Global stock markets rose during August. In a quieter month for corporate results, investors are contemplating a complex investment environment. Covid-19 cases remain high and the economic impact of the pandemic is clear to see (though very varied by geography and sector). Meanwhile, progress is being made on treating the virus, and monetary policy remains extremely accommodative. The Evenlode Income fund rose +1.7% in the month compared to a rise of +2.4% for the FTSE All-Share and +3.1% for the IA UK All Companies Sector.

The most positive contributors to performance were Bunzl, Relx and Howden Joinery. Bunzl released strong interim results with its repeat-purchase, diversified business model driving +7% sales growth. The company will now pay the dividend it initially passed during lockdown. Relx and Howden Joinery both released their interim results at the end of July.

The most negative contributors to return were Diageo, Cisco and Unilever. Diageo and Cisco shares fell back following results that showed some pandemic impact (Diageo due to the lockdown-closure of bars and restaurants and Cisco due to some delays in decision-making from small business customers). Both companies have maintained their dividends and we continue to view their competitive positions and long-term growth prospects as attractive. Unilever shares fell back after a strong July on no specific news.

On 1 September, the fund went ex-dividend, declaring a second quarter rate of 1.32p per share (B Income shares). This is the same rate as the first quarter dividend and represents a year-on-year fall of -21.4%. The outlook remains somewhat uncertain, but at present we believe the reduction for the fund’s full year (to February 2021) is likely to be towards the bottom end of the -20% to -25% range that we guided to in May.

Looking past the current year and the immediate impact of the crisis, we think the portfolio’s dividend stream should recover quite strongly next year (albeit not immediately to pre-crisis levels). Longer-term, we think the prospects for free cash flow and dividend growth are healthy, given the competitive advantages, attractive economics and growth prospects enjoyed by the portfolio’s holdings.

Hugh Yarrow31 Aug 2020
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