12 months on from the biggest dividend cuts since World War II, there are signs of improvement for income investors.
On a global basis, in the first three months of 2021, dividend payouts fell at their slowest pace in a year, down 2.9% on a headline basis* - only one company in five (18%) cut its dividend, far fewer than the 34% that have cut over the last year*.
Does this mean we are over the worst? We asked a range of equity income managers from around the globe for their views on the outlook for their regions in the second half 2021.
Edmund Harriss, co-manager, Guinness Asian Equity Income:
“Last year in Asia, the biggest dividend cuts were to be seen in Australia, Hong Kong and Singapore particularly amongst banks and miners. However, dividends from the Taiwanese electronics manufacturers and from Chinese companies proved to be much more resilient.
“We have already been positively surprised by recent company results. Cash generative businesses with pricing power and the ability to manage costs have a greater likelihood of growing their dividends, and in an environment of rising inflation and interest rates are probably a good place to be.”
Karen See, co-manager, Baillie Gifford Japan Income Growth:
“Japanese companies benefited from strong balance sheets coming into the pandemic and, in aggregate, free cashflows have increased due to lower levels of spending, so they are in a robust financial position. At the same time, a recent expansion in the savings rate among households, which were already awash with cash, bodes well for a sharp recovery in demand.
“A recent poll conducted by the Nikkei of 1800 Japanese companies indicated that a third of businesses plan to increase their [dividend] pay out ratio. There has also been a recovery in share buy backs after a hiatus last year, resuming the multi-year trend of rising shareholder returns. Even several companies that expect to remain loss-making have plans in place to increase dividends.”
Fiera Capital’s Ian Simmons, who runs the Magna Emerging Markets Dividend fund:
“Emerging markets have seen dramatic swings between the digital euphoria of 2020 and the cyclical re-opening trade of 2021. Between these camps we see plenty of quality companies capable of growing their earnings and dividends consistently which are still on offer at very reasonable valuations.
“We expect performance to be more broad-based than the extremely focused returns of 2020, with scope for the performance lag in dividend-paying companies to close. Rising commodity prices benefit several emerging market stocks both directly as low-cost exporters, and indirectly as the trickle-down effect of stronger currencies and stronger government balance sheets benefits a broader cross section of domestic companies.”
Clare Hart, manager of JPM US Equity Income:
“2021 continues as a year of reopening and recovery in the US with expectations for the best economic growth in over 30 years. This strong rebound in GDP is being reflected in the performance of the US market with the more cyclical elements leading the way.
“While we see opportunities across the market, we are cognisant that an overly enthusiastic “return to normal” market sentiment can be its own risk. With this backdrop, we see opportunities across sectors in specific areas. Within financials we like banks and asset managers. Industrial end markets are also off to a strong start, and we expect these trends to continue. Some of this appears priced in, so we continue to watch valuations and seek specific opportunities or dislocations in names.”
Andreas Zoellinger, manager of BlackRock Continental European Income:
“We think the fundamental support for European markets is strong as a result of a positive earnings outlook backed by improving economic momentum. Alongside continued strong consumer demand, we expect spending from the EU Recovery fund to begin in the second half of this year, and we see this as supportive for several of our leading businesses addressing digitisation and the green transition.
“Over the last 7-8 months the market has been led by poorer quality businesses, catalysed firstly by the successful vaccine trials, and latterly by high level reflationary macro narratives. We believe this has run its course, and focus will soon return to company fundamentals.”
Tom Dorner, co-manager of ASI Europe ex UK Income Equity:
“We’re positive on the outlook for European dividends during the course of 2021 and, particularly, as we enter 2022. The earnings season in the first quarter of this year was strong and dividend estimates have seen the highest level of positive revisions in the last decade. It’s also notable that management teams have started to mention share buy backs in their communications again.
“We’ve been overweight financials for some time, because they are well positioned for the improving macroeconomic backdrop and also offering a compelling combination of high dividend yields and dividend growth. We’ve been adding to a number of positions since the start of the year because we have confidence that their balance sheet strength will support extraordinary returns to shareholders in additional to attractive starting dividend yields.”
Charles Luke, manager of ASI UK Income Equity:
“The second half outlook for UK equity income is positive - the broad backdrop is supportive both politically and economically. We also believe that valuations in general are attractive given that UK equities have lagged most global equity indices and, on a sector-adjusted basis, are still very appealingly valued.
“This will increasingly come to the notice of international investors who are underweight UK equities. It is also interesting that M&A activity has increased, signalling value in the market. Furthermore, in a world where income is scarce, the UK equity market continues to offer a generous dividend yield. Nearly all companies that needed to have rebased their dividends so we should now see robust dividend growth from this point on. In short, UK equity income offers significant potential for the second half of the year.”
*Source: Janus Henderson Global Dividend Index, Edition 30, May 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund managers and do not constitute financial advice.