A fall of 46pc in the dividends received by one of our investment trust holdings sounds like alarming news for income investors. Under the surface things are not quite so bad – in fact we can still expect a rise in the annual dividend from this holding come the end of the year.
Schroder Income Growth disclosed the 46pc fall in its income in its interim report, published last month. But it said a couple of circumstances had conspired to bring about such an extreme outcome.
First, in Schroders’ words, “the comparison of the six months to Feb 28 2021 with the six-month period to Feb 29 2020 compares the most Covid-19 disrupted six months with an undisrupted prior period”.
The fund manager pointed out that many of the trust’s holdings in those parts of the economy most severely affected by the pandemic, such as leisure and hospitality, had not declared a dividend in the six months covered by the interim report, while others across a wide range of sectors had reduced their payments to shareholders as a result of falls in profitability.
That is much as we might expect: no fund manager could do much about lockdown’s effect on those parts of the economy and the reactions of individual companies when it came to their dividends. But the second reason reflected conscious decisions by the manager, Sue Noffke, in response to the pandemic.
“Comparing the six months to February 2021 against the six months to February 2020, we had sold out of several previously higher dividend paying companies where the dividend outlook and the investment case weakened,” Schroders said, and named BP, BT, the builder Crest Nicholson, HSBC, the software company Micro Focus, Next and ITV as examples.
“Much of the proceeds of these sales have been reinvested in attractive and higher yielding companies but where their income is concentrated in the second half of the [trust’s] financial year.” Examples here were the miner Anglo American, the asset management company M&G and Direct Line, the insurer.
Bridget Guerin, the trust’s chairman, added: “We have seen a move towards companies reinstating their dividends recently and the portfolio has been reorientated towards those companies that are paying dividends, a greater proportion of which are expected to be paid in the second half of the [trust’s financial] year.
“We therefore hope to see an increase in the revenue per share received in the second half of the financial year and for the fall in revenues received to be less pronounced at year end.”
She pointed out that the trust had reserves of 11.3p a share available to augment the income received from dividends at the end of the year, “when we will decide what the final dividend will be”.
Last year’s full year divi was 12.6p so there is clearly scope to increase the annual payment, as the trust has done for the past 25 years, if the reserves are called into play.
Turning away from income, the trust’s net asset value grew by 16.1pc in the first half with dividends reinvested, so it substantially outperformed the FTSE All-Share index, which gained 12pc.
We can probably attribute this to the return to fashion of “value” investing as the fund’s income focus “gives the portfolio a natural value bias which may have impeded performance in a market driven by growth stocks”, said Stifel, the broker.
Capital returns were also helped by the fact that two large holdings that the trust had retained even though they did not pay dividends, G4S and William Hill, were the subject of bids during the period.
So we have the renaissance of value investing and good reason to feel confident about the dividend. Questor also has the sense that Noffke took bold and rational decisions to adapt the portfolio to the new circumstances of the pandemic.
Stifel agreed. “After a number of years of underperformance the relative returns of the trust have rebounded as growth headwinds have subsided and the value investment style has come back into vogue,” it said. “We respect the trust’s lead manager, Sue Noffke, who has stayed true to her long-term, fundamentals-focused investment philosophy.”
Questor says: hold
Share price at close: 313p
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