Global dividends grew in Q3, but a marked slowdown is underway
A slowdown in global dividend growth is underway, according to the latest Janus Henderson Global Dividend Index (Index). This trend began in the second quarter, as identified in our previous report and has continued into Q3.
We have been cautioning investors
that the rapid income growth they have enjoyed over the previous couple of
years was set to return to more normal levels, as a softening global economy
begins to impact corporate earnings and dividends.
Key report findings
Australian dividend cuts leave domestic investors vulnerable
Australia had a difficult quarter, with approximately 40% of companies in our Index cutting their payouts. The biggest impact came from National Australia Bank, which made its first dividend cut in a decade, as higher costs and rising regulatory pressures meant it had to hold more capital. The big four banks already distribute a very large proportion of their profits, so their dividends are vulnerable to any earnings pressure.
Telstra made another deep cut as it struggled with broadband rollout costs and rising competition, while Woodside Petroleum’s dividend suffered from the impact of adverse weather, lower energy prices and maintenance shutdowns.
Australia already has the lowest dividend cover in the world among the bigger economies, so if the slowing economy leads to a decline in corporate profitability, it will be bad news for income investors, highlighting the importance of taking a diversified global investment approach. It wasn’t all bad news in Australia though, as the mining sector saw large special dividends from BHP and Rio Tinto.
Weakness in Asia Pacific Ex-Japan
The slowing global economy is taking its toll in Asia Pacific. Lower profits flow through very quickly to dividends in this part of the world because most companies operate a fixed payout ratio dividend policy, so when profits fall, dividends fall in tandem. As a result, Asia Pacific has lost its position as the fastest growing region for dividends for the first time since mid-2017, overtaken by North America, and equaled by a resurgent Japan.
Chart 1: Janus Henderson Global Dividend Index by region
North America the fastest growing region
As shown in Chart 1, North America has seen faster growth than any other part of the world over the prior decade, overtaking Asia-Pacific.
Record US dividends of $124.7bn were 4.1% higher year-on-year on a headline basis. Special dividends were much smaller this year, however, meaning that the underlying growth rate was well ahead of the global average at 8.0%. With most US companies paying four equal quarterly distributions, the dividend growth trend is set very early in the year. But changes in dividends lag behind earnings and a slowdown in US profit growth is now apparent. Consequently, a rising proportion of US companies are not increasing their dividend payments; one in six US companies in Q3 kept payouts at the same level, up from one in ten in Q1. Nevertheless, there remain very few outright cutters and one third of Index constituents are delivering double digit dividend growth.
The most recent US earnings season was better than anticipated, with most companies beating relatively pessimistic consensus expectations. For the time being, companies are generally choosing to increase their payout ratios rather than reduce dividend growth. The largest dividend payer in the US this year will be AT&T, jumping ahead of Apple, Exxon Mobil, and Microsoft. AT&T’s return to the top spot for the first time since 2012 is thanks to its acquisition of Time Warner in 2018. The combined company will distribute close to $14.9bn, though this will not be enough to dislodge Shell as the world’s largest payer for the fourth year in a row.
China’s slowdown squeezes dividends
China’s companies pay around 80% of their annual dividends in Q3, enough to make China’s contribution the third largest in the world during the quarter, after the US and the UK. The slowdown in the Chinese economy is affecting the dividend-paying capacity of its companies, particularly since in the short term dividends are more closely tied to profits in China than in other parts of the world, such as the US and UK. Almost half the Chinese companies in our Index reduced their payouts year-on-year. China Construction Bank is China’s top payer. It was the world’s sixth largest in 2018, and accounts for almost one third of all Chinese dividends. But a squeeze on margins meant it only just managed to eke out a small increase in its annual payout this year.
The energy sector saw the strongest growth in Q3, with dividends up by just over a fifth on an underlying basis. Most of this came from Russian oil companies, but China, Hong Kong, Canada and the United States also made a significant contribution.
headline growth was boosted by special dividends, but telecoms companies around
the world were hit by cuts, with the biggest impact from Vodafone in the UK,
China Mobile and Telstra in Australia. Just over half of the telcos in our Index
increased their payouts year-on-year, reflecting the challenges faced by the
The third quarter unfolded broadly in line with our expectations. North America was a little stronger, Asia (particularly Australia) and the UK a little weaker, emerging markets were in line, and Europe and Japan did well.
Our forecast for the full year remains unchanged at $1.43 trillion, up 3.9% on a headline basis, equivalent to an underlying increase of 5.4%. 2019 will therefore mark the third year in a row that dividends have reached a new record in US dollar terms. It will also be the tenth consecutive year that dividends have grown in underlying terms.
Q3’s developments show the advantage of taking a global approach to income investing – diversification means that slower growth in one part of the world is often compensated by faster growth elsewhere.
Underlying growth this year will be slower than the rapid increases investors enjoyed in 2017 and 2018, but at 5.4% it is still encouraging, given the wider global context. We will introduce our forecast for 2020 in January, but it is likely that dividend growth next year will slow further. Consensus expectations for corporate earnings still seem too high, given the current slowdown in the global economy; slower profit growth will impact dividends too. Yet, with interest rates at their current low levels, equities will continue to provide a valuable source of income for investors, even if the rate of dividend growth is less eye-catching than in the recent past.
Download the full report for detailed analysis across regions and sectors
What is the Janus Henderson Global Dividend Index?
The Janus Henderson Global Dividend Index is a long term study which tracks the world's 1,200 largest firms by market capitalisation, measuring the progress global firms are making in paying their investors an income on their capital.
- Headline dividends The sum total of all dividends received.
- Headline growth Change in total gross dividends.
- Special dividends Typically, one-off payouts made by companies to shareholders that are declared to be separate from their regular dividend cycle.
- Underlying dividend growth Headline dividend growth adjusted for special dividends, change in currency, timing effects and Index changes.
Note: All dollar figures are in US dollars.
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Jane Shoemake is a Client Portfolio Manager on the Global Equity Income Team at Janus Henderson Investors. Prior to joining Henderson in 2006, Jane spent two years at Threadneedle Investments and five years with J.P. Morgan Asset Management, where...
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