Edinburgh cuts dividends 16% in search for sustainable yield

UK equity income investment trust that sacked Invesco and Mark Barnett last December, gives advance notice of a 'rebasing' in quarterly payouts next year in response to this year's dividend crisis.

Edinburgh (EDIN ), the UK equity income investment trust that sacked Invesco and Mark Barnett last December, is to slash its dividends by 16% as it looks to put payouts on a more sustainable footing after the coronavirus crisis.

Chairman Glen Suarez today declared that quarterly dividends for the current financial year to 31 March would be cut to 6p per share from 6.4p last year, although a special, additional dividend of 4.65p will shield investors from the reduction this year and maintain the total distribution at last year’s level of 28.65p.

Thereafter, however, annual dividends will be ‘rebased’ to 24p per share, reducing the trust’s current 6.5% yield to 5.5%, but at a level from which it can hopefully grow again.

The cut is effectively the third from a trust in the UK Equity Income sector following a 25% reduction by Temple Bar (TMPL ) and the warning of an ‘almost certain’ cut by Troy Income & Growth (TIGT ) next year. It comes four months after Majedie’s James de Uphaugh, who restructured the £858m portfolio in March after taking it over with deputy Chris Field in March, warned that a dividend cut was likely given the pressure on investment income during the pandemic.

Suarez said: ‘The board recognises the importance that investors place on a sustainable source of income. While we are keeping the dividend unchanged in total for the current financial year, we are also re-setting the dividend for future years to a level that is more sustainable and offers the potential for future dividend progression.

‘Our investment strategy seeks both capital growth and income and our manager’s total return approach is well placed to navigate the current market environment,’ he said.

Numis Securities described the cut as ‘sensible’, with the trust using some of Edinburgh’s revenue reserves this year while ensuring the dividend was more likely to be covered by earnings in future and still offering an attractive yield.

‘For financial year 2020, dividends were 0.97 times covered by earnings per share of 27.8p, down 3.1% from FY19, although the portfolio was transitioned under the new manager between 6-25 March, late in the financial year. Adjusting for the dividends paid since 31 March, the fund has revenue reserves equivalent to about 0.9 years of the total FY21 dividend,’ Numis said.

Edinburgh shares stand 13% below their underlying net asset value (NAV), in line with the average discount of the past year as investors wait to see what the new fund managers can achieve. Early signs are positive with the NAV up 6.2% and the shares up 5.5% over six months, ahead of the FTSE All-Share’s 3.6% gain and the sector average 1.8% share price uplift.

However, longer-term performance lags the sector, reflecting the problems Barnett faced in the past five years. A ten-year total return on net assets of 65.8% and total shareholder return of 51.3% compares to the 69.7% peer group averages for both measures and the All-Share’s 56.9%.

Alan Brierley, analyst at Investec, Edinburgh’s corporate broker said: ‘Undoubtedly, the experience of recent years continues to weigh heavy on the rating. We believe a catalyst for a re-rating will be an improvement in relative total returns.

‘Since the re-balancing of the portfolio, there has been a much-needed stabilisation in performance, with the NAV total return in-line with the benchmark; the key challenge is to now build on these foundations. The rebased yield remains attractive, both on an absolute and relative basis, and given the current discount, we reaffirm our “Buy” recommendation,’ the analyst said.

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