Law Debenture (LWDB) has released its annual results for the year ended 31 December 2021, during which it provided an NAV total return with debt and its Independent Professional Services business (IPS) at fair value for 2021 of 25.1%, outperforming the All-Share Index by 6.8%. LWDB says that it was another year of strong performance from the IPS business with profit before tax up by 9.1% and valuation up 32.4% to £166m. The FY2021 dividend has been increased by 5.5% to 29.0p per share (2020: 27.5p).
43 years of maintaining or increasing dividend payments
LWDB’s board says that one of its top priorities is to gradually increase income by increasing dividend payments. LWDB is now in its 43rd year of maintaining or increasing its dividend payments, which the board says is supported by the diversified nature of IPS revenues. These have funded roughly 36% of dividends over the last 10 years.
LWDB’s board propose paying a final dividend of 8.375 pence per ordinary share, which will provide shareholders with a total dividend of 29.00 pence per share for 2021, an increase of 5.5% compared with 2020. This represents a dividend yield of 3.7% based on our share price of 783 pence on 23 February 2022.
Income backdrop
2021 saw an excellent recovery in UK dividends. Investment income from LWDB’s portfolio rose to £26.3m, a 45% rise from £18.1m in 2020 (for pre-pandemic comparison, £29.2m investment income was earned in 2019). Among the key drivers of dividend growth were miners, as a result of high commodity prices, and banks, where dividends resumed following their forced suspension by the regulator in 2020. In a broader sense, there was also an annualization benefit from a number of companies that suspended dividends during the peak of the pandemic in Spring 2020, many of which only resumed payments towards the end of that year.
LWDB’s managers says that, when they look ahead, there are reasons for optimism on the prospects for further dividend growth in the portfolio. This is because there are a number of companies held that are yet to resume dividends. These tend to be companies in industries most affected by the pandemic, such as travel or hospitality. As these end markets will recover, the managers see it as likely that these companies will return to paying dividends, adding a further leg to portfolio dividend growth. In addition, as the managers were sizeable net investors over the course of 2021, this will benefit 2022 earnings from the portfolio.
Portfolio activity
The managers say that the most material active decision in 2021 was to continue to be a net investor. They invested £58m (net) over the course of the year, the vast majority of which (£55m) was invested in the UK. The managers say that this is because they continue to find widespread value opportunities in UK equities relative to overseas peers. While in the Spring of 2020 there was a deliberate tilt towards purchasing companies that would benefit from the global economic recovery (such as mining companies such as Rio Tinto, and retailers like and Marks & Spencer), in 2021 there was greater breadth to portfolio purchases. Purchases spanned further additions to financials (such as banks, including Barclays, HSBC, Lloyds and Natwest) as well as pharmaceuticals (with new positions in Sanofi and Merck) and specialist retailers (such as Kingfisher and Vertu Motors). The managers say that the commonality among these purchases is that they are well-managed by experienced teams and are often one of the market leaders in what they are producing. In seeking out these market-leading businesses, the managers say that they are implicitly seeking out businesses which have the capability to adapt and respond to higher inflation. A company that is a market leader producing an excellent product (or service) has a greater likelihood of being able to pass on higher input costs. This capability will be of increasing importance if, as they expect, inflation proves to be more persistent than is widely expected.
IPS business summary
LWDB’s IPS business remains a unique differentiator between it and other UK income funds. Over the course of 2021, the IPS business grew its revenues by 20.6%, with profit before tax up 9.1% and earnings per share up 7.0% compared to 2020. The material increase in revenue was driven primarily by the acquisition of CSS. LWDB says that the acquisition of CSS enhances its capabilities and growth opportunities in an attractive market. LWDB says that it continues to pursue a consistent strategy of developing IPS through a combination of organic growth, operational improvements and potential acquisitions that meet its strict financial and strategic criteria.
Comments from Robert Hingley, Chairman of Law Debenture
“Law Debenture aims to provide a steadily increasing income for our shareholders whilst achieving long-term capital growth in real terms. In 2021, we have continued to realise these ambitions, exemplified through a significant IPS valuation uplift and another good increase in our full-year dividend of 5.5%. I am pleased at the consistent long-term outperformance of our benchmark.
We are confident that, in the long term, the combination of a robust and well-positioned equity portfolio and continued growth in our IPS business will deliver attractive returns for our shareholders.”