Interim management report
Half year results
When I last wrote to shareholders, six months ago, I reported a year of positive asset returns in both absolute and relative terms. I am pleased to announce that this outperformance has been maintained, both at portfolio and NAV level: your company has delivered robust results over the six months to 31 July 2018, with NAV total return of +7.4%, significantly ahead of the FTSE All-Share Index (+5.0%). You will find more information on the performance of the investment portfolio in the Investment Manager's Review on pages 5 to 9, and an attribution analysis on page 2.
Net earnings and dividends
Earnings in the first six months of the current year, to 31 July 2018, were 15.61p per ordinary share (2017: 15.05p).
Towards the end of 2017, the company announced the refinancing of the first tranche of its long-term borrowing, replacing it with new borrowings at a much lower interest rate. This factor, together with your board's confidence in the ongoing potential for income growth generation within the investment portfolio, has enabled dividends to grow faster. The board has declared a second quarterly dividend of 6.5p per ordinary share, payable on 15 November 2018 to shareholders on the register at close of business on 5 October 2018. A Dividend Reinvestment Plan (DRIP) is available for this dividend and the relevant Election Date is 19 October 2018 and the ex-dividend date is 4 October 2018.
We are proud to be an AIC 'Divided Hero', an elite group of investment trust companies that have increased their dividends each year for 20 years or more. The company's dividend has increased for 36 consecutive years, and a high and growing yield remains a key objective of the company. The total distribution declared for the first half of 2018/19 is 12.9p, an increase of 4.9% on the same period last year (12.3p). It is the board's intention to at least maintain quarterly dividends at the current level for the rest of the year, which would lead to a minimum annual dividend of 25.9p for 2018/19, an increase of 4.4% on the previous year.
As at 31 July 2018, the company's revenue reserve, after deducting the first and second quarterly dividends, represented 14.0p per share (2017 – 13.3p).
Prospects
Stock markets have experienced increasing volatility over the period and the risk profile for the UK economy remains elevated, primarily because of Brexit uncertainties as well as high levels of debt and rising interest rates. In spite of the political uncertainty in the UK and elsewhere, UK equities remain reasonably priced on a long term basis.
Market volatility creates its own opportunities, as our investment manager explains later, and we would remind shareholders that the UK stock market is not the same as the UK economy since many of the companies listed on the London Stock Exchange are truly international in nature, including some of the world's largest and best-known multinationals. Indeed, the UK stock market offers access to a diverse range of industries and markets and is predominantly exposed to economies outside the UK.
Over time, our fund managers have proven their ability to uncover many interesting investment opportunities that offer both good yields and prospects for attractive total returns. By focusing on individual stocks, they remain confident that they can continue to do that, aiming to ensure that Merchants' diversified portfolio continues to deliver a high and rising income together with capital growth for its shareholders.
Simon Fraser
Chairman