Schroder Income Growth hit by widening discount

Schroder Income Growth continues to increase dividends

Schroder Income Growth hit by widening discount – over the year ended 31 August 2019, the trust underperformed its benchmark, the All-Share Index, returning -1.9% against +0.4% for the index. A widening discount compounded the problem, however. The discount went from 4.6% to 8.3% leaving shareholders with a return for the year of -5.4%.

On the income side things were a bit rosier. Revenue rose by 11.2%, helped by the weakness of the pound, gearing and special dividends from a number of companies that the trust holds. The board felt able to increase the dividend by 5.1% to 12.4p. The trust has increased its dividend each year since it launched.

Change to investment policy

After careful consideration and consultation with your investment manager, your board has decided to ask shareholders to approve at the forthcoming AGM the removal of the words ‘above average yielding’ (preceding ‘UK equities’) from the company’s investment policy. We believe that the current wording restricts your Manager’s discretion and its removal will allow investment in more stocks having a high likelihood of growing their dividends materially over time, alongside the traditional, higher-yielding stocks in the portfolio. This change supports the company’s objective of increasing the company’s dividend over time.”

[The proposed policy change is reasonable in our view and brings the trust into line with many of its better performing peers.]

Extract from the manager’s report

The Company’s lack of exposure for the majority of the period to beverage firm Diageo, which has been sought after by investors for its significant defensive growth characteristics, has been the greatest single stock detractor of relative performance. We do not invest in the company for valuation reasons; believing the stock’s attractive characteristics are more than reflected in current valuations.

Stock selection in industrials also detracted from performance. The holding in security services company G4S has struggled but we have increased the position recently, encouraged by solid trading in the security business and the potential for strategic value creation from the sale of their customer cash management division. Meanwhile, not owning certain highly valued perceived growth stocks, such as credit and marketing services business Experian, also detracted.

The Company’s holding in broadcasting services company ITV weighed on relative returns as investor concerns over both structural (Free-to-air model versus subscription service models) and cyclical (Brexit related advertising) issues depressed the share price.

Bookmaking company William Hill has been negatively impacted by profit headwinds brought on by tighter regulation in the UK and investor concerns about the scale of investment required for its US expansion. However, we remain positive as management change and an exciting US outlook have led to some recovery in the stock’s performance more recently.

Our holding in overseas company Galp Energia suffered as a result of the decline in oil prices. We maintain our conviction in the company because of its rapidly growing Exploration & Production division, driven principally by offshore Brazil operations, as well as the potential for attractive dividend growth compared to other oil companies.

On the positive side, performance benefited from stock selection in mid-sized companies. Shares in Pets At Home have done well on the back of better-than-expected results and growing market confidence in the company’s veterinary business strategy. Shares in designer, builder and investor in GP and primary care buildings Assura have benefited from the reduction in bond yields. Intermediate Capital Group shares were re-rated in recognition of its strong franchise within alternatives investment management. Lastly, shares in John Laing, one of the top contributors last year, re-rated on increased optimism about the prospects of growth in the US infrastructure market.”

SCF : Schroder Income Growth hit by widening discount

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