March 30, 2018
Welcome to the third review in the series.
Today, we’ll be taking a look at Milton Corporation. This is another LIC we own personally, and are happy to hold for the foreseeable future.
But for the dividend investing enthusiasts waiting for the next instalment, let’s get started…
Milton was established as an investment company back in 1938. And since 1958, it’s been listed on the Aussie stock exchange, turning it into a listed investment company (LIC).
Straight away we can tell they’ve been doing something right, to be around that long and still be prospering.
Nowadays, Milton is the third largest LIC in Australia, behind of course, AFIC and Argo.
Today, they have a diversified investment portfolio worth $3 billion. They currently hold shares in close to 100 different companies and trusts. And their primary focus is delivering an increasing dividend stream to shareholders.
They take a very long term view, and the investment committee has significant experience. Also, the company is run in a low-cost, tax-efficient manner with low turnover in the portfolio.
Here is Milton’s goals, from the company website:
1) Increase fully franked dividends paid to shareholders over time
2) Provide capital growth in the value of the shareholders’ investments
3) Invest in a diversified portfolio of assets which are predominantly Australian listed companies and trusts
Obviously, with these goals in mind, Milton has a strong focus on companies that pay dividends. And companies which they expect to deliver sound growth in dividends over time.
Clearly, this ties in very well with our own goals. Owning a vast pool of companies which spit out increasing chunks of cash, is the ultimate retirement income stream.
Milton holds a large diversified portfolio – close to 100 companies and trusts. And like the other big LICs, they have the bulk of their funds invested in the largest companies on the ASX.
Let’s take a look at the breakdown by sector…
So, we can see that Milton owns a lot of banks and other financial stocks. In fact, more than the other LICs. Because of the strong run banks have had over the last 20-odd years, they have come to dominate Milton’s portfolio, and indeed, the Aussie sharemarket index as a whole.
In some respects, I admire Milton for sticking to what they believe will be a solid dividend-producing portfolio into the future. But on the other hand, I think it’s best not to be too reliant on one sector for income.
Now, let’s look at Milton’s top 20 holdings…
So to me, this is interesting. Milton’s top 20 holdings vary more from the index than one might expect. They have large holdings in stocks that aren’t even in the ASX top 20. Stocks like Washington H. Soul Pattinson, AP Eagers, Blackmores and Brickworks.
They also have only small holdings in companies where they’re less convinced of the long-term income potential. Despite those companies making up a much larger portion of the overall index.
I view this as a positive. Seems to me, Milton is even more of a stock-picker than other LICs and has conviction in what it’s doing.
It doesn’t matter if these companies aren’t familiar. What’s important is, Milton sees potential in these companies to provide a good flow of dividends now, and into the future.
So while they’re a bit heavy on banks, the portfolio is still diversified. And overall, Milton has a nice spread of dividend-paying stocks.
Now let’s take a look at how Milton has performed over the long term.
As we can see, over the most meaningful time frame (15 years), Milton has performed roughly in line with the All Ordinaries Accumulation Index. But we should note, Milton’s returns are after tax, and after management fees, whereas the index figures are not.
If we included franking credits for both, and fees for the index, Milton would be ahead. But in any case, we’re splitting hairs. Total returns have been similar. Both over 11% p.a, after franking, over 15 years.
Each investor will receive a different after-tax return of course, depending on their own tax-rate. That’s just the way investing works.
But remember, we aren’t investing in Milton to beat the market. We’re investing for a solid dividend stream which grows over time. So let’s see how they’ve done in that area…
As regular readers will know by now, this is the most important metric, in my view.
Here’s a chart of the dividends Milton has paid to shareholders over the last 20 years…
As we can see, just like with Argo, Milton had a huge increase in dividends as the economy was booming, before the GFC. Incredibly, dividends increased by over 80% in the 5 years leading up to the GFC. Then, they were reduced to more normal levels, where dividends have continued to increase, in line with their long term trend.
Anyway, these figures show Milton has grown dividends at a rate of 4.9% per annum, for the last 20 years. And over that time, inflation was 2.5% per annum.
While I’d prefer the dividends were smoother than that, they’ve done a good job, in my book.
Remember, an ever-growing dividend stream is the name of the game. As far as I’m concerned, for investing, it’s about as close to heaven on earth as it gets!
As an interesting side note, I managed to find some longer term history for Milton. According to their 2014 Annual Report, an investment of $2000 back in 1958 would’ve yielded an annual dividend of $160 the following year in 1959.
Now, if we fast forward to 2017, that initial parcel of shares would now produce an annual dividend of $5,335. This is assuming the dividends are spent every year and no money is ever reinvested.
What does that tell us?
Well, Milton has been able to grow their dividend at a rate of 6.2% p.a. And our old trusty RBA Inflation Calculator, tells us inflation was 4.8% p.a. over that time.
So this means, Milton has been able to increase its dividend faster than inflation for 60 years. That’s incredible!
But in truth, there’s nothing all that strange about it. Company earnings in Australia have grown faster than inflation over the long term. And this naturally allows them to pay larger dividends over time too. Indeed, it tends to be the case for most developed economies.
While long term data is usually hard to find, I’m glad I did some digging and found this example.
Now it should be pretty clear why I love dividends so much. Over the long term, your income is almost certainly going to increase ahead of inflation.
Milton has very low fees.
The costs of managing the portfolio are currently 0.12%. Honestly, that’s about as low as it gets.
Since Milton has internal management, there’s no fees paid to outside managers. And there’s also no performance fees. Basically, the costs to run Milton are mainly for staff, office costs, and share registry fees.
As the portfolio gets bigger, the costs will stay roughly the same. So the management expense ratio (MER) is likely to get even lower over time. Same as our other LICs we’ve discussed so far, this aligns well with shareholders.
I like Milton’s very long history dating back over 60 years. Also, the fact that they aren’t afraid to have their largest holdings be different from the index. Essentially, that’s what we want.
We want them to have conviction in the companies they’re buying. And manage the portfolio based on its long term income potential, regardless of what the market is doing.
Milton runs a tight ship, as far as costs go. Their expense ratio is roughly in line with AFIC, who is twice the size they are.
Recently, Milton has added a new member to their investment team who has experience in finding opportunities from the disruption that new technology creates. Hopefully this helps them uncover future lucrative investments, or identify risks in their current holdings.
Most of all, I like their strong focus on finding good dividend-paying companies, to add to the already dividend-rich portfolio. Just like with the other LICs, our own goal perfectly aligns with Milton’s – that is, investing for a solid income stream which grows over time.
Although I’ve said it’s a plus overall, Milton’s stock-picking has resulted in the portfolio being heavily invested in banks and the financial sector.
While this might turn out to be a good move over the next few decades, in my view, it’s adding risk by being more reliant on one sector.
And Milton’s dividend growth track record, while impressive, is not as smooth as the other LICs we’ve covered.
Also, I could complain that they haven’t beaten the market in recent years. But for an investor focusing on income, that doesn’t matter so much. What counts, is the increasing amounts of cash being received, not share price growth.
Anyway, I’m really just nit-picking now. They’ve done a good job for the last 60 years, staying true to their dividend growth focus.
To sum it up, Milton is a very low-cost way to own a large portfolio of Aussie dividend-paying companies.
The company has a solid long-term track record. They aren’t afraid to be different and own large stakes in companies that aren’t big holdings for other LICs, or the index itself.
Shareholders in Milton, for many decades, have been well rewarded with a regularly increasing income stream. And I expect this to continue far into the future.
For that reason, this LIC is one of our largest holdings. And I’ll definitely be adding to my position over time.
Currently, Milton is on a dividend yield of 4.1%. Or, 5.9% when grossed-up to include franking credits.
Clearly, I’m a big fan of Milton and it’s investment philosophy. As early retirees, it’s comforting to know you’ve got a bunch of professionals with decades of experience, managing a big portfolio of shares, to deliver the best income stream they can.
All this at a very low cost, with nothing to do but sit back and watch the cash come in!
If you enjoyed this review you can find my other LIC reviews here, including BKI, Argo and more.
Recommendation: The low cost broker I use to buy shares is Pearler which is purpose built for long term investing. Simple, clean and great features like Autoinvest, with none of the trading-focused rubbish other brokers have!
Join using this link and get free brokerage on your first investment. Pearler also have a referral program, meaning if you sign up using that link it supports this blog, so thanks!