Pimco’s Raji Manasseh has warned against investors piling into the US in search of high-yielding equities, as many companies with high payouts have been overbought in the recent rally.
Mr Manasseh, senior vice president for dividend strategies at US investment giant Pimco, said the company had recently sold down much of its exposure to sectors such as telecoms, utilities and real estate investment trusts (reits) as they had become overvalued.
“Financial repression has driven a thirst for yield,” Mr Manasseh said. “Clients have funnelled into a narrow range of dividend stocks and raised values to historic highs.
“Since 1995 US telecoms have traded in line with the wider market, but now they are at a 40 per cent premium. You have to ask if these companies are worth 19-20 times next year’s earnings.”
He added that utilities stocks had seen similar movements – compared with a historic trading level of roughly 20 per cent lower than the wider market, the sector is now also at a significant premium.
Healthcare giants Pfizer and Johnson & Johnson have both seen their share prices rise significantly in the past six months.
Pfizer has risen 19.4 per cent while Johnson & Johnson has posed a gain of 21.7 per cent, helping the wider S&P 500 index post a 17.4 per cent rise in that period.
Interest in US income funds has grown as markets have rallied, but newsflow surrounding the sector was swamped by technology giant Apple’s announcement in April that it was hiking its annual payout by 15 per cent to $3.05 a share.
The company’s shares currently yield roughly 2.7 per cent.
However, Pimco’s equity income managers – including $693.6m (£448.8m) Pimco EqS Dividend fund managers Brad Kinkelaar and Cliff Remily – are backing Apple’s rival Microsoft, which Mr Manasseh said had a more stable dividend model. He criticised Apple’s decision to partially fund the dividend increase with a $17bn (£10.9bn) bond issue.
Mr Manasseh added that a number of US companies had declared dividends in recent months “but not on a scale which we like to see”.
Pimco’s income managers are also looking to areas such as infrastructure, with toll road operators in China, Latin America and Europe offering a 5-6 per cent yield at “more attractive valuations”, Mr Manasseh said.
Elsewhere, the managers are topping up holdings in “selected companies” in the UK, including Imperial Tobacco. Mr Manasseh said the company’s recent share price fall was an “overreaction” by investors. Imperial Tobacco has fallen 8.1 per cent in 12 months.
Pimco’s EqS Dividend fund, based in Ireland, has returned 27.2 per cent since its launch in December 2011, according to FE Analytics.
