Shires Income has announced results covering the 12 month period that ended on 31 March 2025. The trust returned 9.5% in NAV terms and 22.4% in share price terms (as the discount narrowed from 13.3% to 3.7%). By contrast the return on the All-Share index benchmark was 10.5%.
The full-year dividend of 14.8p matches Shires’ revenue per share figure. Revenue reserves equate to 70% (2024: 69%) of the current dividend cost. For the current financial year, the board has decided to increase the rate of each of the next three interim dividends from 3.20p to 3.45p per share to create a more even balance between the rates of the interim and final dividends.
The company bought back 1.2m shares during the year (2.8% of the issued share capital) at a cost of £2.8m, enhancing the NAV by 0.3% for continuing shareholders.
Extracts from the manager’s report
The largest negative impact on performance over the period was the weighting towards smaller companies. Over the long term, small and mid-cap companies in the UK have delivered markedly superior returns to large caps. They are more likely to grow and, in turn, to deliver dividend growth. As an active manager, we see more ability to deliver differentiated returns from small and mid-cap companies, given they are less well analysed and understood by market participants. Furthermore, we have a genuinely size agnostic approach to investing. That means that the portfolio is more likely to have an underweight exposure to large companies and an overweight exposure to small companies compared to the benchmark. However, this weighting towards smaller companies did not work well during the year as returns within the benchmark were heavily skewed towards larger companies. The FTSE 100 Index returned 11.9%, but the mid-cap FTSE 250 Index returned only 1.1%, an unusually wide spread between the two.
Why was this the case? We don’t see compelling fundamental reasons – earnings revisions from the FTSE 250 have been comparable to the FTSE 100. But we do see an impact from lower liquidity in the UK market and there is a clear correlation with negative sentiment on the UK and investor caution. The FTSE 250 is slightly more domestically focused and is seen as higher risk by investors. However, it very rarely trades at a valuation discount to the FTSE 100, with the most recent occurrences during the Covid-19 pandemic and immediately following the Brexit vote in 2016, yet it currently trades at an approximate 10% discount on a price to earnings multiple. Smaller companies tend to underperform when UK bond yields rise, as investors are more risk averse, and growth is discounted to a greater extent. Our hope would be that, as interest rates come down and sentiment towards the UK improves, we will see a recovery in UK mid cap stocks.
On an individual stock basis, the top performers included Morgan Sindall, which returned 50% as it continued to deliver strong earnings upgrades, benefiting from tightness in the fit-out market and robust construction demand in the UK. Imperial Brands (+72%) delivered improved cashflows and was helped by a consistent high level of share buybacks through the year. Banks in general were particularly strong, boosted by higher for longer interest rates and low starting valuations. Within the portfolio, NatWest (+83%), HSBC (+54%), Standard Chartered (+74%), and OSB (+30%) all delivered notably positive returns. Games Workshop (+46%), was another smaller-cap holding that delivered earnings upgrades and re-rated over the course of the year.
The greatest detractors from performance this year were companies where there were unexpected, company specific events. Wood Group (-79%) fell sharply after announcing an investigation into internal accounting procedures. Two potential bids for the company demonstrated the attractions of the underlying business, but uncertainty and bad timing meant these did not complete, leaving the company in a weak position. We retain a small position in the portfolio and the company remained in discussions with one potential acquirer as at the year end. Close Brothers (-33%) also fell as the company dealt with the fall out of an FCA investigation into historical motor finance loans. We see the impact of this as reflected in the price and hope for some relief on an outcome of a recent Supreme Court hearing. Novo-Nordisk (-40%) was another detractor, due to increased competition to its GLP-1 weight loss drugs. We have been reducing the holding for some time after a period of strong performance, and the holding has still had a positive contribution to performance over the last five years. Conduit (-30%) underperformed due to exposure to the fires in Los Angeles at the start of 2025, while Melrose Industrials (-30%) was impacted by concerns over global trade and the pace at which free cashflow is generated.
The fixed income portfolio delivered a return of 17.5% over the period. Values were helped by the stabilisation of bond yields and by strong underlying performance of the issuing companies which are primarily in the banking and insurance sectors. Although this portion of the portfolio has generally very low turnover, there were some changes during the year. This was largely driven by the tender offer for the RSA preference shares in July 2024. A change of capital rules for insurance companies means that preference shares are less valuable to issuers, making it more attractive for insurers such as RSA to retire them. From our point of view, the tender offer came at attractive terms, with an implied yield of 6% resulting in an uplift in the value of around 10% and pricing the preference shares at a level last seen in a much lower interest rate environment.
We reinvested the proceeds of the RSA tender offer into Nationwide Building Society perpetual debt at a 7.8% yield, thereby delivering an increase in income generation for shareholders alongside the gain in capital value. Overall, this is a positive development, and it sets an encouraging precedent for terms on any future tender offers. So far in 2025 we have also seen Aviva tender to redeem outstanding General Accident preference shares at terms we see as similarly attractive for holders.
SHRS : Shires Income will rebalance its quarterly dividends
