AAIF much cheaper on good NAV discount and better performer. |
Vietnam going strong(er). |
Hang Seng is up just over 30% in 3 weeks after a 6% rise overnight. The last factsheet said 11.9% of assets were invested in Hong Kong at August 31st.
I note South Korean CPI came in at 1.6% versus 2.0% last time and 1.9% forecast. Presumably this creates some leeway for stimulus. A number of Asian countries have seen CPI come in under expectations and below central bank targets in the last month. |
Thanks Aleman! Shame these highs are not (yet?) coming through into HFEL TNAV ps. Am beginning to wonder about their stock selection? and rotation? Also, the spread here has recently widened (for much of the trading day, at least) and it seems like a case of 'buyer fatigue meets MM resistance'. There was a tick up in TNAV ps at the end of the week, and I'd like to see more of that to become dissuaded from my relative gloom, here. Maybe I've just been invested for too long, at the wrong entry cost levels? - and I'm guessing there are many others in the same boat? We need the dividend, but kinda believe that it can't be maintained? Naturally, the 31/8/24 finals (when known) may help demystify matters. |
Thanks Aleman.
What I find a little surprising, given the uncovered dividend, is that they choose to increase it again to 6.2p per quarter (from 6.1p). It smacks of only wanting to be able to claim that there has been a "forever increasing dividend" which is frankly nonsense in this situation. If they froze it now then, using your 5% growth estimate, the dividend would be covered again half way though 2027, about 18 months earlier than if they increase the dividend along the way. That puts less stress on the reserves and just looks far more sustainable.
Guitarsolo |
 Will they have to cut at some stage? Assuming the option income remains steady at around 8% of total income, 5% p.a. revenue growth growth would see a slowly rising dividend covered again in about 5 years, and I think they shuffled a modest portion of the fund to slightly lower payers in the hope of slightly higher dividend growth. I would think of a 5% target as being conservative. I have reservations about selling the likes of Vietnam (cheap) and buying the likes of India (expensive) but I can see that the plan might well work if their stock selection is ok and markets don't even have to do well. One would imagine 10% dividend growth might be possible in a better year, which might eliminate over half the deficit in just one year.
The scale of the problem here seems to be getting exaggerated. It does not appear to be a big problem. I think the problem is more the inconsistencies in recent communication of policy. Is it poor policy or just poor communication. If they know what they are doing, we will be fine. They need to prove that they know what they are doing, though. I still have some doubts.
Year Revenue Div
2020 23.71 23.0
2021 23.22 23.4
2022 24.41 23.8
2023 20.92 24.2
2024 21 ? 24.6 ?
2025 22.1 ? 25.0 ?
2029 26.4 ? 26.4?
(Growth is picking up in a number of Asian countries and it is possible that interest rate rises there will lift their currencies as the west cuts rates. Currency moves could do some of the heavy lifting for HFEL revenues. Just a thought, not a prediction.) |
And put this share on a more sustainable footing |
I wish they would grasp the nettle here and rebase the dividend - they will have to at some stage |
Fordtin
I take your point. I had implicitly assumed that the dividend growth would cover the top slicing of stock, albeit that is an important assumption.
As someone whose portfolio will in the next few years provide my retirement income, I would not count on the full HFEL dividend when calculating my annual income. Perhaps no more than half, to bring it into line with others in the sector, and anything above this is then a bonus. |
I totally get that many rely on income for their pensions etc but achieving a decent return should not be at the cost of capital.
For me they lost my trust when I looked at their long term performance and sold last year but still follow and may buy back in at some point.
HFEL are down 31% on capital and only up 40% with dividend reinvestment over 10 years (4% a year).
Thats a pretty woeful performance when you consider the Asia Pacific Equity Income sector is up 90% and the FTSE world index is up over 200% in the same period.
Even Merchants investment trust which invests in the UK which has not exactly been flying has seen a 100% return in that time and currently yields just under 5%.
But the future is what matters and it remains to be seen if they can change, there certainly are some positives in recent performance (although still looks to me like they are using covered options or other means to boost dividends) so I hope for the holders they improve.
If you want to check for yourself have a look on trust net who have some great chart tools for comparing performance with or without dividend investment. |
Thanks fordtin! - very difficult to disagree with a single word of your post! rocks & hard places spring to mind! |
 Mostly disagree. Those of us who rely on dividends as a part of our retirement income would have an ever diminishing income if we had to sell shares to subsidise a dividend cut.
Slashing the dividend because woeful share price performance has artificially inflated the yield, results in a double whammy for anyone who has trusted the management and has ridden the storm through market down-turns.
The current dividend yield for anyone holding shares for 5 years, is only ~7%. Slashing that ~7% would be a huge red flag pointing to extremely poor and untrustworthy management.
I’ve unfortunately owned shares in several companies which have slashed their dividends. The inevitably poor share price performance post divi cut has taught me to take the loss and move on as soon as possible.
If HFEL lose the trust of passive long-term investors, it’s unlikely they’ll ever trade at a premium again, as they’ll probably become just another traders’ plaything being churned over at a very large discount to NAV. |
Fully agree |
I tend to pay most interest in total share holder return as the underlying performance metric. (As an aside, I currently use NAV TSR rather than share price TSR as the share price discounts in the IT sector are distorting comparisons).
IF HFEL consistently deliver 10%+ per annum total shareholder return, then I am agnostic whether they pay out the full amount as dividend or retain some of it to grow NAV (with one hopes an equivalent increase in the SP). So, as an example. with a 5% divi and 5% annual share price growth, I can choose to top slice some of my holding if I want to cash in the full 10% increase in shareholder value per annum. That becomes a personal investment choice.
There are some ITs who pay out most of their income each year as dividends, so NAV growth is low. There are others who pay out nothing and have a faster NAV growth rate. As long as total returns meet your personal threshold, then imv that is more important than the dividend policy.
HFEL have been poorly managed in recent years, chasing yield to the detriment of total returns. One year in from their reset, they are doing ok, a 10% NAV total shareholder return secures them a mid-table ranking in the Asia Pacific sector (17% is best performance). If HFEL can maintain double digit annual TSR over the medium to long term, then most of us should be happy. Time will tell. |
Possibly worth a read concerning China :- |
Chinese manufacturing PMI rises from 49.8 to 50.4. It's worth commenting that this series has read under the 50 mark about half the time over the last 12+ years as GDP has averaged around 6%. So 50.4 for China would tend to indicate above the last decade or so's average growth. (In the last 13 years, it has only reached 51.0 or higher on 37 occasions - about 25% of the time. The same 25% for GDP would equate to 7%.) So 50.4 is a healthy manufacturing PMI for China, suggesting GDP growth of perhaps the upper end of 5 to 7% if it steadied around this level. |
super-impressed by all the recent posts above, since my response to Aleman's great finds. Thanks all! More heavy sales pressure today, yet the MMs are holding it up? (for now). |
Good post, articulates more clearly my point. 10.3% return, 10.6% dividend. They have to align (over time), what level the dividend is set at makes no difference other than perception.
There are some dividend heroes in the PE space paying a fixed % of NAV which is similar in that it restricts NAV growth |
The 12 month rolling NAV total return (increase in the underlying value of the company with dividends reinvested) is currently showing 10.3% versus the 10.6% dividend.
The last twelve months NAV total return performance puts HEFL 4th out of 7 ITs in the sector, versus 6th over three years and 7th over five years. So trending in the right direction.
HFEL is currently the only IT whose share price is at a premium to NAV, so while there is understandable scepticism over the dividend, it is not putting all investors off.
One of my (small)holding which I am watching very closely to see if management deliver on their promise to improve total shareholder returns. I agree with others who have posted that reducing annual dividends to support NAV growth could be a sensible option, albeit my sense is that management will not want to lose their Dividend Hero status. |
Using historic revenue reserves |
Thanks Skinny.
I know this has been pointed out before but looking at the yields of the top ten they are considerably below the 10% the share yields with the top 2 yielding under 2% each in fact most of the others pay well under 6%.
Yet they pay over 10% in dividend so how are they achieving that unless a lot of their smaller holdings pay VERY large dividends then I can only think of a lot of covered calls or maybe some sort of dividend rotation strategy?
If I've missed something please enlighten me. |
Agreed, it all comes down to stock picking. As you say "the biggest gains in a portfolio can come from a small number of shares that take off". And if you're not in those stocks you underperform.
Selling options should reduce overall returns but with reduced risk/volatility if you ran two identical portfolios with and without the options.
The question is, has the stock picking been influenced by the need for income to support the high yield. I think management are admitting it has. ie they have invested in Aussie miners to the detriment of fast rising markets like Vietnam.
That is a quite different discussion to the effect of option selling. |
There are certainly benefits to yield by writing covered options.
However as we all know some of the biggest gains in a portfolio can come from a small number of shares that take off.
The problem with covered options is when this happens you lose that gain as the options are exercised.
You are effectively capping your exposure to a shares capital growth when you write a covered call option. |
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