Invesco Income Growth reports that the total return on net asset value over the half year to 30 September 2016 was 9.1%, it was a little behind their benchmark, which returned 12.9%. Nonetheless the share price’s total return was better, at 11.6%, thanks to the narrowing of the discount. The Board is declaring a second interim dividend of 2.2p per share in respect of the year ending 31 March 2017. Together with the first interim dividend, this makes a total of 4.4p for the first half of the current financial year compared with 4.3p last year, an increase of 2.3%.
Looking at the performance in the period, Ciaran Mallon’s report says that the holdings in the tobacco sector were amongst the top contributors, benefiting from their international exposure, but also from continued positive news flow. Half year results from British American Tobacco indicated the benefits of its focus on the group’s four Global Drive Brands, which increased volume by 10.8% per cent. Imperial Brands confirmed its forecast of a 10% increase in dividends, reaping further benefits from last year’s acquisition of US brand Winston and production facilities. Despite well publicised headwinds from declining volumes and the introduction of plain packaging, dividend growth and profit margins are strong across much of the sector, in part a result of the ongoing shift towards industry consolidation.
Notable positive contributions also came from holdings in the pharmaceutical sector – AstraZeneca and GlaxoSmithKline. Both companies are beneficiaries of the strong US dollar, while AstraZeneca issued plans to seek approval of its injectable asthma treatment drug with US and European regulators later this year, after favourable trial results. The failure of the Bristol-Myers lung cancer study was also seen as positive for AstraZeneca’s combination therapy cancer drugs. GlaxoSmithKline’s half-year report confirmed strong growth across its three business arms – pharmaceuticals, vaccines and consumer healthcare.
Elsewhere in the portfolio, HSBC’s share price rose as the market sought perceived safety in its globally diversified business and US dollar exposure; the bank’s announcement of plans to repurchase US$2.5 billion of stock this year – leveraging capital gained from the completion of the sale of its Brazilian business – was also viewed favourably.
While domestically focused stocks typically saw their share prices fall post the Brexit vote, the portfolio’s holding in Young & Co’s Brewery performed strongly. The company again reported impressive sales growth against a declining beer market, confirming double digit profit growth with full year results during the period.
The shares in Micro Focus International, a recent addition to the portfolio, performed well throughout the period, culminating in a positive reaction to the company’s proposed merger with Hewlett Packard Enterprise’s Software Business Segment. This is viewed as consistent with Micro Focus’s strategy of acquiring and efficiently managing mature infrastructure assets.
The period was notable for warnings of lower profits by companies, to which the stock market was inclined to react by aggressively de-rating the shares. These included the portfolio’s holding in Essentra, formerly known as Filtrona, whose shares fell by more than a quarter in June after the company issued a warning about “challenging” market conditions. In light of these conditions the company is to implement a new cost-cutting programme, but noted that the warning reflects a “short-term blip”, with management “taking a rather cautious view.”
The holding in Capita also fell sharply in value, as it downgraded full-year earnings forecasts. This was blamed on a slow-down in specific trading businesses, one-off costs and problems with a major contract with Transport for London, along with delayed client decision-making since the EU referendum.
Towards the period end, fellow support services business MITIE warned that it remains under significant pressure from various fronts including lower UK growth rates, changes to labour legislation, further public sector budget constraints and uncertainty both pre and post the EU referendum. None of these factors were new, hence the scale of the reduction in management’s guidance on profits was surprising – and indicated that the proportion of profits from higher margin project work and discretionary spend was a lot greater than had been expected. The holding has been sold.
Other domestically focused holdings to deliver negative share price performance included N Brown, BT and Next.
IVI : Invesco Income Growth hit by a few profit warnings