The Scottish Investment Trust (SIT) said it will increase its dividend for the 37th consecutive year despite its share price total return falling 12% and net asset value (NAV) total return falling 10.6% in the year to October 31, 2020.
The contrarian SIT has a current stock market value of about £520 million.
The investment trust is recommending a final dividend of 6.1p which, if approved, will mean total regular dividend for the year will rise 1.8% to 23.2p.
The objective of the SIT is to provide investors over the longer term with above‑average returns through a diversified portfolio of international shares and to achieve dividend growth ahead of UK inflation.
“Taken as a whole, it has been a challenging year for our contrarian approach,” wrote SIT chairman James Will.
“Seldom, if ever, has the dispersion of returns between growth and value names been so stark and, within this context, performance has been disappointing.
“While our performance relative to global indices has lagged in recent periods, we believe that this dispersion has created an opportunity to buy unloved, but robust, companies at attractive prices …
“Notwithstanding our lack of exposure to what we consider irrationally priced momentum driven investments, there were two particularly advantageous decisions made during the year.
“The first was our manager’s decision to take pre-emptive action to preserve capital at the onset of the Covid-19 crisis by selling out of some of the companies we believed would be most impacted.
“The second was a large exposure to gold miners, which participated strongly in the recovery …
“Over the past year, earnings per share fell by 27.1% to 21.7p (2019: 29.8p).
“The decline was driven by reduced dividend receipts as many businesses, including some in which we invest, opted to curtail dividend payments to safeguard their financial health.”
On future dividend policy, Will wrote: “The board’s target is to declare three quarterly interim dividends of 5.8p for the year to 31 October 2021 and recommend a final dividend of at least 5.8p for approval by shareholders at the Annual General Meeting in 2022.
“The final dividend will be reviewed in accordance with the board’s desire to continue the long track record of annual dividend increases and the aim of the company to provide dividend growth ahead of UK inflation over the longer term.”
The SIT’s manager Ally McKinnon wrote: “Markets have continued to reward past winners, leaving the unloved parts of the market, where we prefer to invest, in their shadow.
“Before we consider the portfolio over the last year, I want to reflect on the position in which we find ourselves now.
“On one hand there is reason for us to be optimistic.
“The divergence in the performance and valuation of the most loved companies and those that are unloved, has seldom been more extreme.
“As contrarian stock pickers, that excites us and offers the potential to buy attractive companies at a good price.
“Certain areas of the market look especially cheap but, on the whole, there are companies in almost all sectors that go unrewarded despite their incumbent market positions, durability and cash generation.
“That is where our opportunity lies.
“On the other hand, we continue to worry about the overextended valuations accorded to previous ‘winners’.
“These can appear to offer the prospect of perpetual growth.
“We understand why this finds favour with some but, in contrast, we are wary of paying a fancy valuation for a company that is priced as if nothing willever go wrong.
“In our view the margin of error is diminished and the potential for disappointment large …
“The root cause of such exuberance is, like then, too much cheap money creating a febrile atmosphere.
“In the period we have seen an electric truck maker, without a product in production, soar in valuation to become one of the biggest companies in the world.
“The share price quickly crashed when it was revealed that the promotional video purporting to show the vehicle in action was filmed using a mocked-up truck rolling down a slope.
“Our view is that a large proportion of market participants do not make discerning value judgements.
“This allows momentum to build for extended periods.
“There is tremendous pressure on many to perform in a similar manner to markets (or benchmarks), while passive investment products explicitly target such an outcome.
“Success breeds confidence which breeds inflows which breeds momentum.
“All we can say is that, without valuation support, when markets turn, as they always do, the virtuous circle quickly becomes vicious …”
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