Results analysis: BlackRock Income and Growth

• BlackRock Income and Growth Investment Trust (BRIG) released its final results for the year ending 31 October 2020 on Monday this week, reporting a decline of 16.7% in NAV terms.
• The trust outperformed its benchmark, the FTSE All-Share index, which lost 18.6% over the same period and has delivered very strong absolute returns since the end of the period; the share NAV and share price are up by 17.1% and 10.2% respectively to 28 January 2021 (all performance figures are in sterling with dividends reinvested).
• At a share price level, BRIG returned -14.8%, as the discount narrowed over the period to a premium of 0.5% (to 31 October 2020). 
• The board is proposing a final dividend per share of 4.60 pence, giving total dividends for the year of 7.20 pence per share. This is despite earnings per share falling and maintains the dividend at the same level as the prior year (2019: 7.20 total dividend pence per share). 
• The managers note that UK valuations are extreme and even on an industry adjusted basis remain at multi decade lows vs other international markets. They believe that once the market has certainty, we could see this divergence narrow, supporting their view that now is a great time to invest in the UK market.

Kepler View

Although the final numbers are negative over the reporting period, we see this as a strong set of results from a trust sitting in arguably one of the hardest hit sectors during the COVID-19 pandemic. Moreover, since the results period ended the trust has seen performance rebound strongly with the NAV and share price up by 17.1% and 10.2% respectively to 28 January 2021.

Over the past twelve months, ending 29 January 2021, the trust delivered NAV total returns of -9.5%, outperforming the benchmark by 1.8%, and sitting largely in line with the AIC and IA peer groups according to Morningstar.

The reasons for BRIG’s resilience are twofold. The managers started 2020 with relatively defensive portfolios, as they believed there to be a decoupling between valuations and earnings growth. This caused them to be cautious in the weeks leading up to the crisis, such that they significantly reduced the cyclicality and gearing of the portfolio. This meant the trust was less exposed to some of the hardest hit areas of the UK market, and wasn’t highly leveraged like others. The second reason for the strong performance was due to the managers’ ability to capitalise on the opportunities that arose during the COVID correction. They used the extreme market sell-off to improve the quality of the portfolio and to recycle capital into businesses where they saw stronger growth and dividend prospects in the medium-term. However, they remained cautious in doing so, focusing on balance sheet resilience, liquidity, long-term growth paths supported by clear competitive advantages as well as the prospect of the business following the crisis.

This focus on balance sheet resilience lent itself to identifying companies which ultimately proved better able to maintain dividends. Although BRIG saw year-on-year declines in revenue returns per share of c.26%, the managers note that this is substantially ahead of the rate of decline in the benchmark FTSE All-Share index. Furthermore, they expect that only around 10% of dividend impairments within their portfolio will ultimately prove to be permanent. This compares to a figure of c. 50% from the benchmark, in their view.

Because of their stringent analysis, the trust has continued to be able to maintain its dividend at a level in line with the previous financial year. Based on the proposed final dividend, the trust is yielding 4%, at a time when the majority of companies in the UK have had to cut or cancel their dividends. The board did dip into the trust’s revenue reserves to achieve this; however even after the final dividend payment of 4.6 pence the company will still have dividend reserves of c.0.9x the full annual dividend of 7.20 pence.

We believe the trust is well positioned for 2021, with increased quality in the portfolio, companies with strong underlying balance sheets and prospects, and revenue reserves which can support any dividend uncertainty. Alongside this, subject to shareholder approval, the board has authorised the managers to invest up to 20% of the gross assets in non-UK listed securities. This will allow them to access opportunities in sectors which are not otherwise available to them because they are either dominated by companies listed outside of the UK, or because specific companies representing the most attractive investment opportunity in a particular theme are listed abroad. It was stated that this will predominantly be in the US or Europe. We see this as adding another string to their bow, enabling the managers to further diversify BRIG’s sources of revenue and increase the potential to enhance total returns.

Currently BRIG is trading at a discount of 4.6%, almost double that of the sector which is trading on a weighted average discount of 2.7%. This may add to the trust’s appeal for investors seeking a source of diversified income.

Login to read the full article...