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LONDON (Alliance News) - The Investment Company PLC Friday said it intends to reduce the dividend it will pay for its next financial year as part of a broader change in policy as it targets "sustainable and growing" dividends in the future.
The company, which invests primarily in listed UK equities, said it intends to pay a dividend of 23.6 pence per share for the year ending June 30, 2015, based on a net asset value of 394.4 pence per share at the same stage of 2014.
For the following financial year, the company intends to pay a dividend of 20.72p, equal to that paid in the year to the end of June 2014. It then wants to begin growing the dividend from that level, with payments to be made from revenue, capital or both.
"As with the current policy, it remains the board's intention that the modified dividend policy will lead to our dividend yield remaining ahead of many competitor funds," Chairman David Thomson said in a statement.
The company had previously raised the possibility that it would change its dividend policy. It said that interest rates, which are at historic lows as central banks aim to help a slow economic recovery since the financial crisis of 2007-09, are likely to remain depressed for longer than expected when the company undertook a capital reconstruction at the end of June 2013 and pursued a policy of paying dividends through the year amounting to 6% of net asset value.
"The current policy explicitly links the dividend payment to the capital value of the portfolio at the beginning of a financial period. There is concern that this may lead to the dividends paid conflicting with the company's longer-term success," Thomson said.
The chairman also said the board may approve the issue of new shares in the second half of its financial year, citing an increase in the issuance of "attractive" convertible loan stocks by smaller quoted companies.
"Increasing the scale of the company defrays the fixed costs of running the company over a wider number of shares, which reduces cost on a per share basis. In addition, it is expected the extra shares will increase liquidity in the company's shares traded on the stock exchange," Thomson said.
Separately, the managers of the trust's portfolio, Gervais Williams and Martin Turner of Miton Asset Management Ltd, revealed that the company has bought a put option covering about one-third of the company's assets to guard against the risk of a fall in the FTSE 100. A put option gives the holder the right but not the obligation to sell a financial instrument at a pre-agreed price.
"Our view is that an option like this should only be purchased when its cost appears modest by historical standards. This tends to occur after markets have appreciated for some years, and at times when confidence in further appreciation is at a cyclical high," the fund managers said in a report.
Noting that it is unusual for the FTSE 100 to fall back in a dangerously steep way, Williams and Turner said the running cost of the put option equates to 0.07% each month to March 2016 if markets don't experience a downturn.
Arguing their case for holding the put option, which they described as having a relatively modest cost, Williams and Turner said that the put option would tends to gain in market value if markets do suffer a significant setback.
"The advantage for shareholders is that the option could then be sold to bring in additional capital in the company at a time when share prices were depressed," Williams and Turner said.
"This could be used to buy additional income stocks, at a time when their prices were abnormally low, on hopefully more attractive dividend yields. The effect would be to boost the dividend income generated by the company, as well as increasing the portfolio's ability to participate in any subsequent market recovery," they added.
The put option can be exercised if the FTSE 100 index falls to 5,800. The bluechip index is currently reading about 6,936 points, after hitting a record intraday high of 6,958.89 on Tuesday, exceeding the previous record set during the 1999 dot.com boom.
"Although we are in a low growth environment, we believe there are still encouraging prospects for further income growth from many of the equities in the portfolio. In addition, the very low yields offered by most government bonds should lead to the prices of both high-yielding fixed income securities and higher-yielding equities stepping up in market price over time," the fund managers said.
The disclosures came in The Investment Company's report for the six months to the end of 2014, the first half of its financial year.
The company reported a net asset value per share of 388.09 pence at the end of 2014, while its total return per share was 4.66 pence.
The Investment Company shares were up 4.0% at 439.50 pence on Friday.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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