Dividend update: AXA Framlington UK Equity Income Fund

Over a year on from the onset of the pandemic, we now have full twelve-month performance for AXA Framlington UK Equity Income and the impact of COVID-19 on its dividend. The net result is that the Z class income shares saw their distribution decline by 16% for the 12 months ending 31/03/2021, a better performance than both the FTSE All-Share and many of our peers.¹

Below you can also see the fund’s total return performance, though some of the periods below are from before my appointment.

Source: AXA IM. Performance figures all to 31/03/2021 and net of fees. Past performance is not a guide to future results.

The Fund’s dividend cut in context

It is disappointing to report a cut for the full year, but 2020 was an extraordinary year. Some companies had literally no revenue for large parts of the year – e.g. pubs or some store-only retailers, while other companies such as banks were mandated by regulators to withhold dividends.

The reduction in the 12-month distribution is better than I had hoped midway through last year when I thought the Fund’s full year distribution could be down by 20-25%. It is also much better than the performance for the FTSE All Share, with dividends down by 33.9% over the same period. The fund’s dividend has fallen by less than half that of the FTSE All Share.²

A cut of 16% is unwelcome but I believe needs to be viewed through the lens of what we are trying to achieve – long-term growth of capital and dividends by investing in companies with high barriers to entry that are able to withstand unforeseen downturns.

In many ways this year proved what we are trying to achieve. Despite the cut in the Fund’s dividend, we are yielding 3.4% compared to 2.9% for the FTSE All-Share and I believe it leaves us well placed to claw back those distributions over time and ultimately grow them.²

How did the Fund’s cut in distributions compare to our peer group?

The fund has stood out from its peer group this year, with the investment process naturally steering away from companies who were most likely to cut their dividends over the past year. As a general rule, the more value-based peers (i.e. those exposed to energy, banks) have cut the hardest, with some cutting their dividend by a larger percentage than the FTSE ALL-Share and now yielding less than the market.

Why the decline of 16%, vs. mid-year expectations of 20-25%?

The primary driver of the Fund’s better than anticipated dividend has been the underlying trading of the holdings. As the pandemic first struck, many of our companies took pre-emptive action to prepare the businesses for a long period of difficult trading. As lockdowns have eased, trading has been better than originally estimated.

A minority of holdings have benefitted from lockdown – for example Admiral Insurance through lower insured losses from fewer motor accidents, or Games Workshop via strong online trade despite their shops being closed. The fund had little exposure to the most pandemic-exposed sectors such as airlines (by accident, rather than design), but we do own a small position in low-cost, short-haul airline Ryanair.  

We have made it part of our investment process to invest in businesses with what we perceive to be high barriers to entry. Lowest cost providers tend to do better in recessions as consumers look to save the pennies. Companies with high levels of repeat income such as software subscription only tend to account for a small part of a user’s costs. We aim to construct a portfolio of dividend-paying businesses that can survive an unexpected recession and emerge on the other side in a better relative position, ready to capitalise on the opportunities presented. This has stood us in good stead, even if this particular recession has been unusual.

Was there much turnover?

Turnover was a bit higher than what we would normally expect, but it wasn’t wholesale. We made some changes to the portfolio in the last six months but net-net these haven’t added a huge amount to the dividend. For example, we initiated positions in Greggs (low cost food on the go retailer) and Compass Group (international food service business). Both Compass and Greggs have fine dividend track records but given their consumer orientation they are not currently paying dividends, although we expect this to change. What they have in common with the Fund’s other holdings is that they are super businesses, with experienced management teams and strong balance sheets.

We also started holdings in Hargreaves Lansdown, Redrow, Hipgnosis Songs Fund and Goodwin plc, which we believe pay attractive dividends. We sold a couple of holdings on valuation grounds (and we would love to buy them back at some point) while a couple of others were sold as we felt their business model was impaired by an acceleration in structural trends due to COVID-19.

Results by share class

Source: AXA IM, April 2021. Past performance is not a guide to future results.