GREAT SCOTS
Conal Gregory urges investors to look to stock market giants in Scotland
SCOTLAND HONOURS its patron saint, St Andrew, next week and many investors worldwide have good reasons to join in the celebrations.
Its industry and achievements are far more than a ‘Land o’ Cakes’ as the poet hero Robert Burns claimed in Captain Grose’s Peregrinations.
Scotland is home to some of the greatest companies listed on the London Stock Exchange, reflecting its natural resources, innovation and professional management.
Its economy is generally known for oil, distilleries and financial services but there are also hubs of excellence like biotechnology in Dundee and artificial intelligence in Edinburgh. No portfolio should ignore such enterprises and continuing potential.
With no specialist fund, the only pure way to invest is via individual stocks. There are UK equity and income collectives with Scottish holdings but the proportion is too low to make a distinct difference.
SSE, formerly known as Scottish & Southern Energy, is just such a company. Based in Perth, it was formed in 1998 and is a major UK energy supplier.
Danny Cox, of private client discount broker Hargreaves Lansdown, says: “A high proportion of SSE’s revenues are regulated and recurring. That reliability underpins the dividend which is expected to be around seven per cent in 2020, plus any income paid by the retail business which is being spun off.”
The group has an attractive position in the renewable sector although a high level of debt could become a problem given the reduced cash flow following the Npower deal. At over £11.8m, SSE is the 39th largest stock market listing and notably more sizeable than utilities like Centrica (which owns both British Gas and Scottish Gas).
SSE is tipped by Jonathan Baker, investment director at wealth manager Charles Stanley in Leeds. He says that whilst the share price has steadily fallen in the last two years, it is worth holding for its strong dividend which is around eight per cent.
Scotch whisky is unique. A special single bottle of 60-yearold Macallan with a label created by Valerio Adami made £848,750 at Bonhams last month.
As the largest Scotch distiller with 27 malt and two grain distilleries, Diageo could be a good long-term holding. It owns the largest brand, the iconic Johnnie Walker. The company has consistently performed well, generating margins over 20 per cent with free cash flow for investors.
In July it announced a £2bn share buyback, buoyed by net sales for the year to June of £12.2bn. Pre-tax profits rose five per cent.
Its distilleries – notably Dufftown, Glenkinchie, Mortlach, Oban and Talisker – provide not only Scotch for blends but profitable single site bottling.
In the most unlikely event Scotch was to fall out of fashion, investors can be reassured by the breadth of a portfolio that also includes Guinness, Smirnoff vodka and both Gordon’s and Tanqueray gins.
Several companies quoted on overseas exchanges also have significant Scotch whisky interests. They include BrownForman, LVMH, Pernod Ricard and Remy Cointreau. Pernod Ricard alone has 10 malt distilleries (such as Aberlour, Glen Keith, Longmorn and Scapa) and the popular Chivas Regal brand.
AG Barr makes Scotland’s other national drink, Irn Bru. This bright orange carbonated soft beverage was created in 1901 and today made in North Lanarkshire. The strength of the brand has allowed the firm to grow their profits every year for the last five. The group boasts a moat that can compete with Coke on the local level. In the interests of the long-term health of the brand, the company has recently invested more in marketing.
To gain some of the financial expertise north of the Border, Standard Life Aberdeen is the second largest fund manager in Europe, formed by merging Standard Life and Aberdeen Asset last year. It has over £7bn capitalisation and yields a very healthy 7.7 per cent, more than three times the rate from Diageo.
In the same sector, The Royal Bank of Scotland has a distinguished history. It was founded by royal charter in 1727 and is a totally separate entity from the Bank of Scotland. The latter helped to fund the Jacobite cause whilst The Royal Bank of Scotland gave support to the Hanoverians and Whigs.
It has absorbed many banks including Drummonds in 1924, NatWest and Ulster Bank. It actually invented the overdraft. Today it is a massive £29.3bn company but without any dividend should be considered for its long-term potential.
The leading investment trust, Scottish Mortgage, is managed by Baillie Gifford, which is an independent private partnership. The trust is its oldest client. Despite its title, Scottish Mortgage has virtually nothing to do with Scotland or housing.
Its managers – James Anderson and Tom Slater – are based there but its 70 holdings aim to capture top ideas around the world rather than from one country. Over five years it has delivered a total return of 237.6 per cent compared with 118.3 per cent for the sector.
The Scottish Investment Trust is also Edinburgh based. Over a century ago, it provided finance for the world’s first railways. Today it is global and looks after over £92m.
The Glasgow engineering Weir Group shows the technical expertise still very much in evidence in Scotland. It was established in 1871 and quickly gained a reputation for its pumping equipment for Clyde steamships. Today it is one of the world’s leading engineering businesses providing solutions for the mining, energy and infrastructure industries.
Weir was first listed in 1946. It is one of three tips (the others are SSE and RBS) from Martin Payne, senior investment manager at Brewin Dolphin in Leeds. He says: “An upturn in both North American oil and gas and global mining markets has seen the Weir Group recover strongly from its 2016 lows.” He expects strong cash generation this year.
Research by Darius McDermott of Chelsea Financial Services reveals some major Scottish holdings in collectives:
■ LF Lindsell Train UK Equity holds AG Barr
■ TB Saracen UK Income holds Standard Life Aberdeen
■ Jupiter UK Special Situations and Schroder Recovery have The Royal Bank of Scotland
■ Franklin UK Mid Cap hold Weir Group
■ Legg Mason IF RARE Global Infrastructure Income holds SSE.
Aberdeen is the base for Wood which provides project, engineering and technical services in over 40 countries. The company was started by Sir Ian Wood in 1982 and today is valued at over £4.6bn. Its yield is just 1.2 per cent, the same as the London Stock Exchange.
Keep an eye out for Brewdog if it should seek a listing. Baker says: “They have got the market right and craft beers are still doing well. They also have a great edgy marketing campaign.” Established 11 years ago, the firm is based in Ellon, near Fraserburgh.
■ Conal Gregory is AIC Regional Journalist of the Year.