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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