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Scottish American maintains inflation busting dividend increases

Scottish American maintains inflation busting dividend increases

Scottish American maintains inflation busting dividend increases – Scottish American delivered a share price total return of -1.6% and an NAV total return of -2.4% for 2018. Global equities, as measured by the MSCI World Index, fell by 3.4%. The full year dividend will be 11.5p per share, 3.6% higher than the 2017 dividend of 11.1p. The increased dividend will extend the company’s record of raising its dividend to thirty nine consecutive years. The increase is also significantly above the annual rate of inflation of 2.1%, as measured by CPI. Over the last ten years, dividends have increased at well above the rate of inflation.

The chairman says that income from equities has been helped by operational progress at many of the company’s investments and by related increases in dividends. The rents from the company’s property investments have also increased modestly, helped by the high proportion of rents which are linked to inflation. Against this, the company has reduced its investments in fixed income holdings, a move which the board believes will be helpful to returns and revenue growth in the long-term but which has reduced the overall growth in revenues for the year.

Extract from the manager’s report

2018 was a good year for SAINTS’ income growth, though the capital performance this year was weaker than it has been in recent years. Income growth from the equity portfolio was strong, but the capital return offset this and across the year the equity portfolio delivered modestly negative total returns. The property portfolio delivered a strong positive return. The small fixed income portfolio generated a negative return. The Company’s NAV at fair value produced a total return of -2.4% during the year and total income from investments was GBP21.7m, a 6.2% increase on the prior year.
The biggest driver of returns in any one year will be the performance of the equity portfolio, and 2018 was no exception. As explained in the Investment Approach section on page 10 of the Annual Report and Financial Statements, we aim to invest the bulk of the Company’s net assets in equities. History tells us this is the best asset class for delivering real income and capital growth over the long term. 2018 was a year of two halves both for SAINTS, and for broader equity markets. Generally markets were strong in the first half of the year, buoyed by strong corporate earnings; and then weaker in the second half of the year, as worries around the potential effect of new trade barriers spread, and consumer confidence deteriorated. Across the year, global equity markets fell by 3.4%, and the Company’s equity portfolio delivered a very similar performance.

Our starting point when choosing equities for your portfolio is always to look for where we can see significant potential for profit growth, as we believe this is typically what will drive capital and dividend growth over the long run. Sometimes our analysis is that growth rates in the future will be higher than in the recent past, and it is striking that several of the strongest performers in 2018 were businesses where the acceleration in growth that we were hoping for began to be more visible to the outside world.

These investments all benefit from new, technology-enabled business models that allow companies to sell more useful products to a wider range of customers. For instance, Edenred, the French vouchers business, has seen double digit growth in its most mature markets, as it has rolled out its mobile-based vouchers for employees and restaurants, cutting a huge amount of administrative grit from the process. Microsoft’s cloud businesses, including Azure, have delivered astonishing growth rates, as businesses have adopted these software products and used them to improve the way they work. Less dramatically, Wolters Kluwer’s growth rate continues to accelerate as their portfolio of products steadily shifts towards digital solutions that help doctors, accountants and lawyers do their jobs more efficiently.

All three of these businesses delivered strong positive returns during the year, and dividend increases of between 8% and 37%. Because they are delivering real benefits to customers, in each case we think the long-term growth drivers are relatively immune to the ups and downs of the global economy. The focus of our research continues to be on finding these businesses where we can have high levels of confidence in the long-term outlook, and where the drivers of success are to some extent within the control of the management teams.

We don’t always get these judgements right. A common factor in several of the investments that we sold during the year was that we lost faith in management’s ability to steer their businesses through increasingly challenging end markets. In some cases this loss of confidence was exacerbated by unplanned management changes. Examples of this included WPP Group, Continental, Pandora, Pearson and Dia. In each case the specific circumstances were different, but we felt our investment case no longer held, and that we should move on. We will continue to be demanding of the managers we invest alongside on your behalf.

The overall dividend income from the equity portfolio grew by 11%. Local currency dividend growth was robust, and SAINTS also benefitted from larger holdings in equities thanks to the proceeds of issuance, and purchases of equities during the year, funded by sales of property and bonds. At the end of the year, equities represented 80% of the portfolio.
The property portfolio also had a positive year, generating income of GBP5.1m, and a total return of 10.6%.

The directly-held property portfolio is managed on SAINTS’ behalf by OLIM Property Ltd. The wider UK commercial property market delivered healthy returns in 2018, though some sectors such as high street retail showed signs of real stress. However SAINTS’ portfolio has little exposure to the weakest areas, as OLIM have correctly predicted these areas of stress and moved the portfolio out of them some time ago. Meanwhile the smaller commercial properties in the portfolio performed particularly well. As in 2017, the biggest contributor to returns was the caravan park in New Romney, a long-standing holding which is a great fit for SAINTS objectives, and where the appraisal value increased by another 15% during the year. Overall rental income for the portfolio was flat, reflecting the benefit of inflation-linked increases in rents, offset by modest net sales of property during the year following the large purchases made in 2017.

The Company’s small fixed income portfolio had a weaker year, following a very strong 2017. The Alibaba Convertible which was purchased in 2016 has performed strongly for SAINTS since purchase, thanks to the rapid growth of Alibaba’s core business. We think Alibaba’s long-term prospect are still exciting, however, Alibaba’s share price weakened in the second half of 2018, which reduced the conversion value of our bond. For the fixed income portfolio as a whole, interest income was GBP1.2m, and the total return was -5.9%.”

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