Alliance Trust: Interim Results
Alliance Trust is a client of Kepler Trust Intelligence, and this is a non-independent marketing communication. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
The global growth giant holds income steady as COVID continues to batter dividends for investors
Alliance Trust (ATST) released its interim results for the six months to 30 June this morning, recording a 3% increase in its dividend compared to the same period in the previous financial year and keeping the trust on track for its 54th consecutive year of rising dividends, one of the longest track records of progressive dividend growth in the investment trusts universe.
The trust, which will pay two further dividends in its current financial year, paid out 3.595p per share, and barring even greater volatility than we saw in H1, is by our calculation on track for a total payout of 14.38p by the year end (compared to 13.96p per share in 2018-19) despite the significant headwinds faced by equity income investors during the COVID-19 crisis.
In performance terms the trust lost 3.5% in terms of NAV total return, underperforming the benchmark MSCI ACWI index which gained 0.5% over the same period. Share price returns were slightly weaker, down 5.8% over the same period.
The first half of 2020 has been very difficult period for everyone. Putting the human tragedy to one side, conditions for equity investors have been extremely challenging, and the economic contraction we have witnessed, triggered by lockdowns around the world, is of a greater scale than anything we have seen since the Second World War.
It is against that backdrop that Alliance Trust’s interim results should be considered and, while total returns over the period have not been outstanding neither have they been very poor, and we see promising signs for the future, particularly where the trust’s income is concerned.
While the trust has underperformed the MSCI ACWI index over the period, we note that the performance of this index has been skewed by very strong performance of a small number of its mega-cap constituents – including the ‘FAAMGs’ (Facebook, Amazon, Apple, Microsoft and Google) which have prospered so much during this period.
While the trust had some exposure to these stocks, it was underweight the largest-cap stocks in general. Not fully keeping up with the largest-cap stocks as a whole may feel uncomfortable in the short term, but it is worth considering the strategy behind it.
The stock pickers behind Alliance Trust’s underlying portfolios think valuations of these mega-cap stocks already reflect future performance, and see more opportunity elsewhere.
For that reason their exposure reflects a broader range of companies outside the very largest index constituents. Should the narrow market leadership of these mega-cap stocks begin to wane – the trust will be well placed to benefit in our opinion.
Looking at the trust’s AIC Global peer group it is clear that some of the big ‘winners’ over the period were those with the largest exposure to these companies; large cap growth focused mandates like Scottish Mortgage and Monks investment trust, for example.
We note also that that ATST outperformed its closest competitor, Witan, by a considerable margin. Witan lost 13.58% over the period and almost 20% in share price terms.
Perhaps the most encouraging news for the ATST shareholders concerned the dividend. The trust’s dividend is backed up by significant revenue reserves of £109.1m; equivalent to around 33p per share as at 1 January 2020 – around double this year’s likely total dividend even after the subtraction of the trust’s final dividend for the previous year (paid in March in 2020) is taken into account.
These reserves could be bolstered further by the conversion of the trust’s legacy merger reserve, which the board intends to put forward as a resolution at next year’s AGM.
This would add a further £645.3m to the trust’s reserves, which could potentially be used to support the payment of future dividends for a considerable period.
We think companies’ dividend payouts are likely to be depressed for some time, given the impact which COVID-19 has had – and will continue to have at least until a vaccine is developed and implemented – and so these very large revenue reserves, particularly if shareholders approve the move to convert the merger reserve next year, offer significant appeal to the Alliance Trust formula.
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