Its ‘merger reserve’ could provide healthy dividend cover
Thursday 11 Mar 2021 Author: James Crux

Investment trust Alliance Trust (ATST) has racked up 54 years of rising dividends and expects to pay a higher dividend in 2021 and beyond, boosted by a massive ‘merger reserve’ that gives the trust huge scope to support long-term dividend growth.

Though net asset value (NAV) total return performance lagged the benchmark in 2020, as large cap tech and e-commerce companies continued to dominate the market, Alliance Trust raised the total dividend by 3% to 14.38p. 

This was despite the challenging backdrop for generating income caused by Covid as the company used a small portion of its revenue reserves.

Investing globally under a ‘manager of managers’ approach, Alliance Trust, which sold the Alliance Trust Savings platform to Interactive Investor in 2019, has one of the largest revenue reserves of any investment trust, £99.2 million after the 2020 dividend in fact.

At next month’s annual shareholder meeting, Alliance Trust will seek approval to convert a £645.3 million merger reserve, a legacy from 2006 when the merger with the Second Alliance Trust took place, into a further distributable reserve.

This move would take total distributable reserves close to £745 million, dramatically boosting the trust’s dividend-paying firepower for the future and covering the most recent annual dividend more than 16 times, according to Kepler Trust Intelligence.

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