Dunedin Income Growth did really well last year – over the year ended 31 January 2020, Dunedin Income Growth delivered a net asset value total return of 22.2% on a total return basis, more than double the return on the All-Share Index, which produced a total return of 10.7%. The share price total return for the year was 28.8% reflecting a significant narrowing of the discount to NAV.
The manager sold off the trust’s bond portfolio during the period as it refinanced its long-term debentures. The bond portfolio had been around since 2015 and had been introduced to offset the debentures and cut the gearing on the equity portfolio. This refinancing cut gearing further, from 8.8% to 4.8%. This reduced the trust’s revenue but the board still felt confident enough to raise the dividend by 2% to 12.7p. Revenue covered 12.08p of this and the balance came from reserves. After this, it still has 10.9p left in its revenue reserve.
Much has changed since 31 January, however. Dunedin Income Growth’s NAV is down 19.7% over the past three months and its share price down 17.4%. The chairman says “The consequences of employees not being able to get to work or of businesses not being able to meet demand for goods and services have already been evidenced in pressures on cash flows and balance sheets, especially for leveraged businesses. In addition, consumer demand is likely to continue to weaken as people are unable to go out and some parts of the economy close down. Historic monetary policy responses aimed at stimulating aggregate demand, and easing liquidity, have already been implemented, even though interest rates were close to zero in many economies. Further policy responses to support business and preserve incomes have been introduced rapidly. The effectiveness of all these measures is hard to gauge, particularly if the social distancing measures, which restrict economic activity, remain in place for a prolonged period.
The UK stockmarket has fallen by approximately 25% since the beginning of 2020 as the impact of the Coronavirus pandemic and the measures to try to control it (whilst taking measures to manage the long-term economic impact) are assessed. Against a backdrop that is significantly more uncertain than at the Company’s year end, it is worth restating the Company’s investment policy which is to “invest in high quality companies with strong income potential”. Our Investment Managers continue to focus on investing in companies with strong balance sheets, good cash flows and sound business models that can deliver good, growing dividends with the prospect of capital growth. Whilst there may be significant volatility ahead, we believe this approach should reward shareholders over the longer term.”
DIG : Dunedin Income Growth did really well last year