BlackRock Income & Growth 24 December 2021
Disclaimer
This is a non-independent marketing communication commissioned by BlackRock. 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.
BlackRock Income & Growth (BRIG) offers a focussed portfolio of companies, picked for their ability to pay a solid and growing dividend income over the long term. In March 2021, the board increased the proportion that can be invested overseas from 5% to 20%, providing an even greater opportunity for stock picking. The majority of the Portfolio (c. 70%) will typically be invested in ‘income generators’, those companies which generate sustainable free cash flow with a balance between re-investing for growth and paying a dividend to shareholders.
This is a true stock-picking approach; Adam and David aim for a relatively concentrated portfolio (of currently 47 holdings). They pay little heed to the benchmark and are able to use the investment trust structure to invest across the market capitalisation spectrum if appropriate. This enables a long-term focus and flexible and dynamic stock selection. The high-quality stocks that BRIG owns means that it has underperformed this year, which has seen a cyclical rally.
Underpinning the managers’ decision-making process is the desire to maintain a strong track record on dividends. BRIG had delivered growth in revenue returns per share of c. 7.3% p.a to the end of FY 2019. The pandemic saw dividend cuts across the market, but the focus on quality meant that BRIG was significantly less badly affected in terms of revenue declines than many open-ended funds, as we discuss in the Dividend section. In any event, the board was able to use the significant revenue reserves to maintain the 2020 dividend. BRIG will announce the final dividend when it publishes its results early in 2022.
Our recent research highlights the inherent attractions of trusts like BRIG when compared to open-ended equity income funds. We show that 60% of open-ended UK Equity Income funds have delivered two consecutive years of distribution cuts – pretty disastrous for those investors who depend on them.
In contrast, despite seeing revenues decline in 2020, BRIG held its dividend. With substantial revenue reserves of c. 1x the annual dividend, BRIG looks potentially well-placed and offers a historic dividend yield of 3.9%. The board have the firepower to support the dividend, but whether the upward trajectory re-starts this year remains to be seen. With the final results due early in 2022, we won’t have to wait for long to find out.
The managers’ focus on resilient income streams has protected revenues from the worst falls, as did their adroit use of Gearing. Performance over 2021 has been disappointing, with the market rewarding more cyclical companies (inherently less reliable dividend payers). For those playing the long game in equity income, it is reassuring that BRIG’s managers are not deviating from their strategy.
BRIG’s Discount has lagged the peer group, and the board have been buying shares back. For those attracted to a nimble, stock-picking equity-income team, there are few trusts that offer such an attractive discount (currently c. 9%). Certainly, BRIG’s small size may give institutional investors pause for thought, but the fundamentals on the longer-term dividend trajectory look well supported by revenue reserves.
bull | bear |
Reasonable yield which is well supported by revenue reserves |
Gearing can amplify downside as well as magnify upside |
Closed-ended structure allows managers to employ dynamic and flexible investment approach without worrying about overall portfolio liquidity |
Small size of trust may make it harder to build a position for institutional investors |
Discount to NAV is currently considerably wider than peer group |
Quality characteristics can moderate exposure to cyclical rallies |