Where have all the value managers gone?
After 20-odd years in the industry, there’s one observation I consistently make when it comes...
Global dividends may have risen by 2% in the first quarter of 2016*, but two of the world’s most reliable income payers, Australia and the United Kingdom, saw their dividends fall, according to the latest Henderson Global Dividend Index.
Commodity companies in both countries contributed significantly to the cuts. Australia’s third largest dividend payer, mining giant BHP Billiton, swiped US$2bn off its payout*, also affecting investors in the UK where it is dually-listed. Banks and supermarkets at home likewise made reductions including Barclays, Standard Chartered and Morrisons.
Australia and the UK’s struggles were compounded by their respective falling currencies over the period, driving down their rankings in the Henderson index, which is measured in US dollars. The drop in UK dividends highlights domestic income investors’ reliance on financials and mining, which, together with oil, make up almost half the country’s equity income*.
Royal Dutch Shell, now firmly the largest dividend payer in the world after acquiring BG Group*, was one of the few large cap companies to increase its dividend over the period. They now contribute £1 out of every £7.50 of the UK’s total dividend payments^, but even that won’t be enough to make up the short fall.
Investors are definitely feeling the pinch and several popular funds have been moved out of the Investment Association’s (IA) UK Equity Income sector and into the UK All Companies classification over the past year due to no longer meeting yield requirements.
The association currently requires funds to produce a yield equivalent to 110% of that of the FTSE All Share index over a rolling three-year period.
Among those that have been affected are Rathbone Income and Schroder Income, both of which have maintained their Elite Rating following the transition. FundCalibre continues to view the funds as equity income investments and to benchmark them against the IA Equity Income sector.
Both funds’ managers have spoken about the importance of prioritising dividend sustainability and stable growth potential—particularly in tough times—over simply buying what might be poorer quality companies or sectors simply to meet a yield percentage.
I, for one, agree. Investors need to know that they can earn an income from their shares not just today, but tomorrow and ten years into the future too. The Investment Association recently concluded a review of the sector in light of these challenges, with a view to perhaps amending the requirements. Hopefully we should hear some news on this front soon.
Plenty of other places, according to the Henderson research, which expects the total amount paid out in dividends to rise by 4% in 2016*. Special dividends over the first quarter of this year almost doubled on the prior corresponding period, with the US and Hong Kong making particularly large payments. Japan’s dividends also rose (although it’s worth noting their market has not performed well from a growth perspective in the year-to-date).
The two charts below suggest the value of diversifying globally when it comes to your long-term income strategy. On the left, the overall rate of growth in dividend payments around the world over the past six years. As you can see, they have risen fairly steadily. On the left are the regional growth patterns. Looking at this chart, it is clear how certain regions have performed better than others throughout their market cycles.
Spanish stocks weighed on European dividend growth in the first three months of this year, as did the major Swiss pharmaceutical groups, Novartis and Roche. But every French and German company in the Henderson index increased payouts or at least held them flat, giving Europe headline dividend growth of 11%* – albeit with a particularly large special dividend from one firm and some payment timing effects.
Elite Rated fund: BlackRock Continental European Income
Emerging markets on the whole also struggled with currency falls; however, even stripping out the impact of exchange rate movements, dividends in developing countries were 17% lower over the quarter*. India was the one real bright spot, increasing its total amount paid out by a whopping 61% off the back of a much higher-than-usual dividend from Coal India*.
Looking forward, China’s companies often have a fixed payout ratio, so with certain sectors such as banking struggling, dividend falls are likely there in 2016. The Russian government is contemplating a law to increase dividends from state-owned enterprises, so we may see some improvements in that market down the track.
*Henderson Global Dividend Index, Edition 10, May 2016
^’UK investors braced for first regular dividend cut in six years’, The Telegraph, 18/04/2016.