Trade of the Month: In search of dividends

In these tremulous times a solid dividend flow from lower-risk investments might suit the portfolios of jittery traders.

For investors who prefer not to sift through the list(s) of potential high yielders and meticulously crunch numbers to assess the sustainability of distributions, there are a few international and local investment instruments that provide a diversified dividend portfolio, sometimes with the convenience of quarterly payouts.

The Satrix Divi Plus exchange traded fund (ETF) is probably the default option these days — though there are some very interesting local alternatives as well as international plays like the Charles Schwab Dividend Equity Fund and Main Street Capital (which pays dividends monthly).

IM is probably going to take some flak for this month’s trade pairing — which suggests going short the Satrix Divi Plus and long on a rather obscure but well-established counter called Marshall Monteagle. These are very different businesses but the longer-term yield outcome might be quite similar if Marshall Monteagle continues to refine its structure.

Let it be said, the Satrix Divi Plus portfolio looked an interesting mix at last count with a fair weighting at the top to second-tier or grey-chip resources counters such as Exarro, Kumba Iron Ore, Royal Bafokeng and Sibanye-Stillwater. BHP Group represented just under 5% of the portfolio weighting.

Then there’s a concentration of banks — Standard, Absa and Nedbank. These counters will provide some reassurance against the commodity volatility thanks to banks traditionally faring well in a high(er) interest rate environment — as long as inflation does not start galloping ahead and lead to punitive interest rates (which might squeeze loan books).

Redoubtable dividend providers British American Tobacco and AVI round off the top 10 biggest holdings.

The months ahead may offer yield-seeking investors an opportunity to lock in a solid longer-term yield — particularly if the rand/dollar exchange rate wanes further

Now, Marshall Monteagle certainly does not have the reassuring diversity of this ETF, nor can it match the historic yields achieved or challenge the projected dividend flows. At least for now.

Marshall Monteagle’s main gig is the import, distribution and trade in a variety of nonperishable products including food, food ingredients, household consumer products, metals and minerals and tools. The company imports to SA and Latin America and exports from SA — servicing blue-chip international clients that include the large local retailers and major food producers.

What is reassuring is that Marshall Monteagle’s efforts at business diversification has led to no customers representing more than 10% of sales — which topped $210m in the 18 months to end-March this year. The 18-month trading period is explained by a change to the group’s financial year-end.

The group has also intensified focus on its core business by shedding several noncore assets — namely Monteagle Africa for $10m, Global Coffee Exporters for about $2.2m and 50% of Monteagle Logistics for about R17m.

While the net cash position has diminished markedly to $6m (thanks mainly to a large increase in inventories) Marshall Monteagle maintained its final distribution to 1.90 US cents a share.

This follows a similar interim payout and second interim payout (in line with the changed financial year-end) — which effectively means an annual rand distribution of about 60c a share or net 48c a share payment. That represents a yield of 2.5% — which can hardly be described as rich.

Marshall Monteagle shares tend to dip markedly after the dividends are paid. So the early weeks of August might well see a retreat in the share price, which is often enunciated by poor liquidity in share trading.

IM reckons Marshall Monteagle will perform satisfactorily in financial 2023 — at least matching the performance in the past 12 months of financial 2022. But there is scope for sharpening operational focus if Marshall Monteagle looks to realising some of its listed and unlisted investments (worth about $33m) and investment properties ($30m) — which collectively represent almost R30 a share.

Of course, investors must be aware that in saying Marshall Monteagle should have a fair 2023 financial year, there are logistics issues besetting distribution companies worldwide. If this predicament lingers — which seems unlikely — the bottom line might crimp. However, even in a worst-case scenario IM suspects investors can bank on another 3.80 US cents a share dividend in the year ahead — with scope to start increasing this steadily as market conditions stabilise. In short, the months ahead may offer yield-seeking investors an opportunity to lock in a solid longer-term yield — particularly if the rand/dollar exchange rate wanes further.

Of course, there is an argument for reducing risk by rather opting for the diversity of the Satrix Divi Plus. The commodity weighting, IM believes, does present real downside risk if global economies are slowed by inflationary pressures.

The big selling point for Marshall Monteagle is that a well-timed buy-in would come at a significant discount to NAV — which was last stated on an intrinsic basis at $96m (R1.5bn). That’s equivalent to over R40 a share, which seems quite compelling compared with paying up for an updated NAV for the Satrix Divi Plus ETF.