Banks are the key to higher dividends
Equity managers view the banking sector as a source of potential dividend growth in the face of rising US interest rates – but are split when it comes to technology firms.
Diane Sobin, manager of the £79.8m Threadneedle US Equity Income fund, said focusing on dividend growth was “nothing new”, but it may help mitigate downside risk as US interest rates could pose a threat to high-yielding equities.
Ms Sobin said: “It is quite possible the business models for banks are becoming more stable, so more and more capital will be returned.
“Another area is the IT sector. The larger companies within the technology sector presumed to be straddled with legacy technology, like Microsoft, are transitioning to new technology like the cloud.
“We think of Microsoft with its massive cash pile, predictable cash flow and dividend policy, and we see that as a nice opportunity.”
Ms Sobin said the average dividend payout ratio for regional banks in her portfolio, such as Bank United, was 37 per cent, while the figure for universal banks in the portfolio, such as JPMorgan and Wells Fargo, was 31 per cent.
She expects dividend payout ratios for banks to reach 50 per cent over the next three years.
According to its factsheet, as of June 30 this year Ms Sobin’s fund had a 25.7 per cent exposure to financials, compared to 16.5 per cent for the Investment Association’s North America sector.
The fund also had a 15.2 per cent exposure to the information technology sector, compared to 19.7 per cent for its peer group.
James Davidson, who manages the £81.9m JPM Global Equity Income fund, claimed US banks holding large amounts of deposits would benefit from a rate rise.
Mr Davidson, who has increased his exposure to financials from 15 to 25 per cent in the past 12 months, believes banks could mimic utilities in the consistency of their dividend payouts, and expects Morgan Stanley and Wells Fargo to reach a 4 per cent dividend yield by the end of 2017.
He described the case for technology dividend growth as “less straightforward”. However, he said: “On the one hand, dividend payout ratios are lower, so there is more of a runway, but they are so low because technology cycles are so severe.”
Jamie Forbes-Wilson, manager of the £79.1m Axa Framlington Blue Chip Equity Income fund, agreed banks could start returning more cash to shareholders after years spent rebuilding balance sheets in a “phenomenally tough” regulatory environment, but was less convinced about technology.
He said: “In the US there are lots of big technology companies with huge balance sheets and enormous amounts of cash. I suspect there is potential for them to return some of that to shareholders.
“However, these companies are growth-oriented. It’s more likely they will use most of that money to acquire other businesses and acquire growth.”
In late July, Apple saw its shares fall after sales failed to match expectations for the quarter ended June 27. As a result, tech funds took a hit.
The US technology giant posted quarterly revenue of $49.6bn (£31.7bn) and quarterly net profit of $10.7bn.
