Scottish American (SAIN) has published results covering the 12 months ended 31 December 2024. It was not a good year for the trust, with an NAV total return of 6.1% significantly lagging the market’s return of 19.8%. A widening discount made the share price total return even worse, ending the year at -4.2%. The company bought back 1,665,185 shares (representing 0.93% of the shares in issue at the start of the year) at a cost of £8.5m. [Even after these buybacks, the discount is too wide at 10.9% today].

The board is recommending a final dividend which will take the total dividends for the year to 14.875p per share, an increase of 5.5% over the previous year. The increase in the dividend is 3% ahead of inflation over the year, and is supported by earnings per share growth of 7.5% over the year. The recommended dividend will also extend the company’s record of raising its dividend to fifty one consecutive years. Income from the company’s property portfolio (which accounts for about 9% of NAV) has risen significantly, reflecting the addition of the M23 Pease Pottage motorway service area to the portfolio as well as other transactions and further rental increases. Bond income, on the other hand has fallen, as the bulk of the trust’s bonds were sold to fund the additions to property.

The chairman, Lord Macpherson of Earl’s Court, observes that the trust’s “emphasis on income, and on dependability and reliability, has led us to avoid many AI related stocks and also many cyclical stocks and sectors which have performed well this year as markets have become more optimistic. In contrast, the market has come to the view that, amidst the uncertainty and strategic ambiguity of the new U.S. Presidency, those technology companies which are currently delivering strong growth are the place to be invested. Secondly, SAINTS also invests in asset classes other than equities, principally property and bonds, which bring advantages in terms of diversification and income resilience but have not kept up with equities in a period of high interest rates. However, there are signs that the domestic property market has turned the corner with capital values rising in the second half of the year.”

[QD comment – James Carthew: The report stresses the importance of income to the trust and places the blame for poor returns squarely on the need to generate income, but the dividend yield is the lowest of its peers. in my opinion, the approach isn’t working.]

The trust’s gearing was a positive for returns. The book value of the total borrowings is £94.7m which, at the year end, was equivalent to approximately 9.9% of shareholders’ funds. The estimated market or fair value of the borrowings was £62.1m, a decrease from the previous year’s value of £68.2m. This is because the fixed cost of the trust’s long-term borrowings is just under 3% per annum and market rates of borrowing are much higher than that.

Extracts from the manager’s statement

SAINTS has a lower proportion of its assets invested in the US. Within the equity portfolio, for example, we have about 43% of capital invested in US companies. This is still a large proportion, being by some margin our single largest geography. But it is considerably lower than the index. This is not by accident, but a deliberate choice, rooted in a number of reasons which relate to the dependable achievement of SAINTS’ investment objectives.

The starting point is that we expect SAINTS’ dividend growth in the long-term to be driven by the earnings growth of its underlying investments. We therefore seek companies with strong prospects for earnings growth, regardless of the country where they are listed. There are approximately 6,000 companies available to us globally, of which circa. 2,000 are US-listed. If opportunities were spread evenly throughout the world then, all else being equal, one might expect about a third of the portfolio to be listed in the US.

Secondly, US companies typically have lower dividend payout ratios than elsewhere: the payout ratio across the S&P500 has typically averaged 30‑40% of earnings, whereas in countries such as the UK and Germany this figure has been 40-50%. In addition, US stocks have also been priced more richly, meaning higher price-to-earnings (PE) multiples. The combination of a lower payout ratio with a higher PE means that investors receive drastically less income per pound invested in US companies. Towards the end of 2024, the S&P500 yielded only 1.28%. For comparison a European market like Germany’s DAX yielded 2.87%: more than double the income.

Finally, US corporate dividends bring a concentration of risk: both regulatory risk (for example rates of withholding tax) and the currency risk of US dollars against Sterling.

Putting together all of the above, we believe it would be unwise and perhaps even irresponsible for SAINTS to invest an index-like 70% of capital solely in the US market. The result would be significantly lower income, with significantly higher risks, while missing out on many good companies which fit better with SAINTS’ objectives elsewhere in the world. The flipside of all this though is that in years like 2024, when the US market is rocketing, and other markets such as Europe and Asia are rising less strongly, the NAV performance of SAINTS will inevitably lag its benchmark.

This was one part of SAINTS’ under-performance of the FTSE All-World in 2024. But there was a second major factor. This was the specific type of investments that SAINTS owns. Share prices of many of SAINTS’ investments, companies such as Watsco, Analog Devices and Procter & Gamble, lagged the wider US market. These resilient long-term compounders, which we favour for SAINTS’ income and capital growth objectives, were deeply out of favour within the US stock market last year. The best-performing US stocks were cyclicals such as banks, which benefited from a reversal of expectations from a “hard” to a “soft” landing in the US economy, and so-called “Big Tech” stocks, where investors poured capital into names such as Nvidia, the AI chipmaker.

These types of company are usually a poor fit for SAINTS’ objectives. They tend to be highly cyclical dividend payers, if they pay a dividend at all. For example, at Nvidia, as we noted in this year’s interim report, 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 newsflow has done nothing to alter our view on its suitability.

Or to take another example of the type of US company which fared well last year, we can observe the rise of Tesla, the carmaker. Again, this is both a cyclical company and a member of the “Magnificent Seven” technology stocks, and its share price appreciated rapidly last year. But again, it is a volatile, capital-intensive business model, and it does not pay a dividend.

Shares in these kinds of company fared well in 2024, while the likes of Procter & Gamble, with its 134 years of consecutive dividends, and highly resilient earnings growth, under-performed the wider US market.

SAIN : US and Mag 7 underweight weighs on Scottish American’s returns