Can the astounding global dividend bounce-back last?

Will Australian investors’ love affair with the “Big 4” banks resume after the pandemic, or has the equity income dynamic shifted forever? And what’s the big sector now barnstorming its way up the list of biggest global dividend payers? These questions and more are answered during this interview with Jane Shoemake, client portfolio manager on the Janus Henderson Global Equity Income team.

Five years after I first interviewed her about the Janus Henderson Global Dividend Index (for a different publication), Shoemake says the landscape has shifted dramatically in many ways. Yet some things remain the same, especially when looking at the Australian situation.

Though the Global Equity Income fund doesn’t hold Australian income stocks, it’s a region Shoemake and her team watch closely.

In this wire, Shoemake discusses where equity income is likely to come from over the next couple of years, explains why dividends have bounced back so quickly and highlights three key takeaways from the latest quarterly report.

Source: Janus Henderson

1. Has the last 18-plus months been the most remarkable period for dividends so far?

The study launched at the end of 2009, after the GFC. It would have been great if it started a little earlier and we captured that drop from the global financial crisis, because then we would have had a more direct comparison with the pandemic. But the reason we started it was because the UK is known as such an income market, as is Australia.

UK investors have always been intrigued about income and where it comes from. We haven't seen the concentration issues as in Australia, so there was always a lot of data around the UK market on income and income-providing stocks.

As a global equity income team, we realised how useful it could be to expand that on a more global basis. Because there are some regions that have high yields, but very little dividend growth – and others that have quite low yields but are growing quite substantially, the US being a great example of that. We felt it would help bolster what we already knew, to have more analysis around the trends and what was going on with dividends at a global level.

In terms of the most interesting period, I've looked at all the numbers and yes, since March last year we’ve seen the biggest drop. But let's be clear. We haven't been through a whole cycle – as I said, we missed the GFC.

During the pandemic, earnings didn't fall as much as we anticipated, relative to the global financial crisis and dividends in our study. The headline fall was around 12%, nowhere near what they were down in the GFC when they fell over a third. So, you need to put it in context.

I don't think this is a very remarkable period. We've seen a big drop down in dividends, but they’ve bounced back very quickly and globally.
What you experienced in Australia, where you did see a large pullback, as we did in the UK too, was much more muted on a global basis. It goes back to that point that if you have a global approach, you're more diversified and you're protected from some of these shocks.

We think that by 2022, dividends are going to be quite close to the levels of 2019 in terms of the amount of money that companies will generate globally.

2. Janus Henderson Global Equity Income doesn’t hold any local companies. What’s the rationale for that decision?

Because the Australian market has such a strong domestic dividend-paying market. We didn't want to double up on the Australian exposure, and Australia at the global level is not a big part of the MSCI World as a percentage weight. So, we went ex-Australia purely to complement the fact that clients almost certainly have exposure to domestic stocks and income.

We wanted this fund to be a diversifier accessing some of those regions and some of those sectors, technology being a great example, where clearly you have limited exposure in your own domestic market, as we do in the UK.

But tech makes up about 25% of the US market and are an increasingly big contributor to dividend growth globally. Some of these companies are starting to pay decent dividends. We didn't think us owning the BHP, Rio Tinto and some of your banks – when you already own them in your own domestic portfolio – is particularly helpful.

3. If you were presenting this report to a room full of Australian investors, what three things would you highlight from this report?

Dividends globally have felt a lot lower than they did in a single country approach. Clearly, what we've got here with a minus 12% headline figure when you have minus 40% in Australia, is that clearly, you have a lot more protection in difficult times if you have a global approach.

We've got some really good exposure to some of those companies that are recovering well from the crisis. And when I look at the numbers from our forecast to 2021, we're going to get about US$1.4 trillion. By comparison, that number in 2019 was US$1.43 trillion. This is almost back to where we were at the end of 2019.

Another point is that the recovery has been decent and that in 2022, we may get some more growth and see dividends grow again. We're back on track for 5% to 6% per annum. That is the long-term trend for dividends.

Especially in an inflationary environment, that 5% to 6% dividend growth per annum is very important. You don't get that from a bond coupon. The growth element of equity dividends gives you a level of inflation protection.

The final point I’d emphasise is diversification. The banks, during the GFC and last year had to defer or suspend dividends, depending on the regulations. We saw something similar in mining stocks back in 2016.

It can be very uncomfortable if you have too much exposure in a small number of areas. So spread your risk. This study shows you've been very much protected by having a more global approach.

And again on the miners, most have now moved to fixed payout ratios. That means that if earnings fall, their dividends will also fall. So, in future, their dividends are going to be more cyclical than historically. And people need to be aware of that.

Obviously, we've got some great payments coming out of these miners now, including some special dividends from the likes of BHP. Commodities have had an incredibly strong run and I'm not calling the end of that, but people need to be aware that if the cycle turns – and at some point it will– those dividends aren’t safe and will fall as the commodity cycle moves.

4. With the big bump from the “catch-up” effect after the delayed dividends of 2020, how sustainable are current levels?

Really, the low point for dividends in this crisis was Q2 2020. So, what we now are comparing is this quarter a year later, where many of those companies are again paying dividends and have made some increases.

Some have caught up with dividend payments, and some have paid specials. Measuring from the point of maximum pain to the point of the maximum return, that's going to continue for the rest of the year.

But in aggregate, from a headline decline of 12% last year, we're expecting a headline gain of 11% this year. We should be back to where we were at the end of 2019, two years after the big fall.

It's been a very short, sharp, horrible period to go through as a dividend investor, but many companies have come back quicker than we expected. Cash flow has been decent. You can see that from the earnings. Much of this is because of the support economies have been given. I think It's been much better than any of us thought a year ago.

Some areas including airlines, hospitality, travel and leisure are still struggling as some parts of the world remain in lockdown. We're not out of the woods yet. If we get another COVID variant and get another lockdown are some of the caveats to all of this, but currently, it's looking very positive.

5. Is the resumption of dividends by Australia’s banks just a return to the same old story for local income investors? Or is there a broader shift?

At the end of June 2020, financials account for 44% of equity income in Australia, versus 37% now. So, their share of the income you get from the total market has declined but it's still quite high.

On the other hand, materials have gone from 21% to 31%. So, you've had a slight shift in that the financials were number one and materials were second in Australia. There has been a shift, but two thirds of equity income is still coming from two sectors and a very small number of stocks.

If the commodity cycle starts to go off the boil – and I'm not suggesting that it's imminent, but when that happens – people can't assume the likes of BHP and Rio Tinto are always going to pay at their current levels.

6. Technology contributed US$47 billion in Q2 2021 versus US$33 billion in pre-pandemic 2019 - easily the biggest gain. What’s behind this upward trend and can it last?

Back in early 2000, many tech companies didn't even generate profits and were priced purely on sales, if that. So, dividends were never really on the cards.

But we've seen incredible cashflow generation from some of these tech companies in the last 10 years. And some of that cash has been coming back to shareholders as some tech firms started paying dividends. It depends on the individual company, but we’ve seen dividends from Microsoft.

When we first invested in Microsoft, it was yielding 3.5%. It clearly doesn't yield that now, because the share price has gone up so much, but they've grown their dividend year in, year out and now pay out about 10% per annum. So there's a huge cash flow generation being thrown off by some tech companies.

They’ve got stronger and bigger and the cash flow generation in some of them is phenomenal. They also do share buybacks and many now have a huge amount of cash on the balance sheet. So, I'm not surprised by that trend at all. You also have to consider that many tech firms were beneficiaries of the pandemic, whereas obviously if you're in leisure, the world stopped for you.

I’m not surprised at all and I think that is likely to continue. Because we still have a long way to go with 5G, the whole transition thing to electric vehicles and many other tech themes – there are no signs of this stopping. There was structural growth in these areas already, driven by individuals and also companies improving the technology in their businesses and improving their processes. The pandemic has accelerated that.

This is why we have about 14% to 15% of our funds invested in technology, which is unusual compared to some of our competitors. But we recognised some of these dynamics that might not have high headline yield, they might only be yielding 1% or 2%, but the growth is phenomenal.

There are still many large tech companies that don't pay dividends. But then there are those like Microsoft, Apple – which doesn’t pay a big dividend, but it does pay – and TSMC is also a holding as are Cisco and Samsung Electronics. Within the tech sectors, there are real opportunities to get yield and growth.

7. What are some other global dividend-paying companies you’d highlight over the next 12 months?

There's been quite a bit of rotation among the top end of this report. Some of the oil companies have dropped off, such as Shell and BP. And they're not going to suddenly start going back to where they were. They've got to transition to a new greener world.

Some of the banks have fallen off too, such as HSBC, which has gone from being a big payer to now drop way down the list.

We’ve also started to see companies like Nestlé and the miners rise up the list this year. And we're very aware of this whole transition around climate change and what's happening with net-zero carbon; we've got the COP26 conference at the end of the month in Glasgow.

Samsung electronics is now up there as one of the bigger payers in this quarter and Microsoft is now getting up there as a payer. Even though it only yields just under 1%, it's a big company, so that’s still a big number in absolute terms. Microsoft is now about eighth on the list.

Taiwan Semiconductor has featured but it’s not there this quarter. That drought in Taiwan has had a big impact and has also hit auto production and a raft of other areas. And this comes back to the supply chain disruption that people are experiencing throughout the world currently.

We discuss it quite a lot and clearly in the UK, we feel it particularly acutely at the moment because we've got some empty shelves. We've got Brexit as well that has had an impact, but there are clear supply chain issues that have been going on out of China and freight costs have gone up through the roof.

After the pandemic, we're still trying to get over some of the disruptions that were caused by the shutdowns. And it's not a smooth process, with a long way to work through that yet into 2022.

Access the full report

The first-of-its-kind, Janus Henderson Global Dividend Index report is a quarterly, long-term study into global dividend trends, and analyses dividends paid by the 1,200 largest firms by market capitalisation. Click here for the latest update.

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