LICs listing growth unsustainable
The last 12 months saw a 10 per cent increase in the number of listings of listed investments companies (LICs), however the growth in the sector is unlikely to be sustained, according to Zenith’s review.
The study, titled “2017 Listed Investment Companies Sector Review” found that the period between June 2013 to March 2017 was the strongest period of growth for LIC listings, with 95 LICs listed on the Australian Securities Exchange (ASX) as at 31 March, 2017.
Zenith’s senior investment analyst, Justin Tay, stressed that the growth and contraction in LIC listings were however cyclical in nature.
“Given this belief about the cyclicality of LIC listing growth, with investor and market sentiment key drivers, we expect that the current rate of growth in the sector is unlikely to be sustained over the medium to long-term,” he said.
The research also revealed that regardless of the sentiment towards the sector, LICs had on average traded at a discount to net tangible assets (NTA) up until April 2013, due to a few key drivers which included the rapid increase of self-managed superannuation funds (SMSFs) and amendments to the Corporations Act in 2010 that allowed dividends to be paid out based on a solvency test rather than profitability.
Among other factors that supported a LIC to trade at a premium to its NTA were fully franked dividends and high levels of shareholder engagement, followed by the underlying performance of the portfolio.
“Zenith believes the dividend coverage ratio can be an indicator of a LIC’s dividend sustainability,” Tay said.
“Ideally, a LIC should have at least two years’ worth of profit reserves to maintain current dividend payments in the event there is a downturn in the LIC’s profitability.
“Our analysis found that most LICs on Zenith’s approved products list maintain adequate profit reserves to sustain a growing stream of dividends, and have profit reserves that ensure dividend payments are sustainable and in accordance with dividend objectives.”
From an initial universe of 76 products, Zenith rated two as “highly recommended”, 11 as “recommended”, three as “approved”, followed by 59 which were “not rated”, while one was “redeem”.
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