# Scottish American Investment Company final dividend 9% higher than the 2021

- Link: https://www.directorstalkinterviews.com/scottish-american-investment-company-final-dividend-9-higher-than-the-2021/4121105123
- Published: 2023-02-10T08:03:44+00:00
- Author: Amilia Stone

**Scottish American Investment Company plc **(LON:SAIN) has announced its results
announcement for the year to 31 December 2022 which was approved by the Board on
9 February 2023.

 * 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.

 * 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%.

 * Revenues – Income was £30.0m (2021 – £28.0m) 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%.
   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.

 * 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.

 * 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.

_* See Glossary of Terms and Alternative Performance Measures at the end of this
announcement._

_  Source: Refinitiv/Baillie Gifford and relevant underlying index providers._

SAINTS’ objective is to deliver real dividend growth by increasing capital and growing
income. Its policy is to invest mainly in equity markets, but other investments 
may be held from time to time including bonds, property and other asset classes.

The Company is managed by Baillie Gifford, the Edinburgh based fund management group
with around £246 billion under management and advice as at 9 February 2023.

Past performance is not a guide to future performance. SAINTS is a listed UK company.
As a result, the value of its shares and any income from those shares is not guaranteed
and could go down as well as up. You may not get back the amount you invested. As
SAINTS invests in overseas securities, changes in the rates of exchange may also
cause the value of your investment (and any income it may pay) to go down or up.
You can find up to date performance information about SAINTS on the SAINTS’ page
of the Managers’ website saints-it.com. Neither the contents of the Company’s website
nor the contents of any website accessible from hyperlinks on the Company’s website(
or any other website) is incorporated into, or forms part of, this announcement.

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 150^(th) 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’ 150^(th) anniversary year will also be its 50^(th) 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’ 150^(th) 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 Scottish American Investment 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

_For a definition of terms see Glossary of Terms and Alternative Performance Measures
at the end of this announcement_

_Source: Refinitiv/Morningstar/Baillie Gifford and relevant underlying index providers.
See disclaimer at the end of this announcement._

_Past performance is not a guide to future performance._

Managers’ Review

In 2022 the per share earnings of The Scottish American Investment Company increased
by a little over 8%, while the per share net asset value (NAV total return with 
borrowings at fair value) decreased by 3.7%.  Since the start of 2004, which is 
to say when the present managers were appointed by the Board, the NAV has compounded
at 5.4% per annum, growing shareholders’ capital from 181.9p to 495.5p.* Over the
same period the NAV total return of the Company, meaning the capital gain with dividends
reinvested, has been 8.4% per annum.* Dividend growth in 2022 was 9.0%, taking the
compound increase since 2004 to 4.8% per annum, ahead of inflation† over the same
period of 2.7%.

In what follows below, we reflect on how SAINTS’ portfolio coped with a slew of 
shocks during 2022: war in Europe, soaring prices worldwide, and a sharp rotation
in equity markets away from ‘growth’ towards ‘value’.  We shed light on some of 
the individual holdings that delivered notable positive and negative performance,
and we elaborate on the new investments (and dis-investments) that we made during
the year. 

A brief update is also included on our progress in diversifying the Company’s non-
equity investments, which took place as SAINTS’ borrowings were refinanced to a 
lower rate of interest.  We then offer some comments under the broad heading of ‘
investing sustainably’, something we believe is vital for the long-term compounding
that we seek to deliver in shareholders’ capital and dividends. We finish with our
outlook for 2023 and beyond.

For those who would prefer to cut to the chase, the abbreviated version goes like
this: although 2022 felt rather like sailing through a storm, with waves crashing
left and right and visibility poor, SAINTS’ portfolio proved pleasingly robust and
charted a relatively steady course. The strong companies that constitute the backbone
of the portfolio delivered, for the most part, admirably solid compounding in their
revenues and profits. The portfolio also generated dividend growth that broadly 
kept pace with inflation, ensuring shareholders’ real income was largely maintained.

The Company’s property, infrastructure and fixed income investments also held up
relatively well. SAINTS has been able to refinance its borrowings, and the Company’s
overall borrowing cost has now fallen to 3%, having previously been 8%, which will
be a substantial saving going forward.

Credit for this steady performance should perhaps go more to the seaworthiness of
the ship than the skill of its captains: the quality of the holdings shone through
rather than any change of course by its managers, given that we made only three 
new equity investments during the year.  But the bottom line is that SAINTS’ shareholders
own a portfolio that proved its mettle in 2022 and appears well set for the future.
The outlook for the global economy is showing tentative signs of improvement, and
as managers we remain optimistic about delivering steady growth in earnings and 
dividends in 2023 and beyond.

**Coping with the shocks of 2022**

It seems fair to say that the 2020s, as decades go, have so far proved a little…
challenging.  It is chastening to recall that as this decade dawned, many hoped 
the world was on the cusp of another “Roaring 20s”: repeating the same decade a 
century earlier when peace reigned, prosperity boomed, and investments soared in
value.  That scenario has not, to put it politely, quite transpired.  Each of the
past three years has brought huge challenges to citizens around the world, including
investors seeking capital growth with dividends. The year 2022 was no exception,
thanks to a senseless war in Europe, the return of double-digit inflation triggering
rapid rises in interest rates, and a stock market that turned its nose up at growth-
oriented companies.

As managers of SAINTS it is our job to build a portfolio that can thrive through
thick and thin, whatever storms it may encounter.  If economic activity is collapsing
because of the first global pandemic in living memory, or if the Chinese economy
is slumping while global energy prices are spiking to extraordinary levels, it is
our job to ensure the Company’s portfolio contains investments that can navigate
those adversities successfully.

Happily, this is indeed how the portfolio and most of its underlying investments
performed last year. At the time of writing we are still receiving the final results
for 2022 from the circa 60 holdings in the equity portfolio that form the backbone
of the Company’s NAV, but broadly-speaking we can say that it was a year of solid
earnings and dividend growth.  The decline in the Company’s NAV was attributable
largely to a broad decline in listed equity valuations, as markets adjusted to higher-
than-expected future interest rates.  But fundamentally, the vast majority of SAINTS
holdings continued to perform well operationally, and this is why they delivered
steady earnings and dividend growth.

Growth-oriented companies in general bore the brunt of an adjustment in the stock
market last year to higher interest rates, with a huge rotation taking place in 
favour of so-called ‘value’ companies. These are companies which typically trade
on low multiples of price to earnings, reflecting their poor long-term growth prospects,
but over short periods they can come into favour. A good example is the oil & gas
business, where SAINTS has no capital invested. In 2022 many oil & gas companies
saw their share prices marked up significantly, as the war in Ukraine prompted sanctions
on Russian exports, in turn causing energy prices to spike and profits at oil & 
gas companies to balloon.  In the long-term, we believe these companies are likely
to prove poor sources of capital and dividend growth for shareholders, because they
are likely to see demand for their products shrink quite considerably as energy 
users around the world make stringent efforts to de-carbonise their operations. 
Last year, however, many oil & gas companies saw their share prices increase.

Meanwhile, many companies with attractive long-term growth prospects fell out of
favour.  An example is the soft drinks company Fevertree Drinks, which is a holding
in SAINTS’ portfolio. As managers we believe that Fevertree’s earnings outside the
UK have a strong chance of growing enormously over the next 5 to 10 years.  But 
in the past 12 months the price of gas has dramatically increased the costs of the
company’s glass bottles, and expenses have soared too for the containers it uses
to ship its products around the globe while it is still building local facilities
in countries like the US. Its profit margins have therefore fallen and the stock
market has punished its share price.

This is the kind of headwind that a number of SAINTS holdings had to deal with in
2022. Our investments in Chinese companies are another example where we saw short-
term pain: COVID lockdowns hurt the earnings of companies such as Anta Sports (the
footwear maker) and Man Wah (the furniture maker) in 2022, and their share prices
fell significantly as the market’s risk-aversion increased and time horizon shrank.

When we look through the list of holdings whose prices have been marked down by 
the stock market, however, our belief is that the vast majority have been impacted
by challenges that are likely to prove short-term. We have already seen energy prices
fall in the past few months, to the point that, remarkably, the European gas price
has now declined below its level before the invasion of Ukraine.  China has started“
unlocking” and its government has begun a stimulus programme.

We would much rather invest shareholders’ capital in companies with good long-term
growth prospects, and wait for these storms to pass, than invest in the likes of
oil & gas companies where, to the best of our judgement, the long-term outlook for
growth in their earnings and dividends is very poor. In the medium-term we expect
interest rates and equity valuations to stabilise, while the portfolio’s earnings
should continue to compound higher. Ultimately this should drive growth in SAINTS
NAV and dividends in the years to come.

While a small number of holdings had a difficult 2022, it is important to put these
in context. As managers we have been struck more by how, faced with crashing waves
and howling winds, the vast majority of the companies in SAINTS portfolio have continued
to deliver solid earnings and dividend growth. Particular mention should be made
of a few.

**Notable positive performers**

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.

**New equity investments and dis-investments**

During the course of 2022 we made three new equity investments: Intuit, L’Oréal 
and Cognex. On the other side of the ledger we made four dis-investments:  Kimberly-
Clark de México, Hiscox, Haleon and CH Robinson.

Intuit makes software for small businesses and consumers. It is an investment idea
that came to us through positive reports we heard from other companies, who rate
the management team highly. On investigation we too became enthused. The company’s
core products are software for small business accounting and consumer tax filing
in the US. Profit growth in the years ahead could be substantial as the company 
builds out its product range into areas such as marketing, payroll, HR, and other
adjacencies, giving small business owners a one-stop shop for managing their affairs.
It has a similar strategy to broaden its consumer offering. We are backing the management
team’s vision, their track record of execution, the attractive financial characteristics
of the business, and the company’s commitment to paying a progressive dividend. 
The share price fell precipitously in the first half of 2022 and we took this as
a cue to make an initial investment.

L’Oréal makes beauty products. We have long admired the company’s entrepreneurial
culture and its commitment to seizing every new opportunity for innovation. Time
and again the management team have made good strategic calls and executed on them,
moving early into digital marketing and investing in local R&D in China many years
ago.  The stable hand of the Bettencourt family and a commitment to progressive 
dividend growth, together with an exemplary balance sheet, also attract us.  Again
this was a growth company that fell sharply in the first half of 2022, and we took
this as an opportunity to make an investment.

Cognex makes machine vision products. We are enthused by the company’s growth potential
in the decade to come, as organisations around the world try to automate repetitive,
costly tasks such as checking labels in logistics, and scanning for faults in manufacturing.
Cognex is a pioneer in cameras and software which can do this work at a fraction
of the cost of humans, often with higher accuracy. We see the potential for very
strong demand in the years ahead as its software gets ever-smarter and becomes capable
of checking an ever-wider assortment of items, in turn growing the company’s customer
base. Growth does not require much capital and the company is committed to growing
its dividend alongside earnings. The management team and entrepreneurial culture
again appear excellent.

All three of these companies fit strongly with SAINTS’ objective of long-term compounding
in earnings and dividends, combined with resilience along the way. The dis-investments
we made fell short of these criteria.

CH Robinson is a long-standing holding where the passage of time has raised serious
concerns about its future growth prospects.  Its core business is broking truck 
transportation in the US: matching shippers with truckers. Our investment case had
been predicated on strong customer and shipment growth as its software platform 
went from strength-to-strength, displacing a long tail of smaller competitors who
would struggle to keep investing in the technology needed to provide real-time tracking
information, pricing and other services to customers. What we did not foresee is
that a wave of Silicon Valley start-ups would enter the industry with cheap financing,
writing business at low prices to gain customers while worrying about profitability
later. CH Robinson lost market share, and an activist investor then gained seats
on its board, pushing a particular agenda. We visited the company in Minnesota last
November but failed to gain conviction that the management’s strategy to out-compete
the disruptors would ultimately restore the company to good rates of growth.

Kimberly-Clark de México is the leading manufacturer of nappies, tissues and other
sanitary products in Mexico. Our investment case was based on the assumption that
rising household incomes in Mexico would drive growth in spending on the company’s
products, both in volume terms and through increased pricing power. In practice,
however, the company has struggled to grow its earnings due to sustained pressure
on its input costs, limited success in gaining market share and the depreciation
of the Mexican currency. With little prospect that these headwinds will reverse 
and better opportunities elsewhere in the portfolio, we dis-invested.

Haleon is a maker of over-the-counter medicines, and came to us through a demerger
from our holding in GSK. Our view is that the company, whilst not without merits,
owns a series of brands whose market position is not particularly strong, and whose
volume growth is unlikely to be particularly inspiring.

Hiscox is a provider of insurance for businesses and households.  It has been a 
longstanding holding, but twice in the past 20 years it has stopped paying a dividend
when there has been a global shock: in 2001 and again in 2020. After reviewing the
company last year and considering our ongoing conversations with management, we 
came to the conclusion that it did not meet the criteria SAINTS sets in terms of
dividend resilience, particularly in times of economic crises. Arguably it should
have dawned on your managers earlier that a company which insures its customers 
against losses in extreme events is unlikely to be a resilient distributor of dividends
whenever those events transpire!  We will put that learning to work as we move forward.

It is, we have to say, a little surprising to us that during the course of 2022 
we made only three new investments. We are not short of ideas.  Growth stocks have
fallen out of favour, and we might have expected to acquire, opportunistically, 
more stocks whose price/earnings multiples have been de-rated. But many of the biggest
fallers would not suit SAINTS, either because they do not pay dividends or because
their prospects are too uncertain. In some other cases, where the fit for SAINTS
is better, valuations still don’t look attractive enough for us to bite. We have
tried to remain disciplined in the face of market turmoil, and only bought new holdings
where we see an excellent fit, and long-term returns that we believe are firmly 
skewed in shareholders’ favour.  Intuit, L’Oréal and Cognex all fall into that category.

**Refinancing of borrowings and non-equity investments**

Most long-standing shareholders will be aware that SAINTS has for many years endeavoured
to enhance its income and returns through the use of prudent long-dated borrowings.
By taking advantage of the Company’s permanent capital base, structured as an investment
trust, the Board is able to take on modest levels of debt. The proceeds are then
invested in a mixture of non-equity assets, such as directly-held property and bonds,
with yields above the cost of borrowing. In many cases there is also the potential
for real capital growth, funded by these nominal borrowings. Typically these investments
constitute 10-15% of total assets, broadly matching the level of gearing.

Until 2022, SAINTS borrowings chiefly took the form of a single debenture which 
was arranged in the 1990s.  Its coupon was fixed at 8%.  This debenture matured 
in April 2022, but before this transpired, and before interest rates began their
recent climb, the Board had propitiously arranged replacement debt with a blended
average coupon of around 3%. 

Conscious of the value of diversification, the Board also took a decision at its
annual Strategy Day in 2020 which has since proven well-founded. The Directors instructed
the managers to review and recommend asset classes that could diversify the Company’s
non-equity portfolio. Out of that discussion came the agreement that, alongside 
the directly-held property and corporate credit investments, which remain fundamental
to the Company’s approach, the managers would also seek diversification by investing
prudently in Emerging Market sovereign bonds and Infrastructure-related equities.
In both asset classes, assuming careful stock selection, the risk of default should
be low and the prospective returns higher than the cost of borrowing. Additionally
the income from these two asset classes, perhaps even more so than property and 
corporate bonds, are likely to prove uncorrelated with the Company’s income from
equities, thereby improving the portfolio’s resilience.

In 2022 this strategy proved its worth, as equity and property valuations came under
pressure from rising interest rates, as did the prices of corporate bonds. Over 
the course of the year the Emerging Market sovereign bond and infrastructure investments
turned out to deliver the best-performance of any asset class in SAINTS portfolio.
Both delivered positive total returns.

The sovereign bonds followed a very different path from most of SAINTS’ holdings.
Essentially this transpired because emerging market central banks began hiking interest
rates well before Europe and the US. This underpinned strong emerging market currency
appreciation during 2022, in countries such as Brazil and Mexico, particularly against
Sterling. SAINTS’ income from these investments grew healthily in Sterling terms,
and capital values in Sterling also increased.

The infrastructure investments also had a good year.  These are typically held in
the form of equities, but their underlying cashflows are fundamentally linked to
infrastructure revenues. As managers we take care to ensure these revenues are not
economically sensitive, or at least are likely to remain uncorrelated with the wider
SAINTS portfolio.  Examples include the wind farm owner Greencoat UK Wind, the Italian
national grid owner Terna, and the Chinese tollroad owner Jiangsu Expressway. Across
this portfolio of infrastructure names, cashflows were generally very robust in 
2022, share prices were relatively stable, and dividends were either flat or growing.
Several of these investments, like the emerging market bonds, showed the benefit
of investing outside the UK as there was a further benefit boost to income from 
Sterling depreciation.

The Company’s long-standing directly held property portfolio faced a more challenging
environment.  Underlying performance remained good, with the portfolio fully-let,
but rising interest rates adversely affected valuations. The portfolio retains a
strong focus on inflation-linked and increasing rents, and this has rarely seemed
more valuable: as a reminder, 57% of SAINTS’ rental income is linked to RPI or CPI,
with a further 25% on fixed increases and 18% on upward-only rent reviews.  The 
portfolio also benefited from some well-judged decisions by the manager, OLIM, to
dis-invest from a number of properties at valuations above book value. The portfolio’s
total return over the course of 2022 was -1.7%, ahead of comparable property indices.

In the long-term, we expect the rate of compounding in earnings, dividends and capital
to be significantly stronger in the Company’s equity portfolio than in its non-equity
portfolio. But there are solid returns available from our non-equity holdings, alongside
the benefits to income and capital from diversification.  With these investments
now financed from borrowings at an average cost of just below 3%, and bearing in
mind that SAINTS debt is nominal and will therefore be heavily eroded by inflation
by the time the borrowings are due to mature in the 2040s, we share the Board’s 
view that this is an attractive way for SAINTS to make use of the investment trust
structure and enhance returns for shareholders. The results in 2022 demonstrated
these benefits.

**Investing sustainably**

There is a debate raging at the moment. On one side are those who argue that fund
managers should stop messing about by pontificating on environmental, societal and
governance issues that may or may not surround their investments, and instead focus
on the core task they have been given by their shareholders: to deliver investment
returns. On the other side are those who argue that fund managers have a duty as
asset owners to ensure their investments are not harming the environment or society,
or failing to adhere to good standards of governance, and indeed must be prepared
to divest when those standards are not met. The acronym ‘ESG’ is being tossed left
and right, torn between those who would promote it and those who would bin it.

As managers of SAINTS, we are very much of the same opinion as the Board on this
matter. Our duty is to pursue the long-term goals set out and agreed with shareholders
in the Company’s investment policy. We are long-term investors, seeking to deliver
income and capital growth ahead of inflation over multi-year periods. That long-
term focus has been foundational to SAINTS’ success since it was established in 
1873, and instrumental to the Company’s track record of keeping its dividend at 
least flat and most often growing in every year since 1938.

If we were short-term managers, trading in and out of shares every few months, perhaps
we would hold our noses and invest in companies that are deeply harmful to the environment,
or society, or which exhibit gross failings of governance. We could play the roulette
wheel and gamble that, over such a short holding period, the chances of getting 
caught out were low.

But we are not short-term speculators, we are long-term investors. And over the 
investment period we pursue, with an average holding period of 8 years and many 
of our investments held for over a decade, it is our responsibility to give careful
scrutiny to our holdings’ environmental, societal and governance opportunities and
risks. 

Some examples might be helpful to illustrate the point: investments whose ESG failures
would have damaged SAINTS’ long-term NAV and dividend growth but which, thankfully,
we steered well clear of.  

In the US, in the early 2000s, it was popular to proclaim a renaissance in coal 
mining and to invest in companies such as Peabody and Arch Coal. But America turned
its back on sulphur and the numerous other air pollutants in coal, pivoting to natural
gas as soon as the opportunity presented itself with the shale boom of the late 
2000s. By 2011, numerous US coal companies had gone bankrupt, with their shareholders
suffering a permanent loss of capital.

Just as environmental harms skew the odds against sustainable long-term profits 
and dividends, so the odds have often been stacked against companies with deep social
harms: such as tobacco companies, many of which have struggled for years to deliver
attractive growth in earnings and dividends. As for governance, examples abound 
of companies that have transgressed and subsequently failed. In just the past few
months we have seen the implosion of the cryptocurrency exchange FTX, where investigators
have already alleged gross failings of governance inside the company, precipitating
bankruptcy and the permanent impairment of shareholder value.

All of this informs our strong belief (in which we are very much aligned with SAINTS’
Board) that [sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news)
analysis is absolutely vital to meeting the Company’s investment objectives over
the long-term. This is why, for every SAINTS holding, your managers complete a thorough
analysis of ESG opportunities and risks.  We monitor all of our holdings carefully,
and engage proactively on numerous topics to ensure the long-term compounding that
we seek on behalf of shareholders has every chance of being delivered. The Board
has also adopted and published a clear ESG policy for us to follow.

We have yet to find any company that is perfect. But we will not invest in any company
where we see significant harms that are not being addressed ambitiously by the management,
or where we do not trust them to deliver.  And we _far_ prefer to invest in companies
where there is strong alignment between the company’s products and operations and
its wider stakeholders: such as employees, society and the planet.  For example,
we have invested SAINTS’ capital in Albemarle, the leading lithium producer, for
several years now. We believe the market for green metals will continue to expand
dramatically over the decade ahead. We expect the environmental benefits that lithium
enables will lead to strong growth in capital and dividends. 

We try hard to make sure that all of our holdings are perpetually improving. SAINTS
latest Annual Stewardship Report contains many examples of our engagements with 
holdings over the course of the past year. To highlight a couple briefly: we have
encouraged Apple, Microsoft and other software holdings to continue pushing towards
best practice in cybersecurity, privacy, and supply chain management. And we have
voiced our desire for UPS to lean into electrification and emissions reduction from
its transport fleet.

This is all part-and-parcel of our responsibility as managers to ensure, wherever
possible, the likelihood of continued compounding in capital value and dividends
on behalf of SAINTS shareholders. As long-term investors, there is no other sustainable
path.

**Outlook for 2023 and beyond**

Few predictions cast at the end of 2019 foresaw the advent of COVID in early 2020.
Few of those who forecast continued economic despair during the ongoing lockdowns
at the end of 2020 foresaw the enormous rally in equity markets in 2021.  And few
who prognosticated at the end of 2021 predicted the war in Ukraine at the start 
of 2022, with inflation reaching double-digits and interest rates spiking higher.
As we begin 2023, we remain humble about our (or indeed anyone’s) ability to foresee
what is just around the corner.

What we can say with confidence is that SAINTS owns a portfolio of assets which 
has proved itself resilient to some extreme tests over the past few years. Earnings
have grown steadily, as has the Company’s NAV and, despite the shock of a global
pandemic which caused many income-generating investments to stop or slash their 
distributions, the recommended final dividend will extend SAINTS’ track record of
increases to 49 consecutive years.  In 2022, the Company’s earnings and dividend
broadly kept pace with inflation, despite price indices surging higher. 

Similarly, as we look to the future, we believe that your portfolio is well placed
to cope with whatever the coming year holds, be it inflation, recession or recovery.
This is because it is populated by a broadly diversified mix of growth companies:
including companies with strong brands that should enjoy pricing power in an inflationary
environment, such as Apple, and others that are well placed to benefit from innovation
and a growing competitive advantage, such as Atlas Copco, and still others that 
are relatively recession proof, such as Sonic Healthcare.

We made a number of new investments in 2022 which we believe upgraded the resilience
and growth potential of the Company.  Whatever happens in the world at large, we
as managers will continue our search for steady long-term compounding in earnings
and dividends.  We believe the portfolio is in good shape, with strong underlying
holdings. The cost of borrowing has fallen, and the Company’s non-equity investments
have been diversified further for enhanced returns and future resilience.

There are no certainties in investing. There can be no guarantee that Scottish American
Investment Company’s capital value and dividends will continue to compound higher
in the decade to come as they have in the decade past. But we do believe that, whatever
winds may blow, and as far as we are able to ensure as managers, the odds remain
skewed strongly in favour of long-term capital appreciation and dividend growth 
in the years ahead for SAINTS shareholders.

James Dow

Toby Ross

Baillie Gifford & Co

9 February 2023

* NAV per share with borrowings at fair value

† CPI

Source: Baillie Gifford and Refinitiv

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