The Scottish American Investment Company P.L.C.
Legal Entity Identifier: 549300NF03XVC5IFB447
Regulated Information Classification: Additional regulated information required to be disclosed under the applicable laws and regulations.
The following is the results announcement for the year to 31 December 2022 which was approved by the Board on 9 February 2023.
¾ Dividend – The full year dividend, including a recommended final dividend of 3.67p, is 13.82p per share. This is 9% higher than the 2021 dividend and is fully covered by earnings. The recommended dividend will extend the Company’s record of dividend increases to forty nine consecutive years.
¾ SAINTS aims to grow its dividend ahead of inflation over the long term. Over the past ten years SAINTS has increased its dividend at an annualised rate of 3.5%, which compares with UK CPI of 2.7%.
¾ Revenues – Income was £30.0m (2021 – £28.0m) and earnings per share were 13.82p (2021 – 12.79p).
¾ 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%. Returns were assisted by the resilient operational performance of many of the companies in which SAINTS invests, and also by positive returns from the Company’s infrastructure equity and bond investments.
¾ SAINTS also aims to deliver attractive returns over the long term – SAINTS’ NAV total return (with borrowings at fair value) has exceeded that of equities generally over the past three, five and ten years. SAINTS 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.
¾ Outlook – The Board remain of the view that a long-term approach based on investing globally for sustainable growth is the best route to achieving SAINTS’ aims. In addition, we are encouraged that the Managers have continued to find new and attractive opportunities amidst the recent turmoil. We retain great confidence in the Managers’ approach, and this confidence has been further strengthened by the experiences of the past year.
Chairman’s Statement
SAINTS’ objective is to deliver real dividend growth by increasing capital and growing income. The Board is recommending a final dividend which will bring the total dividends for the year to 13.82p per share, an increase of 9% over the previous year. The Company continues to meet its objective of growing dividends ahead of inflation over the long term, and the recommended dividend will also extend the Company’s record of raising its dividend to forty nine consecutive years.
Overview
2022 has been another difficult year for the world, a period in which equity, bond and property markets have all been weak. As the challenges from Covid-19 receded those arising from the Russian invasion of Ukraine increased. The economic recovery from the worst of the pandemic has been more tentative than expected, in large part due to resurgent inflation. With hindsight, central banks were too sanguine about inflationary pressures in 2021, and the energy price shock arising from the Russian invasion pushed inflation to levels not seen in 40 years. As a result, central banks have had to raise interest rates much higher than expected a year ago. The retreat from globalisation has continued, with trade barriers increasing as countries seek to protect their supply chains in the face of greater geopolitical risks. Closer to home, political missteps eroded confidence though as the year drew to a close there were signs of greater calm and stability.
On the positive side, industrialised economies have shown extraordinary adaptability in the face of the energy shock. Oil and gas prices have fallen recently, creating a more benign outlook for inflation. And the world economy is set to grow in 2023.
Against this background, I am pleased to report that SAINTS has continued to perform well. The refinancing of the Company’s long term debt at a rate pre-arranged two years earlier has significantly reduced borrowing costs, and the Company’s earnings per share have risen at a rate which has enabled the Board to recommend a very significant increase in the dividend. Furthermore, SAINTS’ NAV total return (with borrowings at fair) has exceeded that of the global equity market, despite the managers deliberately eschewing many companies such as those in the energy sector which have been short term beneficiaries of the war in Ukraine, but which they do not believe will support the achievement of SAINTS’ objective over time.
More importantly however, given the long-term nature of the Company’s objectives, it is worth emphasising both SAINTS’ successful record of raising its dividend ahead of inflation over the long term, and the strong total returns it has delivered.
SAINTS 150th Anniversary
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. If you would like to receive a copy, either by email or in physical form, please request a copy using the following link: bailliegifford.com/SAINTS150
Dividend and Inflation
The Board recommends a final dividend of 3.67p which will take the full year dividend to 13.82p per share, 9% higher than the 2021 dividend of 12.675p.
The strong growth in SAINTS’ revenues over the past year has enabled this greatly increased dividend to be covered by earnings. Whilst significant, the rate of increase does not match the annual rate of inflation of 10.5% as measured by CPI. It remains the Company’s objective to deliver real dividend growth over the long term, and over the last ten years the Company’s dividends have in the round increased at a rate (3.5% per annum) which has been well above the rate of inflation (2.7% per annum).
We would mention also that the Board does not necessarily expect to exceed or match the level of the previous quarter’s dividend in each successive quarter. It is quite possible, therefore, that not all dividends next year will match or exceed this year’s final dividend.
Revenues
Earnings per share have risen to 13.82p over the year, an increase of 8.1%, and investment income has risen to £30m. Income from equities has been helped by operational progress at many of the Company’s investments and by increases in their dividends, as well as by movements in exchange rates. The sale of four properties and the purchase of one led to a reduction in rental income.
Both managers (Baillie Gifford and, for the Company’s property investments, OLIM) continue to focus on supporting the dependability and the future growth of the Company’s dividend in line with its objective.
Total Return Performance
In a challenging year your investment in SAINTS delivered a share price total return of negative 3.5% and the net asset value total return (capital and income with borrowing at fair) was negative 3.7%. Although a positive return would have been preferable, in the circumstances this is a creditable result. Although as always we would caution against reading too much into short term performance, it is worth noting a number of positive features over the year. Firstly, the share price and net asset value returns once again exceeded that from global equities which was negative 7.3% over 2022. And secondly, the performance of SAINTS’ investments in equity, property, infrastructure, and fixed income investments all compared favourably with that of their respective asset classes.
The Managers and your Board have a long-term perspective and the Company’s portfolio of investments differs markedly from the make-up of the global equity index against which performance is often compared. This differentiated portfolio is necessary and appropriate in order for SAINTS to deliver a high and growing income stream, as well as growth in the Company’s assets. We would therefore encourage shareholders to assess your Company’s performance over the long term. SAINTS remains at the top of its sector in terms of share price total returns over the past five years and has also outperformed equities as measured by its global equity benchmark over the past three, five and ten years.
The principal contributors to and detractors from performance and the changes to the equity, property and bond investments are explained in more detail in the Managers’ Review.
Borrowings and Debt Refinancing
During the course of 2022, the larger part of the Company’s borrowings were refinanced at a rate agreed some two years earlier and so, in an environment when interest rates have been rising, the cost of the Company’s borrowings has fallen very significantly.
At the start of the year SAINTS’ borrowings took the form of a single £80m debenture, and a further £15m of borrowing which had been added in 2021. The debenture dated from a time when the prevailing interest rates were much higher than today, and bore a coupon of 8%. The £80m debenture matured in April 2022 and, as previously announced, the Company issued £80m of long-term private placement debt to refinance its long-term borrowings. At this time, the overall cost of the Company’s borrowings, including the additional £15m raised in 2021, fell to just below 3% per annum. The refinancing of the Company’s long-term debt appears well timed and, in the Board’s judgement, the Company is now well placed to use its borrowings to enhance returns and support its dividend.
The book value of the total borrowings is £94.7m which, at the year end, was equivalent to approximately 11.2% of shareholders’ funds. The estimated market or fair value of the borrowings was £65.5m, a decrease from the previous year’s value of £97.4m due to the general increase in interest rates and bond yields.
Environmental, Social and Governance (ESG)
I have already alluded to some of the challenges which the world is facing and, in this context, it is important to emphasise that the Board of SAINTS recognises the importance of considering Environmental, Social and Governance (ESG) factors when making investments, and in acting as a responsible steward of capital. We consider that Board oversight of such matters is an important part of our responsibility to shareholders, and the Board has recently reviewed and strengthened its ESG Policy which is available to view on the Company’s website (saints-it.com).
The Board has been strongly supportive of the Managers’ approach, and of their constructive engagement with the companies you own over the course of the pandemic, and in their engagement with holdings and potential holdings in relation to other areas including climate change. I would encourage shareholders to read SAINTS’ annual Stewardship Report which can also be accessed on the Company’s website (saints-it.com). There is also further detail in the Managers’ Review, which includes a section on investing sustainably.
Issuance and buybacks
Over the year the Company has raised £5.9m from new share issuance, at a premium to net asset value prevailing from time to time in order to satisfy investor demand. This is the eighth year in a row when the Company has been able to issue shares. Such issuance serves the interests of existing shareholders by enhancing net asset value, reducing costs per share and helping further to improve liquidity. No shares were bought back during the year.
The Board
As planned, Peter Moon stepped down from the Board at the conclusion of last year’s AGM. We once again thank him for his many years of invaluable service, both as a Director and as Chairman. As previously announced, Bronwyn Curtis took over as Senior Independent Director when I became Chairman, and Christine Montgomery joined the Board on 6 April 2022.
Outlook
Equity and bond markets were weak last year, and other markets including property have also experienced difficulties. As 2023 gets underway, there are tentative signs of hope triggered by lower energy prices and reduced interest rate expectations. It is too soon to know whether the worst is behind us: government finances remain under pressure and many companies will struggle to grow their earnings and protect their balance sheets in the face of slow economic growth. However, with asset prices adjusting, there will be buying opportunities, and maintaining a focus on the strength and resilience of individual investments remains as important as ever.
As a Board, we believe a long-term approach based on investing globally for sustainable growth is the best route to achieving SAINTS’ aim of growing the dividend ahead of inflation over time. In addition, we are encouraged that, as is outlined further in the Managers’ Review, they have continued to find new and attractive opportunities amidst the recent turmoil. We retain great confidence in the Managers’ approach, and this confidence has been further strengthened by the experiences of the past year.
Proposed Change to Articles of Association
Your Board is proposing certain changes to the Company’s Articles of Association which, amongst other things, will permit SAINTS to hold virtual or electronic Annual and Extraordinary General Meetings, as well as physical and hybrid meetings, in the future. Thankfully the worst of the current pandemic seems to be behind us, but we believe it would be sensible to ensure that in similar circumstances the Company would be able to use modern technology to carry out meetings in a timely fashion, whilst also allowing shareholders and others who could not attend in person to take part. A summary of these proposed changes, together with other changes being proposed as part of an overall update to the company’s constitutional documents, is set out in more detail in the AGM section of the Directors’ Report. For the avoidance of doubt, the Board’s preference will always be to hold physical general meetings where it is possible to do so.
AGM, Presentation and Drinks
The AGM will be held at 11.30am on Thursday 6 April 2023 at Baillie Gifford’s offices at Calton Square, 1 Greenside Row, Edinburgh. The meeting will be followed by a presentation from the managers. Shareholders are cordially invited to attend the meeting and presentation, and also to join the Board and the Managers for drinks afterwards in celebration of the Company’s first one hundred and fifty years.
I would remind shareholders that they are able to submit proxy voting forms before the applicable deadline and also to direct any questions or comments for the Board in advance of the meeting through the Company’s Managers, either by emailing trustenquiries@bailliegifford.com or calling 0800 917 2112 (Baillie Gifford may record your call).
Finally, my fellow Directors and I send you all our very best wishes for your health and happiness in the year ahead.
Lord Macpherson of Earl’s Court
Chairman
9 February 2023