Perpetual Income & Growth has published interim figures for the six months ended 30 September 2015. The FTSE All-Share Index returned -7.2% over this period but Perpetual Income & Growth returned -0.2% on net assets and the return to shareholders was +2.4% (the shares moved from a 3% discount to 0.1% discount). The dividend for the six month period was upped by 3.6% to 5.8p.
The key contributors to the Company’s outperformance were tobacco companies, in particular the holdings in Reynolds American and Imperial Tobacco. Over the six months to 30 September 2015, Reynolds American saw its share price rise by over 25% (sterling; total return) after the company’s proposed acquisition of US tobacco company Lorillard met with final approval from the US Federal Trade Commission. This saw Reynolds acquire Newport, a dominant menthol cigarette brand in the US, which strengthened its market position there. Meanwhile, Imperial Tobacco, as part of the deal, acquired some US brands from Reynolds (including premium brand Winston) as well as Lorillard’s US based salesforce. Dividend growth and profit margins remain healthy across the tobacco majors, in
spite of the continuing volume decline in global cigarette sales, as product innovation, tobacco quality improvements and cost rationalisation have helped enhance pricing power in many territories.
Also contributing strongly to performance were some of the portfolio’s investments in the financial services sector, including Provident Financial. A long-term holding in the portfolio, Provident Financial specialises in the non-standard lending market and has two main lending divisions – Vanquis, a non-standard credit card business, and CCD, its consumer credit division, primarily made up of the home collected credit business. The latter has improved profitability in recent years by being more stringent on credit quality and through technology-derived efficiency gains. The company has expanded into complementary areas of credit, both organically through the creation of Satsuma Loans, its online short-term loan business, and by acquisition, with the purchase of Moneybarn, a company specialising in car finance. Provident Financial has been quick to adapt its business model to advances in technology and changes in customer borrowing habits. Profit margins are high and stable, while default rates remain low and within the management team’s expected range.
The Company’s holding in Amlin, a Lloyds insurance market investment vehicle, received a takeover approach from Japanese company Mitsui towards the period end, resulting in a significant uplift to its share price. They say they were fully supportive of this acquisition proposal as the price paid reflected a full valuation for the business. The share prices of Beazley and Hiscox, also in the non-life insurance sector, both rose during the period on the back of positive half-year results and amid growing takeover speculation.
The portfolio continues to have no exposure to banks or mining companies, due mainly to uncertainty on the future direction of dividends as a result of regulatory restrictions in the case of banks, and uncertainty over future commodity prices in the case of mining companies. The absence of holdings in these sectors helped drive the fund’s outperformance of its benchmark over the period.
Weighing on performance were the holdings in Rolls-Royce, BP and Thomas Cook. Rolls-Royce continued to disappoint in share price performance terms. The appointment of Warren East as chief executive in July saw him make a further downward revision of the expected full-year pre-tax profits and cancel the share buyback. Headwinds for its marine business, a slowing production line for the Airbus A330 and lower than expected demand for engines to power business jets have depressed short term profit expectations. However, Mr East was keen to emphasise his belief in the long term prospects for the business as a whole, citing “exceptional technology and outstanding long-term prospects”.
A decline in global energy prices was in part responsible for a fall in the share price of BP. The company has stated its intention to maintain its dividend at current oil prices and with its latest quarterly results has given further details around the substantial cost reduction and capital efficiency agenda. The planning assumption, as enunciated by chief executive, Bob Dudley, is that oil prices will stay ‘lower for longer’.
Thomas Cook saw sales revenue impacted and sentiment dented by the terrorist attack in Tunisia. Profits were also affected by foreign exchange headwinds. However, more recently the company has reported improving demand for holidays in Northern Europe and the UK, with conditions in Continental Europe remaining ‘challenging’. Thomas Cook continues to develop its strategic partnership with Chinese operator Fosun, where it has made progress on a number of new initiatives.
PLI : Tobacco exposure drives Perpetual Income & Growth’s outperformance