Europe’s cash-rich companies return to dividend culture

Fund managers explain how the recovery experienced by European dividends since 2008 has further to run, despite the recent high market volatility.

Europe’s asset managers have promoted equity income funds since the financial crisis of 2008 and August’s extreme volatility, as a ‘cushioned’ way for investors nervous of macro-economic shocks, to gain exposure to share markets.

Few managers have advised riding share prices up and down – more down than up, recently – as the preferable way to play share markets in such volatile times.

Allocators seem to agree. In the middle of August’s volatility, Willem Sels, UK head of investment strategy at HSBC Private Bank, said: “In the equity markets, we maintain a more defensive sector allocation, and believe quality dividend strategies should help limit the damage of possible further downside to equity market indices.”

In the US, Mike Clarfield, portfolio manager at Legg Mason sister organisation ClearBridge Advisors, identified dividends as one reason the outlook for US shares remained positive.

“US businesses are in great shape, profit margins are at record highs, balance sheets are solid and the companies are generating high cash flows. For investors, dividends are showing great promise. Dividends could become in future a more important part of the returns on investments.”

Some managers argue, with statistical support, that investors who identify companies paying and increasing their dividends will harvest greater profits in the long term, than investors who adopt other approaches to equity investing.

Continental companies grew payouts by about ten per cent last year as domestic and emerging market demand for their products remained generally strong, says Stephen Macklow-Smith, manager of the JPM European Investment Trust.

This growth is a continuation and a magnification of a longer-term trend among European companies, which increased dividends on average by 4.9% a year since 1970.

This was interrupted by the financial crisis, when companies cut sometimes sharply. But Macklow-Smith suggests the upswing since then is not over, and this year European investors could expect distribution growth similar to that of 2010.

On top of this, he notes European equities offer yields exceeding 3% – currently around 3.6%.

Equities are the only asset class whose yields now exceeded their ten-year average, with share markets in this unusual position including Europe, but also the US and Japan.

Thomas Schuessler, DWS’s head of portfolio management dividends, has predicted European, and in particular German companies, will soon reach new highs in their dividend distributions.





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