Martin Currie’s Porter sees tremendous value in global dividend payers

Europe is trading at attractive values, while the US is overvalued, says Alan Porter, manager of the Martin Currie Global Equity Income Oeic and Securities Trust of Scotland.

Overview
We are currently seeing tremendous value within the global equity income and growth sector. Relative underperformance over the last two years has created opportunities with stocks trading at cheaper values to the broader market generating a prospective dividend yield up to 4% versus 2.4% across the wider global equities spectrum. Greater shareholder orientation and investor demand has also created opportunity; as demographics change and people get older, more investors are seeking an income in retirement. There is little yield available elsewhere right now so we continue to believe that more investors will turn to this asset class.

However, the question is whether this rate of dividend growth is sustainable? Whilst we expect dividends to grow 6% in the next 12 months, our medium term view is more cautious. For the growth rate to be sustained corporate confidence needs to increase and pay-out ratios need to be higher. Without this, growth will gradually slow down and pay-outs will have to decrease. We believe we are in a sweet spot for the next 12 months, but it is going to be more of a challenge thereafter as the growth rate in dividend per share is at real risk of falling.

Regions
The portfolio is currently overweight Europe and underweight US. In the US more and more investors have been ploughing into dividend payers and the market, in our view, is looking overcooked. We are finding it much more difficult to find opportunities which provide attractive income and growth prospects than we were a year a go. The healthcare and utilities sectors are two examples which we believe are significantly overvalued.

The story in Europe is very different. There are still big macro-economic concerns and Europe has been underperforming. However, we continue to find quality companies trading at very attractive values. The issues in Europe are by no means over and are set to continue into 2014, but we believe the worst is over and is well discounted at current valuations.

Emerging markets have been particularly disappointing. Sectors such as consumer staples, that provide income and growth, look expensive relative to their developed market peers. We continue to keep an eye on opportunities but currently we have limited exposure and prefer exposure via developed market stocks.

Themes
Overall markets are up 30% but not all sectors have performed. The worst performing sectors have been the cyclicals; materials, energy and financials.

As we approach 2014, one sector we focussed on is tobacco. We believe that ‘the three Es’ should provide attractive opportunities:
– emerging markets, which still have strong sales growth
– e-cigarettes, a growth area, particularly in developed markets and
– excess cashflow, as these companies have healthy balance sheets.

We are watching US tech, where we are currently very underweight. There are many companies paying attractive dividends and there are many great franchises that generate significant free cashflow, for example, Linear Tech, Seagate and Texas Instruments. Some of these companies are undergoing structural decline and are in the process of changing their strategies to reposition for growth in new areas. We are therefore interested in them from a growth perspective and are focussing on high cashflow generating companies for potential opportunities.

Overall, within this global universe there is a strong bench of stocks offering investors both strong dividends and growth in the year ahead.

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