RCS - Schroder Inc Growth - Results analysis from Kepler Trust Intelligence

Schroder Income Growth FundAnnouncement

15/05/2025 11:15

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RNS Number : 8481I  Schroder Income Growth Fund PLC  15 May 2025

Schroder Income Growth (SCF)

15/05/2025

Results analysis from Kepler Trust Intelligence

Schroder Income Growth (SCF) has released its half-year results for the six
months to 28/02/2025, reporting NAV total returns of 2.9% and a share price
total return of 1.8%, compared to the FTSE All-Share Index's 5.2% return.
Stock selection within financials was a bright spot-three of the trust's top
five performers were financials: Standard Chartered, 3i Group, and Lloyds
Banking Group. However, this was offset by adverse stock picking in consumer
discretionary, industrials and consumer staples.

Earnings fell by 3.9% over the period, largely due to capital allocation
trends, with more companies favouring share buybacks over dividends,
particularly special dividends. Despite this earnings dip, the board raised
the first and second interim dividends to 3.25p per share, up from 2.50p,
citing this decision as a reflection of their desire to rebalance the pattern
of income more evenly through the year. As such, they anticipate a greater
portion of the total dividend will be paid across the first three interims,
with the fourth likely to be lower.

The board is adopting a more active approach to discount management, aiming to
reduce volatility and maintain the discount within a single-digit range under
normal market conditions. Additionally, the board have announced a number of
changes to reduce SCF's fees. First, management fees will fall from 0.45% to
0.40%, effective from 01/09/2025, and will be charged on the lesser of market
capitalisation or NAV. Second, the separate fee for secretarial and
administration services will be removed. The board estimates that, all other
things being equal, this could result in savings of over £300,000 for
shareholders-equivalent to around 0.4p per share, assuming a prevailing 10%
discount to NAV.

Matt Bennison was appointed co-manager during the period, reflecting his
long-standing working relationship with Sue Noffke and the valuable support
and experience he's brought to SCF over his eight years on the team. Whilst a
positive announcement, the appointment does not change how the trust is
managed, it simply reinforces the strength of the management team.

Kepler View

As the Chairman notes, Schroder Income Growth (SCF) performed well in its 2024
financial year, outpacing the index primarily through strong stock selection,
particularly in financials. However, the first half of FY2025 (to 28/02/2025)
brought renewed volatility, with geopolitical tensions and domestic
uncertainty prompting a flight to defensiveness and liquidity. This was
reflected in index performance: the FTSE 250 ex IT and FTSE SmallCap ex IT
fell by 4.2% and 7.3%, respectively, whilst the FTSE 100 rose 6.5%. SCF's
overweight to small- and mid-caps-and corresponding underweight to large
caps-was therefore a key driver of relative underperformance. Whilst this tilt
may increase short-term volatility, it has historically supported long-term
outperformance and contributed to SCF's near three-decade dividend growth.
With mid-cap valuations at attractive levels, a yield premium over the FTSE
100, and earnings growth potential, we believe SCF remains well
positioned-offering both meaningful upside if sentiment turns and a way to
enhance underlying earnings power.

Since launch, SCF has delivered real dividend growth ahead of CPI inflation.
That continued in FY2024, marking SCF's 29th consecutive annual dividend
increase. FY2025 is on track to extend this run, with the first and second
interim dividends climbing to 3.25p per share (from 2.5p). However, the
growing preference among companies for share buybacks over special dividends
has weighed on near-term income. To support the dividend, the board drew on
revenue reserves. After the first two interim payments, reserves stood at 7.8p
per share-equivalent to just 57% of last year's total dividend.

To help strengthen income generation, Sue has increased exposure to
financials-an area offering strong yields, attractive valuations, and sound
fundamentals-and continues to blend dependable income generators with a mix of
high yielders and lower-yielding names. We also note the board's effort to
smooth income delivery by rebalancing payments more evenly across all four
dividends, reducing reliance on a large final payout.

Overall, in our view, SCF's dividend growth consistency-combined with a
diversified portfolio blending high-quality income generators, selective
high-yielders and higher-growth lower-yielders-could appeal to long-term
investors seeking differentiated income with growth potential, supported
further by the boards decision to reduce costs and adopt a more active
approach regarding the trust's discount management.

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