Results analysis: BlackRock Income & Growth

• During the year to 31/10/2021, BRIG’s NAV total return was 30.4%, which compares to the benchmark FTSE All-Share Index which returned 35.4%. At the share price level, the company returned 22.2% over the period, with the discount having widened from par to 6%.
• In absolute terms, the performance was the strongest annual return since the managers took over in 2012. However, the relative under performance over the period reflected their focus on quality companies in a period when more highly leveraged and cyclical shares made the running. The board are conscious that the relative performance is not as positive as they would wish, but remain “fully supportive of this approach and … have every confidence in the ability of our investment managers to continue to deliver on the company’s investment objective as we move into 2022”.
• Revenue earnings per share for the year to 31 October 2021 amounted to 7.10 pence compared with 5.43 pence for the previous year. The full year dividend is unchanged at 7.20 pence per share.
• Ongoing charges increased marginally over the year from 1.19 to 1.21%. During the year, a total of 1,112,783 ordinary shares were purchased at an average price of 177.30 pence per share, for a total consideration (including costs) of £1,973,000 (representing c. 5% of shares in issue at the start of the year).
• BRIG operates a flexible gearing policy which depends on prevailing market conditions and is subject to a maximum level of 20% of net assets at the time of investment. Net gearing during the financial year did not exceed the level as at 31 October 2021 when it stood at 6.0%.

Kepler View

Our recent research highlights the inherent attractions of trusts like BlackRock Income & Growth (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. The results show that revenues have bounced back strongly in 2021, with revenue earnings of 7.1p comparing to the dividend of 7.2p. As such BRIG is very nearly back to paying a covered dividend.

As the chart below shows, the interim dividends have been covered consistently over the past three years, and so the revenue recovery in the second half of the year is encouraging. Indeed, the managers note that they have been “positively surprised by how quickly dividends have come back albeit this includes large contributions from the mining sector where the likes of Rio Tinto and BHP have paid large special dividends. Although these special dividends may not persist, we view the outlook for ordinary dividends for the UK market with increased optimism as most companies have emerged from the COVID-19 crisis with appropriate dividend policies”.

The managers state that they expect the strain on supply chains to continue well into 2022 and expect inflationary pressures to persist as a result. The team are mindful of the potential impact on companies’ margins and have thus sought to concentrate the portfolio on those businesses with pricing power which are able to protect margins over the medium and long-term. After five years under a Brexit-induced cloud, the managers believe that the relative position of the UK in the eyes of global investors appears to have improved. That said, BRIG is now permitted to have up to a 20% allocation to overseas holdings, which enables the team to expand the reach of the portfolio to invest in unique business opportunities not found in the UK market. The team report they ended the financial year with c. 8% invested overseas, with holdings such as Adobe Systems, which is exposed to the structural shift towards digitalisation.

The managers’ focus on cash generative companies which they believe will be able to grow their dividend over time has protected revenues from the worst Covid-induced falls. With BRIG’s revenues now rebounding, the trust’s dividend looks to be back on a sustainable footing. At the current dividend level, the shares yield 3.7%, which compares to the weighted average of the peer group of 3.6%. BRIG’s Discount has lagged the peer group, perhaps reflecting its relatively small size and higher OCF. The board have been actively buying shares back, which may mean the current level of discount is an opportunity. For those attracted to a nimble, stock-picking equity-income team, there are few comparable trusts on such an attractive discount (currently c. 8%). With the significant improvement in revenues last year, the potential on the longer-term dividend trajectory could be of interest to income focused investors.

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