Henderson International Income has reported results for the 12 months ended 31 August 2023. The trust delivered modest NAV underperformance versus its MSCI All Countries World Index ex UK High Dividend Yield Index benchmark, returning 1.4% to the benchmark’s 2.3%. The return to shareholders was -1.9%.
The dividend was upped by 3.0% from 7.25p to 7.47p, and has now increased each year since the trust was launched in 2011. The trust’s dividend has grown at an average of 5.8% per year over the past 10 years, which compares to average inflation (UK RPI) of 4.1%. This year, the dividend was not covered by earnings. The revenue return per share fell from 7.37p to 7.27p, and the chairman’s statement attributes this largely to adverse currency moves as various currencies depreciated relative to sterling. While the revenue reserve is fairly modest, about £7.2m at the period end, the trust has other distributable reserves that it can call on if needed.
The ongoing charges ratio fell materially from 0.83% to 0.72%. This reflects last year’s fee reduction.
Extracts from the manager’s report
Several of the financial sector holdings were among the fastest dividend growers: Asia Pacific banks United Overseas Bank, Bank Mandiri and Macquarie all grew their dividends by over 20%, and European insurers Zurich Insurance, ASR Nederland and AXA grew in the region of 10%. This has been driven by increased regulatory clarity about balance sheet requirements and higher interest and insurance rates.
Earnings in the health care sector are less impacted by short-term factors like interest rates or price trends but more by new treatment approvals and competition for specific medicines. Despite concerns about drug pricing reform in the United States all the health care holdings in the portfolio announced dividend increases this year. The fastest growth has come from Novo Nordisk and Sanofi, which have some blockbuster drugs still in the early stages of their adoption and with little competition. Holdings such as Merck & Co, Novartis and Roche are growing but their drugs are more mature, and their dividend growth is more conservative to fund investment in their development pipeline.
Consumer staples is the third largest sector, and the portfolio companies have also benefited from a supportive pricing environment and good demand for their products. They have generally been increasing their dividends. Beverage company Pernod-Ricard increased its dividend by 23% and food company Mondelez by 10%. Their growth is less cyclical and comes more from their exposures to emerging markets where consumption is increasing and consumers are trading up as GDP per capita increases.
Special dividends were received from TotalEnergies, exchange operator CME, and luxury goods company Richemont.
The overweight exposure to European stocks, which represented on average a third of the portfolio, contributed most to performance. Due to concerted efforts by European governments to increase gas inventory levels and by consumers to reduce consumption, energy prices gradually abated over the period.
Many of the portfolio’s financial holdings have been significant positive contributors to performance aided by rising interest rates and an improving economic environment. In recent years the portfolio has maintained a significant exposure to financial companies because their valuations have not reflected their profitability or dividend sustainability, both of which have endured despite the low interest rate environment of the last decade. European financial companies BFF Bank, ING and AXA, and asset managers Van Lanschot and Amundi were amongst the most positive individual contributors to performance.
The pharmaceutical sector was also a positive contributor. Novo Nordisk has developed its diabetes treatment to also target obesity, where it is proving remarkably effective and seeing a surge in demand. Sanofi was sold off by the market last year due to litigation concerns that have proved unfounded (our position was added to at the time), and revenues have grown faster than the market expected.
North America returned 1.5% and was a poor performing region for higher yielding stocks. The top performers were those with additional demand related to AI: Microsoft, Cisco and nVent. Microsoft is a leader in AI through its investment in OpenAI, the creator of ChatGPT, and has been one of the first companies to monetise generative AI. nVent is benefiting from AI albeit in a much more moderate way via demand for its data centre cooling systems. Whilst the portfolio avoided exposure to real estate or regional banks, the worst hit sectors from rising interest rates, telecommunications has derated as bond yields have risen and Crown Castle (telecom towers) and Canadian telecoms operator Telus have both fallen in value. Broadcom appears as the largest single detractor. We had held the company for several years and took profit from it. It has subsequently rallied on the excitement around AI, causing a relative underperformance against the index. Fidelity National Information Services is a payments company that has suffered from lower transactions than expected because of a more price competitive market. It has been sold post year-end to invest in other opportunities.
The most significant negative contributor to performance has been the overweight to the Asia Pacific region. The region makes up approximately 25% of the portfolio and the return for the period was -12.1%. Despite high levels of consumer savings, the opening up of the Chinese economy after Covid has not yet triggered the pickup in economic and consumer activity that the rest of the world experienced post Covid. Whilst Chinese exposure is relatively low (5.4%), it has disproportionately impacted performance despite the general avoidance of companies involved in property construction. Consumer facing companies including leisure wear retailer Li-Ning, auto dealer China Yongda Automobiles, and JD.Com were some of the largest underperformers. The companies held in the region are all leaders in their respective industries, and in many cases have cash balance sheets, but this has not stopped them falling to very low valuations. Often the best investments are made when sentiment in a particular stock, sector or region is depressed and it certainly feels like sentiment regarding China is now very low.
HINT : Henderson International Income dips into reserves to maintain dividend track record