City of London Investment Trust (CTY) announced its annual results for 12 months to 30 June 2024. The company delivered a NAV total return of 15.6%, ahead of the benchmark return of 13%. The share price total return was 11.3%, leading the discount to widen to 1%. Dividends per share were 20.6p, up 2.5% for the year for a yield of 4.9%.

The growth in dividends from the company’s holdings in bank shares was the most important positive contributor. Special dividends, accounted as revenue, amounted to £1.0m, down from £1.9m in the previous year and reflecting the corporate trend for effecting distributions through share buybacks rather than dividend payments. Stock selection contributed 2.6%. The biggest stock contributor to relative performance compared with the FTSE All-Share Index was 3i, the investor in private companies, whose biggest investment is in Action, a fast-growing discount retailer in Europe. The second biggest contributor was BAE Systems, the defence company, followed by NatWest, the bank. Wincanton, the logistics company, and Round Hill Music Royalties Fund, which were both taken over, were also notable contributors. The biggest detractor to relative performance was not owning Rolls Royce, the aero engine manufacturer which did not pay a dividend during the 12 months. The second biggest detractor was St. James’s Place, which announced changes in the structure of its customer fees and a provision for compensation to those who had not had annual reviews. The third biggest detractor was Shell, where the portfolio was underweight relative to the Index.

Discussuing the outlook, chairman Sir Laurie Magnus commented:

“The US has been the engine of world economic growth over the last year, but there have been recent signs of weakness, for example in new job creation, which has introduced some volatility into stock market confidence. There is potential for the US Federal Reserve to cut interest rates, but it is unclear how long the federal government can maintain its high level of expenditure, funded by borrowing, given that the fiscal deficit is already at record levels relative to GDP. Neither of the two US presidential candidates seems likely to focus on cutting the deficit, but its continued rise is only sustainable if the dollar remains the world’s reserve currency.

“UK economic growth has picked up during the second half of 2024 following a “technical” recession, with two quarters of declining GDP in the second half of 2023. The recent general election ended a period of political uncertainty, resulting in a majority government, in contrast to the instability facing some European countries. The new government aims to boost economic growth but faces major challenges, including stagnant productivity and underinvestment in infrastructure. Recent public sector pay awards, which don’t seem linked to productivity improvements, may make it harder to keep inflation at the Bank of England’s 2% target in the short term.

“Geopolitical tensions remain high. The war in Ukraine continues, and the conflict in the Middle East has the potential to escalate further. Relations between China and western developed countries remain tense, with China’s excess manufacturing capacity, especially in areas like electric vehicles, becoming a growing source of friction. The outcome of the US presidential election in November, which will have significant implications for global markets, remains uncertain.

“Although UK equities have shown some improvement relative to overseas equivalents, they still trade at a valuation discount. It is therefore likely that the trend of takeover bids for UK companies by overseas buyers and private equity investors will continue.

“The dividend yield from UK equities remains attractive compared to other major investment options, especially with UK bank deposit savings rates starting to decline. It’s also notable that there have been solid dividend increases announced during the recent half-year results season. Investors continue to be “paid to hold on” to UK equities.

“City of London’s portfolio is well-diversified, with 64% of investee companies’ revenues earned from overseas. The portfolio’s core holdings include high-quality, cash-generating companies that are expected to deliver reliable and competitive returns.”

CTY Dividend growth drives City of London Investment Trust to strong year