By Heather Farmbrough. Autumn 2020
    Illustrations by Matt Murphy.
  2. After navigating the treacherous waters of the dividend crisis James Dow, joint manager
    of SAINTS, tells Heather Farmbrough it’s time to look east for income opportunities

    Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested.

    This article originally featured in Baillie Gifford’s Autumn 2020 issue of Trust magazine.

  3. In March 2012, Apple announced it would pay shareholders a dividend, the largest initial dividend ever paid by an American company. Although the news was hailed as a turning point in Apple’s transition from a rapidly growing to a more mature company, it wasn’t much of a surprise to the managers of the Scottish American Investment Company (SAINTS). “We could tell from the way Apple’s management talked about generating cash that it was considering returning some of it to shareholders,” recalls Dow. By the time Apple made its announcement, SAINTS had already bought shares in the firm, a bold step by the standards of some income investors.   

    Over eight years later, Apple is still in the portfolio, thanks to its ability to go on growing its dividend. Although SAINTS’ aim is to deliver a growing dividend to shareholders each year, it is very much a growth trust. After all, it is growth that creates the cash to pay dividends, and the companies throwing off cash for the next five to ten years are most likely to be technology stocks, the managers believe.

    “Any business that has the chance to grow its earnings and compound them for many years is unusual and exciting,” Dow says. “As income growth investors, we look at a lot of technology companies and say, ‘Wow, the world is still their oyster’. There is still so much more innovation to come; many of these companies have a strong starting position, because of the businesses they have built, and they just throw off cash.”

    Cash-generative companies are special, Dow says, because they can pay higher dividends without compromising the amount they re-invest for growth. Microsoft is a good example. Little capital investment is required to launch a new product; software engineers simply write more code and the business grows. But technology companies come in all shapes and sizes. For instance, Carsales.com, the leading car, motorbike and marine sales site in Australia, employs coders and sells caravans, trucks and machinery online. Novo Nordisk, the Denmark-based global healthcare company, employs state-of-the-art technology to make breakthroughs in the treatment of obesity and diabetes. Both Sonic Healthcare, a lab-testing firm, and Roche, the world’s largest biotech company, base scientific research on cutting-edge technology.

    The coronavirus pandemic has led to a re-think. Manufacturing companies have had to think carefully about engineering processes and layouts on the factory floor, and this has made automation even more desirable. At the same time, the move towards digitisation is also speeding up, with more and more of us doing travel-free meetings and working remotely. As Dow observes, “These types of businesses, whether making chips or software, should be great beneficiaries of the trends we’re seeing.”  



    Looking east  

    SAINTS is a global trust. Historically, however, it’s been difficult for foreign investors to access local Asian markets. This is changing, particularly in China, where the Shanghai and Shenzhen stock markets are opening up; this is where many of the most promising young tech companies are located. To help spot them, Baillie Gifford has an investment analyst based in its Shanghai office, who provides new ideas to the Global Income Growth Team.

    There may be talk of trade wars against China and angst about its place in the world, but great companies have always thrived regardless of the geopolitical environment. Besides, argues Dow, “We see incredible innovation in China, with first-rate businesses, often run by the founders. We’ve already seen many of these companies thrive and we think there are more to come. As our universe of potential stocks widens, we have an even greater chance to invest in some of the best income-growth companies of tomorrow.”

    This is welcome news against a gloomy background for some dividend investors. Global dividend payments may fall by as much as 35 per cent this year, according to research from the Link Group in May 2020 (UK dividends are expected to fall even further, by up to 61 per cent). SAINTS, however, is continuing to increase its dividend, as most of its companies have maintained dividend payments, and the managers and board of directors of the trust have put aside sufficient revenue reserves in the past to cover payments in 2020.

    And so, according to Dow, there are still reasons for investors to be cheerful. “We invest in companies that are moving forward. These are well-run businesses that still have strong growth and resilient income prospects ahead of them, that we believe should do very well on a 10-year view,” he says. “Those are the firms that SAINTS focuses on.”


    SAINTS total dividend per ordinary share (net) – pence per share

    2016 2017 2018 2019 2020
    10.825 11.10 11.50 11.875 12.00

    Source: Baillie Gifford & Co, data as at 31 September 2021.

    Past performance is not a guide to future returns.


  4. Crises and innovation

    Any crisis has winners and losers. UPS, a SAINTS investment, is emerging as a winner, with 97 per cent of its deliveries in its distinctive brown vans on time since the pandemic began. The coronavirus pandemic is likely to create new kinds of winners we can’t even imagine yet.

    “Typically, after any great crisis and disruptive era, there is an exciting wave of innovation, as well as trends that we have already seen accelerating,” comments Dow. “Problems that people hadn’t anticipated before spring up and good, innovative companies react to that.”

    Take online shopping, which Dow finds dull and unsatisfactory. “For people who enjoy shopping, it’s not even close to going to a store with friends and trying things on. But something more interesting could develop – a more interactive, visual experience, in which perhaps people could virtually try on clothes while chatting to friends, for example.”

    Pointing to the way in which moving from modems to broadband and fibreoptic connections made it possible to stream music, film and TV on Spotify and Netflix, Dow believes that greater investment in technological infrastructure may well follow, creating the potential for another step change in technology.

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    Heather Farmbrough is a freelance journalist and former fund manager. She is a Forbes senior contributor and writes for several other publications including the Financial Times.