Interactive Investor

Merchants final results: the ii analyst view

7th April 2022 12:21

Tracy Zhao from interactive investor

interactive investor comments on the trust's annual results.

Merchants Trust (LSE:MRCH), which is in interactive investor’s top 20 held trusts, reported its annual results today – to 31 January 2022.

The trust's net asset total returned 35.7%, outperforming its benchmark, the FTSE All-Share Index, by 16.8 percentage points.

The Board has proposed a final dividend of 6.85p for the year ended 31 Jan 2022, taking the full-year dividend to 27.3p, compared to the previous year’s 27.2p, a modest proposed increase. Despite the slight increasing, this is the 40th consecutive year for the trust to increase its dividends. The positive note is that among the dividend for the year, only 2.3p was from capital reserves, compared to 9.9p in previous financial year.

Earnings per share increased 38.5% from 18.51pp to 25.64p, seeing the capital reserve of the trust boosted 40%.

Colin Clark, the chairman, said: “Opportunities abound when markets are volatile. While the recent market rotation from 'growth' to 'value' has been helpful from time to time, this style bias isn't required for the Merchants' portfolio to perform.

“For many years, the UK market has been out of favour and traded at a discount to global peers. However, the UK has been more resilient than global peers over recent months - a trend that could well continue.

“Investor interest has started to rise and the UK equity market has the potential to see increased demand.”

ii view:

Tracy Zhao, Senior Fund Analyst, interactive investor, says: “Incorporated in 1889, the trust is managed by Simon Gergel, and seeks to provide an above-average level of income and income growth, together with long-term growth of capital, through a policy of investing mainly in higher yielding UK large-cap companies.

“This is usually a key attraction for income investors, but even more so at the moment given that UK inflation is at a 30-year high. With the trust now hitting a 40-year record of consecutive dividend increases with the declared final dividend, this ‘AIC dividend hero’ has a lot to offer income investors, and is a reminder not to write-off the UK, even if it might have tested patience at times.   

“The trust has delivered a 62% total return over the past five years, [which is more than] double its rivals, as the average UK Equity Income trust has returned 29%. It also ranked top among its Morningstar peer group.

“As of the end Feb 2022, over, 60% of the portfolio was invested in FTSE 100 companies, a high proportion of large and value stock benefiting from the market rotation, where smaller-cap and growth stocks took a hit. The trust allocated 21% into the financial sector whose revenue would advance from rising interest rates.

“The trust’s current yield at 4.8%, together with the annual increased dividend payout, sees the trust continuing to trade slightly above NAV. The trust has issued additional shares of £11.9 million since the end of January on top of the £35.6 million issued over the financial year, a clear indication that the trust is in high demand, and a compelling option for investors who seek extra income during the  rising cost of living.

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