Member Info for Actuary63

I have done some calculations for 3 stocks that have been in the HFEL top 10 over the past 4 years. They are Samsung Electronics, Taiwan Semi-Conductor and the MacQuarie Group. If you examine the annual reports for 2024 and 2020, you will find the market value of the total investment in each stock hasn't changed very much from 31/8/20 to 31/8/24.

What I have done is calculate the quantity of shares held in each company on 31/8/20 and 31/8/24. This can be done by obtaining the 5-year price chart for each stock and 5-year Sterling exchange rate charts for KRW, TWD and AUD.

Here are the figures for the number of shares in the HFEL portfolio:

Samsung Electronics

543, 074 on 31/8/20

487,941 on 31/8/24

Taiwan Semiconductor

1,786,056 on 31/8/20

888,761 on 31/8/24

MacQuarie Group

165,023 on 31/8/20

116,805 on 31/8/24

It's notable that the number of shares held in all three companies has fallen significantly over the 4-year period. In other words, HFEL has been a net seller of shares in 3 of its most favoured investments. This is exactly what one would expect to find in a Fund following a dividend-stripping policy. To generate dividend income, shares are continually being sold at lower prices than when they are later re-purchased. Hence the number of shares re-purchased is continually falling.

Let me add that I have no position in HFEL and no axe to grind here. I just feel I have a duty to shares these findings with other investors and invite them to check my calculations.

Hello Damien,

I'm glad to hear you're not a HFEL shareholder. It wouldn't have made sense for you to hang ono their shares knowng what you do. I agree that what they've been doing is unethical, especially as the depreciation of capital that occurs is quite gradual and obscured by normal market volatility. You've done the right thing by warning people and I'm glad I heeded your warning. The fact that the HFEL share price is still above NAV indicates that that there are a lot of income hungry investors who don't want to believe their ever reliable dividends are a house built on sand. And now AAIF, whose shares are priced below NAV, seems to be adopting the same strategy, probably influenced by HFEL. Needless to say I've sold my shares in AAIF too.

I've done the calculations. The dividend yield on the HFEL portfolio is less than half the dividend yield on HFEL shares and option writing cannot explain this gap. (Covered call writing is also, in effect, a way of coverting capital into income). The portfolio turnover of 100% is abnormal and suggests that shares are being bought and sold for short-term reasons. I sold at 290p and am much better off as a result. Don't understand why Damien is still investing in HFEL.

HFEL's dividend-stripping policy has the effect of boosting income at the expense of reducing capital. That's what happens when you buy shares cum-dividend and sell them ex-dividend. The share price does reflect the underlying value of the investments, but quantity of shares held in each investment is falling because of dividend stripping.

Hello Zebbo,

Earnings per share fell because of lower interest on floating rate debt and writing off the value of "non-performing" loans. The investior adviser is confident the current dividend can be maintained - let's hope he's right!

Hello Damien,

Do you still own shares in this Trust?

I was lucky enough to sell at 290p after you explained their deceptive "dividend-stripping" method and owe you a great debt of thanks. I'm sorry to say that AAIF is now also adopting this dubious strategy in the hope of roping in more income-hungry investors.

If you haven't sold your holdings, what exactly are you hoping for?

Completely agree, Guitarsolo.

I just hope shareholders of the target company don't reject the offer because the market value of the shares they'll be receiving is less than the NAV of the shares they'll be giving up. Exchanging cheap shares for cheap shares is no robbery.

"All have a large dividend payout relative to earnings, meaning there isn't much left over to buy".

which is why IMO any merger would have to involve offering the shareholders of the target company shares of the acquiring company at an agreed exchange rate.

I had a quick look at OB's analysis and immediately pressed the buzzer on a few statements:

"remaining assets had to be reduced “Project Actuals -2.4p” and “Revaluation of NextPower III… -0.5p”. That means remaining assets are being reduced in value due to being below expectations"

Project actuals of -2.4p means that solar irradiation was below expectation in 24/25. It doesn't imply a reduction in the value of assets held.

"The RCF and Preference shares represent a further circa -£343m of debt that will require disposals."

No disposals will be required to redeem the preference shares. The holders will have the right to convert them into ordinary shares, but cash redemption is at the option of the company. Also, the RCF can be rolled over indefinitely as long as there is a willing lender.

"a cliff edge of reduced subsidy and lower future pricing if its own Power Price curves are accurate. "

He is referring to the graph showing a sharp decline in projected income from 2036 when RO subsidy income disappears (not a Power Price curve). A similar decline occurs for other renewable energy trusts. So how will NESF maintain enough income to cover its dividend? The answer is found on page 140 of the AR, which states that NESF has £47.5m worth of "assets at cost", i.e. projects under construction not yet generating power. His own NAV breakdown shows that 2.5p worth of new assets were added to the portfolio over the year. This offsets the deprecation of existing assets and is not the behaviour of a company "eating its own tail".

My final point is that I remember dividend cover for NESF being exactly 1.0 about 5 years ago. The dividend per share has increased a lot since then, so how is dividend cover now 1.1 when there was little or no projected increase in revenue. The answer is new assets coming on line. These assets are conservatively valued at cost until they start generating power, when their cash-flows are added to the projected revenue stream.

Can't see anything about a dividend hike in the montly update. Annual dividend has been unchanged at 6.875p per share for a couple of years. NAV is slightly down after allowing for interest income, probably because government bond yields have edged up. Monthly interest income after expenses of 0.64p is lower than it has been for a long time, but still well above dividend when annualised.

Hello Bearraider,

Have you considered SEQI and NYCF?

In addition to what TheTrotsky said, there would only be one audit to pay for and adminstration costs should be lower. The expect cost savings would be quantified if the merger were put to a vote.

Hi SparkyEdwards,

What does "selling on the cheap" actually mean when all the investment trusts in this sector are trading at large discounts to NAV?

Every shareholder of NESF should ponder the following question. Would you now exchange half of your shares for an equal (or slightly greater) number of FSFL shares? If the answer is "yes", there is no rational reason for opposing a merger on these terms, given that a merger should also result is cost savings.

Hello Krustysmegma,

Another way of looking at it is that NESF's cash-flow would need to be 18% higher to have the same dividend cover as FSFL.

Now that I think of it, FSFL's offer may have been less generous than I suggested, which might be why it was not seriously considered.

As a NESF shareholder, I can understand the reluctance to accept an offer below NAV. But if the offer is in the form of FSFL shares, these are also currently trading at a large discount to NAV. Furthermore, dividend cover is significantly higher for FSFL than NESF. So, if NESF shareholder receive enough FSFL shares to maintain their dividend income, I don't see how they could be worse off.

Hello Therosyl,

I own shares in both FSFL and NESF and would favour a merger if it results in cost savings and is conducted on terms fair to both groups of shareholders.

So what terms would be fair? IMO, NESF shareholders should get 843 FSFL shares for every 810 NESF shares they hold. This would mean that if FSFL pays it's new target dividend of 8.1p per share, NESF shareholder will receive exactly the same dividend income as before.

In theory, the price paid for each NESF share would only be 82p, based on the current market price of FSFL, but what does that matter if you're a long term income investor? The short-term investors could get out of NESF with a profit and the long-term investors could continue to collect the same dividends, or hopefully higher dividends if the cost savings materialise.

It seems like a win-win scenario to me and I hope the NESF board have not turned down an offer on these terms for selfish reasons.

How would FSFL pay for the merger? It would surely be by offering its own shares to NESF shareholders at an agreed exchange rate. They would need to offer 843 FSFL shares for every 800 NESF shares to maintain the dividend income for NESF shareholders. At the current FSFL share price of 77.5p, they would need to offer 82p per NESF share.

10-year gilt yield has fallen pretty sharply since 29 May. Similar price spikes for INPP and SEQI, so I doubt it's anything to do with the renewable energy sector.

Hello Ascoyne,

I am a shareholder and I will be voting against discontinuation. The shares are currently providing an extraordinary dividend yield that is well covered by cash flow. Discontinuation would force the trust to sell off its high yielding assets for uncertain prices. The shares would then be redeemed for an uncertain price, which we may or may not be able to re-invest at the same yield.

I received the dividend today.