Henderson Far East Income Share Discussion Threads

[zac0_4] 18/4/2023 11:45

For me the achieved yield of income into the fund holding by holding, in percentage terms, is irrelevant.

[mjames20] 17/4/2023 14:26

There is a slide in the AGM presentation (approx 36 mins in) which attempts to justify the current high yield of the trust in terms of the underlying portfolio including stocks whose yield exceeds the portfolio yield (four are listed - China Shenhua Energy (14.7%), Woodside Energy Group (10.6%), BHP Group (10.4%) and Guangdong Investment (8.8%) however it is not particularly convincing.

They do go on to say that the average dividend growth for the fund is 14.4% which is great and much needed if the trust is to maintain its dividend.

In rough terms the options fees generated are approximately equal to the expenses charged to the revenue account so the entire underlying yield of the portfolio can be distributed to shareholders but I am still finding it hard to see how the underlying yield supports the current covered dividend unless use is made of "churning"/gearing.

I guess the interims which are due out before the end of this month will tell us more.

[mjames20] 17/4/2023 14:12

Another boost to dividends could also come from gearing.

Bank loans at year end 2021 were £25m and £17m at year end 2002. However, cash flow statement shows loan drawdowns of £88m and repayments of £100m suggesting gearing may be considerably higher at times outside of the reporting points. Higher interest rates means a strategy of borrowing to secure income is less effective.

The notes say that there is a loan covenant that total loans cannot exceed 30% of net asset value and that this covenant has been complied with.

The annual report also says that the Company is ungeared at the date of the report (3rd Nov 2022)so the increase and repayment of the borrowings shown in the cash flow could have been transient.No way of telling from the numbers but narrative suggests no gearing and hence no dividend income boost.

[mjames20] 17/4/2023 13:50

Good point on the churning.

HFEL Annual report for August 2022 shows:

Investment at fair value £438m

Proceeds from sale of investments £450m
Purchase of investments £448M

So, proceeds from sale exceed value of the portfolio suggesting that portfolio turnover exceeds 100% supporting the "churning" point.

[bareknee] 14/4/2023 18:04

Goldpig

I think you're right on churning, in that the yield is artificially increased by moving part of the portfolio in, and out, of some companies to increase revenue. Plainly that comes at a cost in terms of dealing costs, though that cost isn't massive.

The underlying ( high divi ) index, such as there is, probably yields 5.5 to 6%. Stock picking ( without churning ) might increase that by 0,5 to 1%. Options likely increase revenue by another 0.5% or a bit more, with churning filling the gap.

I don't think the divi is unsustainable, but maintaining it and increasing it will mostly, but not totally, depend on if the underlying companies continue to increase their divis

At the moment, the constituents are out of favour, and may well remain so, but hopefully they'll eventually rerate with that being, partially reflected in the NAV.

As the old saying goes, you pays your money and takes your pick. Probably like yourself, I wouldn't want HFEL to be a major part of my portfolio, but it's a useful way of diversifying my minor wad, so, while not being ecstatic with it, I'm reasonably comfortable with it.

[goldpiguk] 14/4/2023 17:11

Hi mjames20 and Bareknee.

Cutting the dividend in half would be a worst-case scenario for HFEL, but at some point in the next couple of years, I do expect the dividend to be 'rebased' lower.

I have not done a complete analysis of every HFEL holding, but below are details of the top ten holdings with yields alongside. These cover about a third of holdings in value. (Information taken from Market Screener and HL websites.)

BHP Group yield 6.65%
Woodside Energy yield 11.51%
Macquarie Group yield 3.82%
Samsung yield 2.45%
Macquarie Korea Infrastructure Fund yield 6.45% expected to rise to 7.06%
Rio Tinto yield 7.49%
United Overseas Bank yield 4.37%
Digital Telecommunications Infrastructure Fund yield 8.14%
Vinacapital Vietnam Opportunity Fund yield 3.36%
Taiwan Semiconductor Manufacturing yield 2.05%

Only Woodside Energy in the top ten holdings has a dividend yield above HFEL. Bareknee is right to refer to the use of options, but a close look at the portfolio suggests something else is also at work - churning of shares to flatter income.

In one of the company reports I do remember reading that purchases are timed carefully to maximize dividends, but this is coming with capital destruction. With a decreasing value of capital, choices become more and more limited and the company will eventually have its hand forced.

I would much rather HFEL tackled this sooner rather than later. Unless there is an incredibly strong bull market the current dividend looks unsustainable.

Goldpig

[bareknee] 14/4/2023 16:18

Reducing the divi by up to 50% is a big call and would likely need the trust to change it's stated objectives.

There might ( or might not ) be something to said to stop using options to top up the divis collected from companies to increase the divis paid to trust shareholders, which might then enable the trust to deliver better return capital returns ( which, lets face it, have been poor relatively recently ), but that's a lot of mights.

Even then that would, if my abacus is right, only trim the divi by something like 6 or 7% of the total paid, so, to slash the divi by up to 50% would really need a fundamental realignment of the underlying portfolio.

There's absolutely nothing really wrong with wanting an investment trust with those objectives, but for smallish investors like us, it's probably best to look for a trust which exists like that rather than to hope/wish that HFEL would morph into it.

[mjames20] 14/4/2023 15:28

Last annual report was reasonably positive on the dividend:

"Our forecast for dividends in the current year is cautiously positive. After paying the dividend we will once again be adding a moderate amount to revenue reserve which we will use to smooth the dividend when market conditions are severe."

So, divided fully covered and Asian dividends expected to increase this year hence no reason to expect a cut?

[goldpiguk] 14/4/2023 13:26

Hi terrybill,

Unlike many investment trusts, HFEL doesn't seem to publish an annual (or semi-annual) dividend timetable.
The next dividend is expected near the end of May.

I really do wonder how much longer this trust can continue paying such an elevated dividend. The share price is still at a premium to NAV and I expect a rebasing of the dividend at some point to avoid further capital erosion.

I am still a holder of HFEL and would welcome such a move. I think it is more 'when' and not 'if' a dividend cut happens. Slashing the dividend by up to 50% would still leave a good yield and provide the basis for longer-term capital growth. In the short term, the shares would be likely to move to a discount. That would be the point I would consider adding to my holding.

Goldpig

[rik shaw] 14/4/2023 13:19

Next dividend not announced but have a look here for guidance:

[terrybill] 14/4/2023 12:51

Is a dividend due soon? ADVFN useless months out of date. thanks

[uapatel] 27/3/2023 14:29

Well, the drop into the mid £2.50 zone seemed worth adding back a few more. Will now use new ISA for other Trusts.

[skinny] 17/3/2023 12:12

As at close of business on 16 March 2023, the unaudited net asset value per share, calculated in accordance with the AIC formula (including current financial year revenue items), was 251.0p.

As at close of business on 16 March 2023, the unaudited net asset value per share (excluding current financial year revenue items) was 250.4p.

[uapatel] 09/3/2023 11:14

My recent reduction in holding has helped me here, but then that money went elsewhere which are also suffering under the current sentiment. Might top up my holding a bit in new isa year if price around 260/270 range. But to be honest a lot of high yield asset options to choose from at present and it’s a case of keeping thing’s balance for my PF/risk profile.

[superiorshares] 07/3/2023 20:35

It's looking like the dividend will hit 10 per cent +
The whole interest rates have peaked story is utter hogwash !
Big market sell off over the next month or two I reckon .

[neilyb675] 02/3/2023 11:27

269.00 - 272.50 (GBX) at 11:15:21
on Market (LSE)

[gateside] 02/3/2023 09:56

Buys going through at 270pSells at 269pSo spread is actually only 1p

[scruff1] 02/3/2023 08:26

What a spread - 10p

[investingdad] 01/3/2023 08:52

From my FCSS post:Sentiment is low and US and the media still focused on Chinese politics but some buy signals... Alibaba is now oversold.Manufacturing posting its biggest improvement in more than a decade, services activity climbing and the housing market stabilizing.Next week's National People's Congress will be held, where a new growth target will be disclosed.I think I will buy in a smaller holding than i had at today's price and top up monthly here. There seems to be value and as long as China don't fully align with Russia it might just make it through. Due to the volatility here, it is a high risk trust - it might end badly for me.

[wednesday6] 01/3/2023 08:34

China,s factory activity rose for the first time in seven months while manufacturing activity expanded at the fastest rate since 2012.

[scruff1] 01/3/2023 08:25

Interesting. Whats caused signs of life - anyone know?

[investingdad] 28/2/2023 20:53

Very true, but what types of companies are they? Admittedly, it has been a while since i looked but they had Chinese petrochemicals and oil etc. Are those companies stopping their growth/dividend payment? they Asia focused and likely to still grow in current conditions? Or are they tied to the global chain? Miners will return once demand picks up again, particularly into the energy transition which will be long. Financials will pick up too. I suppose it all depends what time you bought in, as I am a recent newcomer here for the dividend. My view is that this fund isn't bought for massive growth, I have had that in the past with BGS, FCSS and PHI all of which at a point have gone to +100%. But in 10 years time, I think Asia will be doing well, I think the share price will be above 400p and I will have reinvested the dividend to make up a significant part of the holding. Whilst, hopefully, trusts like MMIT and IGC take off for growth. Just the way I see it.

[tim 3] 28/2/2023 15:58

This is my worst performing investment (including dividend reinvestment) by some way and has been for some time.

No good paying a good dividend if capital keeps going down.