Troy Income & Growth Trust Plc – Half-year Report to 31 March 2020

Troy Income & Growth Trust

INTERIM RESULTS FOR THE SIX MONTHS TO 31 MARCH 2020

The investment objective of Troy Income & Growth Trust is to provide shareholders with an attractive income yield and the prospect of income and capital growth through investing in a portfolio of predominantly UK equities.

INTERIM BOARD REPORT AS AT 31 MARCH 2020

Performance

The Company delivered a Net Asset Value (NAV) total return of -16.0% over the six months to 31 March 2020 while over the same period the share price total return was -14.5%. Also, over the same period the FTSE All-Share Index produced a total return of -22.0%. The sharp falls in markets in February and March were caused by the COVID-19 pandemic as the economic implications of a near global shutdown were added to the already devastating social consequences of the virus. Over the twelve months to 31 March 2020 the NAV total return of -9.1% and share price total return of -7.1% were ahead of the FTSE All-Share Index which returned -18.5%. Despite the negative returns the resilience of the Company's portfolio was aided by both good stock selection and the absence of any gearing.

The Board remains predominantly interested in long-term performance and over the three years to 31 March 2020 the NAV total return of -2.9% compares favourably with -12.2% for the FTSE All-Share Index, albeit in negative territory. Over five years the Company's NAV total return of +18.0% outstripped the total return of +2.9% for the FTSE All-Share Index.

The Company paid a quarterly rate of 0.695p for the first and second interim dividends, an unchanged quarterly rate over the previous year's fourth interim dividend, which typically has set the quarterly dividend rate for the following year. The Board's outlook for future dividends is expanded on later in this Report.

Background

For the first four months of the period under review the UK equity market made limited progress in any direction. The Conservative victory in the first December General Election since 1923 provided a clear end to the tortuous Brexit debate and much needed certainty to business, but in January market confidence began to ebb again as earnings expectations began to come under pressure.

The first concerns about the possible spread of COVID-19 beyond China became public in late January and once rapid transmission to Europe and North America became apparent this precipitated the most rapid collapse in markets since 1929. The UK equity market fell by over 30% from mid-February before rallying somewhat in late March to end the quarter down 25%.

The move from a localised epidemic to a global pandemic, requiring what amounts to a global economic lockdown, has taken place with breathtaking speed. The huge stimulus packages announced by multiple governments and central banks reflect the devastating impact of the lockdown on businesses of all sizes. In the UK, the impact of the Chancellor's multi-faceted bailout will have a major impact on the public finances for years to come. Many listed UK companies who have received support such as business rates relief, government-funded furloughing of employees or preferential loans have chosen to suspend or cut their dividends, meaning that dividend income from the UK equity market in 2020 is forecast to be somewhere between one third and a half below that of 2019.

For many companies in the consumer service and retail sectors revenues will be down by over 90% during the lockdown, so whatever government support is available, a strong balance sheet has been the best protection. The Company's portfolio has a natural bias towards well-financed companies and that has provided resilience in the early part of the crisis, but the Managers are fully aware that even well-financed companies will come under significant pressure if the lockdown extends into the summer. Equity issuance in the form of placings and rights issues may become more widespread in those circumstances.

The outlook is therefore exceptionally uncertain. Until COVID-19 infection rates start to abate and governments can be clearer about their plans to restart their economies, the equity market is likely to remain volatile. The Managers do expect that from mid-May there should be the opportunity in the UK to begin this process and it will be possible for the UK government to have learnt from the experiences of other countries which are further along the pandemic curve.

Discount Control Mechanism ('DCM')

The DCM was active during the period with the Company issuing 26.25m shares at a small premium to NAV. No shares were repurchased during the period under review. All transactions are NAV enhancing and provide additional liquidity to Shareholders. The DCM also reduces discount volatility which remains much lower than for the peer group as a whole. 

The Company issued a prospectus in October 2019 partly in respect of a merger with Cameron Investors Trust plc. The merger took place in November 2019 and the Company issued 13.65m shares to shareholders of Cameron.

Gearing

The £20 million gearing facility with ING was renewed in April 2019 for a further two years. The facility was not utilised during the period and indeed gearing has not been employed at any time since Troy became Manager in 2009. This reflects Troy's conservative investment style as well as a desire to keep the volatility of returns relatively low. However, the current situation may yet present the sort of unprecedented risk/reward scenario in which both the Board and the Managers would hope to use the Company's gearing facility.

Dividends

The current quarterly dividend rate is 0.695p and the second quarterly dividend was paid on 24 April 2020. As mentioned earlier many listed companies have suspended or cut their dividends and so the outlook is particularly unclear. The Board appreciates Shareholders' wish for visibility and certainty on future dividends but given the current unprecedented situation, it is simply not possible to provide either at this time. As disclosed in the Annual Report, the Managers have been transitioning the portfolio away from higher yield but low-growth, to lower yielding and higher growth investments, with the result that the Company's reserves would have been used to support this year's dividends. This portfolio transition has already benefited performance and it is vital that the portfolio's quality is not compromised in order to produce a particular dividend outcome. The appropriate dividend distribution to Shareholders should be the natural result of a portfolio structured by the Managers to produce the best possible risk adjusted total return, an important element of which should be a growing dividend.

The Board and Managers believe it will be some time before economic conditions allow the current fog surrounding many listed companies' dividends to clear. During this highly uncertain time, it is the Board's intention to maintain the current quarterly dividend rate of 0.695p for this financial year (i.e. the third and fourth interim dividends will, in the absence of unforeseen circumstances, each be 0.695p). However, partly because of the portfolio repositioning but mostly due to the probable results of the present economic disruption, it is almost certain that the Board will reduce the dividend to a sustainable level from which its growth can resume. This is likely to be with effect from the beginning of the next financial year but that will depend on the outlook at that time. Meantime, the Company's significant distributable reserves will be used, in the absence of unforeseen circumstances, to maintain the dividend at its current quarterly rate.

Outlook

It is unlikely that the speed at which the global economy has entered this crisis will be mirrored by the rate of recovery. Governments will be keen to avoid allowing a second wave of the pandemic to take off if restrictions are removed too quickly. So much uncertainty still exists with regard to the nature of the virus and its behaviour, and with the prospect of a vaccine in any volume being available for at least twelve months it would be imprudent to expect a return to pre-COVID-19 normality any time soon. The economic damage will be extensive and the impact on listed companies and their ability to pay dividends will be widespread – only time will tell whether these cuts will be temporary or permanent.

In such a volatile environment, the Company's cautious but concentrated investment approach has thus far mitigated the worst effects of the crisis. The Managers are making changes which will further increase the quality and resilience of the portfolio and generate the longer term, sustainable income growth which will drive future total returns.