Murray Income Trust — In a Celebratory Mood

The team at Murray Income Trust (MUT) is in a celebratory mood. The trust is marking both its centenary and its record of 50 consecutive years of dividend growth. When the trust was founded in Glasgow in June 1923, it was called the Second Scottish Western Investment Company, and it invested mainly in bonds and preference shares, but its name and remit have evolved over the years. In 1984 it adopted its current name and changed its remit to focus on achieving high and growing income, combined with capital growth, from UK equities. The trust’s manager at that time, Murray Johnstone, was taken over by Aberdeen Asset Management in 2000, and MUT has been part of the abrdn stable since then.

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While the loss of historical paper records means it is not possible to calculate the trust’s performance since inception, MUT’s 50-year record of dividend growth is well-documented. The trust aims to provide investors with a high and growing dividend, paid quarterly in December, March, June and September each year. In 1973, the trust paid a dividend of 0.47p, unchanged from the previous year. Dividends have risen every year since. The dividend for the financial year ended June 2023 (FY23) was 37.5p (FY22: 36.00p), which represents compound annual dividend growth of 9.2% pa over the 50 years since 1973, although perhaps a more meaningful comparison is the 6.0% compound annual growth rate achieved since the trust adopted its current UK equity income strategy in 1984. Based on the current share price, the FY23 dividend represents a dividend yield of 4.7%. (See the chart on page one for details of recent dividend payments.) MUT’s board has clearly signalled its intention to keep building on its impressive dividend record. In the trust’s recently released annual report, the board confirmed that maintaining the trust’s record of annually increasing dividends is ‘a priority for the future’.

And unlike some investment companies, MUT seeks to fund dividend payments from current revenues, rather than reserves, in normal market conditions. The FY23 dividend was more than fully covered by revenues, as portfolio revenues per share amounted to 38.7p (103% of the dividend per share). After the excess revenues were transferred to revenue reserves, reserves per share rose to 20.2p, up from 17.5p in FY22, sufficient to cover 54% of the FY23 dividend (FY22: 48%). This degree of dividend cover is consistent with the board’s preference that revenue reserves per share comprise between 50% and 100% of a full year’s dividend per share.

MUT’s performance has improved over the past year, after a rare bout of underperformance last year (Exhibit 2). Over the year to end September, returns totalled 14.5%, in line with the benchmark return (represented throughout this note by the CBOE UK All Companies Index), while its share price rose 17.1%, reflecting a narrowing of the trust’s discount over the year. However, these returns mask some deterioration in relative returns in the three months to end September 2023, when the trust rose 0.7% in NAV terms and 1.1% on a share price basis, compared to the market return of 2.2%. And returns over the past year have lagged those of most of MUT’s AIC peers (see Exhibit 4). Relative performance against both the market and peers over three years has been adversely affected by the trust’s underperformance last year; MUT’s average annual return over the three years ended September 2023 was 8.8% in NAV terms and 9.0% in share price terms, compared to the benchmark return of 12.4%. However, it is arguably more meaningful to judge performance over longer periods, especially for trusts with a long-term investment approach. On this basis, MUT has delivered outright gains and outperformance of the market, and the average of its peers, over five and 10 years. In the 10 years ended 30 September 2023, the trust delivered an average annualised return of 6.1% in NAV terms, compared to an average benchmark return of 5.6%. The average share price return of 5.4% pa reflects some widening of discount over this period (see Exhibit 3 and Exhibit 4 and discussion in the Performance and Peer group comparison sections).

MUT’s managers, Charles Luke and Iain Pyle, are positive about the future, and they cite several reasons for their optimism. Perhaps the most significant is the fact that the trust’s portfolio has exposure to several ‘unstoppable long-term trends’, which the managers expect to provide major tailwinds to earnings and dividend growth over the medium term. One such trend is ageing populations and MUT is exposed to this theme via its holdings of several pharmaceutical names including UK-listed AstraZeneca (NASDAQ:AZN), Denmark’s Novo Nordisk (CSE:NOVOb), and Switzerland’s Roche. It is leveraged to the digital transformation trend via positions in overseas companies US software giant Microsoft (NASDAQ:MSFT) and Swiss-based VAT Group, which provides vacuum valves for many industries including semiconductor manufacturing. UK-listed companies providing exposure to this theme include Sage Group (LON:SGE), which supplies business software apps, and RELX, an information-based analytics company. The inexorable transition to renewable energy and zero-carbon emissions will benefit MUT’s positions in National Grid (LON:NG), the UK energy system operator, SSE (LON:SSE), a UK electricity supplier, and French energy producer TotalEnergies (LON:TTEF). Rising global wealth will boost demand for everyday items and luxury goods, benefiting several of MUT portfolio companies including producers of household staples such as Coca-Cola (NYSE:KO) HBC, Unilever (LON:ULVR) and Nestlé, and purveyors of prestige brands such as LVMH (EPA:LVMH) and beverage supplier Diageo (LON:DGE).

In the managers’ view, near-term economic developments may be challenging for many companies. Although economic activity has been holding up surprisingly well in the face of aggressive interest rate increases, Luke and Pyle expect tight monetary policy to eventually slow growth in the UK and elsewhere, resulting in a ‘relatively rapid fall in inflationary pressures’, which should facilitate ‘significant interest rate cuts over the next 18 months’. If they are correct, UK equities in general may be in for some rougher weather. However, the managers are confident that their high-quality, predominantly global businesses are well-placed to sail through any squalls, maintain their income generation and emerge in a stronger position, thanks to their pricing power, high margins and balance sheet strength.

And Luke and Pyle have a positive view of the UK equity market’s prospects over the medium term. They argue that the valuations of UK-listed companies remain attractive in absolute terms, and relative to both historical levels and other markets. With a current P/E multiple of 10.8x, the UK market is cheaper than at any time over the past 30 years, except during the global financial crisis. The UK market’s dividend yield also remains at an appealing premium to other regional equity markets. In their words, ‘investors are benefiting from global income at a knock down price’.

Yet both domestic and foreign investors are, for the moment, seemingly blind to the market’s attractions and remain underweight. It may take smoother economic waters, and perhaps a more certain political climate beyond the forthcoming UK general election, for investors to recommit to this market, but for Luke and Pyle, the case for doing so is compelling and will eventually tempt more players to return to the UK market. MUT’s quality holdings are likely to do better than others when this tide turns.

For those who share the managers’ confidence in the longer-term prospects of the UK market, and MUT’s portfolio holdings, now might be a good time to invest, as its share price discount is wider than usual and there is, in our view, scope for it to narrow over time. MUT’s share price historically trades at a discount to its NAV. Over the past 10 years, the discount has averaged around 4.8%. However, discounts across the investment trust sector have widened in the past year or more, including in the UK equity income sector. There are several possible reasons for this. As discussed above, UK equities are currently out of favour with international investors thanks to political uncertainties, low growth, poor productivity and persistently high inflation. In addition, high interest rates mean that for the first time in many years, cash and bonds are offering relatively attractive, low-risk returns that are a viable alternative to investments in equities and investments companies more generally. The cost-of-living crisis also means individuals and households have less free cash to allocate to savings products.

As a result of these developments, and also, perhaps, last year’s underperformance, MUT’s discount has widened to 8.5% at present, from 4.5% and end June 2022. MUT’s board has responded to these developments by stepping up share buybacks to support the share price. The trust repurchased 5.0m shares over FY23, amounting to 4.3% of shares in issue at the end of FY22. It has repurchased a further 2.5m since then (up until 30 October 2023). These buybacks should, over time, have a favourable impact on the discount. So too should any sustained improvement in MUT’s performance. An increase in investors’ appetite for UK equities would also help. There are, therefore, several reasons to suggest that the discount may, in time, move back towards its long-term average.