The dividend has risen every year for 36 years and Merchants offers one of the highest yields in the UK equity income sector.
The Merchants Trust (MRCH) is managed by Allianz Global Investors. It invests mainly in large UK-quoted companies for an above-average and consistently rising dividend and long-term capital growth. Its annual report for the year to 31 January 2018 shows shareholders’ assets of £593 million.
Manager Simon Gergel has a long-term value focus and invests in ‑ firms with strong franchises and sound finances he expects to deliver high income and good returns.
Merchants’ year-end portfolio comprised 45 holdings. The largest sectors were ‑ financials (29.1 per cent, including 10.5 per cent in banks), industrials (16.5) and consumer services (12.9).
Gearing enhances the portfolio’s yield and long-term total returns. Covered call options are overwritten, primarily to generate additional income. Gearing averaged 19.7 per cent over the financial year, down from 22.7 per cent for the previous 12 months. The December 2017 replacement of an expensive debenture with long-term but much lower-cost loan notes reduced the weighted average cost of debt from 8.5 per cent to 6.1 per cent, which is enhancing earnings per share and investment flexibility.
The net asset value (NAV) total return was 14.5 per cent, exceeding the 11.3 per cent return on MRCH’s benchmark, the FTSE All-Share index. The share price total return was 13.3 per cent. Merchants’ ‑ five-year NAV total return of 49.1 per cent was ahead of the 45.9 per cent return on the FTSE All-Share index. Ongoing charges remained competitive at 0.6 per cent.
The dividend has risen every year for 36 years. Last year it was raised by 2.5 per cent to 24.8p, fully covered by earnings of 25.5p. Merchants offers one of the highest yields in the UK equity income sector.