Scottish Mortgage to pay dividend with dip into decreasing reserves

Scottish Mortgage, the £3.3 billion flagship fund run by Edinburgh-based investment house Baillie Gifford is proposing to dip into its reserves to pay this year’s final dividend of 1.55p per share.

The trust’s preliminary annual results showed earnings per share fell 7.8 per cent to 2.43p per share in the 12 months to 31 March.

Chairman John Scott reminded investors that while there was no immediate threat to the dividend, the fund’s ability to increase shareholder payments could be constrained in future as the reserves decrease.

The top performing global investment trust will seek shareholders’ approval at its annual general meeting in June to use 0.7p of the 4p per share of its revenue reserves.

Last year Scottish Mortgage underlined its growth philosophy by removing the requirement for it to grow dividends in real terms above inflation. While the trust remains committed to growing dividends, increases can be below inflation.

The current zero rate of inflation as measured by the consumer price index means this year’s 1 percent rise in Scottish Mortgage’s total dividends to 2.93p per share still passes the old target.

However, it just scrapes over the 0.9 per cent level of the retail prices index, which many income investors still regard as the benchmark for inflation.

Mr Scott said the growth companies in which the trust’s managers – James Anderson and Tom Slater – invest tended to retain their earnings and reinvest in them future growth rather than paying out dividends to the fund.

Mr Scott said: “Whilst this is entirely consistent with the approach that the managers seek in their investments and ought to be positive for the long-term capital return prospects of these companies (and therefore of our own), the corollary is that we expect Scottish Mortgage’s earnings to continue to fall in the foreseeable future.”

Scottish Mortgage pays two dividends a year and its shares yield 1.1 per cent, below the 1.8 per cent average of Global Growth trusts. However, its total shareholder return is well ahead of rivals. In the year to end of March it returned total growth of 29.6 per cent, beating the FTSE World index’s 19.2 per cent gain.

Over ten years shareholders have enjoyed total returns of just over 387 per cent, more than double the sector average.

Last year the shares moved to a premium to net asset value enabling the trust for the first time to issue 25.6 million shares it had previously bought back and held in treasury. This growth in the size of the fund meant its annual on-going charges ratio fell to 0.48 per cent from 0.5 per cent, one of the lowest in its sector.