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Alex Crooke, Head of Global Equity Income at Henderson, on what dividend growth can show and why payout ratios remain supportive
Consistent dividend
growth is generally a
sign that a business is
doing well and should
provide investors with
a degree of confidence. If dividends
are rising steadily over time, then a
firm’s earnings, cashflow and capital
should also be growing.
Sustainability ratio
Payout ratios identify the percentage
of corporate earnings that are paid as
dividends and can be an indicator of
whether a company has the scope to
maintain or increase dividends. The
payout ratio can be influenced by a
number of factors, such as the sector
the company operates in and where
the company is within its growth
cycle. As the graphic shows, the level
of current payout ratios varies
considerably between countries
and regions, both at an absolute
level and when compared to
historical averages.
Although the chart shows that
opportunities exist for dividend
increases in the emerging
markets, the outlook for
earnings and dividends remains
uncertain and at present we are
finding the most attractive stock
opportunities for both capital
and income growth in developed
markets. Within the developed
world, Japan and the US have the
greatest potential to increase payout
ratios, although from a relatively low
base, with both markets currently
yielding around 2 per cent.
Company selection
Conversely, payout ratios from certain
markets, such as Australia and the UK,
are above their long-term median.
The 2016 forecast yield for Australia
is 5.2 per cent and for the UK 4.4 per
cent. Companies from these
countries are distributing a
greater percentage of corporate
earnings to shareholders in the
form of dividends than they
have done historically. This
leaves the potential for dividend
cuts if a company is struggling to
grow its earnings.
One area of concern for income
investors with exposure to the UK
and Australia is the number of
large resource-related companies
listed within these market indices. We
believe that earnings, cash flow and
ultimately dividends from these types of
firms are likely to be impacted by recent
commodity price falls.
Nevertheless, the UK in particular
has a deep-rooted dividend culture, and outside of the challenging
environment for the energy and
resources sectors is home to a number
of businesses that are delivering
sustainable dividend growth. Our
approach is to invest on a companyby-company
basis using an activelymanaged
process that considers risks
to both capital and income.
Seeking dividend growth
We continue to seek companies with
good dividend growth, and payout
ratios that are moderate or low, which
provides the potential for dividend
increases. Typically, we avoid the
highest-yielding stocks and focus on
a diversified list of global companies
that offer a sustainable dividend
policy with yields between 2 per cent
and 6 per cent.
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