FT: Monzo’s Bold Move for US Banking License Unveiled!

Introduction

Monzo’s U.S. Ambitions: UK digital bank Monzo is reportedly reviving its bid for a U.S. banking license (^[1]), after having withdrawn an earlier application in 2021 when regulators signaled approval was unlikely (^[1]). According to the Financial Times, Monzo’s leadership believes changes in the regulatory climate could improve its chances this time (^[1]). This bold fintech move underscores the evolving competitive landscape in banking – with European neobanks like Monzo and Revolut eyeing U.S. expansion (^[1]) – but what does it have to do with “FT”? In this report, FT refers to Franklin Universal Trust (NYSE: FT), a closed-end fund managed by Franklin Templeton. While Franklin Universal Trust’s portfolio of high-yield bonds and utility stocks may not directly hinge on Monzo’s fate, the broader trend of fintech disruption informs the context in which all financial-sector investments operate. Below, we dive into Franklin Universal Trust’s fundamentals – from its dividend policy and leverage to valuation and risks – to assess its current standing amid an ever-changing financial industry backdrop.

Dividend Policy & Yield

Stable Monthly Payouts: Franklin Universal Trust has a long history of paying monthly distributions. The current monthly dividend is $0.0425 per share, which annualizes to $0.51 per share (^[2]). At a stock price around $7.50, this amounts to a dividend yield near 6.8–7.0% (^[2]). The fund’s primary objective is delivering high current income, mainly through interest and dividends, with a secondary goal of growing that income over time (^[3]) (^[4]). In practice, however, dividend growth has been elusive recently – in fact, Franklin Universal trimmed its payout by roughly 10% in the past year, as reflected by a -10.7% dividend-per-share growth rate over the last 12 months (^[5]). The cut brought the yield to the higher end of its historical range (median yield was ~5.6%, with highs up to ~9.5% during the past eight years) (^[5]). Management appears committed to maintaining a steady distribution, but any future increases will likely depend on improved earnings power. Notably, the fund declares its distributions as coming from net investment income when possible (^[6]), signaling an intention to fund dividends from cash earnings rather than return of capital.

Dividend Coverage: Investors should examine how well the fund’s earnings cover its payout. For the fiscal year ended August 31, 2024, Franklin Universal Trust’s net investment income did not fully cover the distributions. Roughly 57% of the total FY2024 distributions were funded by net investment income, about 16% by realized capital gains, and the remaining ~27% effectively came from return of capital (^[7]). In other words, the fund had to dip into realized gains (and even principal) to sustain the $0.0425 monthly dividend. This use of return of capital can artificially support the yield in the short term, but it erodes the fund’s NAV if not offset by future portfolio appreciation. The reliance on non-income sources to fund payouts was a red flag that likely prompted the recent dividend reduction to a more sustainable level. Going forward, investors will want to see a higher portion of the distribution covered by interest and dividends earned, especially as the fund reinvests in higher-yielding bonds amid rising rates.

Leverage and Debt Maturities

Borrowing to Boost Returns: Like many closed-end funds, Franklin Universal Trust employs leverage to enhance its income. The fund currently has a senior secured credit facility of up to $60 million with Bank of America . As of the end of FY2024, Franklin Universal had drawn the full $60 million on this line of credit (^[8]). This borrowing represents roughly 30% of net assets (given the fund’s ~$190–214 million net asset base) and increases the fund’s total investment pool beyond what common equity alone could finance. The credit facility carries a variable interest rate – the average interest rate was ~5.95% over the year ended Aug 31, 2024 (^[8]) – and a maturity date of September 14, 2026 for the current 3-year term (^[8]) (^[8]). Essentially, the fund is borrowing at ~6% to buy assets (junk bonds and utilities) yielding around 7–8%, aiming to capture the spread for shareholders.

🧭

3-Minute Walkthrough: How To Skim $4,898

Open the details. Follow Larry's three simple steps — trade ETF options in regulated accounts.

Show the 3 steps ▾

Confirm the Trend — watch the confirmation cross.
Buy an Option — call for up, put for down.
Sell & Collect — take your skim and rinse-repeat.

Get Larry's full step-by-step guide →

Leverage Impact: This strategy can amplify returns when markets are favorable, but it also magnifies risks. The interest expense on the debt eats into what’s left for shareholders; notably, rising benchmark rates have increased the fund’s borrowing costs (which float with short-term rates). At a ~6% interest cost, the benefit of leverage narrows unless the fund’s assets yield significantly more. Additionally, if asset values decline, leverage accelerates the drop in the fund’s NAV (since debt remains fixed in nominal terms). The credit facility’s terms require asset coverage tests (typical for ’40 Act funds) – if the portfolio’s value falls too much, the fund might be forced to deleverage at an inopportune time. Investors should also be mindful of the refinancing timeline: by late 2026, the fund will need to renew or replace its credit line. Should credit markets tighten or lenders demand higher spreads by then, the cost of leverage could climb further. For now, Franklin Universal’s leverage is moderate and in line with peers, but it adds a layer of interest rate and refinancing risk on top of the portfolio’s investment risks.

Portfolio and Coverage Quality

Portfolio Composition: Franklin Universal Trust maintains a hybrid portfolio, investing “primarily in two asset classes: high-yield corporate bonds and utility stocks,” per its mandate (^[3]). The high-yield (junk bond) portion provides the bulk of the interest income, while the allocation to dividend-paying utility equities offers equity upside and dividend growth potential (^[3]). The focus on utilities – including electric, gas, and multi-utilities, along with some infrastructure and energy infrastructure companies (^[3]) – aligns with the fund’s income goals, as these sectors historically offer above-average dividend yields. Many of the utilities in the fund’s portfolio have “a history of increasing their dividends,” a trait the managers seek out (^[3]). This mix is somewhat unique: Franklin Universal is not a pure equity income fund nor a pure bond fund, but a blend that tries to balance stability and high income.

Earnings Coverage: As discussed, the fund’s net investment income (NII) alone hasn’t been sufficient to fully cover the dividend. The high-yield bonds in the portfolio generate substantial interest, and the utilities contribute dividends, but expenses and interest on leverage take a bite out of NII. In FY2024, NII covered just over half the payout (^[7]). The shortfall was met by realizing capital gains (likely by selling some appreciated holdings) and, to a lesser extent, using return of capital (ROC) distributions (^[7]). Some of that “ROC” may actually reflect tax characterization of certain gains or ROC from underlying holdings, but if it’s destructive (i.e. not supported by fund earnings), it effectively means the fund paid part of the dividend out of shareholders’ own capital. The use of ROC (27% of FY24 distributions) is a cautionary sign (^[7]), indicating the fund stretched to maintain its old payout. On a positive note, by cutting the monthly dividend from ~$0.0475 to $0.0425 in the past year (approximate 10% cut), the fund has likely brought the payout closer to what the portfolio can earn without consistently digging into principal. Going forward, coverage should improve as older bonds mature and proceeds are reinvested at higher yields available in today’s market – a silver lining of the rising rate environment. Equity dividends from utilities have also been rising gradually, which could aid NII. Monitoring the fund’s Section 19a notices (which detail distribution sources) will tell if reliance on capital gains/ROC is truly receding or not.

Valuation and Performance

Market Price vs. NAV: Franklin Universal Trust’s stock often trades at a discount to its net asset value (NAV), a common phenomenon for closed-end funds. As an example, in late September 2024 the fund’s NAV was about $8.44 per share (^[9]), while the market price was around $7.50–$7.60 per share (^[10]). This implied a discount on the order of 10% – i.e. investors were able to buy into the fund’s assets for roughly 90 cents on the dollar. The discount has hovered in the mid-to-high single digits to low teens in recent years, though it can fluctuate with market sentiment. A discount presents an opportunity for patient investors (you get a higher yield on price and potential upside if the gap narrows), but it can also persist due to structural reasons. Franklin Universal Trust’s moderate size and niche strategy might limit its following, contributing to the discount.

🤖

Project Colossus: Be part of history

Elon’s supercomputer is building Grok 3 — early private shares available now.

Claim Your Spot Free Special Report

Next funding round: Oct 1 From $500

Peer Context: It’s informative to compare FT with other funds and benchmarks. The fund’s blended approach straddles the high-yield bond and equity income universes. In 2023–2024, rising interest rates and utility sector weakness created headwinds. Utilities, as interest-sensitive stocks, underperformed the broad equity market when rates spiked, and high-yield bond prices fell as yields rose. Despite these challenges, Franklin Universal Trust managed a +10% total return over the 1-year period ending Sep 13, 2024 (^[10]), reflecting a rebound from prior lows. This outpaced the median for its category in some instances, though longer-term returns are modest and in line with its income-focused mandate. Compared to pure utility stock funds or pure high-yield funds, FT offers lower volatility through diversification, but also can lag in a bull market for either asset class. Its beta of around 0.76 indicates lower volatility than the equity market (^[10]), consistent with a more defensive income strategy. In terms of valuation metrics, traditional P/E ratios are not very meaningful for a CEF (since earnings include unrealized gains/losses). Instead, investors focus on discount to NAV and distribution yield. At ~7%, FT’s yield is competitive, though one must remember part of that yield in the past came from portfolio capital, not just income.

Management and Fees: Franklin Universal Trust is managed by Franklin Advisers, part of Franklin Templeton, a large asset manager (^[4]) (^[4]). The fund benefits from Franklin’s research expertise, especially in high-yield debt. However, active management comes at a cost. The expense ratio – including interest expense on leverage – eats into returns. According to the latest report, management fees and other expenses (excluding leverage costs) run around roughly 1% of net assets, and interest expense added another ~1.5% (given 30% leverage at ~6% cost). These costs are reflected in the NAV performance. While not inordinately high for a leveraged CEF, the fee drag reinforces why FT often trades at a discount. Investors need to believe the managers can add value through security selection (avoiding defaults in the bond portfolio, picking utility stocks with growing dividends) to justify those fees in the long run.

Risks and Red Flags

Interest Rate Risk: Franklin Universal Trust is exposed to interest rate risk on multiple fronts. First, rising interest rates cause the market value of its bond holdings to fall, which directly hits the NAV. Bonds comprise a significant portion of the portfolio, many of which are below investment-grade; these tend to be shorter-duration but still sensitive to rate swings. Second, higher rates increase the cost of the fund’s leverage, as its $60M credit facility carries a floating rate. Indeed, the fund’s average borrowing rate jumped to ~5.95% in the past year (^[8]) from much lower levels a couple of years ago. If the U.S. Federal Reserve continues a tight monetary stance, the fund’s interest expense could rise further, squeezing net investment income and potentially pressuring future distributions. Additionally, higher “risk-free” yields (e.g. Treasuries) make high-yielding funds like FT less comparatively attractive, which can widen the discount or push down the share price.

Near Future Report — Jeff Brown

Free report: “Trump’s New Dollar: The Top 3 Companies”

Limited Offer — $179

Includes the three bonus reports + 12 months of research

Claim My Copy

Credit and Default Risk: The high-yield bonds (aka “junk” bonds) in FT’s portfolio come with credit risk. These bonds offer higher coupons to compensate for the greater possibility of default. In an economic downturn or if corporate finances deteriorate (especially in riskier industries), some issuers in the fund’s portfolio could default on interest or principal. Defaults would not only cut off income but also cause permanent capital loss. Franklin Universal mitigates this by holding a diversified bond portfolio and using Franklin’s research to avoid the weakest credits, but it cannot eliminate credit risk. We saw a glimpse of this in past stressed periods – junk bond prices tumbled in early 2020 and late 2022, and FT’s NAV followed suit. A related risk is that credit spreads (the extra yield above Treasuries) could widen even without actual defaults, which would also lower bond prices. Given the fund’s leverage, any major widening of high-yield spreads could significantly erode NAV (a 5% drop in the bond portfolio would translate to roughly ~7% drop in NAV after leverage). Investors should monitor the credit quality breakdown and any indication of trouble (for example, if many holdings get downgraded).

Equity Market Risk: About 40–50% of the fund’s assets are in utility and infrastructure equities (^[3]). These stocks carry the usual equity risk – they can decline in price due to market volatility, sector-specific issues, or company fundamentals. Utilities often behave like bond proxies; when interest rates rise or inflation picks up, utility stock prices can fall. We’ve seen utility indices struggle in a rising rate environment. Regulatory changes or unfavorable rate cases can also hurt utility company profits and their ability to increase dividends. While the equity portion provides upside potential and dividend growth, it introduces volatility. For instance, if the broader stock market corrects or if there’s a shift away from defensive income stocks, FT’s equity holdings could drag down its NAV and share price.

Distribution Sustainability: A key risk for income-focused investors is that the distribution could be cut again. The fund already reduced its payout in the last year (by ~10%) to better align with earnings (^[5]). If net investment income remains under pressure (due to rising leverage costs or shrinking interest/dividend income) and capital gains are scarce, the Board might opt (or be forced) to trim the distribution further. Another cut would likely be a negative catalyst for the share price. Moreover, the fact that a notable portion of recent distributions was funded by return of capital (^[7]) signals that without sufficient earnings improvement, the current payout level might be on thin ice. On the flip side, if coverage improves, the fund could maintain or even modestly raise the dividend in the future – but that remains an uncertainty. Investors should keep an eye on earnings coverage ratios in quarterly reports and the composition of distributions (NII vs. capital gains vs. ROC) for early warning signs.

Liquidity and Market Price Risks: Franklin Universal Trust’s shares are subject to market forces and trade on the NYSE. The fund is relatively small (sub-$200M market cap) and trading volume is modest (often tens of thousands of shares a day) (^[10]). This means liquidity risk – in a market sell-off, the discount to NAV could widen as anxious investors dump shares. CEF discounts can also widen if the fund falls out of favor or if there's a general risk-off sentiment. Conversely, the discount could narrow (or turn into a premium) if the fund attracts buyers – for example, if an activist investor accumulates shares and pressures the fund to tender for shares or liquidate to unlock NAV. Franklin Universal Trust’s Board has authorized share buybacks up to 10% of shares, which is a tool to address deep discounts (^[11]). However, usage of this tool has historically been limited – it’s an option rather than a guarantee. For investors, the discount is a double-edged sword: it can provide a margin of safety at entry, but it can also widen further, exacerbating losses in a downturn.

Other Considerations: Because the fund invests in specialized areas (utilities and high-yield), it may underperform a broad index in certain environments. For example, in a roaring bull market led by tech stocks, a stodgy utilities-and-bonds fund will lag. Conversely, in a recessionary scenario, high-yield bonds could suffer more than investment-grade bonds. There’s also reinvestment risk – as bonds mature or are called, the fund must replace them. In the current climate, that risk is actually an opportunity (reinvesting at higher yields), but if rates head back down in the future, reinvestment yields would decline. Finally, we should acknowledge that fintech developments – such as Monzo’s push into the U.S. – indirectly highlight the competitive pressure on traditional banks and possibly utilities (some fintechs offer energy efficiency financing, etc.), but Franklin Universal Trust’s holdings are not directly exposed to fintech disruption. The fund has minimal exposure to banks or tech; its fortunes are tied more to interest rates and credit markets than to the cutting edge of digital banking. Still, a more dynamic financial sector could influence the high-yield market (e.g. new fintech entrants issuing high-yield debt or acquiring small banks) in ways yet to be seen.

Open Questions and Outlook

Can Coverage Improve? A central question is whether Franklin Universal Trust’s earnings will fully cover its distribution in the coming year. With the Federal Reserve’s rate hikes, the fund’s bond portfolio yields have likely risen (as new bonds are bought at higher yields), and many utility companies in the portfolio have been increasing their dividends. Will this be enough to offset the higher interest expense on leverage? If net investment income approaches 100% coverage of the payout, it would mark a turnaround in distribution sustainability. Investors will be watching the fund’s next semiannual report for NII vs. distribution metrics.

Portfolio Adjustments: How might management steer the portfolio in this environment? The mix of ~50% high-yield bonds and ~50% dividend stocks has served the fund’s mandate historically, but adjustments are possible. For instance, will the managers tilt more toward bonds to capitalize on ~8% yields now available in junk debt, or toward equities if utilities become deeply undervalued? Also, with an eye on credit quality, might they upgrade some holdings (accepting a bit less yield for safer credits) to reduce default risk late in the economic cycle? The fund’s strategy has been fairly consistent, but shifts in allocation or sector focus could be in store if opportunities arise (or if certain risks escalate).

Rate Trajectory and Strategy: The path of interest rates will heavily influence FT’s performance. If rates remain higher for longer, the fund could enjoy higher income (from new investments) but also face continued NAV pressure and expensive leverage. If rates fall (for example, in a Fed easing cycle due to economic slowdown), two things happen: bond prices would rally (boosting NAV) and leverage costs would drop – a favorable scenario for a leveraged income fund. However, a rate drop might coincide with higher default risk if it’s triggered by recession. How the fund navigates a potential recession (with its junk bonds) versus inflation scenario (with its rate-sensitive utilities) is an open question. In essence, the fund sits at the intersection of fixed-income and equity income risks; a key part of the outlook is how well it can balance these in whatever market regime comes next.

Managing the Discount: With the share price discount around 10%, shareholders might wonder if there are catalysts to narrow that gap. The fund’s share repurchase authorization is one lever – will management actively buy back shares if the discount widens further? So far, there’s no indication of aggressive buybacks, but a very large discount could prompt action to enhance shareholder value (since buying back shares at a discount is accretive to NAV). Another wildcard: might the fund consider a tender offer or other measures if the discount stays persistently wide? Some peer funds have taken such steps under activist pressure. There haven’t been public activist campaigns on FT to date, but it’s something to watch, especially given the fund’s smaller size which could attract activist investors looking for CEF discount arbitrage.

Big-Picture Implications: Finally, circling back to the broader context – fintechs like Monzo pushing into traditional finance – one might ask if Franklin Universal Trust is positioned to adapt to a changing financial landscape. While the fund’s mandate keeps it largely in conventional asset classes (bonds and dividend stocks), a question is whether it should (or could) broaden its scope. For example, could the fund invest in digital infrastructure or alternative income streams as the economy evolves? These are more theoretical questions – in practice FT sticks to its knitting. However, as the financial sector changes (with new entrants, new forms of lending, etc.), there may be indirect effects: e.g., if traditional banks lose ground to fintechs, does that alter the outlook for high-yield debt issuers or utilities’ financing costs? Likely minimal impact short-term, but it’s a space to monitor. The bold moves by fintech players underscore that the search for yield and growth is dynamic. Franklin Universal Trust provides a steady, if old-school, approach to yield. Investors must consider whether that approach will continue to deliver in a world of evolving opportunities, or whether the fund will need to innovate within its domain.

Conclusion: Franklin Universal Trust (FT) offers an attractive ~7% yield and a diversified income stream from high-yield bonds and utility equities. The recent Monzo news may grab headlines in the fintech world, but FT shareholders are more immediately focused on interest rates, credit conditions, and the fund’s own dividend coverage. With a prudent dividend cut behind it and higher yields ahead, FT is working to solidify its payout. Still, leverage and market risks abound. The fund’s ~10% discount to NAV provides a potential cushion and upside if narrowed, but also reflects the skeptical view of investors. Going forward, a sustained improvement in net investment income – aided by favorable rate movements or savvy portfolio picks – would be the key to reducing red flags like return-of-capital funding and to unlocking value for shareholders. In the meantime, FT stands as a high-income vehicle navigating the cross-currents of a rising-rate era, offering investors income today while posing the classic challenge of capital preservation tomorrow. Each investor should weigh whether its blend of yield and risk fits their portfolio, keeping in mind both the bold new frontiers in finance exemplified by Monzo’s ambitions and the timeless principles of income investing that underlie Franklin Universal Trust’s strategy.

Sources: Franklin Universal Trust Annual Report FY2024 (SEC N-CSR filing) (^[8]) (^[7]); Franklin Templeton press releases (^[4]) (^[4]); Yahoo Finance (^[2]); GuruFocus data (^[5]) (^[5]); Financial Times/Reuters report on Monzo (^[12]); PYMNTS.com on Monzo’s U.S. license bid (^[1]) (^[1]).

Sources

For informational purposes only; not investment advice.