Every region of the world experienced robust dividend growth at the same time in the third quarter of this year and there seems to be little to derail the trend, according to Janus Henderson’s Jane Shoemake.
In the latest Janus Henderson Global Dividends Index report, headline dividend growth rose 14.5 per cent in the third quarter to $328.1bn, a Q3 record and the fastest increase in any quarter in over three years.
While this growth includes outlying factors including currency impacts and special dividends, underlying dividend growth, which strips these out, was still 8.4 per cent ahead – the fastest increase in almost two years.
“The underlying growth is really the key one to look at as we have had a couple of years at the headline level which have been really quite dull,” Shoemake, a client portfolio manager on the global equity income team, said.
Indeed, she noted that in 2015 and 2016 global dividends didn’t move far from the $1.16trn level, as the below chart shows.
Dividend growth over 7yrs
Source: Janus Henderson
“Headline growth was zero on our index in 2015 and 2016. Underlying growth in 2015 was 10 per cent, which was good, but underlying growth last year was around 0 per cent. So if you average that out you had 5 per cent per annum,” she noted.
On average, data from the last two decades show that investors should have expected between 5 and 6 per cent underlying growth per year over a rolling five-year period.
While the 8.4 per cent monitored in the third quarter is higher than the long-term average, she said it was not overly stretched.
According to the Henderson report, every region saw dividends increase in underlying terms, with records broken in Hong Kong, Australia, and Taiwan.
Ben Lofthouse, global equity income fund manager at Janus Henderson, said: “In recent years it has been rare to see dividends growing in every region of the world at the same time.
“As the global economy continues its long-awaited post-crisis normalisation, confidence is improving and company profits are rising. Income investors are enjoying the benefits of this growth as it feeds through into higher dividends.”
Dividend growth by region over 7yrs
Source: Janus Henderson
As such, the Henderson team has increased their full-year forecast for total dividends to a record $1.24trn – an increase of 7.4 per cent in headline terms and 7.3 per cent in underlying terms.
“Underlying growth is around twice as fast as we anticipated at the beginning of the year, helped by broad and synchronised global economic growth, while the headline growth rate has been pushed higher by a weaker US dollar and higher special dividends,” Lofthouse said.
North American dividends dominated the third quarter, accounting for $4 in every $10 paid out globally while every individual sector saw higher payouts.
However, the real surprise has been in Europe, Shoemake noted, with the region having spent much of the last few years in the doldrums.
“At the beginning of the year we were fairly sure the US was going to be okay but Europe is the interesting one,” she said.
“Things have been awful economically for so long there but we are starting to get some momentum now and it is encouraging to see some of that growth coming through.”
For the region, underlying growth is 4.6 per cent this quarter, which while not ridiculously high is a significant improvement from the last few years.
Of particular note is the financials sector, with some banks starting to pay more back to shareholders for the first time since the financial crisis of 2008 in part due to their rebuilt capital reserves.
“I think it’s been encouraging in terms of what we are seeing coming out of those large European stocks that have had some dull growth for quite a long period of time,” she said.
Another area of improvement has come from the global mining and commodities sector, which has come back to the dividend roster strongly after a down year in 2016.
In the early part of last year many companies were forced to cut or scrap their dividends as commodity prices tumbled on the back of fears of a slowdown in China and therefore overall global economic growth.
Indeed, as the below graph shows, the Bloomberg Commodity index lost 31.87 per cent between November 2014 and February 2016, but has since risen 30.05 per cent since its trough.
Performance of index over 3yrs
Source: FE Analytics
“There is quite a big swing factor when you have oil and mining companies paying large dividends,” Shoemake noted.
She said these companies have come back quicker and are paying larger dividends than some had anticipated, adding to the surprise at the recent figures.
One area to be wary of, however, is the emerging markets, which saw a headline gain of 6 per cent but underlying growth of 2.9 per cent.
“Emerging markets are always quite volatile. They tend to have fixed payout ratios meaning they will only pay out a set amount of their earnings,” the portfolio manager noted.
As such, dividends rise and fall in-line with earnings, meaning that it is a more cyclical area than some of the more developed markets.
Overall, Shoemake said investors should see the improvement in dividends as a “normalisation of the growth rate which has been a bit dull in the last couple of years” and one that could continue into next year.
“I think going into next year the discussion we’ll be having is around the fact that economic growth is very much expected to be underpinned,” she added.
Over the last six years the global economic growth rate has hovered between 3 and 3.5 per cent and while forecasts are for it to be at the top end of that range – so not shooting the lights out – dividend growth remains well underpinned.
“I don’t think anything to derail us next year,” she added, noting that while dividend growth is unlikely to hit double digits, it is likely to be in a range of between 5 and 8 per cent.