/ BAILLIE GIFFORD / the cyclicality of the business , for example ? There ’ s also cash flow generation . Long-term sustainable dividends have to be supported by cash flow generated by the business , and which is available for distribution . The emphasis is on cash flow resilience as well as dividend growth .”
Neary finds that firms with strong balance sheets , and which are cash-generative , longterm growth businesses with attractive valuations and good management , are ultimately the best for maintaining and growing dividends .
“ That ’ s all helpful towards dependability , in that it ’ s a necessary condition , but it doesn ’ t ensure dividend dependability ,” he says . “ That comes back to board attitudes towards dividends when times become more difficult .”
Coca-Cola is a business that has a record of paying dividends even through times of crisis .
“ The US has a less well-developed dividend culture , but Coca-Cola has a long record of growing dividends , even through times like the late 1990s when there were both internal and external issues to contend with ,” says Neary .
“ It ’ s a very cash-generative business , with growth in core brands and products that sell through a fantastic distribution system that we think has a continued runway of growth ahead of it .”
Taiwan Semiconductor Manufacturing Company ( TSMC ) is another long-standing holding that embodies the dividend dependability the trust looks for .
“ Balance sheet strength is an important aspect , but it should be assessed in the context of each company ’ s business ”
“ It ’ s a capital-intensive business but it has an incredibly strong balance sheet and still has a founder-owner interest [ in the form of the chairman ],” Neary explains . “ For a long time it was restricted on how much of the cash building up on the balance sheet it was able to return to shareholders as dividends , so it successfully took the government to court in 2003 to return cash to shareholders .”
Communications firm WPP is a relatively recent holding and another with a founder-owner aspect that supports its dividend dependability . “ It ’ s a capital light model and very flexible on costs , very cash-generative and with growth potential , especially in the digital area ,” says Neary . “ Of late it has recognised it can pay out more of its earnings .”
Those companies are classified as ‘ compounding machines ’. They typically yield between 3 and 4 per cent and collectively such companies have increased as a proportion of the SAINTS portfolio over the past 12 months .
A LONG-TERM STRATEGY SAINTS , which is managed by Baillie Gifford , officially has 37 consecutive years of dividend growth under its belt . Interestingly though , the company ’ s records show that the last reduction in SAINTS ’ net dividend per share was as far back as 1938 . Neary is eager to maintain that record .
“ Not only do we expect that our investments will grow dividends in real terms , we also aim to invest in companies which won ’ t cut their dividends even when the world falls apart around them in the future . That ’ s when our investors will want to rely on the dividends we provide .”•
SAINTS / TOTAL DIVIDEND PER ORDINARY SHARE ( NET ) – PENCE PER SHARE
Year 2012 2013 2014 2015 2016 Dividend 9.8 10.2 10.5 10.7 10.825
Data to 31 December each year . Past performance is not a guide to future returns
IMPORTANT INFORMATION Past performance is not a guide to future returns . 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 . The level of income is not guaranteed . Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates . The views expressed should not be considered as advice or a recommendation to buy , sell or hold a particular investment . This article contains information and opinion on investments that does not constitute independent investment research , and is therefore not subject to the protections afforded to independent research . Some of the views expressed are not necessarily those of Baillie Gifford . Investment markets and conditions can change rapidly , therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions .
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