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Invesco Income Growth is a new dividend hero

Invesco Income Growth is a new dividend hero – Invesco Income Growth says that its total return on net asset value for the year to 31 March 2018 was -3.9%, compared with an equivalent All-Share Index return of +1.2%. The Income Growth sector has been out of favour with investors, so that discounts in the sector have widened, with the company’s being 11.5% at the year end. Earnings per share increased to 11.9p per share (2017: 11.1p), an increase of 7.2%. They are paying a total dividend per share for the year of 11.05p (2017: 10.65p), an increase of 3.8%. The company became an AIC ‘dividend hero’ in 2017 in recognition of having provided 20 years of consecutive dividend increases and the board aspires to maintain this in future years.

Extract from Ciaran Mallon’s manager’s report

The portfolio’s holdings in the tobacco sector, British American Tobacco (BAT) and Imperial Brands, have delivered exceptional returns for shareholders over the long term. I have sold shares into this strength over the past three years, significantly reducing the exposure to the sector. In the past year the sector was impacted by headwinds, including the weakness of the US dollar and the resultant profit impact on translation into sterling, as well as the shift in market sentiment towards more economically sensitive sectors in a period of rising bond yields. 

This negative performance came despite the successful conclusion last year by BAT of the acquisition of Reynolds American – creating an entity which is well positioned to exploit both traditional cigarettes and next generation products, particularly in the key US market. Subsequent results from BAT confirmed headwinds for headline earnings from adverse foreign exchange moves,
overshadowing news of underlying growth across the business and a 15% increase in the dividend. 

My view remains that the tobacco companies’ focus on pricing power, cash conversion and product innovation should continue to provide a reliable source of income, underpinning longer term returns to shareholders, while next generation products have the potential to deliver a significant new revenue stream. Furthermore, the steep decline in the valuation of this sector over
recent months leaves the shares looking increasingly attractive long term investments. 

The portfolio has a spread of investments in the utilities sector. These holdings variously offer an attractive combination of asset backing and, with the exception of Drax, index-linked dividend growth. All except Drax are highly regulated monopoly infrastructure owners, where the regulator ensures a fair outcome for customers while ensuring that well run businesses can adequately
reward shareholders. This fits well with the investment trust’s objectives. The sector performed poorly over the period, with sentiment damaged by Conservative government proposals to cap gas and electricity prices and the rising popularity of the Corbyn-led opposition with a manifesto to nationalise parts of the sector, as well as the shift in market sentiment towards more economically sensitive sectors. Holdings in Centrica, Drax, National Grid, Pennon, Severn Trent, SSE and United Utilities all delivered negative returns. The holding in Centrica has now been sold, as I see little prospect of the company being able to stem the high rate of attrition in its customer base while its dividend now looks to be under threat. However, with as yet little substance to the political agenda, the portfolio otherwise remains well invested in the sector – I anticipate that the attributes outlined above will reassert themselves. 

The holding in Micro Focus fell very sharply as the company warned in March that revenues were declining more sharply than expected, due to problems stemming from its GBP6.6 billion acquisition last year of the software arm of Hewlett Packard. The company also announced the departure of its chief executive, just six months after taking the role. The shares had performed
extremely well in the two years prior to this and also paid significant dividends – given the much more uncertain outlook I disposed of the shares. 

The negatives above outweighed and overshadowed some strong performances from elsewhere in the portfolio. The woes of the UK retail sector have been well publicised. However, Next confirmed that its multi-channel offering allows it to see the growth of on-line shopping as an opportunity not a threat, while it can flex its leasehold property base to take best advantage of future trends in apparel retailing. Meanwhile, its focus on shareholder returns – through special dividends and further share buy backs – underpinned earnings growth despite a challenging retail back drop. 

The portfolio’s very long standing holding in Young & Co’s Brewery was the top contributor to performance over the year. The company, which some time ago closed its brewing operations and focused on its managed pub estate, delivered impressive results during the period – confirming strong like-for-like growth from its pubs despite a tough consumer environment for the industry as a whole. 

Croda International is another long term portfolio holding. This niche chemical business has grown steadily and consistently to become a FTSE 100 constituent. The company’s targeted investment in innovation has paid dividends, as Croda has aligned itself with key industry trends in the personal care market it supplies specialised product to. 

Softcat is a newer addition to the portfolio. The software reseller has been a steady compounder since its IPO in 2015, growing earnings at an annual rate of 15%. The shares performed very strongly over the year, as the stock market increasingly came to appreciate the company’s ability to deliver such consistent growth, along with its strong cash generation and hopes for additional returns to shareholders via special dividends. 

Other notable positive contributions to performance came from the holdings in Compass, Euromoney Institutional Investor, Informa, Jupiter Fund Management, Ricardo and Xafinity. In terms of portfolio activity during the period, new investments were made in JTC, which provides investment management services, and telecoms group Vodafone. As mentioned above, the holdings in Centrica and Micro Focus were sold while AstraZeneca and Capita were also disposed of.”

IVI : Invesco Income Growth is a new dividend hero

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