UK dividend champion Merchants Trust (MRCH) reported a total return nearly double that of its benchmark last year as it recorded its 40th successive year of dividend growth. With a little help from cash resources.
The annual results, for 12 months to 31 January 2022, saw the trust’s NAV (net asset value) total return jump 35.7%, comfortably ahead of its benchmark FTSE All-Share Index’s 18.9%.
The portfolio, which includes many blue chips popular with retail investors, such as drugs giant GlaxoSmithKline (GSK), oil major Shell (SHEL) and mobile phones network Vodafone (VOD), generated earnings of 25.6p per share, 38.4% ahead of the previous year (18.5p).
SAFE HARBOUR IN THE STOCK MARKET STORM
Merchants Trust has been a relative safe haven during a volatile start to 2022, its share price staying largely stable barring a brief rattle during early March, from which it recovered quickly, in line with the FTSE 100’s own performance.
This share price stability and its reliable income streams has made Merchants a popular fund for income investors over the years. The trust’s proposed final dividend of 6.85p would indicate a full year payout of 27.3p, a fraction up on 2021’s 27.2p. Based on today’s share price, up 0.5% at 577.87p, it would imply a 2022 income yield of 4.7%.
The 2022 dividend would include a 2.3p per share contribution from cash reserves, helping to maintain its four decade-long payout increase run, sharply down on the 9.9p reserves needed in pandemic-pounded 2021.
REBUILDING CASH RESERVES
It leaves cash reserves of 16p per share on the balance sheet for future use but encouragingly, Merchants is confident that this year’s 2023 dividend will return to being fully covered, allowing cash reserves to be rebuilt.
‘Opportunities abound when markets are volatile,’ said Merchants chairman Colin Clark. ‘Over the course of the past year for example, when we have emerged from the pandemic and economic recovery looked possible, the market has seemed to hang on the coattails of earnings momentum - sending prices rocketing when earnings surged forward or retreating when earnings didn’t match expectations.
‘This environment has helped our manager to be somewhat contrarian - buying companies which they believe have good long-term prospects but where the market has overreacted to an intermediate drop in earnings. Conversely, our manager has sold companies where market exuberance has driven the stock price past the team’s assessment of fundamental value.’
