By Mark McSherry — Baillie Gifford’s £950 million investment trust Scottish American Investment Company (SAINTS) has extended the company’s record of dividend increases to 49 consecutive years.
The objective of the 150-year old trust, co-managed by former Scotsman reporter James Dow, is to deliver “real dividend growth by increasing capital and growing income.”
The fund’s full year 2022 dividend of 13.82p per share — 9% higher than 2021 — is fully covered by earnings.
The dividend of SAINTS has not been reduced year-on-year since 1938.
The fund’s biggest stock investments at December 31, 2022, included Novo Nordisk, UPS, Greencoat UK Wind, Procter & Gamble, Pepsico, Microsoft, Fastenal, Watsco, Roche, Taiwan Semiconductor Manufacturing and Nestlé.
SAINTS aims to grow its dividend ahead of inflation over the long term. Over the past 10 years SAINTS has increased its dividend at an annualised rate of 3.5%, which compares with UK CPI of 2.7%.
Income for SAINTS in 2022 was £30 million (2021 – £28m) and earnings per share were 13.82p (2021 – 12.79p).
Total return — Net Asset Value total return (capital and income with borrowings at fair value) for the year was negative 3.7%, ahead of the total return from global equities of negative 7.3%.
The share price total return was negative 3.5%.
SAINTS said its NAV total return (with borrowings at fair value) has exceeded that of equities generally over the past three, five and 10 years.
SAINTS said it is also the best performing fund in its Global Equity Income peer group, in terms of share price total return, over the past five years.
The trust’s bond investments at December 31, 2022, included Netflix 5.375% 2029, Catalent 5% 2027, Tesco 6.15% 2037, Brazil CPI Linked 15/05/2045, Dominican Republic 8.9% 15/02/23, Ivory Coast 6.625% 2048, Indonesia 9% 15/03/2029, Mexico IL 4% 15/11/2040 and Peru 6.15% 12/08/2032.
SAINTS managers James Dow and Toby Ross wrote: “SAINTS’ standout performer last year was Novo Nordisk, the Denmark-based manufacturer of insulin for diabetics which has also begun making, more recently, appetite suppressants for patients who are battling obesity.
“This has been a very successful investment for shareholders over the past several years. Revenues have compounded steadily upwards, driven in part by continued growth in the number of patients diagnosed with diabetes, a condition which remains under-treated but where happily detection is increasing over time.
“We remain optimistic about seeing continued progress worldwide in the years ahead.
“Meanwhile, novel formulations of the company’s insulin products have made life significantly easier for many of those living with diabetes: for example the company’s oral formulations which spare patients from the burden of constant injections. This innovation has been rewarded by higher prices, which again has driven revenue growth.
“More recently, the use of the company’s semaglutide molecule as an appetite suppressant has been hailed as a breakthrough treatment for patients battling obesity.
“Future earnings growth from this innovation could be considerable, and shares in the company have risen accordingly. We are mindful of the higher valuation of the shares following this strong period of performance, but believe we are still early in the multi-year opportunity for Novo Nordisk to change people’s lives for the better, while growing the company’s earnings and dividends.
“In the meantime, we continue to liaise with the management team to ensure that, despite rocketing demand for the company’s treatments, it is pricing its products honourably (not gouging) and that it is working as hard as possible to add safe new capacity to meet patient demand.
“Our several investments in consumer staples companies, such as Pepsico and Coca-Cola, also by-and-large performed well during 2022. Over the past several years these companies have delivered solid growth but, candidly, the rate of growth has not always been particularly inspiring.
“However in 2022, with input costs rising sharply, for example due to transportation costs, and with considerable ongoing investments to reduce their packaging impact and improve their nutritional impact, these companies have been able to pass on cost inflation to consumers seeking improved products. Earnings and dividends have continued to compound higher and their share prices have risen, as the outlook for profit growth has brightened.
“The performance of these holdings illustrates a wider point about SAINTS portfolio, that is perhaps under-appreciated. As managers, we make conscious efforts to ensure that we achieve true diversification when investing shareholders’ capital. Not just by investing in different countries and industries, but also in terms of different types of growth case, and business model, and assorted exposures to different macro factors.
“We do all this in pursuit of dividend resilience and steady compounding. We try hard to ensure that we are not ‘betting the portfolio’ on a narrow range of businesses or styles.
“We are far from perfect in this respect – earnings correlations have a nasty habit of rising toward 100% whenever severe shocks occur – but it does mean that in highly volatile years such as 2022, SAINTS portfolio by design includes names which may perform unusually well while others are slowing.
“Our consumer staples holdings just-mentioned, and our two bank holdings United Overseas Bank and Cullen/Frost Bankers, together with esoteric names such as Edenred (the vouchers business), Arthur J Gallagher (the insurance broker), USS (the Japanese car auctions business), and Deutsche Boerse (the German derivatives exchange) are all testament to this approach. Many featured in our top 10 performers list for 2022.”
SAINTS chairman Nick Macpherson wrote: “This year, SAINTS reaches the one hundred and fiftieth anniversary of its formation in 1873.
“And, consistent with the company’s focus on the long term, it is perhaps useful to provide some historical perspective.
“In that year, for example, the Emperors of Russia, Austro-Hungary and Germany formed an alliance to stand against radical thinking.
“It might be easier to list what remains constant rather than what has changed since then, but amongst other things those three Empires and those of Britain and Japan have passed into history, as have the Third Reich and the USSR.
“There have been two world wars, a cold war, hyperinflation, a depression and numerous financial crashes, and immeasurable human suffering, much of it arising from conflict, famine and disease.
“Yet over these one hundred and fifty years the world has made immense progress, in everything from the advent and spread of modern democracy, to a dramatic increase in life expectancy and the many benefits of human and technological progress.
“The US has grown to be the world’s most powerful country, and it and almost every other country have industrialised.
“Of course, progress brings its own challenges, some of which relate to global and other inequalities and some to our planet and its climate.
“But we should hang on to the fact that economies generally grow.
“And the key point for SAINTS is that throughout its history it has been able to take advantage of opportunities to invest globally in order to support and benefit from the tailwinds of economic, technological and even societal progress, and from geopolitical change, and to weather each storm and setback which has arisen.
“It is also worth emphasising that SAINTS is particularly well equipped to navigate stormy seas, both because of its structure and also because of its managers’ focus on selecting individual investments to provide dependability and growth.
“We very much hope that SAINTS’ 150th anniversary year will also be its 50th successive year of dividend growth.
“Indeed, the dividend has not been reduced year-on-year since 1938. The prudent use of revenue reserves has been an important part of this success, but so too has investing in companies and other assets which provide an income which is resilient in tough times and grows above inflation over the long term.
“To mark SAINTS’ 150th anniversary, and to help provide the benefit of perspective which I mentioned above, the Board and Baillie Gifford have commissioned a short history of SAINTS. We expect this to be available, in both electronic and hard copy form, by late May/early June.”