Earnings
While markets have been very volatile, particularly since the start of 2022, the Board’s consistent direction to our Portfolio Manager over the last couple of years has been to focus on the income account and this has borne fruit. The Company’s revenue per share, or earnings per share, for the financial year to 30 September 2022 were 25.51p, an impressive increase of 27.2% from the previous year. This exceeds the Company’s previous record earnings of 22.06p in 2018 and means that the dividend for the year is covered by the earnings for the first time in three years. Furthermore, the Board has stressed that while the focus should be on returning to a covered dividend, this was not to be achieved by simply buying the highest yielding stocks in the market. Our Portfolio Manager has confirmed that he currently expects the income generated by the portfolio to grow, despite the macro environment. Please see the Portfolio Manager’s Review on pages 23 to 27 for more detail on the sources of the performance and income.
Results
Results In the year to 30 September 2022, the Net Asset Value (“NAV”) total return of the Company was -7.6% and the share price total return was -7.8%. The FTSE All-Share Index delivered a total return of -4.0% over the same period. The reasons for the somewhat disappointing NAV performance are detailed in the Portfolio Manager’s Report. The uncertainty of the outlook is probably about the only constant in Chairman’s statements these days but the pace at which events have unfolded since the start of 2022 has been truly remarkable. The last quarter of 2021 was challenging for the Company. However, the market’s rotation out of growth and into value at the start of the year was beneficial, and our Portfolio Manager remained focused on generating sustainable income despite the challenging geopolitical and economic environment.
Dividend
I am delighted that the strong recovery in earnings has permitted the Board to announce a substantial increase in the fourth interim dividend while also making a solid start in rebuilding the revenue reserves. Furthermore, the Portfolio Manager’s forecasts imply that net income in 2023 should be sufficient to allow further growth in the dividend on a fully covered basis. The fourth interim dividend for 2022 will be 6.5 pence per share which will be paid on 9 January 2023 to shareholders on the Register on 9 December 2022 with an associated ex-dividend date of 8 December 2022. This takes the total dividend for the year to 22.70 pence per share which is a 7.1% increase on the previous year and the 22nd consecutive annual dividend increase declared by the Company. After the payment of the fourth interim dividend, 2.94 pence per share will be transferred to revenue reserves, increasing revenue reserves to 24.62 pence per share. In setting the level of the fourth interim dividend the Board balanced the desire to pay a meaningful dividend increase with the need to ensure that revenue reserves were replenished. The situation has been made easier by the impressive income growth exhibited by the portfolio. The Board is committed to its progressive dividend policy and to maintaining and extending its track record of 22 consecutive years of dividend growth. We therefore expect that, in the absence of any adverse circumstances, in the coming financial year we will pay a dividend of at least 22.80 pence per share. The first three interim dividends will be 5.7 pence per share, payable in March, June and September and the fourth interim will be at least 5.7 pence per share payable in January. We have not given guidance on the dividend for the coming year in the past. We believe that it is important to do so now (a) because we recognise that shareholders are looking for certainty in their budgeting and (b) because we want to stress our confidence in the quality of the portfolio and its ability to deliver the income required. The Company is currently trading on a yield of over 7%, the highest in the AIC UK Equity Income sector, which we do not believe is reflective of the revenue earning capacity of the underlying portfolio.
Buybacks
The Company bought back 561,535 Ordinary shares or 1.17% of the issued share capital during the year. The buy backs increased the NAV per share by 0.42 pence. The Board monitors the discount of the share price to the cum-income NAV in both absolute terms and relative to the discount of other UK equity income investment trusts with a view to moderating discount volatility.
The Board
In the Half-Yearly Report to 31 March 2022 I stated that I would stand down from the Board at the completion of the Annual General Meeting (the “AGM”) in February 2023 and that Sarika Patel would succeed me as Chair. We have therefore undertaken a search for Sarika’s successor as Chair of the Audit Committee. I am delighted to welcome Mark Little to the Board. Mark is a qualified accountant and has a wealth of experience in the sector. I’m sure he will be a great addition to the Board. He will stand for election to the Board at the AGM in February 2023 and will take over as Audit Chair from that point.
Online Shareholder Presentation
In order to encourage as much interaction as possible with our shareholders, we will be hosting an Online Shareholder Presentation, which will be held at 11:00 am on Friday, 20 January 2023. At this event there will be a presentation from the Portfolio Manager followed by an opportunity to ask live questions to the Portfolio Manager and the Chairman. The online presentation is being held ahead of the AGM to allow shareholders sufficient time to submit their proxy votes after the presentation but prior to the AGM should they so wish. Full details on how to register for the online event can be found on the Company’s website at www.abrdnequityincome.com.
Annual General Meeting (‘’AGM’’)
This year’s Annual General Meeting (“AGM”) will be held at wallacespace Spitalsfield, 15-25 Artillery Lane, London, E1 7HA on Thursday, 2 February 2023 at 11:30 am. The meeting will include a presentation by the Portfolio Manager and will be followed by lunch. This is a good opportunity for shareholders to meet the Board and the Manager and the Board encourages you to attend. The Notice of the Meeting is contained on pages 97 to 100.
Outlook
I will be retiring from the Board at the AGM after a relatively brief tenure as Chair but nine years as a director.
In his valedictory remarks, Richard Burns, my predecessor, hoped that I would have a better story to tell in terms of our performance when my turn to hand over came round. Despite the negative capital return in the last 12 months, I am delighted that we have been able to cover the dividend this year and resume making significant dividend increases while starting to replenish our revenue reserves. The capital performance of the portfolio needs to be set against the global economic backdrop which remains troubled. The latest UK budget sets out to raise an additional £25bn to address the budget deficit caused by the extensive support provided to households and businesses during the Covid and Ukraine crises.
While low valuations may indicate that this troubled economic outlook is at least partially priced in, the Board is aware that capital growth may be constrained in the near term. This makes the income component of the total return all the more important. The Board is maintaining its direction to the Portfolio Manager that the revenue account should cover a dividend greater than the 22.70 pence per share that we are paying for FY22. At the time of writing, the revenue forecasts indicate that this should be achieved in the coming year.
As the current share price discount to NAV shows, we also still have some work to do to persuade the market that we will be able to achieve real growth in our distributions in the face of a likely UK recession. However, I am very confident in the ability of my successor, Sarika Patel, to lead the Board and believe she will be able to report to you that we have achieved this despite the economic challenges to come. I wish her every success.