Over the 12 months to 30 September 2022, abrdn equity Income says its NAV total return was -7.6% and the share price total return was -7.8%. By contrast, the All-Share Index delivered a total return of -4.0%. The dividend has been increased from 21.1p to 22.7p and this was more than covered by earnings of 25.5p. Reflecting the problems that COVID caused, this was the first time that the dividend has been covered in three years. The board confirms that, in the absence of any adverse circumstances, in the coming financial year it will declare dividends totalling at least 22.8p (5.7p quarterly) in this new financial year. The chairman notes that (using the projected figure) the company is trading on a yield of around 7%, the highest in the AIC UK Equity Income sector.
Extract from the manager’s report
The drivers of our performance over the period can be summarised as follows:
– The main detractors from performance were Financials, in particular small and mid cap holdings. Close Brothers on fears of slowing activity, Premier Miton on weaker fund flows and R&Q Insurance on the narrow rejection of a bid for the company. Among large cap financials, the contribution from owning Standard Chartered and avoiding Prudential was offset by not holding HSBC. Overall, this sector detracted just over 7% of relative performance.
– The next biggest detractor was Consumer Discretionary, notably housebuilder Vistry and sofa retailer DFS, as fears grew over the cost of living impact of Russia’s invasion of Ukraine, as well as Entain and 888 on slowing growth in online gaming revenues. This sector detracted just under 4% of relative performance.
– The gearing position, averaging 13.4% over the financial year, detracted around 0.7% of relative performance.
– On the positive side, the largest contributor to performance was the portfolio’s heavy weighting to Energy at a time of rising concerns over energy security. Notable outperformers were Thungela Resources, Diversified Energy and BP. This sector alone contributed over 7% of relative performance.
– The next biggest contributor to performance was Basic Resources, most notably Glencore and BHP, as commodity prices supported strong cash generation. This sector contributed just under 3% of relative performance. We significantly increased our weightings in these sectors last year in anticipation of the strong cash flows and dividends that these stocks are now delivering.
– This was a busy period for M&A activity, with Go Ahead, ContourGlobal, River & Mercantile and Vivo Energy on the receiving end of bids all at meaningful share price premia. These four holdings generated just under 2% of relative performance.
As noted in the Market Review, the sharp out-performance of large-cap stocks was a key feature of the stock market during the financial year. Overall, this was a drag on performance given the portfolio’s relatively heavy weightings in small and mid-cap stocks; itself a function of the index-agnostic approach that we use in constructing the portfolio. This approach involves sizing our positions according to our conviction levels, rather than anchoring around index weightings. While the constituents of the FTSE 100 Index typically account for around 80% of the total value of the Index, our portfolio’s exposure to the FTSE 100 Index is typically around 60% and was 51% at the end of the financial year. We are aware that this approach can cause variations in the portfolio’s return relative to its benchmark, particularly at times of heightened geopolitical nervousness when larger stocks tend to outperform. That said, we remain convinced that this approach can provide benefits over time, as it allows us to construct a differentiated portfolio with greater flexibility, enabling us to identify stocks that can help us to deliver on our objectives through the cycle and enables us to generate a diversified income stream.
AEI : Dividend hike means abrdn Equity Income tops yield chart