June 6, 2018
Welcome to the latest LIC review!
Today, we’re taking a look at another of the largest investment companies in Australia, BKI Limited.
As with the others, this is an LIC that we own personally and plan to add to over time.
You can check out my reviews of the other LICs on this page.
It’s also a good time to review BKI, given a recent announcement by the company which I’ll discuss in a minute.
BKI formed as a listed investment company in October 2003.
The company was created to take over the investment portfolio of Brickworks – an Aussie building materials business. In its early days, the LIC was actually called ‘Brickworks Investment Company’.
Brickworks had built the portfolio over a few decades with surplus cashflow from its regular business. The aim was to generate a growing income stream through long term investment in a portfolio of listed equities.
These days, BKI is one of the largest LICs in Australia, with a diversified portfolio of shares worth around $1 billion. The portfolio is made up of around 50 mostly-large Australian companies.
“BKI is a research driven, Listed Investment Company, investing for the long term in profitable, high yielding, well managed companies.”
“Our aim is to create wealth for BKI shareholders, through an increasing fully franked dividend and capital growth.”
The company does this by investing across a broad range of businesses. Those which are expected to be able to increase their earnings and dividends over the long term, as well as providing capital growth. And in turn, BKI can pass those growing dividends through to shareholders.
BKI avoids speculative stocks, and will invest only in profitable, dividend-paying businesses. Portfolio turnover is very low (meaning they don’t often sell shares). And the company also has a focus on keeping costs low.
Readers will notice a pattern here. Many of these old-fashioned investment companies are similar. And they essentially serve the same purpose – providing a low-cost portfolio of Australian shares focused on dividend growth.
At around 50 companies, it has around half the stocks of the others. But BKI does hold many of the same big-name dividend-payers. So the portfolio is simply more concentrated in nature.
Here’s what the portfolio looks like by sector…
From this picture we can see a few things. Firstly, BKI is quite heavily invested in banks and financial companies, similar to Milton.
Also, they have very little exposure to mining companies, which comes under ‘Materials’. And, almost no investments in the real estate sector. This is very deliberate, and not without reason.
As I’ve mentioned before, mining companies tend to have a poor track-record of paying steady dividends. Their profits are far too volatile for that. And I suspect BKI has avoided real estate investment trusts (REITs) as many of them don’t have great dividend histories either.
Now, let’s look at BKI’s top 25 holdings…
As we can see, some quite familiar names.
The difference with the BKI portfolio is, they tend to lean a bit towards shares with a higher yield. But don’t get me wrong, they still hold quite a few low-yield, high-growth companies too.
Because of this, the BKI portfolio naturally has a higher yield than the other LICs. Closer to 5%, rather than 4%, before franking.
We’ve discussed before, finding a balance between yield and growth.
Overall, the portfolio is slightly more concentrated, but it’s still a nice mix of dividend-paying companies.
Despite being run privately for many decades, BKI has only been listed on the ASX for just over 14 years. So that’s all the history we have unfortunately. Here’s what the figures look like so far…
In truth, this makes BKI look better than it is. The 14-year figure is boosted slightly as BKI traded at a discount in its very early days.
Because LICs can trade at a share price that is different to the value of their portfolio (NTA), Total Shareholder Return is not the best metric to use (in my opinion). But since this is basically performance since listing, and shares are currently around NTA, it’s acceptable. And besides, I needed a fancy picture to use!
Once franking is included (as it should be), returns have been close to that of the index over the longest time-frame we have – around 10-11% per annum over 14 years.
It’s definitely not easy to beat the index these days. But regardless, many income investors are solely focused on the relatively stable and increasing dividends coming their way. Not so much whether they are generating ‘alpha’!
At the end of the day, we want a nice income stream, plus that other all important factor….
The holy grail of sharemarket investing is growing dividends. That stream of cash can be used to buy more shares to reach financial independence faster. And, it can be a vital source of cashflow to live on once you get there!
Let’s see how BKI has done since listing in 2003…
So you know, I’ve averaged out the first-year dividend. BKI only operated for 6 months of the financial year and paid a dividend of 2 cents per-share, for the half.
Here, we can see the dividend was only reduced for one year after the GFC, before recovering and increasing again from then on.
Since listing, BKI has been able to increase its dividend by 4.4% per annum. And over that time, inflation was 2.5% per annum.
Ultimately, BKI has done a pretty good job of generating a growing income for shareholders. They’ve also paid a few additional or ‘special’ dividends over the years, which I haven’t included here.
Going forward, I expect dividend growth to be slower than the other old LICs. The reason for this, is BKI has a bias towards higher-yielding stocks. And all else being equal, this will result in slower growth in dividends.
Total returns may be roughly the same. But, BKI may achieve dividend growth of, say 3% per annum, rather than, say 4% per annum. And that’s fine, because remember, their yield is close to 1% higher.
For its size, BKI is a very efficient company.
The management expense ratio (MER) is currently 0.17% per annum. Yes, that’s a little higher than AFIC at 0.11%. But we should expect that, because AFIC is 7 times the size of BKI! So its costs can be spread across a way larger asset base.
In recent years, BKI has become externally managed. The investment team hasn’t changed, it’s just been separated from the company. The reason is, the managers have created another LIC, and they decided it made sense to have a separate management company, which manages the LICs.
Now BKI pays a flat 0.10% per annum to its investment manager, ‘Contact Asset Management’. In addition, they have other running costs which adds up to the total MER. And of course, there’s no performance fees.
While I prefer an LIC is internally managed, this is still a low-cost company with the same manager and strategy in place.
Essentially, BKI & Contact Asset Management are partly owned and run by the Millner family. The head honcho Robert Millner is the Chairman of many successful listed Australian companies. Some of these include Milton Corporation, Brickworks, BKI and the 115 year-old family-run investment conglomerate Washington H. Soul Pattinson.
His son, Tom Millner, is one of two investment managers at BKI. Safe to say, the family knows how to invest. Dividends and low costs are a focus for the Millners, and always have been. Here’s an old article which sums up their philosophy well – “the thicker the carpet, the thinner the dividend.”
Due to their long-term philosophy, BKI qualifies as a listed investment company in the eyes of the ATO. This means they can pass on the CGT tax deduction if they sell any shares in their long term holdings. So on the odd occasion, we’ll receive a tax deduction attached to our dividend, along with those franking credits. More info can be found here.
Also, in my view, the Millner family ties are a positive.
I like BKI’s low costs and obviously their strong emphasis on dividends and growing income. And the fact they don’t invest in every corner of the market, for the sake of it. They typically only add companies where a decent yield can be maintained over time.
Because they’ve mostly ignored REITs and mining companies, BKI’s portfolio tends to generate more predictable income. This makes it easier for BKI to provide a relatively stable and growing dividend.
But this also means they’ll underperform at times by avoiding these sectors (like now). Personally, I’m okay with that. For those familiar with Peter Thornhill’s approach, this is the ‘Industrials’ strategy in practice.
As an early retiree, the higher yield of BKI is also nice. And it means the portfolio is less reliant on growth to reach a decent total return.
BKI’s (relatively) small size – $1 billion – means it’s much easier for them to take decent-sized positions in small companies. This is an advantage the larger LICs don’t have. Whether they take advantage of it over time, is another thing.
Also, BKI’s shorter history means they have less capital gains in the portfolio. So making changes to the portfolio is much easier, with less tax consequences than the other LICs.
BKI has a relatively small portfolio in comparison to the others. I would prefer BKI was more diversified and held more companies in total. Hopefully over time, this is something they’ll do.
I’m not keen on the move to external management. But as discussed before, it’s not a deal-breaker for me. The main advantage of internal management is that costs come down as the company gets bigger.
Hopefully BKI’s costs will continue to trickle lower in the future. The new management structure is unlikely to result in fee gouging. I think the chance of the fee or MER increasing over the longer term is near zero.
Ultimately, the investment team are all large shareholders in BKI, so our interests are still aligned.
Ideally, I’d also prefer to have a longer history to better measure the performance of BKI, as we have with the others.
And finally, I’m not thrilled about the recent announcement by the company to offer shares to the public at a discount…
Overall, BKI is a solid, low-cost investment company.
Its portfolio is smaller and its history is shorter than our other favourite LICs. But it has developed a good track record of inflation-beating dividend growth so far. And the family behind it have many, many decades of success investing in Australia.
BKI owns close to 50 companies across many sectors, so the income stream is still diversified. For some who lean a little more toward higher-yield than higher-growth, this one may be the LIC of choice.
Taking part in the ‘General Offer’ is a great way to top-up or buy a first parcel of shares. Currently, you can buy BKI on a dividend yield of 4.9%. Including franking, the gross yield is 7%.
Looking around the investment world today, that’s a very attractive yield. And importantly, I think we can expect the underlying portfolio of shares to spit out a decent stream of income well into the future.
Enjoy this post? You can find my other LIC reviews here, including AFIC, Milton and others.