Schroder Income Growth (SCF)
12/11/2024
Results analysis from Kepler Trust
Intelligence
Schroder Income Growth (SCF)
has released its financial results for the year ending 31/08/2024,
reporting NAV total returns of 19.0% and a share price total return
of 17.7%, outperforming the FTSE All-Share Index's 17.0% return.
Outperformance stemmed from several factors, including the trust's
modest gearing, which averaged 13.5% over the period, enhancing
returns by 2.6%. Manager Sue Noffke's strong stock selection within
the financial and consumer staples sectors further boosted
performance, as well as the portfolio's exposure to small- and
mid-cap stocks, which outperformed their larger
counterparts.
SCF is celebrating its 29th
consecutive year of dividend growth, raising the dividend per share
to 14.2p, a 2.9% increase compared to 2023. During the same period,
earnings per share fell by 11.5%, meaning the total dividend was
82% covered by earnings. After the payment of the fourth and final
dividend, the trust's revenue reserve sat at £5.7m, representing
roughly seven months of the annual dividend. SCF's discount
averaged 9.6% during the financial year, although it currently
trades at approximately 11.4%. During its financial year, the board
repurchased 38,000 shares - the first time since 2008 - and have
since bought back an additional 8,000 shares, aiming to enhance the
asset value per share.
Kepler
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We think the recent results
from Schroder Income Growth (SCF) are strong, showcasing solid
relative performance amid a challenging landscape marked by
geopolitical tensions, polarised political climates, uncertainties
around the speed of interest rate cuts, and sluggish global growth.
We think this success is largely to lead manager Sue Noffke's
disciplined approach.
Whilst the UK market has been
perceived as a home for out-of-favour, downtrodden sectors that
have struggled over the last decade, Sue views the sector's current
undervaluation as an opportunity rather than a limitation,
recognising the potential for long-term recovery and value creation
within this overlooked market. Whilst some companies' low
valuations are justified, she believes many are not necessarily
undervalued due to weak fundamentals; instead, many have withstood
prolonged macroeconomic pressures. As such, she has identified
several companies trading at discounts, that also exhibit strong
fundamentals, representing re-rating opportunities as the market
corrects its mispricing over time.
Earnings from the mining
sector fell by two-thirds, impacting the portfolio's income. As
such, Sue increased the allocation to financials, including
initiating a new position in Standard Chartered, which made up for
some, but not all, of the shortfall from the mining sector.
Additionally, 29 companies in the portfolio conducted share
buybacks, favouring them over dividends. Whilst this wouldn't be
good every year, Sue views these buybacks positively as they signal
acknowledgment of the favourable valuations in the UK market. All
else being equal, she highlights that buybacks can enhance future
earnings and dividends per share, supporting shareholder returns
over time.
Given present valuations, Sue
and her team are optimistic about the opportunity set, something
they believe is also supported by recent bid activity which has
reached its highest level since 2018, indicating increased interest
and investment, and aligns well with those seeking exposure to
undervalued UK assets. Additionally, greater exposure to small- and
mid-cap stocks has allowed SCF to benefit from recent upswings in
these areas, which, whilst potentially increasing short-term
volatility, has supported SCF's objectives over time and sets it
apart from many equity income peers, offering differentiated income
and return opportunities.
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