Franklin Universal Trust (“FT” or the “Fund”) Announces Notification of Sources of Distributions
- None.
- None.
Insights
Examining the distribution announcement by Franklin Universal Trust, a critical element is the composition of the payout. A significant portion, 78% for the December distribution and 58% for the fiscal year-to-date, is sourced from net investment income, which is typically derived from interest and dividends. This indicates a robust income-generating capacity within the fund's portfolio. However, the absence of capital gains, both short-term and long-term, suggests that the fund may not be realizing significant profits from the sale of assets. This could be a strategic choice or a reflection of current market conditions.
The return of capital component constitutes 22% and 42% of the distributions for December and fiscal year-to-date, respectively. This is noteworthy because return of capital can imply that some of the payout is not from the fund's earnings but from the invested capital itself. While this can offer tax benefits, it can also indicate that the fund's earnings are insufficient to cover the distribution, potentially eroding the fund's capital over time.
For shareholders, the implications are twofold. In the short-term, the distributions provide cash flow, but over the long-term, the sustainability of these payouts and the potential impact on the fund's net asset value (NAV) warrant close monitoring. Investors should consider whether the return of capital is a temporary measure or part of a longer-term trend.
From a tax perspective, the nature of the distributions from Franklin Universal Trust is of particular interest. The predominance of net investment income in the distributions is beneficial for shareholders as it is typically taxed at ordinary income rates. In contrast, capital gains distributions would be taxed at potentially lower long-term capital gains rates if they were realized, but none are reported in the current distribution.
The return of capital is not immediately taxable. Instead, it reduces the shareholder's cost basis in the investment, deferring taxes until the investment is sold. While this can be advantageous, it also suggests that the fund may not be generating enough income to sustain its distributions, which could have implications for future tax years if the fund starts to realize more gains to maintain distributions.
Shareholders should consult with tax professionals to understand the impact on their individual tax situations and to strategize around the timing of potential future capital gains tax liabilities that could arise from a reduced cost basis.
The distribution characteristics of Franklin Universal Trust reveal insights into the fund's investment strategy. The lack of net realized capital gains, both short-term and long-term, indicates that the fund may be employing a buy-and-hold strategy or that it has not found suitable opportunities to sell assets for gains. This could resonate with risk-averse investors who prefer steady income streams over the volatility associated with capital gains.
However, the reliance on return of capital for a significant part of the distribution raises strategic questions. While it can support the fund's yield in the short-term, it may not be a sustainable practice. If the fund continues this trend, it could deplete its capital base, affecting its ability to generate income in the future and potentially leading to a reduction in future distributions.
Investors should consider the fund's long-term growth prospects and whether the current distribution strategy aligns with their investment goals. A fund that is not growing its capital base through realized gains may not be keeping pace with inflation, which could erode the purchasing power of the distributions over time.
Notification of Sources of Distributions Pursuant to Section 19(a) of the Investment Company Act of 1940 |
The Fund’s estimated sources of the distribution to be paid on December 29, 2023 and for the fiscal year 2024 year-to-date are as follows:
Estimated Allocations for December Monthly Distribution as of November 30, 2023:
Distribution Per Share |
Net Investment Income |
Net Realized Short-Term Capital Gains |
Net Realized
Long-Term Capital
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Return of
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Cumulative Estimated Allocations fiscal year-to-date as of November 30, 2023, for the fiscal year ending August 31, 2024:
Distribution Per Share |
Net Investment Income |
Net Realized Short-Term Capital Gains |
Net Realized Long-Term Capital Gains |
Return of
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Shareholders should not draw any conclusions about the Fund’s investment performance from the amount of the current distribution or from the terms of the Fund’s Distribution Policy. FT estimates that it has distributed more than its income and net realized capital gains; therefore, a portion of the FT distribution to shareholders may be a return of capital. A return of capital may occur, for example, when some or all of the money that a shareholder invested in a Fund is paid back to them. A return of capital distribution does not necessarily reflect FT’s investment performance and should not be confused with ‘yield’ or ‘income’. The amounts and sources of distributions reported herein are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. The Fund will send a Form 1099-DIV to shareholders for the calendar year that will describe how to report the Fund’s distributions for federal income tax purposes.
Average Annual Total Return (in relation to the change in net asset value (NAV) for the 5-year period ended on 11/30/2023)1 |
Annualized Distribution Rate (as a percentage of NAV for the current fiscal period through 11/30/2023)2 |
Cumulative Total Return (in relation to the change in NAV for the fiscal period through 11/30/2023)3 |
Cumulative Fiscal Year-To-Date Distribution Rate (as a percentage of NAV as of 11/30/2023)4 |
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Fund Performance and Distribution Rate Information:
- Average Annual Total Return in relation to NAV represents the compound average of the Annual NAV Total Returns of the Fund for the five-year period ended through November 30, 2023. Annual NAV Total Return is the percentage change in the Fund’s NAV over a year, assuming reinvestment of distributions paid.
- The Annualized Distribution Rate is the current fiscal period’s distribution rate annualized as a percentage of the Fund’s NAV through November 30, 2023.
- Cumulative Total Return is the percentage change in the Fund’s NAV from August 31, 2023 through November 30, 2023, assuming reinvestment of distributions paid.
- The Cumulative Fiscal Year-To-Date Distribution Rate is the dollar value of distributions for the fiscal period August 31, 2023 through November 30, 2023, as a percentage of the Fund’s NAV as of November 30, 2023.
The Fund’s primary investment objective is to provide high, current income consistent with preservation of capital. Its secondary objective is growth of income through dividend increases and capital appreciation. Distributions may vary based on the Fund’s net investment income. Past distributions are not indicative of future trends.
For further information on Franklin Universal Trust, please visit our web site at: www.franklintempleton.com
Franklin Resources, Inc. is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 150 countries. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management and technology solutions. Through its specialist investment managers, the company offers specialization on a global scale, bringing extensive capabilities in fixed income, equity, alternatives and multi-asset solutions. With more than 1,300 investment professionals, and offices in major financial markets around the world, the
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Franklin Templeton, 1-800-342-5236
Source: Franklin Templeton
FAQ
What are the estimated sources of distributions announced by Franklin Universal Trust (FT)?
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