Chelverton UK Dividend Trust (SDV) has announced its annual results for the year to 30 April 2024, during which it provided an NAV total return of 1.72% in a period that its manager says was a continuation of the difficult environment for UK small & midcaps. The manager says that, despite the combined headwinds of high inflation, volatile commodity prices, supply chain de-stocking and weak demand, it is pleased to note that the vast majority of SDV’s companies continue to trade profitably, generate significant levels of cash and pay dividends. The manager says that this has resulted in generally strong balance sheets across SDV’s portfolio which has, in turn, allowed companies to look at additional ways to return cash to shareholders.

It adds that, across the UK small and midcap market, and in SDV’s portfolio, there is an extremely high level of equity retirement as a number of companies continue to buy back their own shares. It says that this highlights a solid level of underlying cash generation and provides an insight into how company boards view the current valuation of their shares. The manager expects that, as corporate confidence returns, the economy improves, and share prices rise, cash flow will be redirected from buybacks into capital investment, helping to sustain the upcycle.

The manager comments that the recent earnings season has been encouraging, reinforcing the view that they are currently “bumping along” the bottom of the cyclical lows and, as we move through into the second half of the calendar year, earnings forecasts should start to look through to a more accommodative economic environment in 2025. In addition, the manager says that it has seen a notable increase in bid activity across the market – six of SDV’s stocks were the subject of corporate activity in the year to April 2024: Belvoir (now Property Franchise), finnCap (now Cavendish Financial), Numis, Restaurant Group, TClarke and Tyman. The more positive sentiment in the market has translated into a 20.3% rise in company NAV in the second half of the year to 30 April 2024, with the NAV rising further to 169.79p as of 27 August 2024.

Dividend and revenue

SDV has declared a fourth interim dividend of 3.15p per ordinary share (2023: 2.9425p) which, when added to the three quarterly interim dividends of 3.15p per ordinary share, brings the total paid and declared to 12.60p (2023: 11.77p) for the year ended 30 April 2024, an increase of 7.05% over the previous year. SDV has now returned to a position where the dividend is being paid entirely from the current year revenue surplus after costs. Its chairman says that the intention in the future is to increase dividends by a level in excess of prevailing inflation and to use any surplus to replenish the revenue reserves.

SDV has increased its dividend each year for the last 14 years. It says that, because of the strength of the revenue reserves, and the intention to add to them where possible in the future, the company is in a strong position and the board is confident that it will be possible to further grow the annual dividend, assuming the current macro-economic conditions continue. SDV has revenue reserves which, after payment of the fourth interim dividend, represent some 78.3% of the current annual dividend.

SDV’s board says that it is committed to progressively improving the company’s dividend for investors and expects that the four interim dividends paid in respect of the financial year ending 30 April 2025 will very likely exceed, but in any event will not be less than, those paid in respect of the financial year ended 30 April 2024.

Investment manager’s portfolio review

“Corporate activity has been high within the portfolio, however not all have been cash takeovers. Belvoir and finnCap were the subject of all share mergers, and we have retained our holdings in the new combined entities. TClarke and Tyman both received bids in April 2024 and, as such, are still held in the portfolio. We exited our positions in Numis and Restaurant Group. In addition to these two, we exited ten positions entirely in the year. Positions in Bellway, Bloomsbury Publishing, Crest Nicholson, Essentra, Saga, Synthomer, Vertu Motors, Vistry Group and Wilmington Group were all exited on yield grounds, and we accepted a tender offer for our entire position in Town Centre Securities. Shareholdings were reduced in sixteen companies including Alumasc Group, Castings, Fonix Mobile, Hilton Foods, Kitwave Group, ME Group, Smiths News and Ultimate Products.

“Nine new holdings were added to the Company’s portfolio in the year, including home furnishing retailer Dunelm, law firm Gateley, studios business and broadcaster ITV, property finance platform Lendinvest, price comparison business MoneySupermarket, radiator manufacturer and distributor Stelrad and specialist bank Vanquis Banking. In addition, we added to twenty-two positions, including Arbuthnot Banking, Bakkavor, DFS Furniture, Duke Capital, FDM Group, Hargreaves Services, Liontrust Asset Management, Marshalls, Paypoint, RTC Group, RWS, Sabre Insurance, Spectra Systems, STV Group and Wickes Group.”