abrdn Equity Income 27 December 2023
Disclaimer
This is a non-independent marketing communication commissioned by abrdn. 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.
Manager of abrdn Equity Income Trust (AEI), Thomas Moore, aims to deliver three key goals: provide a high income, provide an income that grows over time, and provide capital growth. To achieve these goals, Thomas has considerable flexibility, allowing him to invest across the UK market cap spectrum with an index-agnostic approach. This allows him to find the best opportunities, that often trade at attractive valuations as they are overlooked by other investors (see Portfolio).
The trust is one of the highest yielders in the sector at 7.5%, and the dividends are fully covered by revenue. The manager believes this yield is solidly supported, and its future growth is assured by the diversified portfolio, including the small- and medium-sized companies, and strong underlying revenue growth. Looking forward, Thomas believes a turnaround in macro factors should begin to support a market recovery, with low valuations offering a lot of potential (see Performance).
Gearing is typically a structural element of the trust and has been used to support the high dividend. The current level is approximately in line with the trust’s neutral level to allow the portfolio to capitalise on the low valuations and support outperformance should the market rebound.
The trust’s Discount narrowed sharply in the past 12 months. The trust traded close to NAV for much of the past year which has enabled the board to issue shares and increase the size of the trust.
Thomas has achieved his goal of delivering a very high yield, making AEI one of the best yielders in the sector and delivering a very competitive yield level from equities. He has also delivered another year of dividend growth, which the manager believes is well supported going forward by the underlying portfolio, including the benefits of a diversified portfolio such as holding small- and mid-caps (see Portfolio). We understand the dividend growth track record, currently 23 years, is likely to be a key focus of the manager and, in our view, the prospects for dividend growth are strong. We think for those seeking high-income generation from their equity holdings, AEI makes for a compelling offering (see Dividend).
In our opinion, the UK market is significantly undervalued, and this could lead to an improvement in capital returns from the trust. We understand this is now a focus for the manager with the income profile well supported. We believe the trust would benefit from a change in market sentiment, with one ‘bucket’ in the portfolio used specifically for identifying undervalued opportunities. We would expect the small and mid-cap bias to be supportive in any recovery as they typically perform better in rising markets. The differentiation these holdings provide could also help with relative performance (see Performance).
Furthermore, the high level of structural Gearing could support the trust on the upside should sentiment improve. As such, we believe AEI would be a significant beneficiary of a turnaround in market sentiment and would be well-placed to capture a market rally.
Bull
- Very high covered yield that is delivering growth
- Differentiated portfolio including a bias to small and mid-caps
- Trust has recently reduced its charges
Bear
- Gearing is high which can amplify losses as well as supporting upside potential
- Value-tilted portfolio could struggle in a growth driven environment
- Small and mid-cap bias would likely struggle should a recession take hold