Welcome to the latest update for The Merchants Trust PLC from the Trust’s portfolio manager, Simon Gergel.
The Merchants Trust reported results this month and the directors were pleased to announce a 35th consecutive year of dividend growth (subject to shareholder approval at the AGM). The Company is proud to be highlighted as one of the Association of Investment Companies “Dividend Heroes”.
March was also a strong month for dividend announcements for many of the companies in the portfolio, as they announced results for the 2016 year. The mining companies BHP Billiton and Antofagasta more than doubled their dividends as profitability recovered with commodity prices, whilst the construction company Balfour Beatty paid its first final dividend in 3 years, as the management team’s turnaround strategy delivered improving cash flow and profits. There were double digit dividend increases from Tyman, Hansteen, Aviva and Prudential as well as mid to high single digit growth from Standard Life, Legal & General and Inmarsat. There was also a special dividend from Hostelworld. This was all before taking into account the significant benefit to this year’s income from the weakness of sterling, as close to a third of the Company’s income stream is paid in foreign currencies, primarily the US dollar. The only disappointment was a dividend cut at St Ives, which is going through a difficult repositioning of the business.
On the political front, we saw the UK government triggering Article 50 of the Lisbon Treaty, the beginning of Britain’s exit of the EU. There will now follow to two years of negotiations on the UK’s future relationship with the EU, before the UK leaves. However, uncertainty over future trading relationships and many other matters is likely to persist for a considerably longer period.
The first quarter of 2017 has seen a low level of volatility in the stock market. During March, the FTSE All Share Index produced a total return of 1.2%. The strongest sectors were oil equipment & services, technology hardware and tobacco. The weakest sectors were electricity, mining and fixed line telecommunications.
The Trust’s NAV returned 1.56% against the benchmark return of
1.23%. The portfolio also performed slightly ahead of the benchmark. The largest positive contribution came from Inmarsat, which rallied by 20% from a depressed level, after better than expected final results reassured the market on the company’s strategy and balance sheet. Industrial stocks Tyman and Senior also performed well, with both giving double digit total returns. On the negative side, poor performance at Centrica and underweight positions in British American Tobacco and AstraZeneca held back relative returns.
We made a new investment in the transport company National Express. Following its decision to exit the rail industry in the UK, the company now has a lower risk profile. It has strong market positions, primarily in US school buses and UK and Spanish buses and coaches. The business is modestly valued and can use its strong cash flow to acquire further small operators, especially in the fragmented US bus market.
Elsewhere we added to Standard Life, as the shares reacted negatively to their proposed merger with Aberdeen Asset Management, which promises significant synergy benefits. We took some profits on a few shares that had performed well, including Kier and First Group.
The FTSE 100 index of leading shares has recently traded at record levels, which might suggest an overvalued stock market, but it is only just above the level reached at the turn of the century. Furthermore, the recent rally in the market has been very narrow, led by only a few sectors, with many shares trading well below previous high levels.
It is hard, as ever, to predict where the overall market will go in the short term. We prefer to focus on individual company prospects and valuations when assessing investments and constructing a portfolio. There are many businesses with strong competitive positions, trading on sensible valuations, offering the combination of an attractive dividend yield and the potential for capital gains for investors. These businesses should deliver good returns over the medium to long term. Two major areas offer particular value and continue to constitute a large part of the portfolio; namely, selected “mega-cap” companies and specific recovery situations.
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