Henderson International Income has reported results for the 12 months ended 31 August 2024. The NAV return for the year was 10.4%, and – as the discount widened from 8.1% to 11.7% – the share price return was 6.5%. This is well behind the return on the company’s MSCI ACWI (ex UK) High Dividend Yield Index of 14.2%, and the peer group which returned 14.0%.
The dividend was increased by 3.2% to 7.71p, and has now been increased every year for 10 consecutive years. However, that dividend was not covered by net revenue per share, which fell from 7.27p to 6.72p.
The board has spent some time this year reviewing investment strategy and how this can be enhanced to provide a better balance between income and capital generation. After considerable consultation with shareholders, it has decided to tweak the company’s investment strategy. Dividends from the portfolio will remain the primary contributor to the company’s distributions, but when there are compelling opportunities in stocks, regions or sectors that would otherwise be excluded due to their yield, the board is willing to utilise distributable reserves to supplement dividends paid to investors. This will expand the potential universe of stocks in which the investment team can invest. It will also allow the manager to be more opportunistic and flexible through the cycle to deliver on the company’s objectives.
To aid with this, the company is seeking to turn its share premium account into a distributable reserve – shareholders will be asked to approve this.
[This move is no great surprise given investors’ enthusiasm for JPMorgan Global Growth and Income, which already tops its income up from capital performance and has derived much of its superior performance from being able to hold the low yielding stocks that have been making the running on index returns.]
Faizan Baig, who has worked closely with Ben Lofthouse, has been appointed as deputy fund manager.
Extracts from the manager’s report
The dividend growth of the portfolio has been good, reflecting the earnings growth of the underlying holdings. Local currency dividend growth from the top ten holdings averaged 6.5% during the period, while the weighted average of the portfolio was over 10%, coming from a wide range of sectors and regions. The technology sector is not well known for paying dividends but it is the sector that is seeing the fastest dividend growth and that is reflected in the portfolio’s holdings. Microsoft has been a consistent dividend grower for many years and its 10% increase this year continued that trend. Other companies like Oracle and Taiwan Semiconductor Manufacturing also increased their dividends by over 10% reflecting their confidence in future earnings growth. A notable development this year has been the significant increase in dividend and buyback announcements coming from Korean and Japanese companies. The governments of these countries have implemented programmes to improve shareholder returns, which includes encouraging companies to pay out more in dividends. Portfolio holdings such as Hyundai, Samsung Fire & Marine Insurance, Dai-ichi Life and Sony all increased their dividends by over 10% during the year.
The underlying dividend growth from the portfolio’s holdings has been good but the income return for the period is lower than last year (£14.9m in 2024 compared to £16.6m in 2023). One of the reasons for this is that there have been fewer special dividends from companies. In recent years the portfolio has benefited from approximately £1m of special dividends annually. These payments have come largely from companies that paused payments during the Covid period but have since paid catch up payments, in particular many financial services companies. These payments have not been repeated this year. The other reason for the fall in income is that more opportunities have presented themselves in some lower yielding areas of the market and the team is using the flexibility of the investment structure to hold some lower yielding stocks with more capital upside potential.
Currency has also had a slight negative impact on dividend income. Over the year, sterling appreciated 3.7% against the US dollar and 1.7% against the euro. In a global portfolio, currencies often move in different and uncorrelated directions thus cancelling each other out to a degree. Note 17.1.2 of the financial statements provides some analysis of the portfolio’s foreign currency sensitivity.
Against the benchmark the main detractor was stock selection. Asset allocation was neutral, and the positive impact of gearing in a rising market was reduced by the fair value increase of the debt due to falling interest rate expectations.
Technology stocks represent 19.6% of the portfolio and have provided the greatest absolute and relative performance over the period. Many of the holdings are lower yielding dividend growers, rather than high dividend payers. The exposure of the portfolio was increased throughout the year. The largest position, Microsoft, a longstanding holding, has emerged as one of the leaders in AI by virtue of its investment in OpenAI, the creator of ChatGPT, and its leading positions in cloud computing and business software. Semiconductor companies Qualcomm and Taiwan Semiconductor Manufacturing were also significant positive contributors to performance because of accelerating demand for semiconductors. AI activity is starting to broaden out from demand for semiconductor chips to computing infrastructure investment. A wide range of companies are starting to see customer orders increasing, from the likes of database provider Oracle to server manufacturer Hon Hai Precision and Indian IT services provider Infosys Technologies, which all performed strongly as a result. Not all technology stocks have participated in the rally yet. Portfolio companies Samsung, which is one of the world’s largest computer memory design and manufacturers, Infineon Technology, a leading analogue semiconductor company, and Cisco Systems and Lenovo, computer hardware manufacturers, were negative contributors to performance. Whilst they are seeing some AI-related sales they are not yet significant enough to offset weakness elsewhere in their businesses. We believe this will change over time and that they are undervalued on that basis.
Technology stocks have not been the only good performers. The portfolio’s second largest sector exposure is the financial sector (17.5% of the portfolio) and it was one of the best performers over the period. It is one of the higher yielding sectors and one that we have considered was significantly undervalued for some years. Many companies in the sector benefit from higher interest rates, and higher rates coupled with low credit losses are driving strong profit growth across much of the sector. Fund management company Amundi performed strongly due to the recovery in asset values. The portfolio’s insurance companies benefited from rising insurance premiums and improving profitability. US insurer Travelers Companies was one of the top performers and the positions in AXA, Zurich and Swiss Re also performed well. Asian insurers Dai-ichi Life and Samsung Fire & Marine Insurance rose due to the previously mentioned focus on improving shareholder returns in Japan and South Korea.
The communications and utility sectors have ended up being great performers this year. This was driven partly by interest rates peaking and by a growing acknowledgement that the utility sector is likely to see a higher growth rate in the future due to the heavy investment needed to transform the way energy is generated and consumed globally.
Whilst there has been much to celebrate in the portfolio over the year, the underperformance of some stocks held it back. In general, the portfolio has been overly exposed across all the regions to companies with Chinese revenues. The country has not seen the recovery from the easing of Covid lockdown that the rest of the world experienced and which we had expected. As a result we repositioned the Asia Pacific portfolio significantly in the first half of the year. Insurer AIA and retailer Li-Ning were sold. Anta Sports, Pernod-Ricard and Samsonite were retained as we believed that their valuations did not reflect their longer-term growth potential. It is worth noting that some of the Chinese holdings have performed well, such as Nari Technology and Midea, and the others have seen a recovery post year end on the stimulus announcements.
Another common theme that has detracted from returns over the period has been our investments in companies that are going through transformations and that are increasing investments to accelerate future earnings growth. Examples of this include US companies Air Products & Chemicals, pharmaceutical company Bristol-Myers Squibb and car parts supplier Aptiv. These companies have raised their investment budgets to invest in new technologies and maintain their competitive positions. They are attractively valued compared to their peers and in our view their improving earnings growth is not reflected in their share prices but the market has not yet been willing to give them credit for this improvement. Industrial gases company Air Products & Chemicals, for example, is investing heavily in low carbon hydrogen projects (known as green and blue hydrogen technologies) but the projects will not be ready for a few years and the market would like to see evidence of demand before rewarding the company for investment. It has signed some contracts for green hydrogen recently, which has seen some of the underperformance reversed. In these cases we have learned a lesson about being too early to invest.
The performance from the health care industry has been mixed in recent years. There is a great deal of innovation in the sector and in some cases cheap valuations, but the stocks are very sensitive to drug pipeline news. Novartis and Novo Nordisk have outperformed significantly due to positive drug trials, but Roche and Bristol-Myers Squibb have underperformed on the back of disappointing trial data. We have sold Roche and maintained the holding in Bristol-Myers Squibb.
HINT : Henderson International Income to top up dividends from capital