The investment objective of Troy Income & Growth Trust plc is to achieve rising income and long-term capital growth through investment in a portfolio of predominantly UK equities.
| Financial Highlights | |||
| 31 March 2023 | 30 September 2022 | Change | |
| Equity shareholders’ funds | £186,264,000 | £193,315,000 | (3.6)% |
| Net asset value per share | 72.05p | 68.48p | 5.2% |
| Share price (mid-market) | 70.60p | 67.00p | 5.4% |
| Discount to net asset value | (2.0)% | (2.2)% | |
| Total Return* (for the periods to 31 March 2023) | ||||||
| Six Months | One Year | Three Years | Five Years | Ten Years | ||
| Share price | 7.7% | (5.0)% | 9.5% | 11.5% | 61.1% | |
| Net asset value per share | 8.9% | (3.6)% | 16.0% | 15.8% | 68.1% | |
| FTSE All-Share Index | 12.3% | 2.9% | 47.4% | 27.9% | 75.9% | |
| * Total return includes reinvesting the net dividend in the month that the share price goes ex-dividend. | ||||||
INTERIM BOARD REPORT
Introduction
I am pleased to have joined Troy Income and Growth Trust plc (‘the Company’) as a non-executive Director and Chair. On behalf of myself and the rest of the Board, I would like to thank my predecessor, David Warnock, for his committed stewardship of the Company.
The Company has a clear proposition. It is a UK equity investment trust that invests in high-quality, predominantly UK-listed companies, capable of providing dividend growth every year. The Company aims to offer its Shareholders progressive annual dividend growth and good total returns with lower share price volatility than the FTSE All Share Index. Uniquely in the AIC UK Equity Income sector, it also offers Shareholders the ability to purchase and sell shares in the Company whenever they want at close to net asset value due to the implementation of a strict discount control mechanism.
Company Aims
Since my arrival, the Board has focused on setting clearer objectives for the Company and has spent a full day’s working session with the Managers to gain their input. We have agreed the Company will aim to provide the following:
• Share price total return above the FTSE All Share Index over a 5-year period
Recent performance has fallen short of this target, with the portfolio lagging the wider market return. Calendar year 2022 in particular was a challenging period, with the rapid rise in interest rates and inflation leading to significant polarisation within equity markets. Sectors typically eschewed by the Managers for their cyclicality and capital intensity, particularly Energy and Mining, performed very strongly. Concurrently, many highly profitable and growth-oriented companies held in the portfolio suffered share price declines. The Managers see a considerably more balanced market today, with the environment well-suited to the Company’s quality, dividend growth focused approach. Recent results and dividends reported by holdings provide reassurance on the strength of the portfolio and the outlook for returns in a variety of market scenarios.
• Dividend growth of 4% per annum for Shareholders
Having paid a dividend of 0.5p for the first quarter of the financial year, the Company paid 0.51p in the second quarter. This represents growth of c.4% on last year’s second quarter dividend. It is the Board’s intention going forward to target annual dividend growth of 4%, market conditions permitting.
Over recent years, the Company’s portfolio has evolved. The Managers have prioritised companies able to deliver progressive dividend growth and sold out of companies with higher yields that lack the potential for long term dividend growth. It is encouraging for the Board to see income growth from the portfolio feeding through to revenues. Given the Managers’ confidence in the robustness of the portfolio’s dividends, and the Company’s strong revenue reserves, the Board has decided to increase the rate of dividend growth for the Company.
• Share price volatility lower than the FTSE All Share Index
The Managers emphasise high-quality, resilient, dividend-paying businesses that should drive consistent returns, avoiding the worst of market volatility. In particular, they believe a portfolio suffering fewer and less destructive drawdowns will be in a better position to compound returns over the long run. The Company has consistently fared better than the FTSE All-Share Index during market sell-offs and has continued to provide a return with lower share price volatility. The discount control mechanism has played an important role in this, ensuring the Company’s share price remains closely aligned with net asset value.
The Board will closely monitor the Company’s progress against these aims and will report on this in the annual report and accounts.
Performance
The Company delivered a Net Asset Value (‘NAV’) per share total return of +8.9% and a share price total return of +7.7% over the six months to 31 March 2023. Over the same period, the FTSE All Share Index produced a total return of +12.3%. The average NAV total return for the AIC UK Equity Income sector was +12.6% for the same period. Looking back over time, it has not been unusual for the Company to lag the index and peers in periods of particularly strong markets. The two most significant drags were the Company’s holdings in large, low cyclicality Consumer Staples companies, and sterling’s strong appreciation against the dollar impacting the Company’s US-listed holdings.
There was strong performance from a range of large, stable holdings within the portfolio over the six-month period. RELX, Unilever, National Grid, Compass and AstraZeneca contributed most strongly to returns. Other areas of strength came from UK domestically focused businesses such as Next and Domino’s Pizza, as these stocks recovered from the dislocation caused by the UK’s September 2022 mini-budget. Another notable theme across markets over the period related to China’s re-opening following over two years of strict COVID lockdowns. This was most obviously manifested within the portfolio by the sharp rise in the share price of InterContinental Hotels Group, a company with a strong exposure to Chinese travel. Across the broader index, commodity producers, which the Company does not hold, were also beneficiaries of this trend.
Background
The market continued to digest the impact of high inflation and higher interest rates over the six-month period. UK inflation (CPI growth) hit 11.1% in October 2022, the highest level since the 1970’s. Whilst it is likely that this reading represented peak inflation for this current cycle, the path for inflation returning to the Bank of England’s (‘BOE’) 2% target is highly uncertain. In response to such readings, the BOE continued to hike interest rates. On the 23 March 2023, the UK base rate was raised for the eleventh consecutive time to 4.25%, having been as low as 0.1% in December 2021.
The magnitude and speed of interest rate rises in response to inflation is having acute and unpredictable impacts on the market. In September 2022, we witnessed a crisis in UK pensions. More recently, in March 2023, significant stress emerged in the US regional banking system. This resulted in Silicon Valley Bank’s collapse, in what was the first major US bank run since the global financial crisis. Other banks across the world, including Credit Suisse, suffered varying degrees of contagion and whilst there has been limited direct read across so far to the UK banks, these events provided a reminder as to the risks associated with highly levered business models.
The Managers have chosen not to invest in banks, due to the leverage and cyclicality inherent in their business models. Instead, they seek to invest in resilient, high-quality dividend growth companies that have relatively lower levels of share price volatility.
Portfolio
Large, high-quality, low cyclicality businesses continue to make up the core of the portfolio. Some of the Company’s largest allocations include a c.30% weighting to Consumer Staples (e.g. Unilever, Diageo and Reckitt), c.20% to non-discretionary B2B-focused businesses (e.g. Compass Group, RELX and Bunzl) and c.10% to the relatively non-cyclical Healthcare sector (e.g. AstraZeneca and GSK).
Over the period, the Managers took advantage of market volatility to make new investments in London Stock Exchange Group, Sage, Smiths Group, Imperial Brands and Howden Joinery. All five are resilient, leading companies in their respective industries and have strong balance sheets and well-covered, growing dividends.
The Managers exited positions in Haleon, Halma and Aveva Group. Aveva was subject to a bid by its majority shareholder Schneider Electric, following which the position was sold. Haleon and Halma were sold on valuation and dividend yield grounds.
While the team follow a long-term, low turnover strategy, they will continue to seek to improve the growth of capital values and dividends within the portfolio.
Discount Control Mechanism
The discount control mechanism (‘DCM’) is one way in which the Company sets itself apart from other trusts in the sector. The DCM materially improves the liquidity of the Company’s shares and ensures Shareholders can purchase and sell shares in the Company at a price that closely reflects the NAV. This is particularly important during times of market stress, where it is not uncommon for other trusts to trade at a material discount to their NAV’s.
The Company has operated the DCM since Troy became the Company’s Manager in 2009 and it continues to be a key aspect of the Company’s proposition.
Dividends
The Board announced in March that the Company would pay a second interim dividend of 0.51p per share (2022 – 0.49p). This represents a step up in the rate of the Company’s dividend growth to c.4% compared the prior year’s second interim. Absent any unforeseen circumstances, it is the Board’s objective to maintain this rate of dividend growth going forward.
This increase in the dividend signals the Managers’ confidence in the underlying portfolio and the Board’s strong desire to deliver dividend growth to Shareholders. The Company’s dividend growth can be expected to be sustainable through a wide variety of market environments, with the current annual dividend covered by almost 11 months of revenue reserves.
Recent corporate results continue to demonstrate strong dividend growth from some significant portfolio holdings. Highlights included +10% growth in the final dividends from RELX and InterContinental Hotels Group, +8% from Croda and LSE Group, and +11% from Bunzl.
Outlook
The Managers believe that the lagged impact of higher interest rates and high inflation will continue to affect companies, consumers, and certain parts of the financial system. March brought significant volatility to markets, with pockets of stress emerging in the US and European banking systems. Regulators have acted fast to avoid contagion, but after more than a decade of low rates, the Managers are braced for further speed bumps, as well as possible recessions in Europe and the US.
The Board is confident that the companies held in the portfolio are resilient and adaptable. Over recent months, the Managers have digested encouraging results from a range of the Company’s businesses. Strong operations are feeding through to strong dividend growth from several core holdings; 10% growth in RELX’s latest dividend, 9% from Reckitt, 8% from Croda, and 10% from Bunzl – the latter marking 30 years of unbroken growth at a 10% compound annual rate. These are reassuring signals by management teams on the outlook for their businesses. All of these businesses have proven to be reliable, long-term income payers over many years, and are typical of the companies preferred by the Managers. The Board believes that the consistent, compounding dividend returns possible from such businesses support a robust outlook for total returns from your Company.