Schroder Income Growth Fund (SCF) announced its annual results for the year ended 31 August 2024. The company delivered a NAV total return of 19%. This compares to 17% from the benchmark All-Share Total Return Index. The share price return was 17.7%. The company’s share price discount to NAV averaged 9.6% during the year and ended the financial year at 10.4% Dividends per share for the year of 14.20p represent a 2.9% increase on the previous year, generating a yield of just under 5% at the prevailing share price. This is the 29^th year running that dividends have increased. The dividend was 82% covered by earnings which fell by 11.5% to 11.64p. After payment of the fourth interim dividend, the revenue reserve will be £5.7m, representing 8.25p per ordinary share or seven months of the annual dividend.

The manager noted that the outperformance for the year was driven by stock selection in the financials and consumer staples sectors, as well as favourable stock selection and positioning in the energy sector.

The manager noted that income earned by the company came under pressure during the year for two main reasons. Firstly, the mining sector’s contribution to income has continued to decline, with profits and dividends significantly lower than in previous years. Secondly, companies are increasingly allocating capital towards share buy backs instead of dividend distributions. This shift is seen across a broader range of companies and sectors compared to the prior year, which was dominated by mining, banking, and oil companies. Last year, 17 of the portfolio’s holdings (approx. 38% of the company) undertook share buy backs, that number rose to 29 holdings (approx. 60%) this year. While this has reduced the portfolio’s income, the decision to prioritise share buy backs over dividends is a reflection of favourable stock valuations and the potential to enhance future per share returns.

Regarding the performance and the outlook for the company, chairman Ewen Cameron Watt commented:

“Global equity markets have been performing well, with indices reaching all-time highs. There is an increasing belief in a soft economic landing, as consumer demand remains resilient, inflation has fallen, and central banks have started to implement rate cuts. However, challenges persist, such as geopolitical events in the Middle East and Ukraine, as well as the highly divisive US election campaign.

“The outlook for the UK equity market is cautiously optimistic despite ongoing challenges. Interest rates are expected to fall further. However, inflation remains a concern, though there is an expectation that it will moderate, especially if energy prices remain stable. It is early days to assess the full impact of the recent UK budget. While projections from the Office of Budget Responsibility and Institute of Fiscal Studies do not suggest a step change in UK growth, such growth has limited relationship to share price performance for a globally diversified corporate sector. Corporate responses and the cost of capital in general tend to be more important in determining share prices. Your investment manager believes more than ever that resilient business models and strong balance sheets selling at attractive values are the best routes to inflation-beating share price returns. As a board, we agree.

“The UK equity market continues to offer attractive value to investors, particularly given its lower valuations compared to global peers. The market’s dividend yield, currently around 3.5%, and many companies with geographically diversified revenues make it appealing for investors. This is reflected in bid activity which has reached its highest level since 2018, indicating increased interest and investment. Furthermore, a broader range of UK companies are also engaging in share buybacks, and there have been successful capital raisings, signaling confidence and potential growth. With inflation moderating from the peak of a few years ago, small and mid-sized companies (“SMEs”) are expected to benefit. There has been a deliberate increase in exposure to SMEs in your portfolio, and we expect their improved performance in recent quarters has further to go.

“The US presidential election and its aftermath are much in mind as I write this statement. US stock market returns and a strong dollar have dominated the portfolio investment landscape since inflation peaked in late 2021. Any prolonged threat to the apparent attractiveness of the US and stability of her institutional framework could clearly dent confidence. I can only repeat that the choices made by corporations, their balance sheet strength, and the cost of capital are central to your investment manager’s choice of investments.

“It is against this backdrop that your company seeks to continue to deliver its investment objective of growing dividends and providing capital growth. While delivering real dividend growth to you purely from income received over the year will be challenging, both your investment manager and your board are keenly focused on positioning the portfolio to optimize total returns. Your investment manager has made significant changes to the portfolio in response to the evolving environment, and the ongoing oversight and experience of the team should give investors some comfort.

“Your company has now raised its dividend for an unbroken 29 years, throughout multiple market cycles. It has been able to do this through stock selection and careful management of its reserves. This has enabled the delivery of increases in income regardless of the economic backdrop. While there may still be some challenges that lie ahead, your company’s total reserves remain healthy. Your board will not hesitate to use these reserves if necessary to continue to deliver on your company’s investment mandate of raising dividends, even if such increases lag the growth rate of inflation in the short term.”

SCF : Financials and energy drive Schroder Income Growth Fund to strong year