S&U — Upbeat update

S&U (LSE: SUS)

Last close As at 02/03/2024

GBP18.40

30.00 (1.66%)

Market capitalisation

GBP220m

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Research: Financials

S&U — Upbeat update

S&U’s trading update (for the period since its July half-year end) was upbeat, reporting growth accelerating in both Advantage motor finance and Aspen bridging finance. Recent developments in the pandemic could temper near-term consumer confidence but, looking beyond this, S&U has successfully navigated the onset of COVID-19 while continuing to develop both its businesses, creating a good basis for longer-term growth.

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Financials

S&U

Upbeat update

Trading update

Financial services

10 December 2021

Price

2,673p

Market cap

£323m

Net debt (£m) at 8 December 2021

113

Shares in issue

12.1m

Free float

28%

Code

SUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.2)

(3.2)

38.5

Rel (local)

(7.5)

(5.8)

22.9

52-week high/low

2,950p

1,930p

Business description

S&U’s Advantage motor finance business lends on a simple hire-purchase basis to lower- and middle-income groups who may have impaired credit records that restrict their access to mainstream products. It has c 62,000 customers. The Aspen property bridging business has been developing, following its launch in early 2017.

Next events

Q4 trading update

10 February 2022

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

S&U is a research client of Edison Investment Research Limited

S&U’s trading update (for the period since its July half-year end) was upbeat, reporting growth accelerating in both Advantage motor finance and Aspen bridging finance. Recent developments in the pandemic could temper near-term consumer confidence but, looking beyond this, S&U has successfully navigated the onset of COVID-19 while continuing to develop both its businesses, creating a good basis for longer-term growth.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/21

83.8

18.1

120.7

90.0

22.1

3.4

01/22e

86.5

38.7

258.2

115.0

10.4

4.3

01/23e

95.2

38.0

253.1

127.0

10.6

4.8

01/24e

103.7

41.0

256.7

129.0

10.4

4.8

Note: *PBT and EPS are reported. EPS are diluted.

Advantage motor finance

Advantage is reported to be seeing a strong recovery in both profitability and new business transactions, which were up 30% y-o-y in the period, despite a shortage of used cars in showrooms and a fall of 6% in UK used car sales in calendar Q321. S&U looks for net loan advances of over £140m for the full year (in line with our estimate). Collections remain very strong and credit quality has at least maintained the improvement reported at the half-year end, mirroring the positive comments on this front by Provident Financial in its Q3 update and suggesting the possibility of lower impairment than we currently factor in. Looking beyond the current year, Advantage continues to work on enhancing customer service, underwriting and marketing to underpin longer-term growth.

Aspen bridging finance

The receivables book at Aspen has grown to £60m compared with £57.6m at the end of H122 and £34.1m at end FY21. Transaction numbers are up 38% year to date versus the prior year period despite a quieter housing market. Profits are reported to have made further excellent progress, with margin maintained and credit quality remaining strong. The current pipeline of deals has doubled over the period and a new Bridge to Let product has been introduced to address a market opportunity identified by Aspen. The lumpy nature of Aspen’s loans makes forecasting the level of loan growth for specific periods difficult, but the scope for substantial medium-term growth remains in place.

Valuation

We have not changed our estimates at this stage and on this basis the FY22e P/E ratio is 10.4x and the yield 4.3%. Note that our FY24 earnings estimate allows for the introduction of a 25% corporate tax rate. Using a return on equity (ROE)/cost of equity (COE) model, the current share price appears to imply an assumed ROE of less than 16% compared with our current year estimate of 16.5% (see page 4).

Funding

The high level of collections in both businesses has contributed to current borrowings of £113m compared with £115.5m at end H122. There is substantial headroom for the accelerated growth the group looks for in FY23 given its banking facilities (£180m at end H122).

Background

In this section, we update background data we track as indicators for Advantage and Aspen, starting with economic and industry figures relevant for the used car finance market.

Exhibit 1 shows independent forecasts for UK GDP and unemployment as collected by the UK Treasury in November. Compared with the September data shown in our last note, movements are limited although estimates for unemployment are slightly lower. This should be positive for Advantage as unemployment is an important sensitivity for credit risk and ties in with S&U’s recent experience of credit quality.

Exhibit 1: Comparison of independent economic forecasts for the UK (November)

%

Average

Average of new forecasts

Low

High

GDP growth

2021

7.0

7.0

6.0

8.1

2022

5.1

5.0

3.5

8.1

Labour Force Survey unemployment rate Q4

2021

4.9

4.8

4.5

5.5

2022

4.6

4.5

3.9

6.0

Source: HM Treasury

Exhibit 2 shows that consumer confidence has staged a major recovery, albeit with a recent softening. Uncertainties remain and the influence of COVID-19, supply bottlenecks and inflation fears is likely to fluctuate, but in due course a progressive normalisation in economic activity seems likely to continue. Exhibit 3 shows that, after an increase, the unemployment rate has moved down towards prior levels. Redundancies, a more immediate measure, saw a very sharp spike as the pandemic took hold, but fell rapidly and are now at pre-pandemic levels.

Exhibit 2: GfK UK consumer confidence indicator

Exhibit 3: UK redundancies and unemployment

Source: Refinitiv (last value September 2021)

Source: ONS (last value September 2021)

Exhibit 2: GfK UK consumer confidence indicator

Source: Refinitiv (last value September 2021)

Exhibit 3: UK redundancies and unemployment

Source: ONS (last value September 2021)

We now turn to data on used car transactions and used car finance. Exhibit 4 shows the sharp drop in used car transactions in April 2020. Volume recovered very well following the initial lockdown, albeit with a further dip following subsequent lockdowns. Since April 2021 there has been a return to activity close to pre-pandemic levels, as represented here by the 2019 monthly figures, although the April bounce was smaller than industry participants had thought possible and, as noted earlier, for Q321 there was a 6.2% reduction against a relatively strong Q220 period. Exhibit 5 shows a similar pattern in used car finance.

Exhibit 4: Monthly used car transactions 2019–21

Exhibit 5: Used car finance through dealerships

Source: SMMT. Note: Last value September 2021.

Source: Finance and Leasing Association. Note: Last value October.

Exhibit 4: Monthly used car transactions 2019–21

Source: SMMT. Note: Last value September 2021.

Exhibit 5: Used car finance through dealerships

Source: Finance and Leasing Association. Note: Last value October.

Used car prices (see Exhibit 6) were buoyant in 2020 and have seen a sharp step up in the data since July this year, with strong consumer demand and reduced supply pushing prices up. The ONS data are supported by a similarly marked strength in the Autotrader retail price index. An improving supply of new cars and hence used stock seems likely during 2022 but Advantage’s exposure to auction prices for repossessed cars is moderated by the relatively low value of vehicles it finances. Also, for the moment, the demand side of the equation seems likely to remain robust.

Exhibit 6: Second-hand car prices (CPI index)

Source: ONS (last value October 2021)

Looking at the background for Aspen Bridging, Exhibit 7 shows the number of UK non-residential and residential transactions, with residential being most relevant for Aspen. Both saw sustained improvement following the initial lockdown in 2020 with residential data fluctuating sharply as buyers sought to take advantage of the temporary increase in the stamp duty land tax nil rate band. On a longer view, S&U sees an imbalance between supply and demand for good-quality homes as a favourable backdrop for its customers who are refurbishing and developing properties. As a small business, Aspen should also have significant scope for expansion now that it is more established in the market. Aspen’s involvement in the Coronavirus Business Interruption Loan Scheme has given it useful access to larger and more established developer customers as well as expanding the loan book in the short term.

Exhibit 7: UK property transactions (seasonally adjusted)

Source: HM Revenue & Customs. Note: Figures for August to October 2021 are provisional. SA = seasonally adjusted.

Valuation

P/E comparisons with peers remain difficult to interpret given differences in business mix and significant changes in provisioning levels following the initial impact of COVID-19. We therefore frame valuation using our ROE/COE calculations and the price to book ratio. If we assume a COE of 10% and long-term growth of 2%, then the share price at the time of writing (2,673p) would be consistent with an ROE of below 16%, compared with our 16.5% estimate for FY22.

Looking at the history of the price to book ratio (Exhibit 8), the current level of 1.7x is slightly below the 10-year average following a period of recent weakness in the shares (down 8% over a month but still up 37% over 12 months).

Exhibit 8: 10-year price to book value history

Source: Refinitiv, Edison Investment Research

Exhibit 9: Financial summary

£'000s

2018

2019

2020

2021

2022e

2023e

2024e

Year end 31 January

PROFIT & LOSS

Revenue

 

 

79,781

82,970

89,939

83,761

86,484

95,158

103,738

Impairments

(19,596)

(16,941)

(17,220)

(36,705)

(11,698)

(17,294)

(20,571)

Other cost of sales

(17,284)

(15,751)

(19,872)

(14,264)

(18,922)

(21,559)

(21,675)

Administration expenses

(9,629)

(10,763)

(12,413)

(10,576)

(12,896)

(13,132)

(14,316)

EBITDA

 

 

33,272

39,515

40,434

22,216

42,968

43,173

47,176

Depreciation

 

 

(294)

(414)

(450)

(520)

(527)

(487)

(451)

Op. profit (incl. share-based payouts pre-except.)

 

 

32,978

39,101

39,984

21,696

42,440

42,686

46,724

Exceptionals

0

0

0

0

0

0

0

Non recurring items

0

0

0

0

0

0

0

Investment revenues / finance expense

(2,818)

(4,541)

(4,850)

(3,568)

(3,721)

(4,727)

(5,680)

Profit before tax

 

 

30,160

34,560

35,134

18,128

38,720

37,959

41,045

Tax

(5,746)

(6,571)

(6,252)

(3,482)

(7,357)

(7,212)

(9,861)

Profit after tax

 

 

24,414

27,989

28,882

14,646

31,362

30,747

31,184

Average Number of Shares Outstanding (m)

12.1

12.1

12.1

12.1

12.1

12.1

12.1

Diluted EPS (p)

 

 

202.4

232.0

239.4

120.7

258.2

253.1

256.7

EPS - basic (p)

 

 

203.8

233.2

239.6

120.7

258.3

253.3

256.9

Dividend per share (p)

105.0

118.0

120.0

90.0

115.0

127.0

129.0

EBITDA margin (%)

41.7%

47.6%

45.0%

26.5%

49.7%

45.4%

45.5%

Operating margin (before GW and except.) (%)

41.3%

47.1%

44.5%

25.9%

49.1%

44.9%

45.0%

Return on equity

16.7%

17.6%

16.8%

8.1%

16.5%

14.8%

13.9%

BALANCE SHEET

Non-current assets

 

 

181,015

185,383

197,806

173,413

205,170

228,083

247,250

Current assets

 

 

84,178

95,430

108,275

111,426

121,109

142,403

154,166

Total assets

 

 

265,193

280,813

306,081

284,839

326,279

370,486

401,416

Current liabilities

 

 

(7,927)

(6,722)

(7,424)

(5,309)

(6,261)

(6,724)

(7,052)

Non current liabilities inc pref

(104,450)

(108,724)

(119,183)

(98,501)

(119,878)

(146,798)

(161,718)

Net assets

 

 

152,816

165,367

179,474

181,029

200,141

216,964

232,646

NAV per share (p)

1,276

1,375

1,493

1,490

1,648

1,786

1,916

CASH FLOW

Operating cash flow

 

 

(43,418)

10,530

4,946

32,940

(7,399)

(10,955)

667

Net cash from investing activities

(1,040)

(785)

(265)

(1,112)

(302)

(300)

(300)

Dividends paid

(11,377)

(13,080)

(14,461)

(13,098)

(12,268)

(13,962)

(15,540)

Other financing (excluding change in borrowing)

12

14

14

2

1

0

0

Net cash flow

 

 

(55,823)

(3,321)

(9,766)

18,732

(19,968)

(25,216)

(15,173)

Opening net (debt)/cash

 

 

(49,167)

(104,990)

(108,311)

(118,077)

(99,345)

(119,313)

(144,530)

Closing net (debt)/cash

 

 

(104,990)

(108,311)

(118,077)

(99,345)

(119,313)

(144,530)

(159,702)

Source: S&U accounts, Edison Investment Research. Note: EPS on a reported basis.


General disclaimer and copyright

This report has been commissioned by S&U and prepared and issued by Edison, in consideration of a fee payable by S&U. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by S&U and prepared and issued by Edison, in consideration of a fee payable by S&U. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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