market has priced in an apocalyptic scenario that even Edgar Allan Poe would find excessive.”
The Bottom Line for Investors
Merchants Trust isn’t a get-rich-quick scheme. It’s the investment equivalent of a Victorian steam engine – built to chug through market cycles, belching out dividends like clockwork. While recent performance hasn’t set the world alight, 43 years of payout growth suggests this old dog knows a trick or two about long-term wealth creation.
As the UK market plays wallflower to America’s tech-stock disco, contrarians might find this trust’s value approach and 5%+ yield rather appealing. Just remember – patience is the price of admission.
