The 5 traits of truly resilient dividend payers

Livewire Exclusive

Livewire Markets

'Unprecedented' was a word thrown around incessantly throughout 2020, and once again it is the perfect word to describe the recession that hit our shores. Alan McFarlane of Dundas Global Investors highlights that this was not initially driven by political or economic factors, but their subsequent influence was certainly pivotal. Lockdown, quarantine and mask-wearing severely restricted face-to-face economic exchanges, however, it did bring those companies with resilient business models to the forefront. 

Resilient is what delivers dividend growth, well-managed organisations with high profitability, high reinvestment rates, low financial leverage, sound governance...(management) that understands that their job is not to maximise this quarter's earnings but to sustain the business in the long run.

While there is no doubt that many businesses were unable to operate as normal under the current circumstances, this government-imposed recession has exposed those with fundamental operating flaws. Accordingly, McFarlane emphasises how it is the strongest of business models that will be able to maintain cash generation and therefore dividend payment in the aftermath. 

Edited transcript:

Which parts of the market surprised you as being resilient in 2020 with regards to maintaining dividends and what were some lessons that you picked up from the year?

The first thing to do is remember that 2020 was a recession and its lingering effects were like no other in our lifetimes. It wasn't prompted by an Arab Israeli conflict. It wasn't an oil crisis. It wasn't a bubble economy in Japan. It wasn't the tech bubble of 2000. It wasn't a credit bubble, all of which you could argue are political or economic facts. This was a health fact. 

30 years ago, your Prime Minister said, "This is the recession that Australia needed to have." What we've got now is politicians saying, "We have to put you into lockdown. Otherwise, this will run rampant," which then changed subtly to, "Otherwise, our health systems will be overrun."

The key to economic activity and wealth generation is exchange. It's the buying and selling of goods and services between individuals. Although we've become much more dwellers in the online world, the great majority of the economy continues to be face-to-face. 

You can get on a virtual Emirates A380 to flight to Brisbane but the real thing is much more fun. This recession has particular characteristics now because of government policy. It's hard to be resilient when the government says you can't fly. It's hard to be Qantas, it's hard to be Ryanair, it's hard to be Southwest Airlines when you're told not to do that.

What's resilient is what delivers dividend growth, well-managed organisations with high profitability, high reinvestment rates, low financial leverage, sound governance. Governance is a good word. It's a fancy word for board and management. Boards and management must understand that their job is not to maximise this quarter's earnings but to sustain the business in the long run - that showed up last year. Out of the 66 stocks in the fund, 44 of ours increased the dividends and a further 10 held them. You asked me where have we seen it? We've seen it in the stocks and the portfolio, in technology, in healthcare, some of the financial services companies and so on. And beyond that group, five of them said, "We're not cutting our dividend. We're omitting it, pending how bad this is. And if it's not as bad, we'll reinstate it," and one of them has already begun to. 

We would agree with those who say that what the crisis revealed, if you take away the airlines and the hotels who were just stopped but what the crisis revealed was for many industries that were already under pressure, this hit weak business models much, much harder. 

If you just look at the Australian banking sector, shrinking their interest margins, the profitability came from shrinking loan loss provisions. When those provisions kicked up there, wasn't the cushion to absorb them. So it's the long-run problems that this government-imposed recession have brought to those weaker business models. And they've crumbled in their ability to sustain dividends as a result of that. Resilience comes from those businesses that are already generating cash and can keep going.

Interested in learning more?

If you would like to hear more from Alan McFarlane and unpack the Dundas approach further, please register for the upcoming Apostle Dundas Global Equity Fund webinar. This will take place on the 17th February.


Livewire Exclusive brings you exclusive content from a wide range of leading fund managers and investment professionals.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.