A compelling and cheap investment

At first sight, this professional services business appears a decent investment story, but not a compelling one, says Max King. Yet dig a little deeper and it looks much better.

Law Debenture's bet on RBS reflects its contrarian streak

Credit: Kevin Foy / Alamy Stock Photo

At first sight, Law Debenture (LSE: LWDB) appears a decent investment story but not a compelling one. Yet dig a little deeper and it looks much better. LWDB is a curious hybrid: a professional-services business tacked onto an investment portfolio. The former accounts for slightly more than 13% of net asset value (NAV the value of the underlying portfolio); the latter is 75% invested in UK equities.

Advertisement - Article continues below

The shares trade on a near-10% discount to NAV and yield 3.2%, helped by the professional-services business accounting for about 40% of the pay-out. The investment record, a 58% return over five years and 36% over three, is decent, but well below its peers in the global sector of investment trusts. So why are the shares worth a look?

A generous dividend

The dividend is already generous, but the recent decision to allocate 75% of investment-management and interest costs to capital will add 20% to earnings, enabling a further rise. The potential increase of 35% will not happen all at once, but investors can expect dividend growth at least in line with the 9.2% of 2018 rather than the average of 4.5% of the last ten years. This dividend growth will be further enhanced by the accelerated growth in the professional-services business and in the income from the investment portfolio.

Advertisement - Article continues below

The portfolio is managed by Janus Henderson at a cost of just 0.3% of NAV (the total ongoing charges of LWDB are only 0.43%). For this modest cost, LWDB gets a first-rate team the highly regarded veteran James Henderson and rising stars Laura Foll and Charlotte Greville. Their portfolio, £663m at the start of the year, is invested in about 130 stocks, of which the top-ten account for 24%.

Advertisement - Article continues below

About a third of the UK portfolio is in the FTSE 100, the rest mostly in mid caps. As in their other portfolios, the allocation to industrials is high but to consumer sectors low. A rising allocation to financial services, including the recently bought RBS and Direct Line, shows a contrarian streak.The team is happy with the high UK weighting, seeing it as a value opportunity. If this comes to bear, high UK exposure should no longer be a handicap to performance.

The professional-services business, established 130 years ago, provides advice, administration and management for pension funds, corporate trusts and other company entities, usually fulfilling a role stipulated by law. For seven years, the business marked time, but both revenue and earnings jumped by 9% in 2018. According to chief executive Denis Jackson, "clients loved us but shareholders were disappointed." He saw a need to market more, developing better relationships with banks and boutique financial businesses, as well as withlaw firms.

Strong growth ahead

Growth is not reflected in a valuation of less than ten times earnings, nearly all of which can be distributed as dividends. A more realistic valuation would add 50p to NAV per share, increasing the discount of the shares to 15%. At present, the valuers are cautious, but that will change when growth is confirmed rather than projected. These shares are a bargain.

Activist watch

Yet Barclay's doesn't need "a hostile disruptor in its midst, arguing on false numbers against their execution of the existing strategy to improve returns, for his own short-term ends", says Merian. Aviva Investors' David Cumming, who has previously backed Bramson, has also said he would side with Barclays. The bank has accused Bramson of being "selective and misleading" in his description of the struggling investment banking arm.

Short positions...Woodford's offshore blip

Yet the sector's new watchdog, the Regulator for Social Housing, has issued a string of negative judgements against the governance and financial failings it found in some of the housing associations to whom the funds lease properties. Civitas shares have "slumped" 11% since the regulator's report was published on 4 April, while Triple Point has fallen 10%.

Three of Neil Woodford's stakes in unquoted private companies were suspended from the Guernsey stock exchange last Thursday, says Kate Beioley in the Financial Times. Over the past ten months the fund manager has listed his stakes in biotech company Benevolent AI, cold-fusion company Industrial Heat and technology investor Ombu offshore in an effort to keep the portfolio of his equity-income fund below the regulatory limit for unquoted stocks.

Stocks are usually suspended if "there are question marks over whether they have complied with the exchange's listing rules". Although the suspension may affect the fund's unquoted threshold, it has no immediate impact on the investments within the fund.



Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Investment strategy

How the fear of death affects our investment processes

Many of our investment decisions are driven by one simple fact: the knowledge that, one day, we will be dead. Here, in an extract from his new book, J…
2 Jan 2020
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019

The good investments of the 2010s – and the bad

John Stepek takes a look back on which investments did well and which did badly in the decade that’s about to come to an end.
26 Dec 2019

Most Popular

Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020
Investment strategy

Are you a permabear? Three red flags to watch out for

Contrarian investors are often seen as bearish because the market tends to go up over time. But if that bearishness goes too deep, you risk seriously …
26 May 2020
EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020