213. Where you can find the best dividends around the globe

TRANSCRIPT: EPISODE 213
29 September 2022 (pre-recorded 12 September 2022)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or  may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTERVIEW]

JAMES YARDLEY (JY):

Hello, and welcome to the ‘Investing on the go’ podcast. I’m James Yardley, and today I’m joined by Jane Shoemake, portfolio manager on the Janus Henderson UK Responsible Income fund. Jane, thank you very much for joining us today.

JANE SHOEMAKER (JS):

My pleasure. Good morning.

(JY):

Jane, we regularly write about the Janus Henderson Global Dividend Index on FundCalibre. Can you tell us a bit about the report, how it started and what it looks [like], to tell investors?

(JS):

Yeah, sure. We’ve been running this Global Dividend Index since the end of 2009. And really what it does is, it looks at the trends of the dividend-paying companies of the top 1200 companies in the world by market cap. So, what it’s doing is looking at the dividends they pay, and then identifying any trends. And that’s both by a regional perspective and also by sector. So, it’s looking at the level of growth that is being delivered from some of the largest companies around the world.

(JY):

And can anyone just go and find this index on your website?

(JS):

Absolutely, it is published quarterly, so it’s updated every quarter. And we just talk about some of the key trends in the regions, some of the key trends in the sectors. We also provide an outlook for the next 12 months, for the next year. And it’s available on the Janus Henderson website.

(JY):

And does it help shape how your fund managers invest for income or is it purely just for retail investors to consider?

(JS):

It’s just very interesting in terms of the data it provides us, because it just shows us historically what’s been driving some of the dividend growth that we’ve witnessed in the market. And it also allows us then to sort of think about what we think’s going to happen from this point going on.

Obviously, we’ve been through an incredibly turbulent time with the pandemic, and we literally saw a large number of companies around the world conserve cash and cut dividends. So, the index enabled us to monitor that, to track that, and then also subsequently, see how those companies have come back [and] start paying  dividends. So, it’s informative from that perspective.

And it also shows us, that [in] different parts of the world, dividends are paid at different points in the year. So, it makes you very much more aware of the fact, for example, in Europe, the second quarter is a really important quarter with over two thirds of dividends in Europe being paid in that three-month period. So, it makes you more aware of some of the dynamics of the different regions around the world with regard [to] payments.

(JY):

And I believe your latest report has just come out. So, can you give us a brief overview of the findings? What are the big headlines? Are dividends now fully recovered after the pandemic? And which regions and sectors are doing best at the moment?

(JS):

It’s been a really strong quarter, the last report actually, we’ve had a record second quarter. And yes, dividends have more than recovered to pre-pandemic levels. So, at the global level now, the amount of dividends being paid out are above that pre-pandemic peak. So, it’s really fascinating, because we obviously had [a] very sharp contraction in dividends as the world shut down. And then we’ve seen a very strong rebound. So, really encouraging.

The key drivers with regard to sectors, those dividend payments coming back, is that we’ve seen some really strong mining dividends. With what’s been happening with commodity prices, those mining companies have been paying not just normal, strong dividends, but also some special dividends. We’ve also seen those banks, those financials, as you will remember in the pandemic, a number of regulators really stopped the banks being able to pay dividends. Well, that’s more or less reversed completely now, and banks have come back onto the dividend list, and that has helped drive some of that growth. So, the picture, when you look at it at the moment, is, that it’s really very encouraging and being very strong.

(JY):

And the growth in dividends, is that being primarily driven from better underlying earnings or are we also seeing a change in payout ratios as well? What are  companies’ attitudes towards dividends at the moment? Because it’s been the case for a long time now, that dividend stocks, I guess have been put in the value bucket, which underperformed for a long time, and it was all about growth. Obviously, that’s changed [in] the last couple of years, and suddenly everyone’s remembered that dividends are a key component of your total return.

And then on top of that, of course, we’ve now just recently had the buyback tax introduced in the US. So, what are your thoughts on that? I mean, are you expecting companies to pay higher dividends in the future, increase that pay-out ratio perhaps as a result of those sorts of trends?

(JS):

We had a big change during the pandemic with a number of companies resetting their dividends. So, the oil companies are a fantastic example of that, where we obviously had BP and Shell cutting their dividends and basically halving their dividend payments. So, what you saw during the pandemic, is those companies that were possibly paying too much out in terms of dividends, have taken the opportunity to reset at more realistic expectations.

Elsewhere, we have seen some of those mining companies move to a variable payout ratio. They’ve accepted that they have cyclical earnings, and therefore their dividend will be linked to the level of earnings they have. And so therefore, rather than having a fixed payout ratio, moving to a variable payout ratio.

So, I think what the pandemic has done, is allow some of those companies that were overpaying – Australian banks definitely were in that category as well – of being able to reset at more realistic levels, from which point we think those dividends are more sustainable and possibly can start to grow.

I would caveat that there are some parts of the world where dividends haven’t yet come back. So, hospitality, travel and leisure. Clearly, we’re still seeing those parts of the global economy trying to get back to their pre-pandemic norms if you like. You can see what the problems we’ve had with airlines over the summer and some of those queues at airports, etc. So, there [are] some pockets where dividends haven’t yet come back.

But generally, what we’ve seen, is that people have come back, they’ve come back at more realistic levels, so, I think it’s given us a rebasing of some of those companies that were paying too much, to much more sustainable levels now. So, I think that’s very encouraging.

(JY):

And what are your thoughts for 2023 and how is this higher inflationary environment impacting companies’ ability to pay dividends?

(JS):

We actually have upgraded our forecast in the last report. So, we now expect 1.5-6 trillion dollars’ worth of dividends to be paid. So, that’s a record high for this index given that it’s been going since 2009. You know, that is a new peak for us.

What I would say is, that when we look at the level of growth that means, is we’re around about 5-6% underlying growth again. And if we look at the long term since the index started, dividends generally grow by about 5-6% over the long term, so, we are back toward sort of trend levels really.

Obviously, we are facing some very key challenges in the global economy. We’ve got the geopolitical issues and the war in Ukraine. We’ve got the problems with the gas prices and energy prices. We do, obviously, look like we are going to very clearly be going into recession in a number of parts of the world, and we have a very strong US dollar. So there [are] a lot of things that are going to be causing some concern.

My view would be to investors, is just to remember that dividends are a lot less volatile than earnings. So, you get a similar level of growth from dividends as from earnings, but with a lot less volatility. And given we’ve had this reset during the pandemic, whilst earnings may well start to come under pressure, I think the outlook for dividends relative to that, is more encouraging actually. Balance sheets are generally quite strong, globally. You’ve pointed out that, you know, people have not only been paying back their dividends and paying dividends, but doing some share buybacks, doing some special dividends. So, cashflow on listed equities is not in a bad place, at the moment.

Now, we’re cognisant the environment’s going to be a lot more challenging over the next 6-12 months, but I think there’s still going to be some businesses that will be able to weather that. And then the other really important point in an inflationary environment is, unlike bond coupons, dividends do have an element of growth within them. So, there’s an element of inflation protection. You buy a bond with a certain coupon, and that coupon gets eroded by the inflation impact. With dividends, if you’re going to get that 5-6% growth that we think is going to be forecast globally, that does give you a level of protection that you don’t get from other asset classes.

(JY):

And thinking about your own UK Responsible Income fund. I mean, you’ve obviously got a natural underweight to areas such as oil. So, how is that fund holding up in this environment? How is your dividend holding up?

(JS):

Yes, the UK Responsible Income fund is quite a unique strategy within the income space in the UK, because it does have very clear exclusion criteria. So, we exclude some key areas, such as energy, mining. Also, some of the consumer staples such as tobacco and alcohol, because it has a responsible approach. It integrates ESG and it excludes some of those more challenging areas, from a ESG perspective.

Clearly, when we’ve been in the environment we’ve just been in, where energy has been so dominant within the UK market at driving the market higher, it’s been a challenging environment for the fund in the short-term, but the longer-term numbers, over 5, 7 and 10 years are very, very strong. And we’ve been through periods like this before where some of the sectors we can’t invest in, have led the market.

And it gives us some volatility with performance in the short term, but as I said, longer-term, those performance numbers remain intact. So, yes, headwinds, we have seen this year, but the portfolio has got some offsetting holdings that enable [us] to balance some of those pressures. And over the long-term, we think it’s trading very attractively with some really attractive companies in it.

(JY):

So, as you say, you can’t hold some of those big payers like tobacco, like oil, so what sort of companies are, do you hold in the fund instead?

(JS):

So, what we’re able to do, for example some of the consumer staples I mentioned, we don’t have tobacco, we don’t have alcohol, we’re not allowed to hold those. But what we can do is offset those with other high yielding parts of the UK market. So, we do have an overweight towards utilities, and you must remember with utilities, some of those have an inflation hedge within them because their revenues are linked to an asset base – bases which are linked to inflation. So, those provide some defensive qualities.

We can’t, as I said, own some of those tobacco and alcohol stocks, but we can own telcos. So, we’ve got some telecoms; they yield, they’ve got attractive yields. They’re not big dividend growers, but they give us a decent yield and they’re defensive. And then we also have healthcare. So, what we do is we try and balance the portfolio. So, to offset some of those sectors we can’t own, we find other sectors with similar defensive or cyclical characteristics, that we can hold instead. So, always trying to balance out some of those factors. And you can see from the long- term performance of the fund, they’ve been very successful in the portfolio construction, in offsetting some of those areas that we are excluded from holding.

(JY):

And what are your thoughts on the ground now, in terms of valuation, where we sit, obviously, lots of talk about the UK being in trouble and going into a recession potentially. What should investors’ expectations be for the fund going forward?

(JS):

I think, when you look at the fund’s characteristics, it’s yielding just over 4% at the moment. So, there’s a decent yield, definitely more than you’re getting on cash in the bank for sure, even though interest rates are moving upwards.

And the other thing I’d like to point out is, that the fund has delivered some consistent distribution growth. So, the distributions are income – it’s [been] given to unit holders since the end of March 2010, right through to now (so the last 12 years). We’ve grown that distribution by over 6% per annum. So, you’ve got a decent yield and you’ve got growth in the income that you’ve been delivered as a unit holder.

If I look forward now as well, I think that the portfolio’s trading on a very attractive PE [Price/Earnings ratio], it’s trading on about 12 times forward price to earnings so, obviously that’s a way of valuing the stock market, the higher the number, the more expensive it looks. 12 times looks cheap relative to the rest of the world, which is trading near 16, 17 times at the moment. So, you’ve got that valuation support in the UK.

Yes, the recession, it does look difficult. It looks challenging for the UK, but the market, I feel that’s discounted. And I think there’s lots of really attractive opportunities when you look on a stock by stock basis. And if you choose the right management, the right quality of business, there’s no reason why you can’t make good money in the UK stock market over the next 12 to 18 months.

(JY):

Jane, that’s all been really, really interesting. Thank you very much for joining us today.

(JS):

My pleasure. Thank you.

(JY):

And if you’d like to learn more about the Janus Henderson UK Responsible Income fund, please visit fundcalibre.com. And please remember to subscribe to the ‘Investing on the go’ podcast.

Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at the time of listening. Elite Ratings are based on FundCalibre’s research methodology and are the opinion of FundCalibre’s research team only.