STS Global Income & Growth has published results covering the 12 month period ended 31 March 2025, and they are good. The NAV and share price return were both 10.9% over the period which compares to a return on the Lipper Global – Equity Global Income Index of 4.5%.
The total dividend for the year was 8.37p, 28% up on the prior year. The payments will be rebalanced so that the first quarterly dividend is at least 2p.
Having bought back 19.4m shares during the year at a total cost of £43.9m and at an average discount of 1.4%, the discount ended the year at the same 1.7% level as it started. This added £564,000 to the NAV. The buyback equates to 13.8% of the shares in issue on 31 March 2024.
The statement says “This purchase represented a significant use of shareholders’ capital and provided liquidity and value to the minority of shareholders who chose to sell shares. The board is minded to enhance the benefits for the majority of shareholders who choose to remain invested.” [I am not sure what is implied here – that buybacks should be carried out at wider discounts so there is more of an uplift perhaps?]
Extract from the manager’s report
Longstanding investment Paychex had a strong year. This is a US software company engaged in the delivery of payroll and human resources management including benefits and insurance. The US economy proved to be more robust than many expected last year, leading to a healthy employment backdrop which supports activity for this company. A further fillip was provided by fewer interest rate cuts than were predicted by markets from which the company benefits via its management of client cash. The shares have delivered an excellent return for the Company over the years, balanced between income and capital and we expect this to continue for years to come.
Following a change of management and a reinvigoration of the business, investors have become more enthused by the prospects for Unilever to the benefit of the shares. The company enjoys formidable competitive advantages from owning a number of well recognised global consumer brands, such as Dove, Knorr and Marmite, as well as the scale and depth of manufacturing and distribution to support these brands. However, in recent times the company has struggled to deliver growth. We believe the new CEO, Fernando Fernandez, who himself replaced the relatively new previous CEO Hein Schumacher, has the right attributes to drive change in the organisation to address this and improve shareholder returns.
Formally called the Chicago Mercantile Exchange, CME Group was a positive contributor. The company is very well placed to benefit from the structural increase in the use of futures and options to manage risk in portfolios. It also benefits from greater volatility in markets, as well as increased government debt issuance, both of which we expect. The shares have further benefited from the launch, and then subsequent failure to gain traction of a rival exchange. This highlighted once again the strong, competitive advantages and dominant market position CME Group commands.
The strongest contributor to the return for the year was the consumer staples sector which makes up a material part of the portfolio. These gains were led by Philip Morris and British American Tobacco (‘BAT’) which appreciated by 74.9% and 43.9% respectively in the year. In each case investors have rewarded the companies for the resiliency of their cashflows and gained greater confidence in the sustainability of their business models.
Both companies are transitioning from the traditional business of selling combustible products to distributing a range of dramatically less harmful products. In the case of Philip Morris, they have developed the premier global heat-not burn product called IQOS and, via the acquisition of Swedish Match, have a rapidly growing modern oral product named Zyn. This should allow the company to increase both free cashflow growth and margins in the long term. BAT is strategically some way behind Philip Morris but should benefit from similar trends in time. This is not yet reflected in the valuation of the shares which trade at a very wide discount to its better managed peer. We see plenty of scope for this to close to the benefit of the shares. Further upside is possible from the sale over time of BAT’s stake in Indian fast moving consumer goods (‘FMCG’) company ITC, the proceeds from which may be used to buy back shares.
The two greatest detractors from performance were both spirits companies Diageo and Pernod Ricard. Diageo is a long-term investment in the Company whereas Pernod Ricard is a newer addition. We like these businesses long term as spirits brands give rise to greater consumer loyalty than wine or beer. Further, the trend towards drinking less but better has seen spirits enjoy a greater share of consumption, with premiumisation further improving margins. Recently these structural advantages have been challenged by offsetting structural and cyclical trends that have worried investors.
Structurally it is feared that the consumption of spirits may be reduced owing to the widespread adoption of GLP-1 drugs which suppress appetite. Further, it is thought younger consumers are now more health conscious and less inclined to drink alcohol. Additionally, there is some concern that the legalisation of cannabis may lead to some substitution of consumption. To these structural concerns have been added cyclical fears: the boom in consumption and stocking up of spirits during COVID- related lockdowns has been followed by a mini-bust.
Our view is that, though these concerns have some merit, they do not invalidate the long-term investment case for these companies, especially following the material de-rating of the sector. We believe demand will recover and inventories will normalise in time. GLP-1 drugs may impact consumers while on the medication, but it may, we believe, be a temporary effect (human nature tends to be surprisingly consistent in some respects). Evidence suggests that the young are delaying consumption, but that this tends to revert to more familiar trends when people either have children or enter the workplace. As regards cannabis, it is thought to be consumed in different “use occasions” and so is arguably less impactful than feared. More recently the tariff wars have hurt sentiment as well, potentially, as profitability for a time.
In our experience the narrative and sentiment surrounding an industry or business follow share prices. The more they fall the more negative the surrounding comment. It is worth remembering, however, that you cannot have good news and attractive prices. These companies are dealing with plenty of bad news, including tariffs, but we think in time that current valuation levels will be seen as having been a long-term buying opportunity.
We bought Canadian National Railway last year and have added to it recently. We view this as an excellent strategic asset that is impossible to replicate. It has long benefitted from both the increasing productivity of its network with the application of technology and its pricing power owing to its oligopolistic position and lack of substitutes in certain regions and for certain types of cargo. It also benefits from being the only transcontinental railway in North America running from the Atlantic (Halifax), to the Pacific (Vancouver) to the Gulf of Mexico (or should that be America?) in New Orleans. The shares have been weak for several one-off reasons such as wildfires and floods and a more persistent problem relating to labour relations. Tariffs are also unwelcome. Despite this we believe the combination of value, predictability and resiliency of free cash flow and income renders this is an appropriate long-term investment for the Company.
Pepsi also appeared in the list of detractors to performance. With an impressive track record of dividend growth, a dominant market position in the US snacking industry and a long-term opportunity to grow in the rest of the world, this is a high-quality global income asset. A combination of a fuller starting valuation and, like the spirits companies, concerns around GLP-1 adoption has made for a lacklustre return. Free cash flow growth has been constrained by a capital investment programme that should in time reap rewards. We would expect this to be evident in the coming months. Meanwhile the durability of the business should not be overlooked given the current policy and market backdrop.
Finally, Microsoft declined in this period following years of strong returns. In part this was owing to the sharp sell off in the very large technology companies that have led the US equity market higher in recent years. A change in market sentiment against the so-called Magnificent 7 (of which Microsoft is a part) was inevitable at some stage. More fundamentally, however, there is rising scepticism surrounding the efficacy of the massive investments made in the build out of artificial intelligence (‘AI’) infrastructure. Microsoft is deploying AI and has been a direct beneficiary of this capital splurge via its hyper-scale cloud business. It was therefore exposed to this shift in sentiment. The scale and diversification of Microsoft suggests this is a manageable challenge and that the combination of predictable growth and quality justifies the current valuation. This leads us to retain the position despite shorter term market pressures.
STS : Good year for STS Global Income & Growth
