HFEL. Buy or sell?

[lansdown]

Final results out today - hopefully the link below will work.

https://www.londonstockexchange.com/new ... aimer=true

[daveh]

Final results out today - hopefully the link below will work.

https://www.londonstockexchange.com/new ... aimer=true

and the dividend isn't covered by income as they have paid a percentage of the fourth dividend from reserves.

Dividend

The Board has again increased its dividend to shareholders, marking 16 consecutive years of uninterrupted dividend progress. A total dividend of 24.20p has been paid in respect of the year ended 31 August 2023, representing a 1.7% increase on the dividend paid last year.

In keeping with the outcome of our discussions on strategy and implementation, we have opted to augment our fourth interim dividend using the Company's substantial reserves. We have therefore covered £5.7m of the dividend from distributable reserves. Doing so enables our Fund Managers to better position the portfolio, with scope to invest in a greater number of companies with higher growth characteristics.

Performance doesn't look that good. I'm don't think I'm going to top up further - hope they can improve their performance going forward. I think I may go back to IAPD for my Asia Pacific dividends or add one of the other high yield Asia Pacific ITs with lower yield but better performance.

[midgesgalore]

The dividend increase has been 1.7%, year on year, for the last 3 years.

my records show:
23.4p paid to 26th November 2021, 23.8p paid to 25th November 2022, and 24.2p paid to 24th November 2023.


midgesgalore

[bluedonkey]

In round figures income £33m, dividends £38m. Figures from the annual report linked above.

[clissold345]

I've owned HFEL for about ten years. As far as I remember it used to be OK (big dividend and modest capital growth). I've finally had enough of HFEL and I'm going to (very slowly) sell it off. (I can't sell it off fast because I need the dividends.) I've been lazy. I should have done research on how they can give such a big dividend. I saw a Citywire comment online saying that in part they generate the dividend by high portfolio turnover. This seems plausible. Eg from the HFEL annual report 2023. Net assets = £362M. Sales of investments = £348.7M. Purchases of investments = £384M. Portfolio turnover (PTR)=348.7/362 = 96.3%.

[bluedonkey]

I've owned HFEL for about ten years. As far as I remember it used to be OK (big dividend and modest capital growth). I've finally had enough of HFEL and I'm going to (very slowly) sell it off. (I can't sell it off fast because I need the dividends.) I've been lazy. I should have done research on how they can give such a big dividend. I saw a Citywire comment online saying that in part they generate the dividend by high portfolio turnover. This seems plausible. Eg from the HFEL annual report 2023. Net assets = £362M. Sales of investments = £348.7M. Purchases of investments = £384M. Portfolio turnover (PTR)=348.7/362 = 96.3%.

Sorry but that doesn't make sense logically.

[clissold345]

bluedonkey, do you mean "in part they generate the dividend by high portfolio turnover" doesnt make sense? Portfolio turnover is currently high and I believe it's been high in previous years too. I mean that I suspect the managers sometimes trade not for stock picking reasons but to capture extra dividends. Chasing dividends can easily lead to capital losses. This is just my suspicion based on the very high yield and the high portfolio turnover.

[Arborbridge]

bluedonkey, do you mean "in part they generate the dividend by high portfolio turnover" doesnt make sense? Portfolio turnover is currently high and I believe it's been high in previous years too. I mean that I suspect the managers sometimes trade not for stock picking reasons but to capture extra dividends. Chasing dividends can easily lead to capital losses. This is just my suspicion based on the very high yield and the high portfolio turnover.

If what you say is true, it is no more than assett harvesting to bolster the dividend - the sort of thing which JGGI does as a policy to pay its dividend.
There's nothing wrong with that, provided they are selling off investments which yield a profit - although I don't believe that they are not doing that. I haven't look into the accounts, but do I need to? If they were making a profit when they sell, I doubt the share price and NAV would be continually falling, so I assume the opposite is also true.


Arb.

[bluedonkey]

bluedonkey, do you mean "in part they generate the dividend by high portfolio turnover" doesnt make sense? Portfolio turnover is currently high and I believe it's been high in previous years too. I mean that I suspect the managers sometimes trade not for stock picking reasons but to capture extra dividends. Chasing dividends can easily lead to capital losses. This is just my suspicion based on the very high yield and the high portfolio turnover.

Oh ok. I was disagreeing with a causal link between investment churn and funding dividends. I see now that you refer to doing what perhaps HYP has sometimes led to which is chasing ultra high yield only to find that it's at the expense of capital loss. If HFEL's underlying investments aren't sound businesses with good cashflow, then that could be the case. I don't know.

[BullDog]

bluedonkey, do you mean "in part they generate the dividend by high portfolio turnover" doesnt make sense? Portfolio turnover is currently high and I believe it's been high in previous years too. I mean that I suspect the managers sometimes trade not for stock picking reasons but to capture extra dividends. Chasing dividends can easily lead to capital losses. This is just my suspicion based on the very high yield and the high portfolio turnover.

Oh ok. I was disagreeing with a causal link between investment churn and funding dividends. I see now that you refer to doing what perhaps HYP has sometimes led to which is chasing ultra high yield only to find that it's at the expense of capital loss. If HFEL's underlying investments aren't sound businesses with good cashflow, then that could be the case. I don't know.

Looks to me like they're buying a stock, collecting a dividend and selling ex dividend. That's the only definite way I can see a link between high portfolio churn, high yield and capital attrition. I suspect at HFEL, that's highly likely. Last time I looked, none of the invested stocks supported such a high yield without some intervention. I had thought they were selling future contracts to fund the dividend. But on those numbers it looks more like dividend farming at the expense of high churn and dealing costs.

[clissold345]

If what you say is true, it is no more than assett harvesting to bolster the dividend - the sort of thing which JGGI does as a policy to pay its dividend.
There's nothing wrong with that, provided they are selling off investments which yield a profit - although I don't believe that they are not doing that. I haven't look into the accounts, but do I need to? If they were making a profit when they sell, I doubt the share price and NAV would be continually falling, so I assume the opposite is also true.


Arb.

Thanks for mentioning JGGI. Yes their portfolio turnover is high too. JGGI annual report 2023. Net assets = £1,812.9M. Sales of investments = £1,509.4M. Purchases of investments = £1,536M. Portfolio turnover (PTR) = 1509.4/1812.9 =83.3%.

It would appear that chasing dividends is boosting returns for JGGI at present. But in a downturn it won't work?

[Itsallaguess]

Thanks for mentioning JGGI. Yes their portfolio turnover is high too.

JGGI annual report 2023. Net assets = £1,812.9M. Sales of investments = £1,509.4M. Purchases of investments = £1,536M. Portfolio turnover (PTR) = 1509.4/1812.9 =83.3%.

It would appear that chasing dividends is boosting returns for JGGI at present.

How are you able to declare such turnover as specifically being related to 'harvesting dividends'?

Given that share-prices around ex-dividend dates are more than likely going to drop, to reflect the release of such dividend-related company-capital, isn't a more likely explanation, especially with an IT with the word 'growth' in it's name, going to be that much of that turnover is going to be from fruitful share-price growth of holdings, rather than such 'dividend harvesting' theories?

Cheers,

Itsallaguess

[bluedonkey]

Oh ok. I was disagreeing with a causal link between investment churn and funding dividends. I see now that you refer to doing what perhaps HYP has sometimes led to which is chasing ultra high yield only to find that it's at the expense of capital loss. If HFEL's underlying investments aren't sound businesses with good cashflow, then that could be the case. I don't know.

Looks to me like they're buying a stock, collecting a dividend and selling ex dividend. That's the only definite way I can see a link between high portfolio churn, high yield and capital attrition. I suspect at HFEL, that's highly likely. Last time I looked, none of the invested stocks supported such a high yield without some intervention. I had thought they were selling future contracts to fund the dividend. But on those numbers it looks more like dividend farming at the expense of high churn and dealing costs.

If they are doing that, then that's worrying. No wonder the capital value is falling.

[Arborbridge]

It would appear that chasing dividends is boosting returns for JGGI at present. But in a downturn it won't work?

I don't know if JGGI is "chasing dividends". I thought their way of operating was to invest in companies with high capital growth and harvest some of that growth to produce a "dividend" for holders of their IT. This is doing behind the scenes, what some investors here do who invest for high TR and harvest the asset growth as an income.

This won't work in a downturn, (maybe they keep an income reserve?) but if you look at JGGIs long term growth they seem to be doing whatever they are doing rather more smoothly than most ITs in this area.

I've no doubt they invest in some companies for income also, but whether that counts as "chasing dividends" I have no idea. I would say, judging by results, that it is a pretty well run outfit so I'm happy to invest some of my wealth.

Arb.

[BullDog]

Looks to me like they're buying a stock, collecting a dividend and selling ex dividend. That's the only definite way I can see a link between high portfolio churn, high yield and capital attrition. I suspect at HFEL, that's highly likely. Last time I looked, none of the invested stocks supported such a high yield without some intervention. I had thought they were selling future contracts to fund the dividend. But on those numbers it looks more like dividend farming at the expense of high churn and dealing costs.

If they are doing that, then that's worrying. No wonder the capital value is falling.

I don't see any other simple explanation given the numbers. But maybe it's not a simple situation.

[absolutezero]

The dividends ARE your capital...

[Arborbridge]

The dividends ARE your capital...

Yes, but they are also the reward for your risking capital. It's up to you whether you re-invest and call it "capital" or spend it and call it "income".

Or did you perhaps, mean that in this case HFEL appears to be paying us out of our own capital - i.e. the value of our capital is reducing to fund the dividend?

Arb.

[absolutezero]

The dividends ARE your capital...

Yes, but they are also the reward for your risking capital. It's up to you whether you re-invest and call it "capital" or spend it and call it "income".

Or did you perhaps, mean that in this case HFEL appears to be paying us out of our own capital - i.e. the value of our capital is reducing to fund the dividend?

Arb.

All dividends are paid out of your own capital. They are in the share price, which is why it falls on XD day (plus or minus market noise on the day).
Selling 5% of your holding is the same as having 5% of it paid to you as a dividend (assuming held in a tax shelter).

With HFEL you have the double whammy of a falling share price due to market movement AND a falling share price on every XD day.

Dividend investing is a fallacy.
Might as well just sell x% of your shares as you need them rather than chasing yield.

[Arborbridge]

Yes, but they are also the reward for your risking capital. It's up to you whether you re-invest and call it "capital" or spend it and call it "income".

Or did you perhaps, mean that in this case HFEL appears to be paying us out of our own capital - i.e. the value of our capital is reducing to fund the dividend?

Arb.

All dividends are paid out of your own capital. They are in the share price, which is why it falls on XD day (plus or minus market noise on the day).
Selling 5% of your holding is the same as having 5% of it paid to you as a dividend (assuming held in a tax shelter).

With HFEL you have the double whammy of a falling share price due to market movement AND a falling share price on every XD day.

Dividend investing is a fallacy.
Might as well just sell x% of your shares as you need them rather than chasing yield.

Thanks for explaining what you meant in this context.
While I agree factually (and Warren Buffett would too if anyone needs another voice to this idea!) there is a difference in practice. I prefer the mechanism of having dividends paid into my bank account rather than having to decide what to sell and when. You and I have been along this road before, so let's not do it again.

I see Nick Train also would agree to some extent as would Jim Slater. If a company cannot find anything better to do with its cash, it pays it out - not a good recommendation of that management or business model. I think Jim Slater always recommended companies with a small dividend as he felt it was good discipline (some quirky logic), but on the whole he would rather keep it in the company and use it to growth that company for the future.

Arb.

[absolutezero]

All dividends are paid out of your own capital. They are in the share price, which is why it falls on XD day (plus or minus market noise on the day).
Selling 5% of your holding is the same as having 5% of it paid to you as a dividend (assuming held in a tax shelter).

With HFEL you have the double whammy of a falling share price due to market movement AND a falling share price on every XD day.

Dividend investing is a fallacy.
Might as well just sell x% of your shares as you need them rather than chasing yield.

Thanks for explaining what you meant in this context.
While I agree factually (and Warren Buffett would too if anyone needs another voice to this idea!) there is a difference in practice. I prefer the mechanism of having dividends paid into my bank account rather than having to decide what to sell and when. You and I have been along this road before, so let's not do it again.

I see Nick Train also would agree to some extent as would Jim Slater. If a company cannot find anything better to do with its cash, it pays it out - not a good recommendation of that management or business model. I think Jim Slater always recommended companies with a small dividend as he felt it was good discipline (some quirky logic), but on the whole he would rather keep it in the company and use it to growth that company for the future.

Arb.

I don't particularly disagree with any of that.