Shires Income has reported results covering the year ended 31 March 2020. The trust outperformed its benchmark in NAV terms – Shires returned -18.0% for the period against the benchmark’s -18.5%. However, a small widening of the discount towards the end of the period left shareholders with a return of -21.2%. The dividend has been maintained at 13.2p, as for last year, a fraction of the dividend was made up by revenue reserves (0.22p of the 13.2p). Even after this, the reserves represent 1.1 times the total annual cost of the dividend. The board is also planning to ask shareholders for permission to distribute capital profits as dividends, in line with many other investment trusts.
The end of the period included the collapse in markets as a result of COVID-19. Frustratingly, the trust had been 5% ahead of its benchmark at 31 December 2019, with a positive return of 13.9%. A number of companies have reduced or suspended their dividends. The board has decided that it will pay three interim dividends of 3p each. Then it will review the situation again at the end of the financial year before deciding how much next year’s final dividend will be.
Extract from the manager’s report
“A number of large index constituents that were not held in the portfolio helped performance. In particular, avoiding Lloyds Bank, Glencore and Barclays stood out as material positive contributors. Similarly, the underweight positions in HSBC and Royal Dutch Shell also helped relative performance given the weakness in these companies’ share prices over the year. The holding in Assura performed strongly as the market revalued the company’s asset-backing and quasi-governmental secure income stream for its GP properties. The market responded positively to London Stock Exchange’s strong earnings growth as well as the potential acquisition of Refinitiv leading to a strong share price performance.
The largest negative contributor was the holding in Aberdeen Smaller Companies Income Trust. Despite a robust performance from the company’s portfolio for most of the year under review, its discount widened considerably at the end of the period in the wake of concerns around the COVID-19 virus. The impact of the COVID-19 virus also impacted Cineworld, with concerns that cinemas would remain closed for a protracted period weighing on the shares. Finally, the holding in Saga performed poorly given its profit warning during the period.”
“Gearing increased during the year from 19.6% to 23.7%. The gearing is notionally invested in the preference share portfolio. At the year end these securities had a value of £20.9 million, in excess of net indebtedness which stood at £15.2 million. This part of the portfolio provides a core level of high income and has been more resilient than equities as the market has fallen, but has still generated a negative return. The preference share portfolio declined by 7.3% in total return terms over the 12 month period. The issuers of preference shares have come predominantly from the financial sector and the Company’s holdings reflect this. Amongst the preference shares held, Royal & Sun Alliance, Standard Chartered, Santander, Aviva and Ecclesiastical Insurance are all in the banking or insurance sector and these areas of the market performed poorly, particularly in the final quarter of the period.”
[It is a shame to see the shine coming off Shires Income after a period when it had managed to eliminate its discount and start to grow the company (615,000 new shares were issued over the year ending 31 March 2020). The culprit is, of course, COVID-19 and the manager cannot be faulted for failing to anticipate this. Helpfully, while many financial companies were forced to suspend dividend payments on their ordinary shares, this has not been the case for their preference shares. This helps protect a large part of Shire’s dividend revenue.]
SHRS : Shires freeing up more distributable reserves