Dividends: ‘You have to be very active in stock selection’

-- | 23/06/2020

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Glenn Freeman: I'm Glenn Freeman for Morningstar. In this edition of "Ask the Expert" I'm speaking with Jane Shoemake from Janus Henderson about the outlook for global dividends.

Jane, thank you for joining us all the way from over there in London.

Jane Shoemake: Pleasure, Glenn. Nice to see you.

Freeman: It was a pretty dismal outlook from this global dividends report that you put out, say, in the middle of last month. Let's say, the best-case scenario that global dividends would fall 15%, worst-case 35% and it was worst still in Australia. I think it was worst case 30%, best-case 50% fall. But how can investors best address some of the concerns that this raises, especially for income investors?

Shoemake: Yeah, it's an incredibly challenging year. It's the most challenging year we all have had in dividends and the income space since the Global Financial Crisis. To put those numbers you quoted, so globally best-case minus 15% on dividends, worst-case minus 35%. To put them in some context, during the Global Financial Crisis, global profits fell around 60% and dividends fell around 30%. But that happened over a sort of 15 to 18-month period. What we've seen this time around is a very sort of similar feel for dividends and profits possibly this year but in a much shorter space of time. So, this has happened very quickly and very dramatically.

But I would say that even with those falls there are still plenty of companies globally that are paying dividends, are generating cash and are relatively resilient. And it's our job as active fund managers to position the portfolio into those stocks where we think are going to be able to weather this very difficult environment we currently find ourselves in.

Freeman: So, which sectors are you backing – are you more positive on in this environment and conversely which ones you like the least?

Shoemake: So, in the report we produced, it's the Janus Henderson Global Dividend Index Report, it covers the dividend trends of the world's top 1,200 companies and we estimated in 2019 around 40% of those dividends were paid in companies that are very resilient defensive sectors. So, those are sectors such as healthcare, technology, consumer staples, utilities. So, we are still very much seeing payments from those types of companies. Conversely, about 40% of the dividends were from very cyclically exposed sectors and that includes the financials, energy stocks obviously we're seeing Royal Dutch Shell cut their dividend. So, we have got some cyclical areas that are being particularly hard hit. And then, the other 20% is quite mixed. I think again the message is that you have to be very active in your stock selection and you have to be aware of the dynamics of the individual companies you're investing in, the geographies and the sectors. And the most important thing is to ensure you're diversified is not to have too much of your exposure in just one country or one sector.

Freeman: And that sort of leads onto my next question about which countries – I think North America was one that you were speaking about. Is that still the most secure place for dividends?

Shoemake: So, North America isn't a high-yielding market. It yields around 2% and it has about another 3.5% that comes back to shareholders in share buybacks. So, actually, what we've seen in the U.S. is that those share buybacks being turned off, but the dividends have tended to be more resilient. So, it's a lower-yielding region but we don't think the falls there will be quite as bad as elsewhere in the world.

Freeman: Why are Australian corporates more exposed to the dividend cuts than say some other countries around the world?

Shoemake: In Australia, the top 10 stocks account for over 60% of all the income paid by the market. So, it's very concentrated. And of those the four big banks are around 40%. So, you have a real concentration of this income. And of course, what happens is, when you see any cuts as you have seen from some of the banks is that really impacts the dividend available in that market. So, I suppose it's really to say to our viewers that you must be diversified both by geography and by sector, because if you diversify globally, you can obviously access some of those technology sector stocks I was talking about that actually pay decent dividends, great cash flow. You just can't access those domestically in your market. And so, again, it's about spreading the risk and making sure you don't have too much exposure to any one area.

Freeman: The government pressure surrounding corporate dividends has been quite a prominent feature in sort of recent months. How significant has this been?

Shoemake: It's been really interesting in this particular crisis the regulatory intervention we've seen. In the U.K. and in Europe, basically, the regulators have stopped the banks paying dividends. They've also told insurers to be very careful about how much they return to people via dividends. That is not something we saw in the financial crisis per se as much. So, it has been quite a unique aspect. And I think it's quite right really that companies really have to think about what they are doing with regards their balance sheets at the moment because there is a social aspect to this. It's really important, when this is such a difficult time for so many people that these companies look after their employees and they keep their businesses in as good a position as they can for the medium to long-term. And if that means not paying a dividend in the short term, well, for us as investors that's fine, because we want these businesses to be sustainable and we want them to look after the people that they employ because we believe long-term that will ultimately make them better businesses.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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