BlackRock Sustainable American Income 04 April 2024
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 Sustainable American Income (BRSA) is a value-focused portfolio of largely US-listed stocks, with an explicit ESG mandate. BRSA also makes full use of its ability to invest in non-US stocks when comparable valuations make for an attractive alternative, with for example Shell currently a top-ten holding in the holding in the trust, both on valuation grounds and on ESG grounds, which is explored in the ESG section.
The team’s focus on value sets the trust apart from many of its peer group and the wider US funds’ universe. Over the last five years BRSA has performed in line with its reference index, the Russell 1000 Value Index, but value investing has lagged the wider market and BRSA has lagged the Morningstar North American investment trust peer group, which is on average more growth-orientated than BRSA. This has led to a very wide gap in valuation between BRSA's portfolio, on an average P/E of c. 12x and the S&P 500 Index on c. 19x. The very narrow range of stocks that drove the S&P 500 Index's performance in 2023 has exacerbated this gap, and the team have identified a number of sectors on historically low valuations, notably healthcare.
BRSA currently yields 4.3%. Since 2018, BRSA has paid a dividend totalling 8.0p each year, and for the current financial year ending 31/10/2024 the board has guided investors to expect the same. Dividends are paid from a mixture of revenue and distributable reserves.
BRSA currently trades on a c. 12% discount. Having historically traded at a narrower-than-average discount for the peer group, it recently widened towards the peer group average and the board has increased the rate of share buy-backs in response. With the team currently taking a defensive stance within the portfolio, the trust is currently ungeared awaiting an opportune period to re-apply leverage to the portfolio.
Many investors were caught on the wrong side of the 'magnificent seven' trade in 2023, which saw a very narrow group of large-cap technology-focused stocks in the US drive the overall market's performance to an unusual extent. It's writ large that BRSA's value-based approach means that it was never likely to own these stocks, and as the team point out, the overall valuation on the US market is now at what they consider to be quite a stretched level, even as many stocks continue to trade at attractive valuations, with BRSA’s portfolio's average P/E at 12x compared to the S&P 500 Index's 19x. BRSA's value approach did identify some winners last year, with Cognizant Technology Solutions and Cardinal Health. Cognizant, an IT services company, trades at a large discount to its closest peers. Cardinal Health, a healthcare services and products company that specialises in the distribution of pharmaceuticals and medical supplies, has seen some recent management changes that the team view as a positive to further drive value.
Investors wondering whether the US equity market cares about dividends could do worse than examine the positive share-price reaction of Meta upon its recent announcement that it would commence paying a dividend. Meta isn’t in BRSA’s portfolio on valuation grounds, but we think it is perhaps an interesting juncture for the US market. BRSA's own portfolio has a yield of 2.5% and an historical dividend growth rate of c. 9%, higher than the S&P 500 Index's yield of 1.7% and growth of c. 5%. Long-term, valuation and dividend growth can really matter for equity returns, and while the abovementioned Meta's dividend yield is fractional in comparison to its market cap, perhaps this marks an interesting moment for US investors to re-appraise the value of a dividend policy? We think BRSA could perform well in such a scenario.
Bull
- Portfolio at a significant P/E discount to US equities
- Consistent record of dividend paying
- Shares currently trading on wider-than-average discount
Bear
- The value style has remained out of favour in 2023
- Dividend has not grown since 2018
- Some investors may prefer 100% North American exposure