14 May 2020

PIA looks to stable, fully franked dividends over the coming years

The Board of Pengana International Equities Limited (“PIA”) has re-confirmed its objective to, and its high degree of confidence in, being able to continue to pay a total yearly dividend of 5 cents per share (paid half-yearly) over the coming years. At the current share price of $1.01 (at close of day 12 May), this equates to a yield of ~5% on a cash basis or a yield of ~7% when grossed-up for franking credits. In addition, PIA has implemented a change to the investment mandate that is likely to result in these dividends being fully franked.

Historically, Australian investors have prized stable, higher-yielding, fully franked dividends stocks above all else, focusing on Australian “blue chips”. However, with so many of these stocks now slashing dividends, investors recognise the need for alternative and more secure ways of generating fully franked dividends.

PIA Managing Director, Russel Pillemer said, “in our view, PIA has excellent growth prospects and is likely to be one of the most reliable vehicles in the Australian market for the generation of stable and secure fully franked dividends over many years to come.” The reliability of PIA is due to the way in which the portfolio is managed (as illustrated by its historical track record delivering 9.77% p.a.[1] since Pengana took over the strategy) as well as unique structural advantages inherent in the vehicle, as detailed below.

Why is PIA highly confident in the stability of the dividend?

Mr Frank Gooch, Chairman of PIA, said, “PIA is positioned to meet its dividend objective of paying at least 5 cents per share over the medium to long term. The company has total assets in excess of $300 million, no debt, investments in highly liquid global companies and a disciplined investment management team that has demonstrated its ability to deliver throughout the cycle. This is unlike many other companies that are limited in their ability to pay dividends due to capital constraints, illiquidity or debt covenants – as shown during the recent COVID-19 crisis.”

Some LIC managers are reluctant to commit to paying out consistent ongoing dividends as this may negatively impact their fees particularly in periods in which the LIC has failed to generate sufficient earnings to cover the dividend and thereby reduce the size of the company

PIA’s strategy is to generate consistent long-term returns whilst reducing volatility and the risk of losing capital. The success of this strategy has been demonstrated in the recent crisis, i.e. since January 1 to April 30 this year, the portfolio generated a 1% return1 versus a - 6% fall in the market[2].

Change in investment mandate aims to generate fully franked dividends

PIA is acutely aware of the benefit of delivering fully franked dividends to our shareholders and has therefore implemented a change to the investment mandate, such that the portfolio will now be managed on a tax aware basis with the specific additional aim of delivering fully franked dividends. This will result in slightly higher turnover in the portfolio to realise investment profits and deliver franking credits that will arise from the tax paid on the profits.

In order to pay fully franked dividends, PIA needs to satisfy two tests:

  1. Have either profits in a specific period or alternatively having profit reserves, sufficient to cover the dividend, and
  2. Have sufficient franking credits (from tax paid on realised gains on investments) to enable dividends to be fully franked.

As a listed investment company, it is impossible to guarantee having profits in a particular period. However, PIA is uniquely placed to satisfy the first test as it has $114 million of profits reserves, i.e. sufficient to pay the current amount of fully franked dividends for the next several years.

It is important to note that whilst PIA cannot guarantee it will satisfy the second test, the company anticipates that it will have sufficient franking credits to pay fully franked dividends. The reason for this is that:

  • Our holdings are highly liquid and therefore should be capable of being traded efficiently in order to realise investment gains
  • Due to the diversification of the portfolio, historically, we have always had a proportion of holdings generating positive returns in all years. Going forward, we intend to actively realise a proportion of these profits
  • Holding periods are generally medium-term and so we have flexibility across time periods as to when we realise gains and losses
  • The mandate is far more likely to result in the sale of stocks that make large gains (i.e. that reach our price targets) as opposed to stocks that are in a loss position

Upcoming dividends

In the 10 months to 30 April 2020, the investment portfolio has returned 8.2%1 compared to the benchmark return of 2.4%2.

PIA’s unaudited results for the 10 months to 30 April 2020 indicate that the company is well placed to fully frank a final dividend of 2.5 cents per share. This will be in addition to the fully franked, 2020 interim dividend of 2.5 cents per share paid on 30 April 2020.

Russel Pillemer said, “It is also pleasing that the investment manager has been able to realise investment gains even in a period in which global markets have been severely disrupted by COVID-19. This should enable a final dividend of 2.5 cents per share to be fully franked.”

The Board will meet in late August 2020 to approve the 30 June 2020 audited financial statements and to consider and declare the final dividend for the 2020 financial year.

A unique combination of growth and yield

Last year, PIA announced the reset of the half-yearly dividend to 2.5 cents in order to provide more certainty over the dividend as well as to provide room for additional capital growth in the PIA shares. Increasing the level of franking via a change in the investment mandate is viewed by the PIA Board as increasing the attractiveness of PIA shares.

Russel Pillemer said, ”We think PIA is an ideal vehicle for investors who are seeking investments with an ability to generate good long term, relatively low risk, capital appreciation with highly stable dividends that are likely to be fully franked.

There are very few companies that offer investors such a compelling combination of income and capital growth prospects - and we think that PIA has the potential to make a significant contribution to investment portfolios. In addition, as PIA is currently trading at a discount to its underlying net asset value, incoming investors have the prospect of earning additional returns in the event that the discount is reduced.

I strongly urge investors who are seeking stable and secure, fully franked dividends to consider investing in PIA.”

 

The PIA team will be hosting a shareholder webinar on Tuesday 9 June that is open to the public to discuss the new mandate as well as provide an update on the portfolio’s performance and positioning. Interested parties can register at http://pia.pengana.com

 

DISCLAIMER

 

Pengana International Equities Limited (“the Company”), its staff, consultants, or any individuals preparing this communication, may at any time have a position in securities or options of any of the companies mentioned in this communication. An employee or consultant of the Company may be a director of a company mentioned in this communication.

Although the statements of fact in this communication are provided in good faith by the Company, have been obtained from, and are based upon sources that the Company believes to be reliable, it does not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in this communication constitute the Company’s judgement as of the date of this communication. Performance figures provided in the presentation are past performance which is not a reliable indicator of future performance. Neither Pengana International Equities Limited, Pengana Investment Management Limited nor their directors or employees make any representation or warranty as to the accuracy, reliability, timeliness or completeness of the information provided and to the extent permissible by law, disclaim all liability for any error, omission or loss or damage so suffered. 

This communication is for information purposes only and is not intended as an offer or solicitation with respect to the dealing of any security. The information in this communication is only intended for Australian residents. The purpose of this presentation is to provide information only and the contents of the communication do not purport to provide investment advice. The information provided is selective and may not be complete or accurate for your particular purpose and should not be construed as a recommendation to invest in any particular security.

This communication does not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of this communication. No guarantee or representation as to performance of the Company, the maintenance or repayment of capital, the price at which shares will trade or any particular rate of return can be provided.



[1] Performance figures refer to the movement in net assets per share, reversing out the impact of option exercises and payments of dividends, before tax paid or accrued on realised and unrealised gains. Past performance is not a reliable indicator of future performance, the value of investments can go up and down. Inception date of PIA: 19 March 2004, new investment team with new mandate adopted: 1 July 2017.

[2] MSCI World Total Return Index, Net Dividends Reinvested, in A$.