Results analysis: Aberdeen Standard Equity Income

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ASEI’s board have indicated that it intends to raise the dividend again in the current financial year…

• This week, Aberdeen Standard Equity Income (ASEI) released its interim results for the financial year (FY) 2021. Over the six months ending 31/03/2021, ASEI generated NAV total returns (with income reinvested) of 29.0%. Over the same period, ASEI’s share price rose 34.8% (with income reinvested); share price returns were boosted by a narrowing discount to c. 8.8% from c. 12.5% in September 2020. ASEI outperformed the benchmark on both an NAV and share price total return basis, with the FTSE All-Share Index generating a total return of c. 18.5%.
• Looking forward, the manager, Thomas Moore, notes that he believes there to be several reasons why “the recovery this time could be far more prolonged and intense than previous recoveries”, and that he continues to look for positions where market valuations underestimate the degree to which the company would benefit from such an outcome. The board has expressed satisfaction with the pick-up in relative performance, commenting “these returns represent some of the best results, both in absolute and relative terms for a number of years”.
• The board declared a second interim dividend for the financial year of 5.2p per share (with an ex-divi date of 03/06/2021). This brings the total dividends from the first two interim dividends to 10.4p per share, in line with that paid in the previous financial year. The board has furthermore stated its intention to pay total dividends for FY 2021 in excess of those of FY 2020, though it will continue to monitor the revenue account and will not confirm final dividends until the accounts for the financial year are finalised. Revenue returns per share for the six months to 31/03/2021 amounted to 7.74 pence per share, compared with 8.35 pence per share for the same period over the previous financial year. This represents a fall of 7.3%, with the board noting that “Covid-19 impacted the ability of some investments to maintain dividend payments”.

Kepler View

Aberdeen Standard Equity Income (ASEI) has enjoyed a purple patch, with a return to favour of cyclical stocks and value strategies playing to its favour in recent months. After the announcement of the successful development of vaccines for COVID-19, there was a substantial ‘catch-up’ rally in many areas of the market which had previously lagged the presumed ‘covid-beneficiaries’.

When, in November 2020, we last updated our research on ASEI, we noted that manager Thomas Moore had highlighted such a scenario as a potential tailwind. In the face of widening valuation dispersions between ‘value’ and ‘growth’ stocks within the market, we reported that: “Thomas sees it as providing the scope for a very sharp recovery in performance should conditions change. An economic recovery, potentially (in the team’s view) linked to the announcement of a vaccine, could prove a tailwind to a recovery in many of ASEI’s holdings.” This has subsequently materialised, with ASEI outperforming the benchmark substantially over the interim reporting period.

We note that ASEI has subsequently continued to outperform, producing NAV and share price total returns of c. 6.7% and c. 13.5% respectively from 01/04/2021-18/05/2021, against a benchmark return of c. 4.4% (Source: Financial Express Analytics). After a longer-term period of more challenging performance, it is reassuring to see outperformance when conditions are more favourable.

The manager’s gradual shift in the portfolio to take on more exposure to ‘value’ factor areas of the market, by extension incorporating a greater degree of cyclicality, has frequently been a headwind in recent years.

However, with favourable tailwinds as markets brought forward assumptions on economic reopening and societal normalisation post-COVID, ASEI has been able to outperform its benchmark index.

With the manager anticipating further acceleration in domestic economic activity (boosted by an anticipated fall in the currently very elevated savings rate), he reports portfolio activity as having been focused primarily on areas which can benefit from this.

Other areas of focus for purchases have included companies already offering attractive dividend yields and able to offer dividend growth from existing cash flows. Lower yielding stocks have been trimmed, as have mega-cap stocks where the manager believes the earnings outlook to be muted.

Clearly there has been a challenging backdrop for dividend generation over 2020, with the UK market seeing an estimated fall in total dividends of c. 42% over the calendar year and 27% over the reporting period (when compared with the same period 12 months prior). ASEI’s first two dividends, as accounted for from net revenue returns per share over the interim reporting period, look like they will not be covered from income.

Yet the board remains supportive of growing distributions, having last year been awarded AIC ‘Dividend Hero’ status after ASEI increased its dividend for the 20^th consecutive financial year.

The manager has noted that he continues to categorise stocks within the portfolio as either ‘resilient income’, ‘resumed income’ and ‘interrupted income’, terms which we have previously discussed in our research.

As at 31/03/2021, he estimates that just over 60% of ASEI is invested in companies the team classify as ‘resilient income’, where the company paid dividends continuously throughout the crisis. He anticipates ‘interrupted income’ stocks to increasingly resume dividends throughout the year as they gain greater visibility on earnings, and for an acceleration in dividend growth. Should this materialise, it should improve the dividend cover.

The board has indicated it intends to raise dividends for FY 2021 by 0.1% over FY 2020, through the payment of a third interim dividend of 5.2p per share and a fourth interim dividend of at least 5.1p per share (giving a total dividend of at least 20.7p per share for the whole financial year).

This would represent a yield of c. 5.5% on the current share price. However, it has noted that the final dividend level will remain somewhat dependent on the degree of recovery in the revenue account.

With FY 2020 revenue returns per share of 15.61p per share, a covered dividend at this level will require significant further acceleration in revenue receipts. However, the board retains recourse to significant revenue reserves, totalling c. £7.6m as at 31/03/2021.

This is prior to the payment of the 2^nd interim dividend. We estimate, after deduction of the 2^nd interim dividend, but accounting for reported retained earnings (based on reported differences in ex-income and cum-income NAVs as at 17/05/2021), ASEI retains revenue reserve cover of c. 0.77x the FY 2020 dividend.

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