Ben Lofthouse, Head of Global Equity Income, provides an update on some of the dividend trends his team is seeing within the world of equity income.

Key Takeaways

• The changes to social and working practices because of COVID-19 have benefited many companies – notably in the technology, pharmaceutical, utilities and telecommunication sectors – and the dividends they pay.
• Economically sensitive areas of the market, such as leisure and airlines as well as oil and gas companies, have been most impacted by the slowdown, while regulators and central banks in some parts of the world have asked the banking sector to put a hold on paying dividends.
• The uncertainty has left large parts of the market looking attractively valued from a historical perspective. A selective approach should allow for investment in leading companies that are able to fund their dividends while investing for the future.

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Ben Lofthouse: So in terms of dividend trends, in terms of what we are seeing and how we have reacted to that, firstly, I think it is worth saying that actually a lot of companies have continued to pay dividends all through this year. So after the initial time when COVID first kind of started to impact the market most and economies most, the key western economies, we did see a large number of dividend cuts in markets like the UK and Europe. But actually, we have seen the trends in areas from Asia and the U.S. and Canada actually being much more stable the longer this has gone on. So, we haven’t seen a kind of spread of those dividend cuts to other areas.

In terms of areas that have been most impacted, they are obviously the most cyclical areas, so areas like leisure and airlines, which are not sectors that we have had a great deal of exposure to, where we cut exposure where we did have it very early back in the first quarter of this year. Other areas that have been impacted particularly include companies like the oil and gas names. And the banking sector particularly within the UK and Europe, where the regulators have asked companies not to pay their dividends. But at the same time, within Europe many insurance companies were allowed to pay their dividends, so again, it has been a question of being very active and active managers have managed to maintain a much better level of dividends this year than the overall market would suggest.

In terms of the outlook for dividends, there is definitely a feeling as we have come through this year that the worst is behind us. That is partially because those companies that were paying high payout ratios or had balance sheets that perhaps were vulnerable have rebased those dividends. Consensus is looking for around about 5% dividend increase next year. The big variable between that being 10 or less than five will be around whether the banking sector is allowed to pay dividends. So in many cases, the regulators in some parts of the world have asked the banking sector to hold off on paying dividends for now.

The actual impairments coming through are less than many commentators and the banks themselves I think would have thought five or six months ago. But it remains to be seen whether they will be given permission to pay next year. So overall looking for growth again next year, the extent of that growth might depend on some factors that are outside of the purely kind of economic arena.

So, moving on to where we are seeing opportunities, it is worth saying we have continued to see a lot of opportunities in a lot of different sectors, so there has been enormous divergence between what people discuss as value and growth, and effectively one way of looking at it is the uncertainty has caused people to look very much for safety in all types of different assets. And that has left large parts of the market [to] become very attractive.

Areas like the health care sector, again, many pharmaceutical companies are continuing to pay dividends. Many of them have actually seen the crisis shining a bit of a spotlight on some of the expertise that they have in areas like diagnostics. Again, that is quite an interesting sector there, very diversified. And then other sectors, again, they have continued to cope quite well with the crisis, I mean areas like staples and telecommunications. I think in the longer term, you know, we are cautiously optimistic on a 12- to 18-month view that we are closer to the end of this than the start. The progress on vaccines have been faster than people have expected. And actually, the treatments are getting better as well for COVID. So we are in the midst of a pickup at the moment, think again, our 12- to 18-month view there will be a lot of opportunities in the market in some of the more cyclical areas that are not necessarily structurally challenged, but are cyclically challenged. And it just might take a little bit more time for investors to feel less cautious about the world when they come back to them.

 

Unless otherwise stated, all source is Janus Henderson Investors, as of November 2020.