Securities Trust of Scotland generated a return on net assets of -10.7% over the six months ended 30 September 2015. By contrast, the fund’s benchmark, MSCI World High Dividend Yield Index, returned -9.1%. The discount widened from 5.75 to 7.5% and so the return to shareholders was -12.5%.
The dividend was increased from 2.3p to 2.9p. The Chairman reiterated the commitment to deliver a minimum annual dividend of 5.8p per share in the current financial year, an increase of over 18%. This will consist of three equal payments of 1.45p and a fourth payment of at least 1.45p. Based on the share price on 4 November 2015 the forecast annual dividend yield for the financial year is 4.3%.
The manager says gearing cost the fund 1% during the period.
At the stock level, the strongest positive contributors to performance included two recent purchases: WEC Energy Group, the US electricity utility, and delivery name United Parcel Service (UPS). WEC Energy has just completed the acquisition of a competitor – creating the leading electric and gas utility in the Midwest. They like the combined business as it is well placed to execute on a pipeline of regulated capital investment in a friendly regulatory environment. This, in turn, should support a generous return of capital, by means of dividend, to shareholders. UPS has reported good financial results through the year. They like it as it is seeing signs of pricing improvement in its US business, reflecting its improved services, stronger international growth and effective cost control. The resultant free cash flow and dividend growth is the cornerstone of their investment case.
Key detractors from performance during the period included Kinder Morgan and Chevron. US oil and gas pipeline firm Kinder has been weak due to the falling commodity prices and interest rate volatility as it has a relatively large amount of debt, given its utility-like business. They remain confident in the long-term outlook for the holding because of its large backlog of infrastructure projects which provide stable, fee-based cash flows. Chevron has underperformed, in line with the broader energy sector, as the oil price has fallen. It is the only integrated oil firm we own. They like it because it has many attractive upstream projects close to starting, strong capital discipline and a positive attitude towards returning cash to shareholders. In addition, strength in certain consumer staples stocks which were not held, like Nestle and Altria affected the fund’s relative performance.
STS : Securities Trust committed to dividend increase