The Scottish American Investment Company(SAIN) 502.3p
Market cap: £864 million
The Baillie Gifford-managed Scottish American Investment Company (SAIN), or ‘SAINTS’ for short, aims to be a core investment for investors seeking real dividend growth.
The focus of the portfolio is global equites, but the trust also invests around 10% of the portfolio in bonds, property and other asset types to generate income.
SAINTS has grown its dividend every year since 1938 at a compound rate of 8% per year, ahead of average consumer price inflation of 5%.
Since Baillie Gifford took over the mandate in 2003, the dividend per share has grown at an annualised 5% compared with average inflation of 2%.
After three years of moving sideways, the shares trade at a significant 11% discount to NAV (net asset value), reflecting the manager’s ‘quality compounders’ investment style moving out of favour as investors chased large-cap tech and AI themes.
The portfolio is underweight the frothy US market while giving shareholders access to high-quality businesses with good prospects for capital and income growth.
We believe this attribute, alongside the wide discount to NAV which reached a new high in 2024, represents a great buying opportunity.
Lead manager of the trust James Dow is Head of Global Income Growth at Baillie Gifford and has been at the firm since 2004. He is assisted by Ross Mathison, who joined Baillie Gifford in 2019 and became deputy manager at SAINTS in 2023.
WHAT IS THE INVESTMENT APPROACH?
Dow and Mathison search for steady, long-term compounders which have resilient dividends supported by surplus cash flow.
‘Our ‘north-star’ is 10% compounding: we are looking for companies which can deliver 10% annual growth in earnings and dividends and keep doing so for long periods of time.
‘Inevitably not all the companies in which we invest will meet our expectations, so in practice we expect this approach to deliver a result that is a little lower: perhaps 6-9% growth.
‘But over time this level of growth would deliver excellent results to SAINTS’ shareholders,’ the managers wrote in the 2024 annual report.
The starting point is always a company’s potential to deliver earnings and cash flow growth above inflation. Importantly, the managers believe share prices and dividends follow the trajectory of company earnings and cash flow over the long run.
The team focuses on companies whose dividends are likely to be dependable whatever the weather or state of the economy, and typically the portfolio consists of around 50 to 80 positions.
Companies fall into four broad buckets of opportunity which the managers describe as compounding machines, exceptional revenue opportunities, management acceleration and long-cycle returns.
The first two buckets are characterised by companies with enduring competitive positions, strong balance sheets, pricing power, proven management and strong volume growth.
The latter two buckets comprise companies with margin potential accompanied by a catalyst for change, strategic development, a shift of asset allocation priorities and strong management teams with a clear strategy.
Over 90% of the portfolio is invested in the first two buckets, compounders and exceptional revenue opportunities.
Compounders include consumer goods giant Procter and Gamble (PG:NYSE) and fast food company McDonald’s (MCD:NYSE), while UK premium mixer specialist Fevertree Drinks (FEVR:AIM) falls into the exceptional growth bucket.
HOW HAS THE COMPANY PERFORMED?
The managers don’t aim to outperform the market every year, but have done so in eight of the last 10 years. 2024 was one of the underperforming years when the trust’s NAV grew 6.1% against the FTSE All World index return of 19.8%.
The managers point out that this reflects the fact quality compounders were deeply out of favour as investors instead chased big technology stocks and AI names such as Nvidia (NVDA:NASDAQ).
These types of company are never a good fit for SAINTS and tend to be highly cyclical dividend payers or they don’t pay dividends at all.
Commenting on Nvidia, the managers explain: ‘There is a significant risk of a sharp downcycle in earnings if customers find ways to pursue gains in AI through optimisation rather than ever-more hardware.
‘This cyclicality and the lack of a meaningful dividend makes Nvidia unsuitable as an investment for SAINTS, and recent news flow has done nothing to alter our view on its suitability.’
Over the last 10 years the trust has delivered an NAV total return of 206.8% or 11.9% per year compared with a 207.4% return for the FTSE All World index.
The share price total return of 191.9% reflects the widening of the discount to NAV (before the pandemic the shares traded at a 7% premium). The trust has an ongoing charge of 0.58% a year.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
magazine
