High yielding Merchants Trust set to benefit from lower financing costs


Originally published at: https://whichinvestmenttrust.com/high-yielding-merchants-trust-set-to-benefit-from-lower-financing-costs/

It has a 35-year track record of increasing dividends and pays a high yield, but previous management left the trust with expensive debt that is shortly to begin rolling off. Fast Facts AIC Dividend Hero with a 35yr record of increasing dividends One of the highest yielders in its sector at over 5% Healthy dividend…


Also worth noting about Merchants (MRCH) is:
• The Board recently ditched the FTSE 100 as a benchmark in favour of the FTSE All Share. Done to allow the manager to fish for likely income stocks further down the index.
• The manager tends to run very little cash, always looks to be fully invested if possible.
• Manager Simon Gergel, like the long-time previous manager of MRCH, Nigel Lanning, is a value investor who prefers to run concentrated portfolios. Factor in the debt level together with the focused nature of the holdings and the capital performance of the trust can get volatile on occasions and out-of-step with the market.
• The way that MRCH is set up is very much targeted at those seeking an immediate source of income rather than one of delayed gratification. Over time, quarterly dividend pay-outs to shareholders have been smoothed out to a point where they are now each equal in value over the year.
• I understand there have been mutterings by shareholders as to the percentage amount that the trust’s dividend growth has been lagging inflation since emerging from the 2007 / 2008 crisis. I know that the Board are well aware of this but their hands are tied somewhat until a major chunk of the debenture debt can be refinanced at a lower cost come the end of this year. The trust’s priority of the last 10 years having been a successful defence of the dividend rather than 100% inflation proofing it – considered by the Board to have been a bridge-too-far in their opinion.


Merchants is a very good yield play, Simon Gebel has managed it very well.

I take @forrado 's point about the lack of dividend growth, which was accurately described an anaemic in the article by @dicem.

Undoubtedly the ending of this horrendously expensive debt is something to look forward to, though there the 9.25% £40+ bond won’t mature until 2023. I am not normally in favour of the death penalty, but the Board members back in the eighties or nineties who took out this debt should surely be candidates for capital punishment.

If you are in the market for a reliable high dividend paying fund I think Merchants is a terrific option.