Equity IncomeMar 30 2017

What is the outlook for dividend payouts in 2017?

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
What is the outlook for dividend payouts in 2017?

While global equity income has long been a reliable source of income for many investors, there are signs dividend growth is slowing.

The Henderson Global Dividend Index, published in November 2016, reveals global dividends declined 4 per cent on a headline basis to $281.7bn in the third quarter - $11.9bn lower than a year earlier.

This saw the Global Dividend Index (the statistical measure of change of the index) fall to 159.4, back to a level not seen since mid-2014.

This means global dividends for the full-year 2016 inched ahead by just 0.1 per cent to reach $1.2tn.

The slowdown is largely attributed to a decline in payouts from US companies, where there were lower special dividends but also to a stronger dollar which translated into less favourable exchange rates.

“Not all dividends are created equal and we anticipate 2017 being a year when we start to see greater disparity between sustainable and unsustainable dividend paying stocks.Andrew Wheatley-Hubbard

Henderson points out European dividend growth is not enough to offset the drop off in payouts from the US.

Figure 1: Net retail sales of the IA Global Equity Income sector

 £m
Jan-16-54
Feb-168
Mar-1627
Apr-16-6
May-1632
Jun-16-143
Jul-1629
Aug-165
Sep-1623
Oct-16-19
Nov-1654
Dec-1640

Source: Investment Association

Andrew Wheatley-Hubbard, portfolio manager of the BlackRock Global Equity Income fund, believes the outlook for dividends comes down to sustainability.

“The low rates of most of the last decade have made dividend stocks seem more attractive, and encouraged companies to increase the portion of their profit they pay as a dividend – their payout ratio,” he says. 

“When considering dividends, we believe that the most important factor is how sustainable it is – how sure are you that it will still be paid in three, four or five years’ time?

“Not all dividends are created equal and we anticipate 2017 being a year when we start to see greater disparity between sustainable and unsustainable dividend paying stocks.”

The reason for this is some of the highest yielding sectors, such as utilities, have had to borrow in order to fund their dividend payments.

“In fact, over the last five years the S&P Utilities sector in aggregate hasn’t brought in enough cash to cover its capex requirements, let alone pay dividends,” Mr Wheatley-Hubbard points out.

He cautions: “In a world of rising rates, debt will become more expensive and the dividend is at risk of a cut for those companies that have borrowed to return cash to shareholders.”

Currency effect

But Andrew Jones, global equity income fund manager at Henderson Global Investors, is far more positive on the outlook for dividend payments this year on the basis corporate profitability is likely to improve.

“Payout ratios for the MSCI World [index] are broadly in line with historical levels and therefore increases in earnings should lead to rises in dividends,” he suggests.

“That said there is significant regional dispersion in payout ratios which could affect dividend growth rates in some parts of the world, and international investors will continue to see currency movements impacting the income they receive once it is translated back to their base currency.”

This is particularly true for the UK market, where the pound’s ongoing decline has had a significant impact on investments.

The currency’s rocky ride is in light of the country’s vote to exit the EU. Now prime minister Theresa May has triggered Article 50, the pound could be set for further volatility.

Hugh Yarrow, manager of the Evenlode Income fund, calls the outlook mixed.

“Payout ratios for the aggregate market have fallen over the last few years and revenue growth remains relatively low due to a patchy economic backdrop. Corporate debt levels have also been rising, as companies have used low borrowing costs to help fund acquisitions and shareholder returns,” he explains.

“Offsetting these factors last year was the significant depreciation in sterling which is helpful for UK companies that earn and/or pay their dividends in foreign currencies. This led to a modest increase in dividends for the aggregate market last year, but without this currency benefit dividends would have fallen.”

If the oil price steadies and the outlook for banks begins to improve we may also see these companies restarting or growing dividends.Darius McDermott

Mr Yarrow predicts 2017 will be similar as a difficult dividend environment is offset somewhat by the weak pound. 

“The outlook for oil and commodity prices will also be important for the UK index given how important these companies are as a percentage of overall UK distributions,” he adds.

Darius McDermott, managing director at Chelsea Financial Services recalls that pre-EU referendum, there were concerns over dividend cover, particularly in the FTSE 100. 

“But with costs in sterling and most earnings in US dollars, these companies have been given some breathing space and are more likely to be able to maintain or even grow dividends this year.”

He confirms: “If the oil price steadies and the outlook for banks begins to improve we may also see these companies restarting or growing dividends.”

Commodity boost

One FTSE 100 company set to restart dividends is supermarket giant Tesco, following its announcement in January of a deal to buy wholesaler and convenience store owner Booker Group which if it goes ahead will see Tesco commit to dividend payments again from 2018.

The Henderson Global Dividend Index reports oil and mining stocks saw decreases in dividend payouts year-on-year in the third quarter.

The recovery in commodity prices should certainly provide a boost to dividends and will be a welcome relief for global equity income investors.

“The outlook for 2017 is much better than last year when global earnings fell, driven by a collapse in commodity prices and subsequent cut in dividends in those sectors,” observes Adrian Lowcock, investment director for Architas.

“In addition developed market economies are improving and economic data looks more positive than it did at the start of 2016. If company earnings improve then that gives the companies more flexibility to increase dividend payments.”

This is no reason for investors to be complacent though, as Mr Lowcock acknowledges earnings expectations are often more elevated at the start of the year.

Mr Crooke acknowledges the outlook for global economic growth appears brighter for the year ahead. 

"With a new administration in the White House promising greater spending and tax cuts for business, corporate earnings in the US could benefit, even as they contend with the effects of the strong dollar," he explains.

"Business confidence across the eurozone is rising too. Meanwhile, higher prices for oil and other commodities will lift profits for these dividend stalwarts, and allow payouts in these battered sectors to gradually be restored.

“The strong dollar may well disguise this underlying growth in 2017, but over the longer-term exchange rate factors tend to even out, allowing underlying growth trends to exert themselves.

"Moreover, even with dollar-based growth temporarily on hold, we mustn’t forget that equities are still generating huge sums of income for investors every year."

eleanor.duncan@ft.com