Henderson Far East Income Share Discussion Threads

[fordtin] 25/7/2023 16:30

re -"Am I missing something"

"The Company announces that it agreed on 24 July 2023 to allot 175,000 ordinary shares at 241.75p per share, each fully paid under its block listing facility. The net asset value per ordinary share as at the close of business on 24 July 2023 was 232.8p. "

8g, they are selling something for more than the sum of it's parts are worth, what more can I say?

edit -to add clarity for fabius1, I've changed 'it's worth' to 'the sum of it's parts are worth'.

[8gggggggg] 25/7/2023 16:11

What is the point of issuing new equity at these very low prices, !?, I would have thought best action do opposite and BUY in equity at these very low levels..??Am I missing something Dakas.

[zac0_4] 24/7/2023 12:50

I too hold this in 2 accounts - ISA & SIPP. I'm in the process of selling all my dividend payers in my SIPP and moving the capital into funds (global growth & global growth and income). It won't happen overnight but that's my plan.

Here's the 5 year returns, with dividends reinvested, of my holdings

Greencoat UK Wind +48%
Merchants Trust +40%
Henderson High Income +27%
LGEN +24%
New City High Yield Fund +16%
Henderson Far East Income -4%

And here's the return from my holding in Legal & General International Income Trust, which is a simple global tracker fund, +58%

I've known for some time that dividend investing is not all it seems to be . . . I'm finally starting to do something about it! Both BP & Shell have been sold so far this year. The cull will continue.

[scruff1] 24/7/2023 08:52

One things for sure - seeing as this as a !0% divi being handed out on Thursday there is virtually zilch interest - indeed we are down 4p at the mo and we can add 6p to that Thurs. I have 2 tranches of HFEL each in different accounts. If there isnt a sign of life one of em is going Weds pm - better things to do with my money.

[zac0_4] 23/7/2023 20:33

Robsy2 - My portfolio is made up of 30% dividend payers and 70% non-dividend payers.

My suggestion would be to simply invest in a global tracker fund and (if required) sell down units as and when you need income.

Not 1 of my dividend payers (trusts / individual shares) can match the total return from Legal & General International Index Trust over a 5+ year time period!

[tim 3] 22/7/2023 11:40

Robsy2

You may want to do some research on MRCH.(I am a long term holder)

They have increased the dividend for 40 years and have a good capital return compared with the ftse all share over the last 5 years.

CTY may also be worth a look.

[bluemango] 22/7/2023 07:59

Good cautionary posts, yes, but I would just gently ask - is the perceived churn actually the full story here or are there other (eg future regional growth) factors that might in time become more significant, thereby leading to less future reliance on churn?

If it's only a temporary strategy to cope with difficult market conditions that all have been experiencing, then good luck to them.

[robsy2] 22/7/2023 07:27

I was intrigued and attracted by the dividends here with a view to investing but having read the excellent posts have decided not to . Thanks Aleman particularly for the posts.
The search for rock solid yielders moves elsewhere! Any suggestions welcome.

[aleman] 20/7/2023 16:49

Their churn is high. They are constantly selling, so they are never short of cash to "exploit short term trading opportunities". They are doing it all the time.

[fordtin] 20/7/2023 16:01

Hi Aleman,

re - premium to NAV

For many years I was very wary of funds trading at a premium, but have since learned it can be a strength.

It seems to me that a part of HEFL's ability to maintain an attractive dividend is their ability to raise additional capital at a premium to NAV. It gives them the ability to exploit short term trading opportunities which would not be attractive if they had to raise capital at a discount to NAV.

[aleman] 20/7/2023 12:48

That's a separate issue. Most investment trusts would normally only dip into revenue reserves to maintain a dividend in what it considered exceptional and temporary circumstances (such as Covid). They would not do it routinely to maintain an uncovered dividend.

Last year's revenue reserve was £27m and dividend cost £36m, so that's 9 months cover. The interims saw a slight reduction in the revenue reserve and there has been a marginal dividend rise on a marginal expansion in equity base. So this year is looking at £37m+ dividend with a £26m buffer, which would be closer to 8 months cover. If that reserve cover continues to thin, expect to see some sort of modest dividend reduction.

However, if that goes hand in hand with further capital erosion in the absence of a return to a bull market, do not be surprised to see a possible change of policy and a significant rebase of the dividend. This is why I think buying the shares at a premium is not a good idea. That premium could become a significant discount, like other trusts, if and when there is such a policy change (even though there would be no related change in NAV). I think the shares should be trading at a discount just with this knowledge.

That is not to say that I think there is not reasonable value here in the underlying assets and underlying yield after the falls in recent years. I just think the market is slightly overpricing those underlying values because it possibly does not fully understand how the many consecutive years of large and rising dividend have been paid out. The market seems to assume it will continue. In absence of a new bull market, I think there is a distinct possibility it might not, and any change could come as a shock to some holders. The resultant selling would then see us move nearer a more typical discount - or even an overshoot of a that (again, even though underlying investments and NAV would not suddenly change).

There's a good possibility I might top up here in time but it's very unlikely I will do it at a premium to NAV unless I feel there is strong case that a bull market is restarting and the dividend footing then looks more secure.

[scrwal] 20/7/2023 12:27

I think in the past that Edison have stated HFEL has accumulated income reserves of maybe the equivalent of the yearly divi - these reserves came from excess profits not being paid out such that Edison didn't regard them as capital per se and probably still don't.

[tim 3] 20/7/2023 11:04

Am fine however they decide to generate the yield provided it doesn't result in a reduction in capital value.

Unfortunately for the last few years it has.

[goldpiguk] 20/7/2023 10:44

Hi 8w,

In the last full year results to August 31st 2022 option premium income is given as £2,922,000. With 154,948,564 shares in issue at the time that is under 2p towards earnings before taking management fees and expenses into account. Options writing only made a small contribution toward total earnings in the 2022 results.

Aleman is correct. (Was just writing this post and noticed Aleman's post above.)

Goldpig

[aleman] 20/7/2023 10:38

"Other income" was about 11% of the total at the interims. That does not explain the yield that is much higher than the underlying one you would expect on the investments. GoldPig and I seem to believe the same. I'm not sure how much proof there is for it, though. Given an unusually high churn, unusually high dividend and disappointing capital performance, it seems the logical assumption to work from - unless anybody else can come up with a better explanation.

Some other investment trusts pay out more than they earn and subsidise with capital - not necessarily in exactly the same way. So long as people understand how they work, and the associated risks, they can be useful enhanced income investments.

[8w] 20/7/2023 09:24

Options writing provides a chunk of income.

[melton john] 20/7/2023 09:11

I managed to get out alive with dividends covering capital loss after two years or so. Looking at Stocko, dividends weren't covered, eps went down from 58p to 5.24 2017-2022. In that time shares issued went from 116 to 154 Millions.
I put the money into POLR which has suffered from the general pressure from withdrawals but now at substantial discount but a rising price. I'm afraid hanging onto a losing position in this is costing you as it did me, an opportunity elsewhere.

[goldpiguk] 20/7/2023 00:48

Hi Aleman,

You are 100% correct about the churn. Kerley has in the past talked/written about careful timing of investments to maximise income. Although he did not elaborate on this it is fairly clear what is happening.

Buying shares shortly before they go xd, selling them xd, then moving to another similarly timed investment certainly generates far more dividends and a much higher income. This might work well for a time, in certain market conditions, but ultimately it is unsustainable if capital is eroded.

Goldpig

[aleman] 19/7/2023 22:53

The income is unusually high and it's not clear where such high income comes from. It's well above what the underlying investments seem to pay. Last year they bought nearly £450m worth of investments and sold almost exactly the same. That's a very high 100% churn. They must be scalping dividends to pay double a typical yield at the expense of capital losses on shares sold soon after ex-dividend. This will look ok in bull markets but not in bears. Unless you can tell us where else the oddly high level of income is magically appearing from? The churn seems to be converting capital loss into part of the dividend. Technically, yes, it might be a fully covered dividend but the extra income is actually a conversion from a capital loss, and I think we've now eroded capital sufficiently that maintaining the full dividend is in doubt.

[spangle93] 19/7/2023 18:12

Aleman: the Edison note states

"The trust offers a very attractive 10.0% dividend yield (fully covered by income) plus the potential for capital growth. This is a different proposition compared with its four peers in the AIC Asia Pacific Equity Income sector (average yield of 5.8%), with two funds paying dividends out of capital.

[aleman] 19/7/2023 16:13

HFEL effectively pay part of their dividend out of capital churn. I think it was just over 50% of the dividend last year? This will look worse in a bear market as it is more visible - the capital fall recently is highlighting it. It's not necessarily a bad thing if you are aware of what is going on. EAT do something similar in that they pay out 6% of year-end NAV but that is also well short of being covered so capital tops it up. In good times, they present hefty yields and modest growth that can be useful in enhancing an income portfolio. In bad times, you must watch out for the capital loss. EAT's divided automatically adjusts and was cut this year - but I can still see them cutting the 6% of NAV dividend target if bear markets continue. It tends to trade at around a 10% discount. Do not be surprised if HFEL's dividend is cut and be cautious when some people chase the share price to a premium over NAV, thinking the dividend justifies it. That premium to NAV will likely quickly disappear if and when a dividend cut comes. I have a modest holding and could be a buyer at these levels but the premium to NAV continues to put me off. I think it should be trading at a similar discount to others. Despite that, I think there might be dips here worth buying after the substantial fall in the last few years.

[makinbuks] 19/7/2023 14:18

Not surprising since Edison is paid for research so will always look to accentuate the positives in any note.

I liked the table showing that the top ten investments a year ago bear little relationship to now. Like Goldpig, I have doubts that the Chinese economy will grow at the rates we saw previously but at least Hendersons seem to be trying something new to reverse the trend in declining NAV.

I also welcome the reduction in mining stocks. I have exposure to these elsewhere (BRWM) and always thought there was too much in here.

Final thought, I wonder if anyone has analysed the effect of currency over the 5 years of NAV decline as opposed to stock performance.

[goldpiguk] 19/7/2023 13:21

Hi all,

I still hold HFEL and will continue to do so, but the Edison research note does not engender confidence in this stock. The last five years have seen a sustained fall in HFEL's NAV year on year. (See Below: Taken from Edison 'research' note.)

FY 18 - 15.9p
FY 19 - 0.3p
FY 20 - 58p
FY 21 - 1.4p
FY 22 - 18.5p

It remains my view that the 94.1p fall in the year-end net asset value between FY 18 - 22 will constrain future earnings potential and ultimately lead to a 'dividend reset', which I would welcome.

With Chinese economic data showing the recovery is fading Kerley's comments reported in the Edison note seem a little over-optimistic in the short term - even allowing for some expected stimulus from Beijing.




Goldpig

[aleman] 19/7/2023 09:29

Last time the shares were this low was April 2009. How much inflation has there been since then?

Edit - RPI says 78%.