11th March 2014
Dividends have contributed 42% of equity returns in Europe since 1973 a study by Allianz Global Investors has revealed. In a report issued today, the fund manager says that on a 5year rolling basis, dividends have made a consistently positive contribution to MSCI Europe performance since 1973 and have been able at least to mitigate (1973 – 1978; 19982003; 2008 – 2013) the effects of share price losses in difficult markets. Dividends accounted for about 42 % of the total annualised return of equity investments for the MSCI Europe over the entire period shown in the graph below. Dividends also contributed more than one third to total performance in other regions as well, such as North America (MSCI North America) or Pacific (MSCI Pacific), although the dividend yields themselves were lower in absolute terms.
The report also suggests that equities that pay out high dividends not only may offer higher returns, they could also bring more stability to a portfolio illustrated below.
The report adds: “A look at the US, where longer time lines are available, shows that the volatility (measured against the 36month rolling standard deviation) of US equities has been tangibly lower since 1972 among companies that paid dividends compared to stock corporations that did not distribute profits. The same trend is visible among European dividend securities since the 1990s.”
The report also considers three factors that should auger well for dividend payouts and three potential factors that might count against across the board increases.
The reasons for optimism
1. We believe that the basis for dividend payments – company profits – will continue to grow moderately in 2014. Overall the framework of monetary policy should continue to support global growth–monetary policy therefore represents the safety net for the global economy. The inventory buildup should benefit the developed economies additionally. Accelerating investment activity boosts economic growth further.
2. As earnings blossomed following the 2008/2009 financial crisis, the distribution ratios of companies have declined considerably. In Europe, the ratio of paid dividends to earnings per share is currently around 55 %, which is moderate by historical comparison. In the US, it is close to its lowest levels ever, at about 35%. There is thus scope for dividend hikes.
3. At present, companies are sitting on a lot of cash. The net cash flow of US companies, for example, is nearly 14 % relative to US gross domestic product and close to its former record high. Companies have already made good progress with the deleveraging phase that followed the financial crisis to strengthen the equity base and reduce borrowings. In 2014, these companies can carry on focusing on shareholder value.
There are, however, three factors that might preclude a general increase in dividend yields
1. Historical experience has shown that, following financial market crises, recovery tends to be fairly weak, and a selfsustaining upswing is slow to emerge. This nourishes expectations of persistent weak economic growth.
2. Earnings of many companies are still volatile. Banks, for example, are scarcely able to guarantee dividend continuity when faced with massive refinancing needs and increasing regulation. These companies, however, are generally not the main focus of dividend strategies.
3. Instead of distributing their free cash flow, companies may search for investment opportunities, possibly resuming their merger and acquisition activities, for example. Past studies on acquisitions, however, have shown that the vast majority of acquisitions have never generated the promised returns.
Joerg de Vries-Hippen, CIO European equities at Allianz Global Investors, says: “Investors should continue to take a closer look at dividend paying companies. We’re still finding very attractive companies with reasonable valuations that offer an even higher dividend yield. If investors want to get real returns in times of financial repression they should start to see dividend paying stocks as a possible substitute “to earn the coupon” they need. A focus on sustainable dividend payments has become a clear pattern on the CEO agenda of listed companies in Europe and it looks like the dividend theme is here to stay as it is a convincing way of gaining shareholder trust . This policy does require a lot of discipline, but the good news for investors is that you’d be hard pushed to find a better proxy for the robustness of a company’s earnings expectations than its dividend policy.”