Templeton Emerging Markets introduces dividend reinvestment plan to enable shareholders to plough back investment trust's growing income into its shares and reduce their wide discount to asset value.
Templeton Emerging Markets (TEMIT) has introduced a dividend reinvestment plan (DRIP) to enable shareholders to plough back the investment trust's growing income payments back into its shares.
The facility will be provided by the trust's share registrar Equiniti Financial Services. It is free but investors will pay a 1% commission charge on share purchases with a minimum fee of £1.50.
The company said shareholders should register online or by post by 21 December if they wish to reinvest the next dividend due on 16 January.
The £1.8 billion listed emerging markets fund this week declared its first-ever interim dividend of 5p per share, having announced at its full-year results in June that it would up payments to twice a year from the previous annual payment.
The second and final dividend for 2017/18 to be announced next June should be much bigger with the board looking to beat the 15p per share it paid for the last financial year.
The annual dividend in the summer was 81% higher than the 8.25p paid in the previous year and was driven by a surge in earnings per share from 6.59p to 15.9p which was in part boosted by higher dividends from the companies the trust invests in.
Half-year results this week showed the interim dividend covered by investment revenues which continue to be buoyant, up nearly 50% to £60.5 million from £40.7 million from a year ago.
The shares yield 2.1% which is in line with the average of other global emerging and frontier markets trusts.
The TEMIT board, chaired by City grandee Paul Manduca, said it decided to introduce the dividend reinvestment plan after consultation with shareholders to all them to reinvest their income in a ‘convenient and cost effective way’.
‘There is a great deal of academic research which demonstrates that, for some investors, reinvested dividends can be an important source of returns,’ it said.
While helping investors, the board will also hope the scheme will support the trust's share price during a difficult time for emerging markets.
Like its rivals, TEMIT shares trade at at a discount of about 12% below net asset value (NAV), a slight improvement on the 13% at the end of September but nevertheless a clear sign of a lack of investor demand.
During the half year the TEMIT board bought back nearly 14 million of the trust's shares in a bid to reduce over supply and narrow the discount. If the DRIP takes off, the six-monthly rounds of share purchases it would trigger could help to reduce the gap further.
The announcement came as TEMIT reported that it had slightly outperformed a difficult market in the six months to 30 September with its net asset value including the dividend down 1.5% but just ahead of the 1.8% decline in total returns from its benchmark MSCI Emerging Markets index.
The combination of geopolitical tension, trade wars, rising US interest rates, and a strong dollar have seen investors ditch emerging markets although fund manager Chetan Sehgal said they ‘continued to post strong economic growth, surpassing that of developed countries’ with a disconnect between sentiment and ‘robust equity fundamentals for companies’.
Sehgal, who took charge of TEMIT after the departure of Carlos Hardenberg to rejoin its founder Mark Mobius at his new firm, noted the performance of energy companies that have benefited from rising oil prices and said other businesses ‘continued to ride on the back of strong structural trends such as technological innovation and increased consumption’.
All this has been overshadowed by trade tariffs between the US and China, which saw Chinese stocks fall and the yuan fall against the dollar. In order to cushion its economy, China has eased monetary conditions and introduced fiscal stimulus.
Nearly a quarter of the trust's assets are invested in China and Hong Kong but Sehgal said he was comfortable with the position. ‘We believe China has the policy tools to manage economic challenges as it continues with structural reforms,’ he said.
He believes there are opportunities in Asia but China had been unlucky in having trade tariffs imposed at a time when ‘its labour-cost advantage is fading and it is embarking on the process of reducing debt’.
‘China's shift towards innovation, technology and consumption as new drivers of growth supports more sustainable corporate earnings,’ said Sehgal, adding that current emerging market valuations ‘reflect a more pessimistic scenario than we currently envisage over the medium term’, thus creating a long-term buying opportunity.