That’s because the company has repositioned itself from what was largely a play on the US syndicated corporate loan market to one that is now focused on 16 investments in the peer-to-peer and small- and medium-sized enterprise (SME) lending market in the UK, Europe and the US. And it’s the exciting growth prospects here that sparked my interest in the company when the share price was 53.5p (‘Funded for growth’, 25 February 2014).
However, these new investments will take time to replace all of the healthy returns previously earned from syndicated corporate loans and which previously funded GLI’s 1.25p a share quarterly dividend. It was therefore with great interest that I noted the board have committed to continue to pay the quarterly dividend “throughout the transition period”. In other words, that 5p a share payout equates to a bumper 8.6 per cent dividend yield.
The cash cost of that dividend is £7m a year of which the £21.8m investment in 34.3m shares in Fair Oaks Income Fund (FAIR: $1.04), a company to which GLI spun off two of its collaterised loan obligations (CLOs) investments, should produce a first year dividend of $1.7m (£1m), rising to $2.3m (£1.4m) in the second year. In effect, that means the balance of GLI’s assets (worth £48.5m at the end of June) have to generate £5.6m of income after running costs to support the balance of the annual dividend.
These assets are split between a portfolio of peer-to-peer loans (worth £24.7m at the end of June), peer-to-peer investments (worth £16.7m) and net cash of £6m for future investments. Or put it another way, GLI needs to generate a 12 per cent rate of return on these peer-to-peer assets to fund its dividend. This is at the lower end of GLI’s targeted annual return of between 10 to 15 per cent on equity. Importantly, since the half year-end GLI has made, or will shortly make, six new peer-to-peer investments so is now fully invested.
On target to support dividend
Equally important is the board’s belief that the targeted rate of return is achievable to support the dividend policy, and in a reasonable timeframe too. Otherwise GLI would simply be eroding its asset base to cover the shortfall of income to maintain the dividend. During the latest six month period, the company produced an annualised return on equity in local currency terms of 12.26 per cent, in the middle of its 10 to 15 per cent target range, albeit dollar weakness eroded some of these gains. That said, US dollar appreciation since the end of June (currency has risen by 4.4 per cent against sterling) has reversed all these currency losses. For instance, the sterling value of GLI’s investment in Fairoaks is now worth £2m, or 1.4p per GLI share, more now than at the end of June.
There is little to add with regard to the portfolio mix of peer-to-peer investments as I have covered this subject in some depth previously (‘A peerless investment’, 22 May 2014). However, it’s impossible to ignore the board’s comments that “market conditions would seem to be extremely favourable”. Coupled with news on the dividend policy, I feel that prospects for income generation and capital growth remain strong too.
In the circumstances, I am very comfortable reiterating my buy recommendation with the shares trading on a bid-offer spread of 57p to 57.5p and on a 12 per cent premium to my 50p a share estimate of spot book value (adjusted for currency movements). My share price target remains 80p and a price move above February’s high of 63.25p would be a very bullish signal indeed.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
