Mercantile results for the year ended 31 January 2015 have been published. These show that the fund marginally underperformed the Company’s benchmark with a return of 4.4% against 4.6% for the benchmark. Share price total return was -0.7%. The dividend was increased by a penny to 41p on revenues that fell from 47.5p to 42.1p. the Board says the company’s interim dividends will be increased from 8p to 10p this year – to help rebalance the distributions. this may mean that the final dividend is reduced but, in turn, that would not necessarily mean that the full year dividend will fall – they say they might dip into reserves.
The manager’s report says the largest positive contributor to performance was the overweight position in the General Retailers sector. This was a sector to which we added exposure as the year progressed, reflecting primarily stock specific opportunities, including several new issues, but also motivated by an increasingly positive view of the outlook for UK consumer spending, resulting from projected increases in household cash flows. Dixons Carphone was the largest positive contributor to the fund, and resulted from the merger of two of their existing holdings. They viewed both the financial and strategic rationale for the transaction as compelling, and this remains a significant holding.
The underweight position in the Oil Equipment, Services and Distribution sector contributed positively as the share prices of a number of companies which they do not hold, including Amec Foster Wheeler, were impacted by the rapidly declining oil price through the fourth quarter. Having been the largest negative contributor last year, food producers also performed well, principally due to the performance of New Britain Palm Oil which agreed to a takeover approach at an 85% premium.
The largest detractor from performance was the Support Services sector, driven by their holding in Serco, which is no longer held. This investment was made based upon the expectation that whilst it would take time, the new management team would successfully restructure the business, re-establish its position as a UK government outsourcer, and generate significant improvements to profits and cash flows. In the event, the problems uncovered were greater than anticipated, necessitating an expected substantial capital raise and lowering their long-term financial expectations for the business and thus impairing its value.
MRC : Mercantile to smooth dividend payments