Scottish American has published results for the 12 months ended 31 December 2023. Its NAV returns did not match those of its benchmark (the All-World Index), returning 11.8% to the index’s 15.7%, and a widening discount left shareholders with a return of 8.2%. Although the chairman points out that discounts have widened across the invetsment company sector. For part of the year, the trust was trading at a premium and issuing stock, about £8.3m worth. No shares have been bought back.
The NAV returns reflect the dominance of a few very large, zero yielding companies on the index return last year – the so-called Magnificent 7. The trust’s focus on dependable growth in income and capital over the long term means that many of these stocks are not a natural fit for the portfolio. Another factor at work was relatively poor returns from the trust’s property portfolio over the year. As the chairman says, “these bring benefits in terms of diversifying sources of return, spreading risk and boosting revenues, but will not always keep pace with equities”.
Revenue earnings per share fell from 13.82p to 13.48p, which the chairman says reflects higher taxation, fewer declarations of special dividends in the period, adverse foreign exchange movements, and lower rents from the property portfolio. The company is dipping into reserves to fund a 2% increase in the full year dividend to 14.1p (the divided has now risen every year for 50 years). The statement notes that the dividend increase is below the rate of UK inflation (currently 4%).
Toby Ross is stepping back from his role as co-manager of the trust to concentrate on his other responsibilities at Baillie Gifford. James Dow stays on as manager and Ross Mathison as deputy.
Extracts from the managers’ report
One of the standouts from the portfolio was Atlas Copco, the global compressor and industrial tool business, based in Sweden. This well-managed company is religiously focused on innovation to drive growth, and it is always on the look-out for strong niche businesses to acquire. Revenues in 2023 increased 22%, of which 8% came from acquisitions. Operating profit grew 23% and earnings per share rose by more than 30%. The dividend was raised by 22%, while maintaining a prudent payout ratio below 50%. Some of the strength in Atlas’s growth last year was cyclical, and we would not expect the company to continue growing at these rates every single year. But taking a longer-term perspective, we note that over the past five years the company has compounded its earnings higher at an average rate of 10% a year, while the dividend has grown by 12% a year. This is exactly the sort of inflation-busting growth that drives real capital and dividend appreciation for SAINTS’ shareholders, over the long-term. It’s exactly the reason we invest almost 100% of SAINTS’ NAV in growing companies that pay dividends, and take a long-term mindset amidst the noise of the markets.
Other strong performers in the equity portfolio last year included Watsco, the heating, ventilation and air conditioning distributor, and Fastenal, the industrial equipment distributor. Again, both are companies with terrific track records of entrepreneurship and growth, which have compounded their earnings and dividends at inflation-beating rates for many years. They continued to deliver in 2023, and we remain optimistic about their potential for continued growth in the years to come.
Novo Nordisk, the Danish pharmaceutical company, was another highlight of the year. Its pioneering medicine for appetite control, which its scientists have spent years investigating, whilst running clinical trials of thousands of patients to establish that it is both effective and safe, has resulted in significant earnings growth at the company. Since our investment in 2016 for SAINTS, it has been a strong performer. Earnings have broadly doubled, as has its dividend, meaning compound growth of about 10% per year. In 2023 there was a continued flow of good data from its clinical trials, showing reduced risk of heart attacks for patients. This data is likely to drive continued uptake of its new medicine, and revenue and profit growth in the years ahead.
Our natural inclination is to let winners run, to capture the true benefits of compounding. But we are also mindful of diversification, so we trimmed the Novo Nordisk holding a little during the year, to prevent it from dominating the portfolio. It remains a large holding however, and we look forward with optimism to its continued growth.
Of the almost 60 holdings in the equity portfolio, we estimate that about a dozen saw a reduction in profits compared with 2022. In most of these cases our investigations suggest the root cause was cyclical and short-term in nature. For example, Sonic Healthcare, the lab testing company, and Roche, the pharmaceutical company, both saw their earnings drop in 2023. In both cases this was due partly to the wind-down of emergency COVID testing, which had lifted their profits in the past couple of years. The waning of this temporary boost does not undermine our view that both companies have good long-term potential for earnings and dividends growth over the next 10 years.
Not all of our investments will, of course be successful. We try hard to be patient, as long-term managers, but sometimes it becomes apparent that our investment case is simply wrong, and that growth is not materialising to the extent we hoped. In these cases we will divest, and put the capital to work in better companies. A small number of holdings had a weak 2023 that could not be excused by any cyclical headwind. In some cases our review of them led to a re-evaluation of their future prospects. During the year we divested from six holdings.
One of them was Want Want, the Chinese rice cracker and soft drink manufacturer. It had been a disappointing investment, with low earnings growth over a number of years. At first we thought this was due to temporary input cost pressure, impacting margins, and we patiently maintained our investment while the company put in place a number of actions to restore profits and growth. Over time, however, we recognised a more concerning issue. The Board seemed to have become too focused on short-term profits, which had made the company slow to recognise changing consumer preferences in China. It had resisted a shift towards modern distribution channels, and had failed to develop key new products. After visiting the company in China during 2023, and seeing limited prospects for change, we sold the position.
Although the equity portfolio performed well operationally in 2023, in two respects it fell short. First, we must acknowledge that the total return was behind global equity markets, as measured by the FTSE All-World Index (in sterling terms). This can be explained by the large weight in the index of a small number of technology-related companies, which delivered very large share price appreciation during 2023. An example is Nvidia, the semiconductor manufacturer, which has a strong position in the market for AI (‘Artificial Intelligence’) computing and whose share price rose dramatically last year.
SAINTS’ strategy is focused on the steady, long-term compounding of earnings and dividends. Some of these large technology companies, such as Microsoft and Apple, are an excellent fit with this philosophy. We also have a number of investments which should benefit from the growth expected in Artificial Intelligence, including Microsoft but also names such as TSMC, the semiconductor manufacturer that produces most of Nvidia’s chips. However, some of the largest tech companies see wild swings in profits from year to year, and many of them do not pay dividends. We do not invest in such companies, even if this means that in some years we miss out on their share price appreciation. We believe that over the long-term SAINTS’ approach will still perform well in terms of its core objective: growing shareholders capital and income ahead of inflation, with resilience across cycles.
Secondly, we must also observe that dividends from the equity portfolio were broadly unchanged during last year. Of the £23.0m of dividend revenue in the year, revenue from the equity portfolio was essentially flat at £21.5m. (The remaining £1.5m of dividends was from the infrastructure equity portfolio.) Of course, we would prefer it if revenue grew every year. But in 2023 there was a notable absence of special dividends paid by the portfolio’s holdings. Typically, these account for about 5% of equity portfolio revenue, with the other 95% coming from ‘ordinary’ regular dividends. In 2023 there were remarkably few special dividends paid out, perhaps a function of economic uncertainty. The result was that, although the portfolio’s ordinary dividends grew at a mid-single digit rate, the absence of special dividends resulted in total dividends remaining flat, year-over-year. Our expectation is that, going forward, normal growth will resume. Indeed, it may even accelerate a touch in 2024, assuming special dividends return.
SAIN : Scottish American falls short in difficult 150th year