Chair’s Statement

“Company earnings remain solid across the majority of our holdings, supporting confidence in the dependable nature of the dividend and income and capital growth during 2024”

Sarika Patel, Chair

Performance

In the six months ended 31 March 2024, the Company delivered an NAV total return of 1.6% compared to the total return of the FTSE All-Share Index of 6.9%. Over the period, the share price total return was -8.2%. As an asset class, UK equities struggled to keep up with other major equity markets, notably US equities. Whilst performance has been disappointing, the portfolio continues to deliver a  dependable income and  the Investment Manager has re-focused current positioning in the portfolio to stocks where he sees the potential for a combination of dividend yield, dividend growth and valuation re-rating. The Investment Manager’s Review provides a more detailed explanation of the drivers of this performance.

Revenue

Total income for the six months ended 31 March 2024 increased by 13.9% to £5.4 million, compared to £4.7 million for the same period last year. Management fees decreased by 21.9% compared to the same time last year. This was in part attributable to the reduction in the management fee to a flat fee of 0.55% per annum on net assets which the Board negotiated with the Manager and took effect on 1 October 2023 at the beginning of the period.

Administrative expenses were largely unchanged, meaning that overall costs charged to revenue were down 9.4% at £368k compared to £406k in 2023. The tax charge, which increased significantly from £57k last year to £447k in this reporting period, reflects an increase in withholding tax on overseas dividends, primarily in relation to South African-listed Thungela Resources. After interest costs and tax, net earnings increased by 6% to £4.3 million with revenue per share of 9.05 pence compared to 8.60 pence in 2023 for the same period. Typically, the Company earns between 30% and 40% of its total income for the year in the first six months and this year we are in the top half of that range. As a result, given the outlook for the balance of the financial year, the Board expects that the full year earnings will be sufficient to cover the proposed dividend.

Dividends

The Board declared its plans for the dividend for the current financial year in last year’s annual report and the proposed schedule is unchanged at this time. The Company currently intends to pay three interim dividends for the current year of 5.70 pence per share. The first interim dividend was paid to Shareholders on 28 March 2024.

The Board is declaring that the second interim dividend of 5.70 pence per share will be paid on 27 June 2024 to shareholders on the register on 24 May 2024 with an associated ex-dividend date of 23 May 2024. The fourth interim dividend will be determined towards the end of the Company’s financial year. The Board’s current expectation remains for a fourth interim dividend of at least 5.80 pence per share, making a total payment for the year of a minimum of 22.90 pence per share.

Based on the share price of 277.0p at 31 March 2024, this puts the Company on a dividend yield of 8.3%, amongst the highest of any investment trust invested in equities.

Portfolio Performance

Investment Manager’s Review

Market Review

UK equities advanced over the six months to 31 March 2024 as investors expressed relief over the receding risk of a hard landing for the economy, as falling inflation raised hopes of interest rate cuts later in the year.

The start of the period was characterised by nervousness over the resilience of the global economy against the backdrop of elevated interest rates and geopolitical tensions. UK consumer spending remained subdued throughout the period, reflecting cost of living concerns after a prolonged period of high inflation. GDP data for the final quarter of 2023 confirmed a second consecutive quarterly contraction in output, signalling that the UK fell into a mild technical recession in the second half of the year. The market brushed off this news, focusing instead on the reduction in inflation from 6.7% in September 2023 to 3.2% in March 2024, at the same time as a robust jobs market supported UK wage growth running ahead of inflation. This raised the prospect of accelerating GDP growth later in the year.

Elsewhere, the strength of the US economy continued to surprise investors, with the US Federal Reserve providing a further impetus to sentiment by signalling a change in monetary policy in November 2023. This helped to persuade investors that a hard landing for the US economy could be avoided. The success of the US economy was in sharp contrast to China which was held back by an ongoing slump in the real estate sector. Geopolitics remained febrile with investors’ nerves tested by tension in the Middle East and the ongoing conflict in Ukraine.

Towards the end of the period, rate cut expectations were pared back, especially in the US where inflation data remained sticky, leading to higher Treasury yields. Around the world, growth stocks continued to outperform value stocks, while cyclical stocks outperformed defensive stocks. The US equity market continued to outperform that of the UK, helped by the heavy weighting in Technology stocks at a time of intense interest in Artificial Intelligence. European equity markets benefited from their heavy weightings in Industrials, Technology and Healthcare stocks. Late in the period, the UK equity market gained some support from a reversal in commodity prices following more encouraging industrial data from China, while oil prices moved higher on concerns over the potential escalation of conflict in the Middle East. The domestically focused FTSE-250 Index was supported by hopes of imminent rate cuts, outperforming the FTSE-100 Index during the six months, although its outperformance tailed off towards the end of the period as the prospect of early interest rate cuts receded.

Revenue Account

Total income generated by the portfolio in the period under review increased by over £650,000 or 13.9% to £5.4 million. We remain confident that the second half of the year will generate more than 60% of the total income for the period. This is the experience of the last 10 years to differing degrees and is as a result of many of the holdings declaring their final dividend for their previous financial year after our period end.

The contribution from special dividends remained low at 3.7% of the total cash dividend income. We note that share buybacks, rather than special dividends, remain the preferred method of distributing surplus capital. This partly reflects the view amongst management teams that unusually low valuations make these buybacks particularly accretive to earnings. We note that 19 of our holdings, representing 45% of the portfolio, have undertaken a share buyback so far during the current financial year.

Net revenue earnings for the six month period were £4.3 million, or 6.0% higher than last year’s £4.1 million.

We calculate that the portfolio is expected to deliver a gross dividend yield, before costs, of around 6.9% based on the income expected to be generated by the portfolio over this financial year divided by the portfolio value at the period end. While this is lower than it was at the end of the last financial year it continues to represent a significant premium to the dividend yield of the reference index of 3.8% as at 31 March 2024. Elevated interest rates are unhelpful for our investment return as they reduce the gap between the rate we pay for the bank facility and the dividend yield we earn on the portfolio, although we note that money markets are now factoring in rate cuts in late summer.

We continue to focus on identifying stocks that could help us deliver on the yield aspect of our investment objective, while also providing dividend and capital growth over time. The focus on portfolio income is consistent with our investment process given the emphasis we place on finding companies whose cash flow and dividend potential are not effectively priced in by the market.

We are aware of the challenges facing income investors, notably the preference among management teams for share buybacks over special dividends, as well as the prolonged period of geopolitical and economic uncertainty. Looking ahead, we expect many UK stocks to be able to accelerate dividend growth once this uncertainty starts to ease. This would help to reduce the concentration in dividend payments among a handful of sectors that has resulted from the unusual macro backdrop since Covid. Our index-agnostic approach allows us to consider a wide range of stocks, across the UK market, with many different drivers of earnings. We have worked hard during the period to seek out companies with strong dividend prospects from a broad range of sectors, helping to diversify the portfolio’s income.