Earnings Pressure Threatens a Top Dividend Play

(Bloomberg) --

One of the main takeaways of the earnings season is the confirmation that Europe is indeed in earnings recession. True, the decline has not been as bad as feared, as European companies overall managed to mostly exceed low expectations. But along with the slowdown in profit growth, dividend growth is also under threat, particularly in the U.K.

Underlying dividend growth worldwide was 5.3% in the third quarter, but in the U.K. -- which has historically enjoyed rich dividends -- growth was just 0.6%, according to Janus Henderson Investors.

Unsurprisingly, the U.S. played a large part in the jump in global payouts in the third quarter, with dividends there growing 8.1%.

In the U.K., the overall headline payout figure was boosted by special dividends from RBS, BHP Group and Rio Tinto. But Vodafone’s dividend cut had a big impact on underlying dividend growth, along with no dividend increases from some of Britain’s largest multinationals such as Shell and HSBC, Janus Henderson noted.

The U.K. has always been a superior dividend play. Big payouts are part of the market culture, while the depressed levels of the country’s stock market keeps U.K. stocks on a higher dividend yield than the rest of Europe.

The trend may be coming to an end, according to UBS Wealth Management, which closed its U.K. Diversified Dividend Theme on reduced hard-Brexit risks, while seeing less downside risk to global growth. It believes the theme is less likely to outperform from here on. UBS WM keeps a neutral view on U.K. equities, arguing that despite attractive valuations, earnings growth is muted and uncertainties remain.

In fact, U.K. profits dropped 4.5% in the third quarter, the first quarterly decline in almost three years, according to The Share Centre, adding that more than half of Britain’s companies reported lower profits, the largest proportion in at least six years. It sees declines in profits across a broad range of industries.

Globally, underlying dividend growth this year will be slower than in 2017 and 2018, “but at 5.4% it is still encouraging,” the asset manager said in a report.

Janus Henderson Investors expects global dividend growth to slow further in 2020. It sees consensus expectations for corporate earnings as still too high, given the current slowdown in the global economy, and says slower profit growth will weigh on dividends. That said, with interest rates at their current levels, equities will continue to provide a valuable source of income for investors, even if the rate of dividend growth is less eye-catching than in the recent past, the asset manager says. As the chart below shows, that’s particularly relevant for Europe.

To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh

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