Manager Update on Henderson High Income
The rate of new cases of Covid-19 across the globe has started to decline giving governments the ability to start slowly lifting restrictions. At the same time equity markets have rebounded strongly from their March lows, with the FTSE All-Share up 16% since 23rd March, but still leaving the index down 25% YTD (as at 14th May). Optimism over the control on the spread of the virus and the unprecedented monetary and fiscal coordinated stimulus has helped support equity markets.
Dividend cuts have been extremely prevalent in the current environment as companies have looked to shore up cash flow to strengthen their financial positions. On current forecasts the fall in UK market dividends is likely to eclipse that witnessed in the Global Financial Crisis. Following the ban of dividend payments on the UK Banks by its regulator, other notable announcements were from Royal Dutch Shell, cutting its dividend for the first time since World War 2 and BT which has suspended dividend payments till 2022. While the Trust is clearly not immune from dividend cuts and suspensions, the Trust’s revenue account should be more resilient than the overall UK market. Having the ability to own bonds, where coupon payments are more robust than dividends, and owning stable overseas companies with attractive dividends have helped offset some of the impact. The Trust has further utilised its ability to invest overseas and has recently initiated holdings in German insurer Munich Re, Finish telecoms company Elisa and Portuguese utility EDP, all of which offered a high dividend yield.
The Trust’s revenue account has been further aided by having a fairly defensive positioning within the equity portfolio, being overweight in sectors such as pharmaceuticals, consumer staples and utilities, given dividend payments from these companies, so far, have been honoured by management teams. The Trust also has significant revenue reserves, built up over the last 9 years, which puts it in a good position to continue to pay its quarterly dividend for the remainder of the year, as highlighted in the Trust’s 2nd interim dividend announcement.
For a company that has suspended its dividend, the question for income fund managers is what to do with that holding if there is no dividend in the short term? Where a company has taken the painful decision to suspend dividend payments to protect the balance sheet, then we remain supportive especially if the long term fundamentals of a business continue to be strong. The majority of dividend suspensions have been from cyclical companies or those companies most impacted by government lockdowns. It’s important to maintain holdings in this area, albeit focusing on the best quality companies that can survive a downturn and emerge stronger verses its competitors. There will be a recovery as people’s lives start to return to normal and while the timing and strength is hard to predict, valuations in some of these companies are extremely attractive on a long term view. The Trust has kept positions in companies such as bus operator National Express, Premier Inn owner Whitbread, industrial Vesuvius and events company Informa in this regard. Although the Trust continues to have a defensive bias, it maintains holdings in some quality cyclicals, despite no dividends in the short term, in order to benefit from any potential capital recovery.
Index – A statistical measure of the change in a securities market. For example, in the US the S&P 500 Index indicates the performance of the largest 500 US companies’ shares, and is a common benchmark for equity funds investing in the region. Each index has its own calculation method, usually expressed as a change from a base value.
Dividend – A payment made by a company to its shareholders. The amount is variable and is paid as a portion of the company’s profits.
Equity – A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Cyclical stocks – Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.