Invesco Income Growth (IVI) has announced its results for the year ended 31 March 2020, a year that its manager has described as being a volatile one for the trust: dominated by concerns over the outlook for global economic growth, Brexit negotiations and the UK General Election, which were overwhelmed in the final three months by the impact of the Covid-19 pandemic. During the year, IVI provided NAV and share price total returns of -17.3% and -13.6% respectively, both outperforming its All-Share benchmark, which the company says returned -18.5%.
Revenue and dividend outlook – volatile markets saw dividends cancelled
In the final weeks of IVI’s financial year, many companies announced the cancellation or suspensions of their dividends in response to the effects of Covid-19. IVI’s chairman, Hugh Twiss, says that a number of these were dividends that had already been declared and the trust was expecting to receive. As a result, for the year to 31 March 2020, IVI’s revenue return of 11.12p per share (2019: 11.95p) was lower than its board had expected. Its board has decided to use the trust’s revenue reserves and has declared a fourth interim dividend of 4.20p per share. In combination with the previously declared interim dividends of 7.55p, gives a total dividend per share for the year of 11.75p (2019: 11.45p). IVI says that this is in line with the annualised inflation rate for the year to 31 March 2020 of 2.6% (as measured by RPI) and is consistent with the company’s longer-term objective of growing the dividend at above the rate of inflation (the 23rd consecutive year of dividend increases). The fourth interim dividend will be paid on 24 July 2020 to shareholders on the register on 3 July 2020.
Further revenue reserves and capital may be deployed in the future
IVI’s board says that, since its year end, the number of companies cancelling or suspending their dividends has increased substantially and, as a result, it is now forecasting a substantial reduction in our income for the year to 2021. The board says that, while this is only be a tentative forecast, it recognises the importance of dividends to its shareholders and so, it is at times like this that the revenue reserves it has been building up for such occasions, and if necessary the capital reserves, can be further deployed in helping IVI to meet our investment objective of growing, over time, our dividend above the rate of inflation. However, while this is the trust’s goal, the board says that it cannot know with certainty whether the company can achieve it until it discovers the actual income that we will receive and the speed with which companies restore their dividends. Notwithstanding this, it remains the board’s intention to at least maintain the level of the first interim dividend due to be paid in October.
The manager’s portfolio review
Performance of the portfolio had been encouraging in the latter stages of 2019, particularly in the weeks immediately after the UK General Election. But as the disruption around Covid-19 became clear and the potential impact was digested the market started to fall. The portfolio had been carefully positioned with an element of caution factored in given the headwind of the UK exiting the EU. Whilst the portfolio showed some resilience versus the benchmark at the end of January as the crisis was unfolding, it was unfortunately short lived.
The strongest performing sector in the portfolio over the twelve month period has been utilities. Post the general election the threat of nationalisation by a far-left Labour government has been removed and these companies saw this relief materialise in an upward movement of their share prices. Since the post-election rally, these utility companies (Pennon, Severn Trent, National Grid, SSE and United Utilities) have continued to perform well. They have an attractive yield and provide defensive qualities in a challenging environment. Whilst there is some risk from regulators that might be disinclined to see dividends paid to shareholders, as customers struggle to pay their bills in a virus impacted world, I believe this risk to be low.
The exception to the strong performances in utilities was the holding of Drax which traded broadly sideways for the majority of the twelve month period before falling in March as a result of reduced power demand as the country locked down and amid concerns over increased bad debts from business customers in a virus impacted environment.
Elsewhere in the portfolio strong performances were seen from two of the largest holdings, Experian and RELX. The Experian share price has been resilient over the last twelve months but the share price was extremely volatile in March. Despite this the holding remained a strong performer for the portfolio over the period and the company has a resilient and cash generative model with a diverse base of drivers of growth within the business, which should stand it in good stead for the continued disruption in the coming months. In the last recession the business performed well and it is in an even stronger position now. RELX, which provides information and analytics to businesses, performed well for the majority of the period before the impact of the virus. The majority of the business should be resilient during this market volatility but the smaller exhibitions part of the business which accounted for 16% of revenues last year has been severely impacted by the lockdown.
Softcat released interim results mid March stating that trading has been in line with expectations, but given the uncertainty of the length of the impact of the virus the company thought it prudent to protect its cash position and to maintain flexibility around the timing of dividend payments in relation to the current financial year. As such they decided to cancel the interim dividend but will take the opportunity to review this decision later in the year as the impact of the virus becomes clearer. I believe that the company has been slightly over cautious in this decision and fully expect the dividend to be restored in due course. One should remember that if a dividend is not paid, this money does not disappear, rather it remains on the balance sheet available for distribution at a later date, or indeed it remains as cash in the business which should translate into the share price. Following a period of strength in the share price I reduced the holding in early February. Other strong performances in the portfolio were seen from Ferguson and Smith & Nephew.
In contrast, the portfolio’s holdings of Informa and Whitbread have detracted from performance as the virus poses serious challenges to their businesses. Informa which provides business intelligence and academic publishing services, for the most part had an uneventful year, but the virus has significantly impacted the group’s events-related businesses. Other parts of the business remain resilient but in order to ensure stability for the business the company has suspended the dividend, applied for the Bank of England’s Covid-19 Corporate Financing Facility (CCFF) and has raised capital from the equity market by placing new shares. I believe that the company is doing the right things by delivering meaningful cost savings, freezing recruitment and senior leadership are sacrificing part of their salaries. All things considered I am content to hold the position as the actions taken by the management team leave the company in a stronger position financially, and well placed for the spring back in economic activity as the lock downs ease.
Whitbread, which is probably best known for its Premier Inn brand, has effectively closed for business. As a result of the lockdown all its hotels in the UK and Germany have closed, together with its pubs and restaurants. The majority of staff have been furloughed on full pay. The business had enough liquidity to see it through twelve months of closure but subsequently announced a rights issue so that it may press ahead with its structural growth ambitions and win market share in the UK and Germany. The scale of their portfolio means that when they are able to reopen, they can do this in a staged way with not all hotels in each location opening to begin with. The company started the year with a strong balance sheet and access to significant liquidity. There is material headroom on their funding facilities, and they are able to access the CCFF should they require additional financing. In addition, the business is backed by a valuable freehold property estate. However, given the unprecedented situation they have taken swift action to reduce costs and the Board has decided not to declare a dividend for the company’s 2020 financial year. Whilst the business is closed for now, when it reopens, I am reassured that the very experienced management team will do so in a disciplined way to maximise opportunity.
Other detractors over the period have been Young & Co’s Brewery (Youngs) and Bunzl. Both companies saw their share prices trade within a relatively narrow price range over the twelve-month period leading up to the crisis but suffered falls as events unfolded. As the country went into lockdown, Youngs closed their pubs and furloughed the majority of their workers. The company has accessed the CCFF and has decided not to pay its final dividend. Youngs has a strong balance sheet supported by a predominantly freehold estate and has enough headroom to withstand a long period of closure. Bunzl has several divisions to its business with each experiencing varying degrees of impact from the crisis. The food service and retail sectors have been badly affected as offices, conferences and canteens have been closed and they expect cleaning, hygiene and safety areas to vary depending on the end markets served. The grocery and healthcare divisions of the business are expected to have a robust performance but due to uncertainty the company has cancelled the dividend.
Being underweight oil was a positive for the relative performance of the portfolio to the benchmark as oil prices plummeted and some of the major oil companies cut their dividends. Not holding Glencore, Lloyds Bank or Barclays was also helpful for relative performance, although the portfolio does hold Royal Bank of Scotland (RBS) which was a detractor over the period.
There were no new holdings introduced to the portfolio over the period. Notable additions to existing holdings included Drax, GlaxoSmithKline, HSBC, National Grid, RBS, Royal Dutch Shell and Vodafone. G4S has not performed well and the holding has been reduced in recent weeks alongside BT, Aviva, InterContinental Hotels, Legal & General and Softcat. Meanwhile Imperial Brands has been sold and the holding of Merlin Entertainments was bid for and exited the portfolio. Subsequent to the period end the remaining holdings of G4S and BT have been sold.