Weekly market recap: global dividends dip

With the US Federal Reserve pledging lower rates for longer, equities have continued their bull run.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 28th August 2020

While I did make the remark a few times last week that Autumn had come early, I was really surprised to read that not only are festive snacks supposedly arriving on supermarket shelves this week (check out Sainsburys for your panettone and Asda for your mince pies), but that John Lewis has actually already been selling Christmas products for more than a week!

There is no doubt that Christmas has come early for investors in the US as traders continue to enjoy stock markets at fresh all-time highs. Asset class returns are below; with the US Federal Reserve pledging lower rates for longer, equities have continued their bull run while the US dollar has continued to weaken versus international peers.

Figure 1: Asset class total returns, local currency

   

Source: Bloomberg, EQ Investors

Figure 2: Asset class total returns, GBP currency

Source: Bloomberg, EQ Investors

Following a near 25% decline in earnings for the MSCI All Country World Index from its 2019 highs to its 2020 Q2 lows, it is perhaps unsurprising that global dividends have seen a $108 billion decline in the three months to June, according to the Janus Henderson Global Dividend Index. This near 20% decline (which brings dividends paid in Q2 to $382.2 billion) has come as companies around the world have cut or suspended dividends as corporate managers have attempted to shore up balance sheets and preserve cash in response to the coronacrisis. Nevertheless, analyst expectations still place the value of global dividends to be paid in 2020 at over $1 trillion.

Figure 3: Current year expectations for dividends show Financials to be the largest dividend payers despite regulations around the world ordering dividend freezes or bans for banks in order to maintain financial stability
Source: Bloomberg, EQ Investors

Some of the largest regional falls came from the UK (-54%) and Europe ex UK (-44.5%), two regions with traditionally high dividend yields. In the UK – which has a large presence of equity income investors – HSBC, Royal Dutch Shell, Lloyds and Glencore were among the largest contributors to the decline. A further headwind for the UK and Europe has been the strict regulatory environment which have frozen or stopped banks from making distributions to shareholders in order to maintain financial stability.

Meanwhile on the other side of the Atlantic, distributions in the US actually increased year-on-year (albeit marginally at 0.1%) as corporate management teams made cash savings by scrapping share buyback programmes. We believe a key contributor to the resilience of dividends here is also the sectoral composition of the US versus Europe whereby the US has a significantly higher weighting to Information Technology, Healthcare and Telecommunication Services – three areas which have seen robust resilience (or even an acceleration in growth) since the start of the pandemic.

Below, we look at the dividend cover ratio, a measure of what proportion of earnings are being paid out as dividends. A ratio of over 100 indicates dividends are being paid in excess to earnings and are at an unsustainable level, while a ratio below 100 indicates management teams are retaining income within the business. The chart reveals that amongst the major regions, the UK has the highest dividend cover ratio which reflects the collapse in earnings in recent months.

Figure 4: The dividend cover ratio (also referred to as the dividend payout ratio), an indication of what proportion of earnings are being paid as dividends, indicate the UK has one of the lease sustainable dividend rates of all the major regions
Source: Bloomberg, EQ Investors

With many investors relying on dividends for income, the importance of a well-diversified portfolio across both regions and sectors and a total return investment approach is highlighted by the above. While some companies are already coming back to announce the resumption of existing programmes, we are conscious that some corporate managers will use this opportunity to reset shareholder expectations for a more realistic dividend payout ratio.

STAT OF THE WEEK: 27x – the growth in world trade between 1950 and 2008 (World Economic Forum).

DATA CORRECT AS AT: 28/08/2020

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About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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