Targeting a high and growing dividend along with capital growth: abrdn Smaller Companies

abrdn Smaller Companies Income (ASCI) is a trust investing in UK smaller companies, but unlike most in the sector, has a dual mandate of providing both a high and growing dividend along with capital growth. The managers, Abby Glennie and Amanda Yeaman are members of the abrdn Smaller Companies team and follow the in-house investment process that has been refined over several decades.

As discussed in Portfolio, a proprietary quantitative screening tool, known as the Matrix, is used by abrdn to rank companies. The team’s fundamental research is then focussed on the most attractive stocks. Abby and Amanda seek high-quality companies enjoying positive trends in their profitability and operations and strong competitive positioning and management teams.

As high-quality companies by definition are not common, Abby and Amanda build a concentrated portfolio of c. 50 stocks to ensure quality does not need to be compromised and their conviction in companies can be fully expressed.

As detailed in Performance, the process has delivered outperformance versus the trust’s benchmark since Abby took the reins of the trust in 2018, despite facing periods of stylistic headwinds.

ASCI’s historic yield is 3.1% at the time of writing. Although on an absolute basis, this is not as high as that available in the UK Equity Income sector, it is higher than ASCI’s UK Smaller Companies peers and from a segment of the market where most equity income trusts have little exposure. We also note, as discussed in Dividend, it is growing at a substantial rate (4.9% annualised over the last five financial years). The dividend yield received by new shareholders is currently boosted by the trust trading at a Discount of c. 18.6%., substantially wider than that seen across the sector as a whole and related strategies offered by abrdn.

We think ASCI is a useful option for income investors who want exposure to the growth potential of smaller companies without sacrificing too much yield. (smaller companies being a fundamentally lower yielding asset class than large caps). It could also suit those who want to diversify their sources of portfolio income away from more conventional UK equity income strategies that depend on a handful of large incumbent dividend payers. (e.g. high street banks and oil majors).

As noted in our recent strategy article, there is usually a trade-off between current yield and dividend growth, so an investor looking to build a future income stream rather than maximise current yield could find ASCI’s high dividend growth rate more than compensates for the lower current yields versus large-cap strategies.

ASCI is run using the same investment process as the flagship abrdn UK Smaller Companies Growth Trust (AUSC), which Abby co-manages. As noted in the latest update of our Discounted Opportunities Portfolio, the large discount spread between the two trusts to our eyes appears anomalous and is a potential opportunity for a nimble investor to benefit from discount tightening.

The quality focus of the investment process does result in a Portfolio trading at a premium to the market, so ASCI has tended to struggle on a relative basis in cyclical, value-driven rallies. However, as discussed under Performance, ASCI not only benefits from growth headwinds but has tended to outperform in ‘style neutral’ markets. Therefore, if the current value rally peters out ASCI does not necessarily need a market reversal back into growth do well, a style neutral market could also be favourable.