‘The search for dividend growth in an uncertain market’


    In this volatile macroeconomic environment, investors often ask how a positive outlook for income can be reconciled with a modest economic growth backdrop.

    Part of the answer lies in the relative strength of listed companies. During 2011, for example, global dividends grew 8.6 per cent, according to the MSCI World index, while global growth decelerated as companies continued to grow earnings and generate cash, enabling them to increase payouts to shareholders.

    At the corporate level, we continue to see companies reporting strong balance sheets and improving margins, aided by suppressed levels of real wage growth in the developed world, which are helping keep costs in check.

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    For example, net debt-to-equity levels in Europe – outside of the financial sector – are now at their lowest for almost 20 years, with companies exhibiting robust free cashflows, and capital spending remaining well-disciplined at this point in the recovery.

    The confidence to increase dividends

    This balance sheet strength is giving boards the confidence to increase dividends paid out to stockholders in spite of less predictable future levels of economic growth.

    Data from Citigroup shows that, across all regions except Continental Europe, dividends are predicted to grow in 2012 and 2013, providing real income growth on top of what are often already high yields.

    This dividend growth can be seen coming through portfolios – one stock, Merck, for example, chose to increase its quarterly dividend for the first time in more than five years in 2011, in spite of the ongoing uncertainty from US healthcare reform.

    It is not the case that earnings growth and high dividends are mutually exclusive – looking globally for income presents opportunities to gain exposure to fast-growing economies that remain on compelling earnings multiples, and often pay a high yield.

    Australia, for example, is predicted to grow 3.6 per cent this year, with a near 5 per cent yield, and yet remains on a compelling price to earnings ratio. At the stock level, these opportunities often arise outside of traditional income sectors.

    For example, Taiwan-based Asustek – a manufacturer of notebooks and tablets – which sits within the technology sector, pays out a 4.6 per cent yield and is predicted to generate double-digit earnings growth this year. Its UK counterpart would be a company such as ARM, which currently pays only a 0.7 per cent yield.

    Competitive pressures

    In Europe, while certain areas of the market, notably telecoms, have resorted to reducing dividends in the face of macroeconomic and competitive pressures, dividend growth is being witnessed in other segments of the market, including those that are more cyclically-exposed.

    In the chemicals sector, for example, BASF increased its annual dividend by more than 13 per cent this year, illustrating its management’s confidence in the outlook for the business.

    More traditional income sectors in Europe are also increasing their dividends, including pharmaceutical companies Novartis and Roche. With economic growth in areas such as the eurozone stalling, investors are right to be concerned about the prospects for dividend growth.