The Board of PM Capital Global Opportunities Fund (ASX:PGF) advised positive dividend guidance on May 12, announcing the intention to provide shareholders with a fully franked FY21 final dividend of 4c per share. In addition to this, the Board also plans to maintain a minimum 8c fully franked annual dividend over FY22. Assuming that the forecast 4c fully franked dividend is substantiated come release of the company’s statutory accounts in August later this year, we anticipate a dividend growth rate of 17.5%. PGF has historically oscillated around a 5-year long-term average discount to net asset backing of 13.2%, tightening up to an indicative discount of 8.9% following these events. VGI Partners Global Investments (ASX:VG1) also benefitted from a similar occurrence following the Board’s declaration to target a fully franked dividend yield of 4.0% p.a., as calculated on the prevailing share price at the time, commencing with the FY21 final dividend payable in September 2021. The indicative discount has shrunk from our 1-year average figure of 15.5% to 11.0%. Notwithstanding the possibility of accretion through activism, we predict this to be sustained, all things being equal, as discounts compress due to an expected magnification in gross yields, thanks to improved earnings on underlying investments and substantial taxes paid. We reiterate that retained profits and franking credit balances should be taken into consideration when analysing the sustainability of a LIC’s dividend yield.
On a similar trajectory but different note, we maintain an attentive focus on Regal Investment Fund (ASX:RF1) and the declaration of its final distribution in respect to FY21. The closed-end unit trust structure ensures the vehicle and its beneficiaries are unburdened by the dilutive effects of capital inflows, with each respective interest in the Listed Investment Trust (LIT) being identified by the investor’s holding of units. However unlike LICs, in which earnings may be carried forward across reporting periods, with the Board of Directors determining the payout ratio; LITs are required to distribute all taxable net income to unitholders over the relevant financial year, which can result in volatile distributions between such periods (see Figure 1). RF1 operates under the Attribution Managed Investment Trust (AMIT) regime and has posted a trailing 12-month increase in the net asset value (NAV) of 108.2%, as compared to a unit price increase of 136.8%, as at 30 April 2021. We anticipate a material final distribution on the basis of strong performance and high portfolio turnover in relation to FY21. Higher than expected distribution earnings, the absence of a smoothing effect and the fund’s capital growth profile makes for a compelling reinvestment argument. Taking into account the time value of money, this could also result in compounded capital growth. We note the attractiveness of the trust’s distribution reinvestment plan (DRP), in which (1) if the prevailing market price is ≥ NAV, plan participants will receive their distributions as newly issued units in the fund at the NAV price or; (2) if the prevailing market price is < NAV, distributions on units subject to the plan will be used to acquire the fund’s units on-market. This is non-discretionary, being fundamentally built into the plan by the Responsible Entity. RF1 is currently trading at an indicative premium of 0.2%. On the basis of this premium being sustained, investors who elect to enroll in the DRP will receive new units at the ‘cheaper’ NAV price. Assuming RF1 continues to provide unit price and total returns in line with historical levels since inception, we forecast capital growth under distribution reinvestment as being highly accretive to unitholders (see Figure 2). Note that this also assumes a like-for-like generation of dividend income and realised capital gains. An additional estimated 9.2% p.a. from inception to 26 May 2024 would be generated for those investors who fully reinvest distributions over this period.
SOURCE: IRESS, COMPANY REPORTS, BELL POTTER ESTIMATES
Bell Potter’s Indicative NTA tracks the ‘indicative’ movement of a LIC’s underlying NTA each month by monitoring the percentage movements of the disclosed holdings and using an index to track the movement of the remaining positions. The Indicative NTA works best with LICs that have a high percentage of investments concentrated in its Top 20, regular disclosure of its Top 20, lower turnover of investments, regular disclosure of its cash position and the absence of a performance fee. We have also included an adjusted indicative NTA and adjusted discount that removes the LIC distribution from the ex-dividend date until the receipt of the new NTA post the payment date. This report is published each Monday prior to the market open and is available on a daily basis. Intraday indicative NTAs will be available on request through your adviser.
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