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Polar Capital Healthcare to halve dividend under growth push

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Polar Capital Healthcare to halve dividend under growth push

The board of Polar Capital Global Healthcare Growth and Income (PCGH) plans to halve its dividend as its shifts focus from income to growth.

Subject to shareholder approval, the life of the £242 million trust will be extended and its name changed to Polar Capital Global Healthcare. This will reflect a new growth focus and therefore a lower yield. After the changes are put into place, the dividend is expected to be around 2p per ordinary share a year, based on a portfolio size of £225 million. This equates to a yield of just 1% on the share price and compares to a historic dividend of 4.05p in 2016 and dividends of 2.4p so far in 2017.

New shares will be offered to institutional investors in late June, while a separate tender offer will give existing investors an opportunity to sell their investment close to net asset value (NAV). Existing shareholders who wish to participate in the new portfolio will be entitled to one new ordinary share for every two ordinary shares held.

Shares will be issued and repurchased at NAV minus estimated costs of 0.4%. The new ordinary shares that are issued will bear a placing fee, which means that their investors will pay NAV plus 1.25%.

As part of the proposals, the trust’s wind-up vote on 31 January 2018 will be deferred by seven years. The company will not proceed with the plans if assets are below £200 million immediately after the share placing and tender offer.

In order to provide the trust with gearing or leverage, the board proposes issuing zero dividend preference shares (ZDPs) on the basis of £1 of ZDP shares for every £8 of net assets. ZDPs are a type of share issued by split capital investment trusts, which do not pay an income but aim to deliver a fixed amount of growth over a set period of time.

The ZDPs in the Polar Capital Global Healthcare rollover vehicle will have a seven-year life and offer a gross redemption yield of 3% per annum. A gross redemption yield takes into account any capital gain or loss during the period held.

Managed by Gareth Powell and Daniel Mahony (pictured), the trust has lagged its peer group of biotechnology and healthcare trusts considerably. This is down to the managers’ cautious approach and income focus. PCGH yields 2.1% compared to a sector average of 0.6%, according to the Association of Investment Companies (AIC), which rates BB Healthcare (BBH) and BB Biotech (BION.S) as zero-yielding given their dividends are funded from capital. 

Over five years it has generated a total return to shareholders of 97.8% versus a sector average of 194.4%. The sector includes more adventurous rivals, such as Biotech Growth (BIOG), its sister fund Worldwide Healthcare (WWH) and International Biotechnology (IBT). The latter leads the sector over five years with a 222.6% return, according to AIC figures.

At 204.5p, PCGH’s shares are trading at a 3.1% discount below NAV.

Powell and Mahony currently focus on large-cap pharmaceuticals stocks that pay a yield. The portfolio is typically split 80:20 between income and growth stocks. Analysts at Numis pointed out that over half of the growth portfolio is in companies with a market cap of less than $1 billion, while the income portfolio has a bias towards large cap pharma stocks, such as Johnson & Johnson (JNJ.N) and Pfizer (PFE.N)

Numis Securities suggested the decision to lower the yield ran counter to the trend in investment trusts.

‘The dividend reduction goes against the trend of most investment companies in the sector in recent years. For instance, International Biotechnology Trust recently starting paying a dividend of 4% of NAV, and BB Healthcare, which raised £150 million at IPO in November 2016, pays a 3.5% yield both funded from capital,’ Numis noted.

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