The past few months have been marked by a succession of dividend cuts by UK-listed companies. Despite this, a number of global equity income funds, which do not necessarily have to invest in the home market, have maintained an allocation to UK equities. These include Scottish American Investment Company (SAIN), which has around 13 per cent of its assets in this area.
“We’re a global manager and what we’re looking for is businesses with great long-term prospects for earnings and dividend growth,” explains James Dow, co-manager of Scottish American. “Having a global universe is incredibly helpful, as you’ve got so many more stocks to pick from and can avoid some of the issues of the UK equity income sector. But we are not going to turn our noses up at UK companies if we find something that we think is truly exceptional, and can deliver long-term earnings and dividends growth.”
The trust has about 4.3 per cent of its assets in what Mr Dow describes as ‘domestic’ UK companies: insurance company Admiral (ADM), renewable energy infrastructure investment trust Greencoat UK Wind (UKW) and investment platform Hargreaves Lansdown (HL.).
“Admiral, for example, has distinguished itself in the past few months,” says Mr Dow. “It has maintained its ordinary dividend and given customers back some of their car [insurance] premiums [as they have not been driving due to the lockdown]. We think that the kinds of companies doing the right thing through this crisis are going to come out even stronger on the other side as far as customers perceive them.”
The remainder of the UK exposure is in businesses listed in London, but which Mr Dow says are “not really UK businesses”. Examples would be Experian (EXPN), a global credit services business, and Prudential (PRU), which is now an Asian and American business.
He expects to maintain a similar level of exposure to UK equities “as long as they continue to have great long-term prospects and we have confidence in the resilience of their dividends. As with all of our holdings, during the past few months we’ve been going through stress tests, talking to the companies and making sure that we’re right to be confident about the resilience of their dividends. But so far we have been happy to carry on owning [them]”.
Outside the UK, the outlook for dividends is mixed. Mr Dow expects that overall dividend cuts in France, for example, will be greater than those in the UK this year. But in Switzerland and China dividends have been growing in the low single digits. So analysts are estimating that globally dividends may fall 15 to 20 per cent this year.
“Many of our holdings have held up well [including] healthcare and consumer companies that have been able to stay open and been in demand,” he says.
These include Procter and Gamble (US:PG) and Nestle (NESN:VTX), and Sonic Healthcare (SHL:ASX), a lab testing company in Australia.
"Many of them have been able to raise their dividends," says Mr Dow. "As a global investor, if you’re focusing on really resilient businesses and taking advantage of markets where dividend cuts have been less extreme you can get a much more resilient income stream than in the UK. So for our equity portfolio [overall] we’re anticipating a drop in the dividend [income] of maybe 7 to 8 per cent this year.”
However, he does not anticipate that Scottish American Investment Company will cut its own dividend. “Our underlying holdings have proved resilient and are well diversified, ” he explains. “And being an investment trust we also have the benefit of revenue reserves. For the first quarter of this year the board declared a dividend of 3p, which was up [2.6 per cent on the corresponding dividend last year].”
He says it is up to the trust’s board whether it continues to increase the dividends through the remainder of the year. But Scottish American has revenue reserves of £17.34m, giving it dividend cover of 0.95 years – the number of years that the reserves can provide the current financial year of dividends, according to the Association of Investment Companies (AIC).
That said, Scottish American aims to deliver real dividend growth by increasing capital and growing income – rather than just a high yield. And it has a lower yield than the other global equity income investment trusts of 2.9 per cent, as of 23 June. However, it has made some of the best total returns among global equity income trusts over one, three and five years, and grown its dividends at above the rate of inflation over the past 10 years.
Mr Dow says that while an investment with a high yield looks appealing and makes you think there’s lots of income, "often that’s a very risky yield, there’s a high probability it’s going to get cut and it certainly won’t grow. If you’re interested in long-term income you’re much better off going for companies that have a lower starting yield, but great growth prospects. What you’ll find is that you get more income in the long term – and better capital returns. We typically have the lowest yield in our peer group because we’re not focused on delivering one year yield [but rather] a long term income.”
Mr Dow says they do this by looking for companies with great long-term prospects for earnings and dividend growth. “If we can find those the rest should follow in terms of great dividends, good long-term total income and great capital appreciation, because share prices over the long term tend to follow earnings,” he adds.
They also like companies that look as though they will maintain their dividends, including in difficult periods.
“For example, Microsoft’s (US:MSFT) yield when we invested in it 10 years ago was about 2.5 per cent,” he says. “It didn’t look like your typical income stock, but our judgement was that it had great long-term growth prospects and really resilient dividends. And over the past 10 years [it’s experienced] great capital appreciation and [delivered] a great amount of income. Roche (ROG:VTX), the healthcare company, is a similar story – that combination of great long-term prospects and resilient dividends.”
He adds: “Part of our job now is to take stock of what’s happened in the past few months and consider which companies over the next five-plus years could be strong beneficiaries of what we’re going through, have products that are going to remain in demand and are going to be able to sell them even in tougher economic times. Healthcare names are the obvious examples – the value that society places on healthcare products and [people's] willingness to pay for them is only going to go up. So [healthcare companies'] prospects have, if anything, got stronger through this crisis.”
