David Smith, fund manager of Henderson High Income Trust (HHI), argues the lockdown losers that dragged on performance in the half to June will emerge from the Covid-19 crisis in ‘a strong position relative to their competition’.

And despite having been through a period of dividend suspensions, deferrals and cuts, Henderson High Income forecasts an increase in the 2020 total dividend, having built up significant revenue reserves over the past nine years.

During the first half net asset value (NAV) fell 18.1% with performance impacted by the trust’s gearing and overweight position in equities relative to the benchmark, which dropped 13.3%.

Though the trust’s revenue has been affected by the recent dividend drought, Henderson High Income has been able to draw on revenue reserves built up over the past nine years for rainy days such as these.

A third interim dividend of 2.475p was announced in July 2020, to be paid on 30 October 2020, and the board anticipates a fourth interim dividend for the year at the same level. This means the total dividend for the year will amount to 9.9p, or a 1% year-on-year increase in the shareholder reward, news that nudged the shares 0.6% higher to 134.5p on Friday.

LOCKDOWN LOSERS

The biggest performance detractors were the names most impacted by lockdown including National Express (NEX), events specialist Informa (INF) and Premier Inn-owner Whitbread (WTB).

‘Along with many other companies in the UK market they have all suspended dividend payments and raised capital to protect their cash flow and financial strength in the short term,’ explained Smith.

‘This is clearly the correct course of action for these companies in order to support their businesses at an unprecedented time. We supported each equity raise as we believe they are good quality businesses that will emerge from the current crisis in a strong position relative to their competition,’ added the Janus Henderson Investors money manager.

DEFENSIVE BALLAST

During the half, defensive names such as National Grid (NG.), Unilever (ULVR) and French pharmaceutical firm Sanofi fared much better, while meat packing group Hilton Food (HFG) and pork-to-poultry processor Cranswick (CWK) also helped performance.

Early in the crisis Smith, sold a number of cyclicals, International Consolidated Airlines (IAG) among them, and used the proceeds to top up holdings in more stable businesses that should have dependable cash flows and dividends, such as British American Tobacco (BATS), Unilever and Reckitt Benckiser (RB.).

‘We also reduced the gearing of the company in early March to more appropriate levels given the very uncertain outlook, selling £13 million of holdings in US investment grade corporate bonds. These bonds had performed particularly well since purchase, with yields moving to extremely low levels which did not offer compelling value, especially against the company’s cost of borrowing,’ added Smith.

He has taken a pragmatic view to dividend cuts, supporting those companies he believes have the best long term potential despite no dividends in the short term and selling names that have cancelled dividends and ‘where we have less faith over the medium term recovery prospects, such as HSBC (HSBA), BT (BT.A) and Hammerson (HMSO).’

Smith has also ‘materially increased’ the trust’s holdings in overseas companies, buying high-quality businesses that continue to pay attractive dividends, such as McDonald’s and Coca-Cola in the US and European utilities EDP and RWE.

Commenting on the results, Stifel said: ‘Going forward, the equity portfolio has been positioned more defensively and is well balanced. Income from fixed interest holding accounts makes up 13.3% of the portfolio and there is potential for further overseas diversification, resulting in confidence from the company to be able to pay attractive dividends throughout the challenges and opportunities ahead.’

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Issue Date: 11 Sep 2020