Buy this unique trust for its strong dividend growth record while the shares are depressed
Law Debenture’s unusual structure has helped it grow its dividend by 8pc a year over the past decade
‘Since Denis Jackson took charge six years ago, he has improved profitability in its professional services businesses’
Uncertainty over the timing of interest rate cuts and Houthi attacks on Red Sea shipping have weighed on the new year stock market and depressed shares in Law Debenture Corporation, creating a good opportunity to buy the leading UK equity income investment trust previously tipped by Questor.
Launched 135 years ago, Law Debenture is a £1bn listed fund that seeks to generate income and growth from a portfolio of British stocks managed by Janus Henderson and a set of specialist financial services businesses run by its chief executive, Denis Jackson.
This unique combination, which underpins a strong dividend and diversifies investors’ returns, has long impressed us. We first tipped the shares at about 578p in July 2017 and continue to regard Law Debenture as a good core holding for private investors at today’s share price of 773p. Since Jackson took charge six years ago, he has improved the profitability of the company’s independent professional services (IPS) businesses, which account for around 20pc of assets.
Law Debenture derives its name from the oldest of these operations, through which, via its long-standing contacts with lawyers, it acts as a middleman between bond issuers and investors. It also serves as trustee to a growing number of company pension schemes and operates a whistleblowing service for workers with concerns about their employers’ actions.
The recurring, inflation-linked income from these businesses has shored up the returns generated by the £800m, 150-stock portfolio managed by James Henderson and Laura Foll. Recent years have been difficult for the London stock market, although the two “value” investors did well holding Rolls-royce and Marks & Spencer through their dramatic share price recoveries last year.
Over the past five and 10 years, Law Debenture has generated total returns of 64.6pc and 107.3pc respectively, beating the 30.1pc and 62.1pc from the FTSE All-share index. It also has the best performance of 21 trusts in the Association of Investment Companies’ UK equity income sector.
Last year, when its dividends are included, Law Debenture returned 8pc, which matched the FTSE Allshare benchmark. This year, the shares have dipped by 3.5pc, slightly more than the 2.6pc fall in the index, which reflects the impact of the 13pc “gearing” or borrowing the trust uses to increase its investments in the stock market. While gearing generally boosts long-term performance, it can magnify short-term market declines.
At 773p, the shares are 1.8pc below their net asset value (NAV) of 787.11p. While only a small discount, it contrasts with the 2.9pc premium to NAV at which the shares stood in September last year. Compared with Law Debenture’s average one-year premium of 0.9pc, on a relative basis that makes the shares among the cheapest in the investment company sector. However, in absolute terms, rival trusts such as Questor picks Finsbury Growth & Income and Schroder Income Growth both offer bigger discounts of about 7pc.
Before Jackson arrived and shook up the IPS businesses and improved communication with shareholders, Law Debenture used to trade on a much wider discount of 10pc. There is a danger it could return to this as its board has not begun to buy back shares. Analysts at Winterflood believe this risk to be low, however.
Annual results next month are likely to confirm a 14th consecutive annual rise in the dividend. Although Law Debenture’s dividend yield of 39pc is at the low end of the 3pc-8pc range of its peer group, the 7.9pc annual rate at which payouts have grown over the past 10 years has impressed Emma Bird, Winterflood’s head of investment trust research. Bird expects Law Debenture to be able to continue to grow its dividend in future years.
“With the shares currently trading at a small discount, versus a peer group average of 5pc, Law Debenture does not appear to offer particular value at present, although we think it deserves to trade at a premium to its peers owing to its impressive longterm total return record and differentiated approach,” Bird says. Questor agrees and thinks this is a good opening for new investors into a high-quality and resilient fund. Buy.
Questor says: buy
Ticker: LWDB
Share price at close: 773p