Schroder Income Growth has reported results for the 12 months ended 31 August 2023
- NAV total return increased by 4.03% to 220.6p (31 August 2022: 211.7p), but underperformed versus the FTSE All-Share Index return of 5.2%.
- The discount widened to end the year at 8.9% and so the return to shareholders was -3.0%.
- Dividend per share for the year rose by 4.6% to 13.80p (31 August 2022: 13.20p).
- Objective of delivering real income growth in excess of inflation not met.
- However, this marked the 28th consecutive year of dividend growth.
- Earnings per share fell by 5.9% to 13.14p due to reduced dividends from mining shares, corporate management pivoting from special dividends towards share buybacks, and the omission of a dividend by Direct Line, which was then sold.
- The revenue reserve will fall to 10.8p per share or £7.5m.
- Six new holdings were added to the portfolio including Glencore and XPS Pensions with seven existing holdings sold. Exposure to property was reduced whilst exposure to international banks was increased.
- The company renewed its £30m revolving credit facility with SMBC for a further year, effective from 22 September 2023.
Extracts from Sue Noffke’s manager’s report
Additional factors weighing on income in the year was the split of GlaxoSmithKline into two businesses, the biopharma company, rebasing its dividend to free up funds for investment in research and development. Dividends were around one quarter below their level of the prior period. Gambling company 888 did not pay a dividend in the period as the company prioritised balance sheet leverage resulting from the purchase of William Hill’s UK assets. Additionally, movements in dividend dates impacted three of the holdings which last year paid dividends in August and this year switched to September – asset manager M&G, Asian life insurance business Prudential, and student property company, Empiric.
On the positive side a diverse range of holdings saw dividends grow significantly, at more than 20%. Oil majors, Shell and BP, continued to build back their dividend payments to shareholders after the cuts of two years ago. Asian oriented banks, HSBC and Standard Chartered, saw particularly strong growth while domestic bank NatWest Group and financial services infrastructure business TP ICAP also grew robustly. Several of your Company’s holdings in the consumer discretionary area rewarded shareholders with excellent dividend growth as their businesses flourished following the pandemic disruptions – Whitbread and Hollywood Bowl saw dividends double and triple respectively, with strong growth from studios and broadcaster ITV and luxury goods company Burberry. Double digit dividend increases were received from domestic bank Lloyds, investment company 3i, financial services provider XPS Pensions, power utilities companies SSE and Drax and infrastructure and construction company Balfour Beatty.
Elsewhere more stable companies – information providers RELX and Pearson, distribution services business Bunzl, retailer Pets at Home, utility company National Grid, GP patient practice business Assura, defence services business QinetiQ, engineering group Spectris, and insurance company Legal & General all increased dividends by mid to high single digits. Companies in the portfolio with low or no dividend growth are typically in a growth phase such as pharmaceuticals company AstraZeneca, telecoms company BT and sustainable technologies company Johnson Matthey, or they have switched preference to share buy backs over dividends as a way of rewarding shareholders, an example of this is food retailer Tesco.
A feature of the market, particularly evident in the mining, banks and oils sectors, has been a trend to favour share buy backs in capital allocation decisions. With resulting dividend payments spread over reduced share counts, this approach, all other things equal, improves the sustainability, and growth, of income for these more cyclical sectors which are particularly sensitive to the economic cycle. Companies and their boards must determine whether the price paid for shares in conducting a share buyback offer attractive returns when benchmarked against other uses of capital, such as investment in projects, research and development, staff, facilities or acquisitions. Several other companies across a range of industries are conducting share buybacks including food retailer Tesco, budget hotel operator Whitbread, luxury fashion house Burberry, consumer goods company Unilever, infrastructure and construction firm Balfour Beatty, TP ICAP and information companies RELX and Pearson. Some 17 of your Company’s 43 holdings conducted share buy backs over the period.
At a sector level the main driver of negative relative returns was stock selection in industrials. Your Company did not own the strongly performing stocks in this sector. Aerospace and defence companies, Rolls Royce, Melrose and BAE Systems, rose as orderbooks strengthened with a strong post covid recovery in civil and defence aerospace end markets. CRH benefitted from a re-rating of the shares in advance of its move to relist on the US stock exchange, whilst Ashtead continued to experience robust demand for equipment rental in the USA.
Additionally having more exposure in basic materials than in the benchmark index detracted from performance with weakness in commodity prices, particularly precious metals, impacting holdings in miner Anglo American and sustainability solutions company Johnson Matthey. Anglo American suffered from a combination of weaker commodity prices and operational difficulties, now resolved. Your Manager continues to find the diversified exposure to forward facing metals and valuation of the business attractive. Lower precious metals prices weighed on Johnson Matthey whilst increased investment across areas of the group have hit profits. New management has begun to execute its strategy and your Manager is encouraged that Standard Industries, a US activist industrial investor, has increased its stake in the business (announced in September 2023) to 10% from its original 5% stake in April 2022.
Property companies suffered the ructions of bond markets in the autumn of 2022 as yields rose sharply. Assura was the largest individual detractor in the period. The shares suffered as bond yields rose and the market fretted about the higher costs of refinancing debt. BT weighed on performance as the market worried about a range of issues from the near-term cash flow impact of significant broadband investment, the impact of higher bond yields on the large company pension scheme and a change in CEO. The incoming CEO has been an independent director on the board of BT for 2 years and is likely to hit the ground running. The group has potential levers to demonstrate value and the valuation of the shares remains compelling. Your Company’s position in Direct Line, now sold, was a significant drag on performance over the period. The impact of adverse weather and significant claims inflation was detrimental to profits and capital leading to the company forgoing payment of a dividend until profits and capital have been restored.
Positioning in the two consumer sector positions contributed positively to performance by owning less than the market in consumer staples and owning more than the market in consumer discretionary sectors. Staples companies underperformed over the period as they experienced an unwind of the pandemic boost to volumes of cigarettes and alcohol as well as a headwind to profits from currency moves over the period as the pound staged a part recovery from the lows of September 2022. Not owning British American Tobacco, Imperial Brands or international drinks company Diageo, all of which were weak, was positive for your Company. Consumer discretionary stocks performed strongly as they recovered from the sharp selloff in the summer and early autumn of 2022 on fears over domestic politics and economic prospects and in the face of a mounting cost of living crisis and higher costs of servicing mortgages. Many of your Company’s holdings are resilient businesses offering consumers good value for money and they have gained market share in recent years from weaker competitors exiting the market. Your Company’s material positions in Whitbread, Hollywood Bowl and Pets at Home, as well as financial investment group 3i (whose main asset is European value for money retailer Action) all had strong operating and share price performances.
SCF : Schroder Income Growth digs into reserves to maintain dividend record