While the FTSE 100 reaches new highs, there are still a few cheap shares on the FTSE 250. But for most top stocks, prices are rising, bringing about other opportunities.
As prices rise, some investment trusts are starting to trade at a significant discount to their net asset value (NAV). That’s the combined value of all assets in the trust and if it’s higher than the share price of said trust, it could be a bargain.
For that reason, I’m considering buying shares in The City of London Investment Trust (LSE: CTY).
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It has actually been trading at a discount to NAV for some time now, which is rare. Throughout most of 2022 and 2023, it was trading at a premium to NAV. This means shareholders were essentially paying more to invest in the entity than the combined value of its assets.
And even when buying at a premium, City of London offers added value with its 4.8% dividend yield. So now at a 2.5% discount to NAV, I think it’s a great deal.
Why the discount?
Of course, there may be negative reasons for why a trust is trading at a discount. Has performance been weak recently? Are investors losing interest?
In order to evaluate whether a NAV discount is really a bargain or not, all factors must be considered.
In this case, the main reason appears to be the exceptional growth in some of the big-name FTSE 100 stocks that the trust holds. I’m talking BAE Systems, HSBC, RELX and Shell, to name a few. These have all done well recently, pushing the NAV well above the share price.
But with assets exclusively in the UK market, the trust is heavily reliant on the local economy. If the market takes a downturn, the NAV would fall and likely the share price with it. With fears that Shell might migrate its main listing to the US, there’s some uncertainty about the future of the UK market.
In addition, some of City of London’s metrics aren’t doing so well. At only 6.3%, its return on equity (ROE) is below the industry average of 7.6%. Moreover, some analysts feel the share price could be overvalued, based on future cash flow estimates.
An established Dividend Hero
While it’s not without risk, I think the trust has some strong value propositions. Most notably, it’s a well-established operation that’s been around for almost two centuries. No, that’s not a mistake! The original company that runs it was first established in 1861. If it’s survived this long, I imagine it’s doing something right.
In the past 20 years, its price has risen 125%, providing annualised returns of 4.15%. That’s not particularly impressive. But when combined with the dividend yield, it equates to a reliable and more pleasing annual return of 9%.
It’s also currently the highest-rated trust on The Association of Investment Companies (AIC) Dividend Heroes list. Why? Because it’s been increasing its dividend for 57 consecutive years. With a record that long, chances are it’s not going to stop now. So investors could benefit from increasing dividends for the indefinite future.
That all sounds pretty good in my books, which is why I’m thinking about buying the shares for my dividend portfolio next month.
