Invesco Perpetual UK Smaller Companies (IPU) has announced its annual results for the year ended 31 January 2021, in which its chairman, Jane Lewis, says that the Board believes sentiment towards IPU, reflected in its share price and discount performance over the year, is at least in part due to expectations around the level of dividend the Company would pay in future years. For the year ended 31 January 2021, IPU provided an NAV total return of –3.1%, underperforming its Benchmark Index, the Numis Smaller Companies Index (excluding Investment Companies), which returned –0.9%. In comparison, IPU’s share price total return for the year was –16.8%.
Dividend policy of 4% of year end share price is being reinstated
For the year ended 31 January 2020, IPU’s board made the decision to maintain the Company’s dividend at the prior year pence per share level. This decision was made against a background of trying to assess the impact of Covid-19 on UK smaller companies, an increasing number of announcements of dividend cuts for cash conservation purposes within portfolio companies and uncertainty as to when or whether recovery might occur. Interestingly, IPU does not have revenue reserves to call upon in times of income deterioration as these were distributed in full to shareholders in 2015 when the Company’s dividend policy was amended. However, IPU does have sufficient capital profits from which dividends can be and have been enhanced since 2015.
The board considers that uncertainty surrounding whether it would be able to resume IPU’s previous dividend policy (to pay out all income earned within the portfolio and to enhance it annually through the use of a small amount of realised capital profits with a target dividend yield of 4% of year end share price) has weighed on IPU’s share price performance and discount rating over the past twelve months. In recognition of this, together with the improved outlook for recovery described by the Portfolio Managers, ongoing monetary stimulus provided by governments and rollout of vaccine programmes across the world, the Board has confirmed that IPU’s previous dividend policy will be reinstated, including the target dividend yield of 4% of year end share price. The board says that this will result in a larger payment from realised capital profits for the current year than the Board would, under normal circumstances, be comfortable to recommend. However, in these exceptional times, the Board believes it is appropriate in the context of the Portfolio Managers’ expectations for annualised capital growth within the smaller companies investment universe continuing to be attractive.
Performance
In terms of sector performance, it was a year of two halves, with the worst performing sectors in the first half of year (Leisure & Consumer Goods) becoming the best performing sectors in the second half.
At the individual stock level, the best performers included: Keywords Studios (+118%), which provides outsourced services to the computer games industry. The managers say that the sector fared well through the crisis and Keywords Studios continued to grow its presence in areas such as art creation, language translation and games engineering. Financial administration business JTC (+47%), which provides services to real estate and private equity funds, multinational companies and high net worth individuals, weathered the crisis well. It benefits from long-term contracts and recurring revenue, which along with some earnings accretive acquisitions enabled the business to grow despite the pandemic. Kainos (+60%), an IT services business which reduces administrative costs for the government by creating systems that allow people to “self-serve” in areas such as paying their road tax, continued to perform well. The managers say that the company is seen as an ongoing winner as the public and private sector continue to modernise their interactions with customers.
The portfolio also benefited from a number of new holdings bought in the depths of the market sell off. These included: Builders merchant, Grafton (+112%), which sold off very heavily in March but has recovered strongly as the construction industry resumed work ahead of many other sectors. The managers say that Low cost gym operator, The Gym (+124%) also presented them with an exciting opportunity, falling 75% from its pre-crisis level. They say that they are confident that the business will return to growth once lockdowns are eased. Pub group Mitchells & Butlers (+98%) also fell heavily. The stock was trading at around half asset value, which the managers say offered the potential for significant upside even in the event of a protracted return to normality.
At the other end of the performance scale, Housebuilder, Vistry (-42%), fell as much as 65% in the sell-off. The managers say that trading has recovered well, and the business is in a strong financial position, which has given them the confidence to add to the holding. James Fisher and Sons (–49%), which is a marine services business, saw lower demand for its services as Covid-19 disrupted its end markets. The managers still believe that the business has a good future, and its expertise in the construction of offshore wind farms should drive growth once normal working practices resume. The managers say that promotional products business 4imprint (–29%) has been an excellent stock for them over the years, but it saw sharply lower demand for its products as face to face meetings were curtailed by the crisis. The company has emerged from previous downturns with a stronger market position, so they took the opportunity to add to the holding.