Ian Cowie: a high and rising yield, with a big discount

How do you fancy 7.8% dividend income, that has risen by an annual average of 5.7% over five years, from an investment trust that delivered total returns of 19% last year but remains priced 26% below its net asset value (NAV)? Might that float your boat?

TUFTON ASSETS LIMITED (LSE:SHPP), formerly known as Tufton Oceanic Assets, is a £430 million second-hand shipping specialist in the Association of Investment Companies (AIC) “Leasing” sector, which includes aircraft rental funds that did even better.

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Back to business, this week SHPP declared a dividend of $0.025 per share payable on 14 February and said the stock will trade ex-dividend - that is, without the right to the next income payment - from next Thursday 30 January. The total return on NAV during 2024 was nearly 17% and earnings are forecast to cover the cost of dividends by 1.4 times over the next 18 months.

It’s only fair to add that this business faces headwinds in the form of falling freight rates and rising fuel costs. Worries that the President Donald Trump might trigger a trade war with China by imposing punitive tariffs or taxes on imports may tempt fair-weather investors to talk of a “perfect storm” heading towards SHPP.

However, investors are paid to accept some degree of risk and this business, which was launched in December 2017, also has some reasons to be cheerful. While the past is not necessarily a guide to the future, SHPP delivered total returns of 62% over the past five years, in addition to the 19% one-year return mentioned earlier. Both numbers go a long way to justify yearly ongoing costs of 1.04%.

To put that performance in perspective, the self-descriptive aircraft fund Doric Nimrod Air Three Ord (LSE:DNA3), ranks first in the AIC “Leasing” sector over the past decade and five-year periods with a high-flying total return of 126%, followed by 116% over those periods. Even over the past year, DNA3 landed smoothly with 30%.

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To be fair, before shareholders could enjoy those returns, they had to pay lofty annual charges of 2.06%. They also had to remain onboard DNA3 despite extreme turbulence during the Covid crisis, when some folk feared they might never fly again. Bargain-hunters will be deterred by the fact this fund now trades 24% above its NAV.

Returning to SHPP, whose dollar-denominated sister fund Tufton Assets Ord (LSE:SHIP) has the ticker SHIP, it’s just as well that it has sold the last of its container ships and so is not as exposed to the vagaries of the China consumer goods export trade as it used to be.

Also, rising tensions between Russia and the rest of Europe may help to support or increase freight rates for tankers carrying other goods, such as oil and liquefied natural gas (LNG). Perhaps surprisingly, not much more than a third of Russian oil and LNG shipping is currently subject to sanctions or restrictions on international trade.

Sachin Saggar, an analyst at the stockbroker Stifel, pointed out: “The American government has increased the scope of sanctions to include an additional 180 tankers, primarily aiming to reduce Russian energy revenues.

“Separately, the US also blacklisted prominent Chinese companies including China Cosco Shipping for suspected military links. These changes galvanised tanker rates to move higher.

“Lloyd’s List estimates that even after the latest increase in sanctions, only about 35% of the fleet trading Russian, Iranian and Venezuelan oil are now sanctioned by the US, UK or European Union. The potential for further increases represents significant upside for the tanker market.”

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Here and now, I am happy to hold more than 3% of my life savings in SHPP, which currently floats just outside my top 10 holdings by value. I paid 86p per share in August 2021 for stock that currently costs 98p, but the main attraction remains its high and rising yield.

On that point, at the start of this article, I quoted the income calculation shown by independent statisticians Morningstar for the AIC. But Saggar reckons SHPP is yielding 8.4% and independent statisticians LSEG, formerly known as the London Stock Exchange Group, pitch the payout even higher at 8.7%.

Looking forwards, SHPP’s -26% discount - or percentage by which the share price is lower than its NAV - offers scope for hope of capital growth, should the discount ever be reduced. For example, shareholders will be able to vote on whether to wind up this fund and distribute its NAV at a continuation vote due in 2027.

As the ongoing drama with Saba Capital seeking to shake up several other trusts should remind us, there is nothing theoretical about double-digit discounts. So, a stock market bargain that effectively enables investors to get one share free for every three we buy is not a bad place to start. Worse things happen at sea.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Tufton Assets (SHPP) as part of a globally diversified portfolio of investment trusts and other shares.