A contrarian approach to selecting companies appeared to suit The Scottish Investment Trust (Greig Cameron writes). The tactic of finding “ugly ducklings” that are undervalued by the market will always have an appeal to an investor keen to find a bargain.
The Edinburgh-based company stood out for being one of the few listed trusts that still employs its in-house team of stockpickers. Most of the others have gone down the route of outsourcing that function to external suppliers.
However, it appears that the Scottish, as it is known, might be about to follow. Last week the board said that it would review investment management operations. Stanhope Consulting is leading that work and is expected to report its findings towards the end of the summer.
The Scottish was formed in 1887 and has its headquarters in an Edinburgh townhouse that it bought in 1889. Its aim is to provide long-term returns that are above average and a dividend that grows ahead of inflation through a portfolio of global equities.
Being “independently managed by its own employees” is noted as a selling point on its website. Alasdair McKinnon heads the in-house investment team. He has been with the company since 2003 and became acting manager in the summer of 2014 after the departure of John Kennedy, who had run a defensive portfolio for a decade. At McKinnon’s initial appointment, the shares were about 580p; in recent days, they have above 820p. The short-term performance also looks solid, with a steady recovery from the Covid-related trough of 615p in April last year.
The portfolio includes Total, ExxonMobil, Royal Dutch Shell and BP, the oil companies, in spite of the move towards renewable energy and net zero emissions. Its top ten holdings include Barrick Gold, the miner, BT, the telecoms group, The Cheesecake Factory, an American dining chain, and Santander and Wells Fargo, the banks.
The trust also has “dividend hero” status from the Association of Investment Companies as part of a select group with a record of annual dividend increases stretching back at least two decades. The Scottish is on its 37th consecutive year of rising ordinary dividends. Research from the association said that the trust’s yield was 2.9 per cent, while its five-year annualised dividend growth rate was 13.2 per cent. The latter figure was the highest among the 18 trusts assessed by the trade body.
A new dividend policy was introduced in 2017 with a move to quarterly distributions and the total ordinary payment increased by 48 per cent to 20p for the 12 months to October 2017. The following February, McKinnon, 45, pointed out that the trust’s reserves were strong enough to cover the increased payment for the next three and a half years. The 12 months to October 2020 resulted a payout of 23.2p, which cost about £17 million. The trust has more than £44 million in its revenue reserves.
A first quarterly dividend of the new financial year, worth 5.8p per share, was declared in March. The trust previously has paid special dividends in years when its portfolio has returned extra cash.
Yet the board appears to be not entirely convinced by McKinnon’s approach. The Scottish does not compare itself against any formal benchmark, but it has underperformed against the MSCI All Countries World Index over five years to April. Directors cited that fact when announcing the review and pointed out that they had given the contrarian approach more than five years to prove its worth. Soon they will have a decision to make about whether to give it a bit longer.
ADVICE Hold
WHY Even if the management changes, the dividend looks a reliable source of income for the next few years
Marston’s
Freedom Day is fast approaching and it cannot come soon enough for Britain’s pubs (Dominic Walsh writes). On June 21, the final coronavirus restrictions will be swept away under the prime minister’s “road map” to recovery.
Or will they? With the Delta variant of the virus first seen in India taking hold and cases on the rise, there are growing fears that Freedom Day may be delayed, including social distancing.
Although restricted indoor dining is permitted under the second stage of the road map, which came in on May 17, the next stage is the most crucial, making the difference between returning to a decent level of profitability and breaking even, although Marston’s broke even with only outdoor trading thanks partly to a £2 million investment in outdoor areas across a third of its 1,474 pubs.
Those companies like Marston’s with a strong enough balance sheet to withstand the vicissitudes of coronavirus will find themselves in an enviable position when Freedom Day does arrive. The combination of a sharp increase in sales and a fall in the number of rival pubs and restaurants should spark what Finncap, the broker, reckons will prove “a period of supra-normal trading that should last 12 to 18 months”. It also reckons that there will be “a once-in-a-decade opportunity” to cash in on the availability of great sites at lower rents.
After the sale of its brewing business last year via a joint venture with Carlsberg UK, Marston’s has made no secret of its thirst for further bolt-on acquisitions along the lines of the SA Brain deal in December, although its target remains to bring down its debt burden to below £1 billion by 2025.
With Andrew Andrea, its chief financial officer, set to succeed Ralph Findlay as chief executive in October, the pressure on him to deliver will be intense. But with investors backing the board’s decision to rebuff a 105p-a-share bid approach from Platinum Equity Advisors, the stock should progress from the current level of 93¼p and at some point its generous dividend will be reinstated.
ADVICE Buy
WHY Community pubs close to where people live and work are set to prosper
