Deutsche, Fitch question standard dividend fund analysis

Analysts at Deutsche Bank and Fitch are applying factors from the ‘real world’ to the field of dividends, with some startling results that are often quite contrary to traditional equity income strategies.

Their studies come as European shares yield 4.5%, comfortably higher than much core fixed income, and equities in the UK, US and Japan.

Deutsche Bank’s Cash Return On Capital Invested (CROCI) team finds that, for 760 non-financial stocks analysed worldwide, a company’s financial health can sometimes look significantly different when taking an economic approach to accounting, rather than relying on accepted accounting methods behind companies’ reports to investors.

Yield analysis

For Fitch, meanwhile, the real threat is that Europe’s cash-strapped governments could intervene in the popular dividend sectors of telecoms, utilities and financials to bolster public finances, putting at risk the sustainability of their distributions.

Its analysis shows European dividend funds are heavily overweight in these sectors, with a 40% exposure on average versus 29% representation in the MSCI Europe index.

Fitch says fund managers typically use yield to analyse dividends. This is, however, backward looking, so by definition it cannot account for the threat of future dirigisme.

Fitch stresses the need for a forward-looking analysis on dividend sustainability: “Managers need to develop a thorough strategic analysis covering barriers to entry, pricing power and structural sector trends.”

Francesco Curto (pictured), head of Deutsche’s CROCI Investment Strategy and Valuation Group, says there are various differences between CROCI’s earnings analysis, and the production of corporate reported, audited numbers that most fund managers rely, and buy on. Use the wrong earnings assumptions, and many other important ratios used to assess investability will be skewed, he warns.


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