BKI investment company limited (Brickworks) LIC review (ASX:BKI)

BKI investment company limited was listed on the ASX in 2003 to take over the Brickworks Investment Company portfolio, a LIC that had been listed since the 1980s. Whilst the smaller of the large Aussie LICs, BKI still manages a sizeable portfolio of (AUD) $1.3 Billion, which it has grown from the (AUD) $173 Million it started managing in 2003.

BKI objectives and strategy is to invest in a diversified portfolio of around 50 Australian shares, trusts and interest bearing securities. BKI’s main aim is to generate an increasing income stream for shareholders using fully franked dividends, and their secondary aim is to deliver long term capital growth to shareholders, through long term holdings in a portfolio of diversified assets.

“Today, some 30 years since the inception of the core portfolio, BKI’s investment strategy is focused on research driven, active equities management, investing for the long term, in profitable companies, with a history of paying attractive dividend yields.”

“The Group aims to generate an increasing income stream for distribution to shareholders in the form of fully franked dividends to the extent of available imputation tax credits, through long-term investment in a portfolio of assets that are also able to deliver long term capital growth to shareholders.”

“The Group will pay the maximum amount of realised profits after tax to its shareholders in the form of fully franked dividends to the extent permitted by the Corporations Act, the Income Tax Assessment Act and prudent business practices from profits obtained through interest, dividends and other income it receives from its investments.
Pay Out Ratio Target: 90% – 95% of the Net Operating Result.”

BKI investment company limited

The Details

Although mainly holding Australian equities, in their June 2019 quarterly report BKI estimate that over 51% of their holdings are exposed to global markets. This is in response to criticisms of ‘home bias’ and only buying Australian companies. Amongst these globally influenced holdings are BHP group limited (BHP), Woodside Petroleum (WPL) and Ramsay healthcare (RHC) which all get the majority of their income from international revenue.

BKI investment company top 25 holdings (88.5% of portfolio)

In 2016, BKI outsourced its management responsibilities to Contact Asset Management. BKI has an annual Management Expense Ratio of .17%, which still makes it one of the cheapest Aussie LICs to own, despite being over 4 times the management fee of Vanguards US total market ETF, VTS at .04% MER.

I like that the directors and portfolio managers of BKI are all large shareholders, and that the focus is on dividend payments. Its chairman Robert Millner, Director and portfolio manager Tom Millner, and Director and portfolio manager Will Culbert have strong family ties and history in managing BKI prior to creating Contact Asset Management (jointly owned by Tom Millner – 40%, Will Culbert – 40%, and Washington H Soul Patterson – 20%).

Share turnover is low, as they don’t often sell shares, but often add to existing holdings. This focus keeps costs and tax burdens low, allowing them to focus on dividend growth for investors.

Performance

In the year ending June 2019, the total shareholder return (including franking credits) was 11.6% which under performed the S&P/ASX 300 Index by 1.9%. Over the past 15 years, BKI has returned shareholders a total return (including franking) of 10.4% per year.

BKI total shareholder return (including franking)

BKI is currently offering a franked dividend yield of 6.1%, grossed up to 8.8%. This is a very attractive dividend yield, but based on total shareholder return it can see that BKI has under performed some of the other Aussie LICs in terms of capital growth on the portfolio.

Whilst it can be seen that BKI has under performed the index in recent years, BKI has a long term focus on income producing investments and its directing staff are not too concerned about short term noise – they are also holding a fairly large cash holding of 8% (over $100 Million in cash) and are ready and looking to purchase good quality companies, but this is a drag on their total returns.

At the moment there is generally a bit of a lack of earnings growth in the market, and the P/E multiple of the market is increasing as interest rates continue to be lowered – making it more difficult for LICs to snap up a bargain. Over the past year BKI have reinvested in more mining/resource, financial, energy and healthcare stocks, tipping that the mining sector particularly is one of the more attractive sectors given current market conditions.

BKI dividend yield growth chart for the past 15 years

BKI have been able to consistently increase their dividend yield. One way of calculating this is to look at the year on year dividend growth. Using a simple spreadsheet it is seen the yearly dividend growth rate starts at 7.5%, then 16.28%, then 6% and so on, with negative growth occurring in 2012 and 2014, and a record 34% growth in 2019 after three years of dividend stagnation. On average, this works out to be a 6.6% dividend growth over 15 years. A more safe bet at calculating dividend growth is as follows;

BKI dividend yield trend line averaging for the past 15 years

The linear trend above has a an R² value of 0.847 which shows a fairly good fit for our purposes of approximation (the closer to 1 the better the fit). This line has a slope of .271, meaning that on average, starting at around 4c per share in 2004, BKI dividend yield has increased by .271 cents per year. With an average dividend of 6.45 cents over the last 15 years, this means dividend growth has been 4.2% of the average dividend yield over this period – compared to 2.4% average rate of inflation according to the Reserve Bank of Australia.

Why I own BKI

I own BKI because I see it as an attractive long term income source. I particularly like their track record of dividend growth; BKI have a solid upwards trend on dividend yield, but it would be great to see it even higher. Practically this is due to their focus on high yielding stocks already; because they already pay out so much of their dividend, its natural for the dividend growth to be lower. They are also positioning themselves to take advantage of future buying opportunities and increasing their global exposure. BKI are conservative, and focus on owning good income producing companies with a long term focus whilst avoiding speculative stocks.

I have added BKI to my ‘DDH’ investment strategy and will be comparing it to 3 other low fee good quality aussie LICs and 5 ultra low fee international ETFs every fortnight to make an investment decision.

CommSec interview of Will Culbert portfolio manager of BKI investments

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