Sustainable Income

Sustainable Income Strategy – April 1, 2025

Market Review

The first quarter of 2025 proved challenging for investors, as volatility driven by policy uncertainty pressured both stock and bond markets. Our benchmarks—the S&P 500 Dividend Aristocrats for our dividend-growth equities and the Bloomberg Aggregate Bond Index for bonds—posted mixed results, and our Sustainable Income Composite delivered modest positive performance.

For the quarter ended March 31, 2025, the Sustainable Income Composite rose +0.33% net of fees, underperforming the blended benchmark, which returned +3.00%. While our fixed income allocations provided solid returns—closely in line with the overall domestic bond markets—our equities lagged our benchmark and weighed on total portfolio results. Our positioning in higher-quality dividend payers, while well-aligned with our objectives, lagged in a quarter where markets favored more cyclical or growth-oriented names.

As always, individual client account returns varied around the composite average depending on their specific allocations among stocks, bonds, preferreds, and bond ETFs. We continue to emphasize that performance, both absolute and relative, will fluctuate over time alongside market conditions. Our focus is on the long term, where we seek to generate strong results over a full market cycle measured by years, through growing dividends, stable interest and capital appreciation.

Here is the performance record for the Sustainable Income Composite as of March 31, 2025 (please see important performance disclosure at the end of this note):

The first quarter of 2025 was a mixed environment for income-producing assets. Long-term interest rates remained volatile, initially rising in January on stronger economic data before stabilizing in March as inflation readings showed signs of moderating. Credit spreads, which had widened modestly late last year, narrowed slightly during the quarter, reflecting healthier risk appetite and improved economic sentiment.

While rising rates earlier in the quarter created headwinds for bond prices and interest rate-sensitive equities, selected dividend growth companies and high-quality bonds showed resilience. Overall, the backdrop remained challenging for traditional income assets, but pockets of opportunity emerged as volatility created attractive entry points.

Key Portfolio Changes

During the quarter, we made one meaningful trade within our dividend growth equity allocation:

• We exited a 3% position in Sysco Corporation (SYY).
• We initiated a new 3% position in Starbucks Corporation (SBUX).

Why We Sold SYY:

We found Sysco’s performance throughout our holding period disappointing. Although revenue today is approximately 30% higher than in 2019, operating margins have remained flat, reflecting structural challenges in the food distribution industry. The business remains vulnerable to volatile food prices, a trend that has disrupted customer profitability and added uncertainty to Sysco’s own margins over the past five years.

Furthermore, Sysco completed an acquisition last year that added approximately $1 billion of net debt. In an uncertain macroeconomic environment, with higher leverage, we believe management could adopt a more cautious stance on dividend growth, which does not align well with our focus on growing, sustainable income streams.

Why We Bought SBUX:

Conversely, we see Starbucks (SBUX) as offering a more compelling opportunity. After navigating several difficult years, the company appears to be turning a corner under the leadership of their new CEO Brian Niccol, who joined SBUX after successfully leading Chipotle through a similar turnaround. The current uncertain environment could negatively impact consumer spending, which would prolong the recovery timeline. However, we have conviction that Niccol is making the requisite improvements to reignite growth at the company over a longer period.

Importantly, Starbucks raised its dividend by 7% in Q4 2024, signaling strong confidence in its cash flow generation and a reaffirmation of its commitment to returning capital to shareholders. Since initiating a dividend in 2010, Starbucks has grown its payout at a 20% compounded annual rate. We have higher confidence that improving comparable store sales and margin recovery can drive sustainable dividend growth well above inflation going forward.

Key Contributors and Detractors

Top Contributors – Q1 2025

AT&T (T): +25.5%
AT&T led portfolio returns, benefiting from stronger-than-expected subscriber growth and improved cost discipline. Investors saw AT&T as a safe haven in the face of elevated uncertainties. The business is expected to generate $16B of free cash flow, most of which will be returned to shareholders via dividends and buybacks.

Cencora (COR): +24.0%
Cencora (formerly AmerisourceBergen) delivered strong earnings growth, driven by continued strength in its US Healthcare business. Growth was driven by healthy unit volume, including increased sales of GLP-1 products and specialty products.

Nintendo (NTDOY): +16.9%
Nintendo gained on positive momentum around their much-anticipated Switch 2 launch on June 5^th. We believe Nintendo will have a strong year of growth, driven by pent-up demand for the more-powerful console and a large, attractive slate of first and third-party games available at launch. We expect dividend growth to align closely with robust expected earnings growth over the next several quarters.

Top Detractors – Q1 2025

Target (TGT): -22.5%
Target delivered better-than-expected revenue and earnings in the quarter as consumer spending in discretionary categories accelerated sequentially. However, management offered cautious guidance amid concerns about the impact of tariffs on consumer behavior. Target management has done an admirable job of turning around the business – improving its non-discretionary assortment (beauty, food & grocery), moving discretionary inventory more quickly to keep up with consumer trends, and shifting production away from China (which is expected to account for 25% of Target goods sold, down from 60% in 2017). Target will not be able to avoid the fallout from the trade war with China, but we believe its scale and flexibility will allow it to manage through this period better than most.

Eaton Corp (ETN): -17.9%
Eaton faced selling pressure amid concerns over slowing demand in the data center segment. Eaton was among our strongest performers over the past several years, so it is not surprising to see profit-taking amid a volatile period in the market. We expect higher levels of uncertainty in the near term due to the potential negative impact from tariffs. More importantly, the business continued to grow as expected, supported by its strong backlog.

Taiwan Semiconductor (TSM): -16.2%
TSMC declined on fears of slowing global demand for semiconductors and potential tariff impact on semiconductor imports. Despite the headlines, TSMC is expected to deliver mid-20% growth this year as key customers such as Microsoft and Google continue to invest heavily in its cloud and AI infrastructure. We believe TSMC is well-positioned for some of the most important technological trends today (cloud adoption, AI, autonomous driving, etc.).

Looking Ahead

We continue to position the Sustainable Income Strategy to balance dividend growth opportunities with capital preservation. We remain focused on identifying high-quality dividend growth companies and maintaining a strong core of investment-grade bonds within the portfolio. Our equity holdings emphasize businesses we believe have durable competitive advantages, healthy balance sheets, and a consistent record of returning capital to shareholders. In fixed income, we continue to prioritize reliable income generation with a careful approach to credit quality. While market movements will vary from quarter to quarter, we believe our disciplined focus on quality and sustainable income positions the strategy well to meet client goals over the long term.

Dividend Growth Strategy

Summitry’s Dividend Growth Strategy is comprised 100% of dividend-paying equities and is made available to clients who wish to have exposure to the income generation and total return opportunity that is offered from the equities held in the Sustainable Income strategy, but without the exposure to SI’s bond and preferred stock holdings. Your Financial Advisor can help you decide if this is a useful and appropriate strategy given your personal financial circumstances. We appreciate your continued trust in our management of your assets and remain committed to providing resilient, sustainable income over the long term.

Disclosure: The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that an investment in the securities identified was or will be profitable. The information contained herein is intended for Summitry clients only. This is not intended as a recommendation to purchase or sell any of the securities mentioned. Please contact your Summitry advisor if you have any questions or if there have been any changes to your financial situation.