Schroder Income Growth (SCF)
30/04/2024
Results analysis from Kepler Trust
Intelligence
Schroder Income Growth (SCF)
released its half-year results covering the six months to end of
February 2024. Over this period, it delivered NAV total returns of
1.9% and a share price total return of -0.3%, compared to a 3.9%
total return from the FTSE All-Share Index. However, under Sue's
tenure to 26/04/2024, NAV total returns remain ahead of the
benchmark, with SCF delivering 153.9% versus the FTSE All-Share's
total return of 126.7%.
The board have increased
SCF's dividend for 28 consecutive years and remain committed to
delivering portfolio income supported, when necessary, using
revenue reserves to provide growing income for shareholders. As at
the end of the period, revenue reserves accounted for approximately
86% of last year's dividend.
Kepler View
Schroder Income Growth (SCF)
focuses on generating real growth, in both income and capital over
the long run. Under Sue Noffke's tenure, she's demonstrated
consistency and discipline in her approach throughout different
market cycles, resulting in an impressive outperformance of the
FTSE All-Share Index. However, recent performance, notably over the
six-month period to end of February 2024, has faced challenges. SCF
lagged the FTSE All-Share by two percentage points, primarily
driven by adverse stock selection in a few sectors, including
consumer discretionary. Within this sector, two stocks notably
detracted from returns: Burberry and Pets at
Home.
Given recent market
volatility, and historically low UK equity valuations, Sue
observed, "There remains a noticeable disconnect between company
fundamentals and valuations. The UK stock market presents an
attractive opportunity for forward returns, particularly in the
Small and Mid-Cap area." Consequently, several names were added to
the portfolio, including Inchcape and Smith and Nephew. Inchcape,
which is taking share in the automotive market and generating
attractive returns on capital, is perceived by Sue's as undervalued
by the market. Smith and Nephew's addition was driven by compressed
share valuations relative to its own history and to international
peers. Its recent sales growth acceleration and positive
operational leverage, along with cost benefits from restructuring
programmes, should boost margins and improve
valuations.
Whilst some holdings posted
notable increases in dividends in the period, eight portfolio
holdings held their dividend level with prior years. Among these,
seven opted to reward shareholders additionally through a share
buyback programme, indicating that their boards believe their
shares to be undervalued. Oil major Shell, Empiric Student
Properties and budget hotel company Whitbread paid notably
increased dividends. Shell also conducted a significant share
buyback of $3.5 billion. Electricity energy provider SSE reduced
its dividend by one third, seeking to balance income to
shareholders with the capital required to take advantage of the
many investment opportunities afforded by the energy transition
whilst maintaining a strong balance sheet.
We believe that Sue and her
team have built a well-diversified portfolio, poised to deliver a
growing income ahead of inflation along with capital growth. Given
present valuations, Sue and her team are optimistic about the
opportunity set and believe the portfolio is in a good place, with
a number of stocks being added at valuations not seen for a long
time. In our view, having a greater exposure to small- and
medium-sized companies has provided support for the delivery of
SCF's objectives over time, and it may lead to heightened
short-term volatility compared to a portfolio focused solely on
large-cap stocks.
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