Perpetual Income & Growth has published results for the year ended 31 March 2016. Over that period its net asset value was unchanged. By contrast, the return on the FTSE All-Share Index was -3.9%. The discount widened however and so the return to shareholders was -2.9%. The dividend was increased by 4.1% to 12.8p and they are also paying a 2.1p special dividend. The Company’s dividend for the year (excluding the special dividend) has more than doubled over the last 10 years, a growth rate exceeding three times the rate of inflation in the same period.
Mark Barnett’s manager’s report says, against a volatile stock market backdrop, the Company outperformed its benchmark index. The portfolio benefited from its zero weighting in the banking sector, but its underweight position in the oil & gas sector, notably the absence of a holding in BG Group, detracted from performance. The zero weighting in the mining sector, where share prices demonstrated exceptional swings, was a positive over the period as a whole, but a negative over the final quarter.
The portfolio has significant investments in the pharmaceutical sector, in both large multinationals and smaller companies. This sector as a whole underperformed on the back of a sell-off in the US – driven by political opposition to higher drug prices and a reassessment of the merits of some acquisition driven groups such as Valeant Pharmaceuticals (which is not held in the portfolio). This setback in sentiment towards the sector is likely to be only temporary and in a low growth world where many industries have little pricing power, these pharmaceutical companies offer the scope for longer term growth in earnings, cash flow and dividends.
A key positive contribution to Company performance during the period came from the holdings in the tobacco sector. Reynolds American (which is 40% owned by British American Tobacco) concluded the purchase of US tobacco company Lorillard in June 2015 and the company is now seeing cost and revenue synergies emerging from the process of integration. As part of the deal, Imperial acquired some US brands from Reynolds as well as Lorillard’s US based salesforce – a purchase which Imperial anticipates will be positively incremental to earnings. In spite of a decline in sales, dividend growth and profit margins remain healthy across all the tobacco majors as a result of product innovation, tobacco quality improvements and cost rationalisation.
Also contributing strongly to performance were certain investments in the financials sector. Amlin, a Lloyds insurance market investment vehicle, agreed to a takeover from Japanese company Mitsui, resulting in a significant uplift to its share price. The share prices of Beazley and Hiscox, also in the non-life insurance sector, both rose. Meanwhile, the portfolio’s long term holding in Provident Financial gained entry to the FTSE 100 index during the period, as the company delivered a sixth consecutive year of double-digit percentage dividend increases. In March, London Stock Exchange Group announced a ‘merger of equals’ with Deutsche Boerse and saw its shares rise to a record high as New York Stock Exchange owner ICE said it may make a counter offer for the company.
Within the fixed line telecoms sector, BT announced its strongest revenue growth in over seven years and continued its expansion into mobile telephony, with its acquisition of EE gaining approval from the Competition & Markets Authority. Shareholders received further good news as it was confirmed that the company would not have to demerge or sell the Openreach fixed line infrastructure, as had been feared. KCOM saw its shares rise on the sale of its national infrastructure (outside of Hull and East Yorkshire) to CityFibre for GBP 90 million. TalkTalk Telecom, however, announced that it had been the victim of a cyber-attack. The shares were marked down in the weeks following the news, but stabilised towards the end of the period as it was confirmed that the impact of the attack had been less than originally suspected.
The holdings in the support services sector also provided a mixed impact on performance. Capita’s results led to a lowering of forecasts for organic growth and a higher interest charge, while G4S has faced headwinds in its emerging
market businesses and from provisions for its ‘onerous’ (unprofitable) contracts in the UK and from balance sheet concerns. The negative share price reactions appear to have been unduly harsh, with the companies well positioned to deliver growth from their bid pipelines in a challenging macro-economic environment. Meanwhile, Rentokil enjoyed a solid performance throughout the year, as the group’s focus on its core pest control business and on cash flow led to higher margins and a lower interest charge.
GAME Digital saw its shares fall sharply after an update on pre-Christmas trading, which confirmed that UK sales had fallen off sharply at the most critical time of year for the company. Sales in old format content have declined much faster than expected and, while sales of new generation content have remained strong, these were not enough to offset the fall. The company’s sales in the Spanish market have remained strong.
Rolls-Royce published a negative trading update in November, forecasting that 2015 profits would be at the lower end of expectations and that demand would weaken in 2016. With visibility of future earnings growth showing no signs of improvement, the remainder of the holding in the company was sold, having been reduced earlier in the year.
Also weighing on portfolio performance were the holdings in the travel & leisure sector, where sentiment has been overshadowed by terrorist events. Thomas Cook confirmed a challenging trading backdrop for 2016, although it has moved much of its summer capacity to the Western Mediterranean. EasyJet reported a reduction in revenue per seat – with the Paris bombing and the French air traffic control strikes having a short term impact.
PLI : Perpetual Income Growth doubles dividend over ten years