Aberforth Smaller Companies Trust (ASL) has published its annual results for the year to 31 December 2022. During the period, ASL provided an NAV and share price total returns of -10.4% and -7.3% respectively (as the discount narrowed from 12.6% to 9.8% over the course of the year). ASL’s chairman, Richard Davidon, comments that while these asset and share price declines are clearly disappointing, it is pleasing that ASL did succeed in mitigating the more significant weakness of small UK quoted companies in general (ASL’s benchmark, The Numis Smaller Companies Index (excluding Investment Companies) provided a total return of -17.9%).
Revenue earnings and dividends
In setting ASL’s dividend, its Board seeks to look beyond the portfolio’s income receipts in any one year with the ultimate aim of increasing the dividend at a rate above that of inflation. The board is guided by dividend forecasts provided by the managers and can utilise revenue reserves, which are then replenished in the good years. Davidson says that the ambition to grow ASL’s dividend in real terms represents a challenging hurdle at present, with December’s CPI rising by 10.5% year-on-year, but that “the strength of the dividend experience over the past twelve months” means that the Board can comfortably achieve its aim in respect of 2022.
ASL’s revenue return per ordinary share in the year to 31 December 2022 rose to 55.64p, its highest ever. This was 51% above 2021’s level and 32% above 2019’s, the year before the pandemic. Six special dividends paid by investee companies in 2022 made a helpful contribution.
ASL is proposing a final dividend of 26.95p per ordinary share, which is 11.1% higher than last year’s 24.25p. In combination with the 12.05p interim dividend, this would take the full year ordinary dividend to 39.00p, which would represent growth of 10.8%. In addition, the board is proposing a special dividend of 8.30p, much of which would correspond to the special dividends received by ASL during the year.
ASL’s managers expect dividend growth from the portfolio in 2023, but the looming recession means that their estimates are likely to prove volatile. That said, the total dividend proposed for 2022 of 47.30p would allow ASCoT’s revenue reserves to be strengthened from 59.0p to 69.9p per ordinary share. As it did during the pandemic, the Board says that it is prepared to use these reserves to support an uncovered dividend. Furthermore, the Managers’ data show that the balance sheets of the portfolio companies are unusually robust and should be able to mitigate the full impact of a recession on dividends. ASL’s Board is therefore optimistic that the trust can continue its record of real dividend growth, which has seen dividends compound at more than 7% per annum over 32 years.
ASL’s managers say that in a year of poor equity returns around the world, larger UK companies distinguished themselves with a modestly positive return, as the All-Share benefited from its high exposure to energy companies. ASL’s value investment style helped performance in 2022. It has, however, been out of favour for most of the period since the global financial crisis 14 years ago. An important influence on this has been the monetary conditions that were a response to the credit crunch. Low to zero interest rates and quantitative easing contributed to lengthened investment horizons and unusually low discount rates used to value assets. The beneficiaries in the equity world were companies whose cash flows were more weighted to future years, many of which are currently loss-making. These long duration equities are growth stocks, which enjoyed substantial revaluations over the past decade or so and a period of particularly sharp out-performance amid the pandemic.
Stock selection helped ASL’s performance in 2022 and within this M&A was the clearest theme. Six of the portfolio’s holdings received takeover bids during the year, with an average premium to the pre-announcement share price of almost 60%. The stimulus to performance of a takeover in a year of generally weak share prices is meaningful. However, ASL’s managers say that it remains important to guard against opportunism on the part of the buyers when valuations of small UK quoted companies are so low. Notwithstanding the sizeable takeover premiums, the managers were disappointed with the terms of two of the deals, which they believed undervalued the companies concerned.
Over the twelve months to 31 December 2022, turnover was 18%, which is just over half the average in ASL’s 32-year history. ASL’s managers comment that the relatively low rate of turnover in 2022 reflected the weakness of the stockmarket. Lower share prices imply higher upside to the Managers’ price targets, which, all else being equal, discourages changes to the portfolio. By extension, with rising share prices there should be more opportunity to realise value and redeploy the proceeds in other companies with higher upsides. The managers term this the “value roll”. It can make an important contribution to ASL’s performance over time.