Dunedin Income Growth wants new sustainable objective – Dunedin Income Growth says that for the year ended 31 January 2021, it delivered an NAV return of -0.3%, much better than the equivalent return on the All-Share Index of -7.5%. The return to shareholders was +0.1%. The dividend has been increased from 12.7p to 12.8p. The dividend wasn’t covered by earnings last year and this is true again. Earnings per share fell from 12.08p to 10.9p. Nevertheless, 9.1p per share will still be available to support future distributions, representing 71% of the current annual dividend cost.
Proposed new objective
The board has been thinking of ways of incorporating environmental, social and governance analysis into the investment process. It is proposing shareholders are asked at the next AGM to change the investment objective. The new wording would be: “To achieve growth of income and capital from a portfolio invested mainly in companies listed or quoted in the United Kingdom that meet the company’s sustainable and responsible investing criteria as set by the board.”
In practice, this would mean excluding tobacco stocks, arms manufacturers, coal miners, oil companies using fracking and oil companies that have not diversified into natural gas and renewables, fossil fuel power generators and power generators investing in coal or nuclear plants.
The company will target a carbon intensity at least 20% lower than the All-Share Index.
Stewardship and engagement will be an important part of the approach. The manager will engage with company management to influence behaviour and benchmark progress, will use the company’s voting power in support of the new ESG objectives and ultimately divest from companies that fail to improve or reform.
[This is an interesting move by the Dunedin Income Growth board. It helps differentiate it from its peers, at least in the short term. I think that embedding sustainability into investment approaches may become commonplace. The definition of what is and isn’t ok will rest with the board rather than the manager. That raises the prospect of extensive debates at the company’s AGMs as shareholders try to influence the board’s views. I was interested to see that nuclear power isn’t ok, for example, despite its contribution to lowering emissions. Tobacco is a more obvious no-go area, but this came up in my recent conversation with Hugo Ure, manager of Troy Income & Growth – he is sticking with it. The list reminded me of Montanaro’s approach with both its UK small cap and European small cap funds.]
Extract from the manager’s report
“The higher quality, relatively defensive positioning of the portfolio as well as the underweight position in oil and gas was supportive in these volatile markets but we also saw a good number of the holdings continue to deliver strong performance. Notable outperformers included Weir Group, which announced the sale of its oil & gas business which was well received by the market. This not only reinforces its balance sheet but also leaves a much more compelling business centred on its Minerals division that has a solid aftermarket proposition, greater resilience and higher margins. Genus also delivered strong operational results with minimal impact from the virus and strong growth in its markets, particularly its Porcine business in China where it is benefiting from significant restocking on the back of last year’s African Swine Flu outbreak. ASML, which develops and produces semiconductor chips, also performed well, reflecting the significant increase in product demand in its Logic division and better than expected cyclical recovery in its Memory business. This positive mix and increasing pricing led to an increase in both revenue and margin guidance.
The Company’s continued underweight position in oil and gas which helped performance is driven by a combination of lacklustre dividend growth, weaker ESG credentials and the relatively capital intensive and cyclical nature of the industry. Given high yields, we retain some exposure to Total but exited Royal Dutch Shell during the year after it cut its dividend. We continue to prefer other companies in keeping with our quality tilt where we have benefitted from exposure to commodity names such as Rio Tinto and BHP Group which have superior returns and margins and much better cash flow dynamics.
Performance was further enhanced by the overseas holdings which made a useful contribution while also diversifying the portfolio. Notable overseas holdings include Dutch-listed holding company, Prosus, Swiss med tech and diagnostics company, Tecan, and Danish pharmaceutical company Novo-Nordisk.
In terms of income performance, while it has been a year flooded with dividend cuts and suspensions, the Company’s total income declined by just over 10% compared to the broader market where dividends were down by more than 30%. At the beginning of the year, we saw many companies take a more prudent approach to dividend distributions, with a significant number of delays, reductions or suspensions of payments. As the year progressed and visibility improved, we saw the likes of Close Brothers, Euromoney Institutional Investor, Marshalls, Countryside Properties, Standard Chartered and Weir Group all restore some of their dividend, while the resilient trading and balance sheet support from the likes of Diageo, Rio Tinto and Coca-Cola Hellenic Bottling Company led to small increases. Similarly, having already significantly reduced the Company’s exposure to higher yielding companies with weaker prospects, we felt less of an impact from cuts to a number of the very large dividend paying companies within the market. Looking forward, we expect a mid-single digit increase in dividends for the Company’s holdings in this coming year, likely lower relative to the market given the outperformance this year, but nevertheless helpful in our efforts to rebuild dividend cover in the future. Option writing contributed just over 9% of the total income for the year. This higher level than previous years reflects the higher volatility and therefore higher premiums on offer in the market for writing options as well as the effect of lower dividend distributions.”
DIG : Dunedin Income Growth wants new sustainable objective