Is Japan the investment play of 2023?
This article first appeared on moneymarketing.co.uk on 17th January 2023 History has taught me to be...
In what was an extraordinary year, global dividends showed remarkable resilience in 2020. According to the latest Global Dividend Index* from Janus Henderson, two-thirds of global companies either held their dividends steady or increased them and only one in eight cancelled them outright.
“Despite the worst global crisis since World War II and with much of the global economy in enforced hibernation, companies nevertheless distributed $965bn to their shareholders between April and December,” the report said.
Some parts of the world proved particularly resistant to cuts, demonstrating the value of diversifying globally for income. Not only can this approach help smooth out the impact of seasonal patterns, but it also captures the advantage of different sector dynamics from one country to another and reduces investor dependence on a few big companies for their income.
Here, using the Janus Henderson Global Dividend Index, we look at how dividends held up region by region, for those considering building a more diversified equity income portfolio:
In a normal year, companies in North America pay just over two fifths of the world’s dividends, so what happens there has a significant impact on the global picture.
And, despite the pandemic, Janus Henderson says that payouts rose 2.6% in North America, reaching a new record. “North America did so well mainly because companies protected their dividends by suspending or reducing share buybacks instead, and because regulators were more lenient with the banks,” the company said.
Special dividends like that from food retailer CostCo, helped boost the headline figure higher. Microsoft became the world’s largest dividend payer for the first time, while Wells Fargo made the biggest cut, as mandated by the Federal Reserve.
Canada saw the fastest dividend growth in the world among comparable countries and the fewest dividend cuts. More than nine-tenths of Canadian companies increased payouts or held them steady between April and December.
Funds to consider: JPM US Equity Income
European dividends fell by almost 30%s in 2020, giving the lowest total payout from Europe since at least 2009.
“The decline in France had the biggest influence on European dividends overall as they made up more than one third of the total European decline,” the report stated. Apart from the banks and other financial companies, the biggest cuts in France came from aerospace and car manufacturers, but the cuts were widespread – seven in ten French companies made reductions, one of the highest proportions in the world.
In contrast, German companies saw dividends fall only 14% year-on-year between April and December. Just one company in three cut its payout. The lack of strong banks in Germany, even before 2020, partly explains the outperformance, but the refusal of Germany’s largest payer, Allianz (along with other German insurers), to submit to pressure from the EU Insurance regulator to suspend dividends also significantly limited the downside.
Switzerland was the only major European country to escape the dividend fallout from the pandemic and became Europe’s largest payer as a result.
Over the course of 2020, UK payouts fell by a third (-32.8%) on an underlying basis. “But if we consider just the pandemic quarters, the picture was much worse, equivalent to an underlying fall of 45%,” the report said. “Among the world’s large stock markets, this put the UK alongside France as the two most affected countries and puts UK payouts at their lowest level in dollar terms since at least 2009.
“To a large extent the UK picture reflects historic overdistribution by many companies. This left dividends vulnerable to the sudden economic deterioration witnessed in 2020, though the prohibition on banking payouts by the regulator was also a key factor. Banking dividends are set to resume, albeit at a lower level than before, but the UK’s big oil companies have permanently reset their payouts. UK dividends will take several years to regain former highs.”
Dividends from Asia-Pacific fell 11.9% in 2020 on an underlying basis, roughly in line with the global average. Australia contributed most to the cuts, while Hong Kong’s payout held steady.
“Despite exceptional success in controlling the pandemic, Australian dividends were as severely affected as much of Europe and the UK,” Janus Henderson said. “In headline terms, payouts were down by 43% in 2020 (23.3% underlying), mainly because big specials from the mining companies were not repeated.
“Between April and December, Australian payouts fell by 38% as more than three in five companies cut or cancelled payments. Banks in Australia have traditionally paid out an exceptionally high portion of their profits in dividends – even under more normal economic conditions this was becoming unsustainable. Taiwan, South Korea and Singapore all saw dividends fall.
Japanese dividends showed relative resilience in 2020, falling just 2.1% on an underlying basis. “Japanese companies pressed ahead almost completely undeterred with their Q2 payments, which were declared on 2019 profits,” the report said.
“Q4 payments are the first to relate to 2020 trading, so we expected them to be weaker, but the 10.9% underlying decline was better than we expected and reflected the relatively milder impact of the pandemic in Japan. Just one Japanese company in 30 cancelled dividends between April and December – Nissan’s was the largest – while a third made cuts. Nintendo was the star performer, increasing its dividend by four fifths as sales of the Nintendo Switch games console helped profits more than triple between April and September.”
Over the longer term, Japanese payouts have grown faster than all other regions except North America, up 124% since 2009.
Funds to consider: Baillie Gifford Japanese Income Growth
China is comfortably the largest dividend payer in emerging markets and saw an increase in the total distributed in 2020. This explains why emerging market payouts only dipped 6.0% on an underlying basis. Despite the pandemic originating in China, the economy re-opened quickly, limiting the damage to companies’ operations. Moreover, most of the dividends related to 2019 profits and were upheld.
“In Brazil, most companies in our index cut or cancelled payouts, but the total for the year was up thanks to the restoration of Vale’s dividend,” the report stated. “Indian payouts were also higher, as a big increase from tobacco group ITC (becoming India’s largest payer) offset cuts and cancellations from a range of other companies.”
The report concludes: “The outlook for the full year remains extremely uncertain and our worst-case scenario sees payouts fall 3% for the full year an underlying basis while our best-case expectation for 2021 is that dividends grow 2%.
“The pandemic has intensified in many parts of the world, even as vaccine rollouts provide hope. Importantly we will see banking dividends resume in countries where they were curtailed, but they will not come close to 2019 levels in Europe and the UK, and this will limit the potential for growth.
“Those parts of the world that proved resilient in 2020 look likely to repeat this performance in 2021, but some sectors are likely to continue to struggle until economies can reopen fully. As with any economic recovery, profits are likely to rebound more quickly than dividends.”
*All figures sourced from the Janus Henderson Global Dividend Index, edition 29