An attractive yield, and a unique strategy: CT UK High Income

CHI offers a unique strategy that could complement a traditional UK equity income portfolio…by Josef Licsauer

Overview

Having taken over as the trust’s portfolio manager in July 2023, David Moss has made a good start in fine-tuning CT UK High Income’s (CHI) Portfolio. He has concentrated his efforts on increasing the level of sustainable income generated by the portfolio, selling out of companies with zero or very low dividends and little prospect of providing meaningful income soon, such as Experian and Deutsche Boerse, and reinvesting the proceeds in companies offering more attractive current yields and stronger dividend growth potential, including NatWest Group and Mercedes-Benz.

Despite some economic headwinds in the first few months of his management, driven by UK equities struggling amidst inflationary pressures, high interest rates, and geo-political tensions, October 2023 marked a turnaround in CHI’s Performance. A combination of David’s portfolio changes and positive economic news saw CHI rebound, meaning under his leadership, albeit a very short tenure so far, it has outperformed the FTSE All-Share and peer group, delivering NAV total returns of 20.4%, to 14/07/2024. Intermediate Capital Group and SAP were among the strongest contributors to relative performance over the period.

CHI continues to offer investors a premium Dividend yield to the market, which at the time of writing is 6.2% on the ordinary shares compared to 3.7% for the FTSE All-Share, and 6.5% on the B shares due to the wider discount. The high yield is partly due to the dual share-class structure of the trust, but also the emphasis the portfolio manager places on companies with attractive and growing dividends. Over its latest financial year, the dividend per share increased by 2.0%, marking the 11th consecutive year of dividend growth, earning CHI a place on the AIC’s list of next generation of dividend heroes, which includes trusts that have consecutively increased dividends for at least a decade but fewer than 20 years.
 

Analyst’s View

 
Around a year’s stewardship isn’t long, so it’s reasonable to expect some investors will need more time to gain confidence in David Moss’s ability. However, we think he is off to an excellent start, drawing on his nearly three-decade investment experience to help fine-tune CHI’s Portfolio. Coming into this role, David has focussed on investing in companies with attractive current yields as well as those that demonstrate sustainable dividend growth over time. The changes made so far have led to impressive results, particularly in the support of CHI’s recent Performance against the index.

Additionally, David aims to strengthen the underlying portfolio’s income generation potential, which should help rebuild the trust’s revenue reserves following the impact of the COVID-19 pandemic and help ensure the dividend returns to being fully covered by earnings. Over the trust’s latest financial year, the board deemed it necessary to draw from the revenue reserve, given the timing of some Dividend receipts, which has impacted its ability to grow the reserve over the period. That said, revenue earnings have increased over the trust’s latest financial year, showing some progress has been made in returning to a covered dividend.

Overall, we believe CHI continues to deliver a good income for shareholders, well above the sector and index average, making it both an attractive investment for high-income hunters and potentially a complement to the more traditional UK equity income portfolio. CHI’s ordinary shares trade at a 6.8% Discount at the time of writing and the B shares at 10.8%, which we think has the potential to narrow further if David continues to outperform the index and deliver growing dividends year-on-year. The B shares look particularly cheap, and we note that a tax-free wrapper account could be particularly appealing right now.

Bull

• High level of income enabled by unique capital structure and gearing
• Dual share-class structure offers potential tax advantages
• Distinctive portfolio and strategy means it could complement a traditional equity income portfolio

Bear

• Being a small trust, with net assets of around £100m, limits the effectiveness of buybacks
• Relatively high OCF versus UK equity income peers
• Use of gearing could magnify the gains but also the losses

 
See the full research on CHI here >
 

 

^Disclaimer

^{This is a non-independent marketing communication commissioned by Columbia Threadneedle Investments. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}