- Profits globally fell by 24% in 2020 but dividends only fell 8%
- The much greater decline in profits than in dividends meant that global dividend cover fell to 1.8x in 2020, its lowest since 2008 and down from 2.2x in 2019
- In 2020, dividend cover fell in nine of the ten top-paying countries – those that make up £17 in £20 of the world’s payouts
- However, 2021 will see dividend cover rebound to 2.1x and 2022 will see 2.4x, its highest since 2013 as company profits grow rapidly
- The Q2 Janus Henderson Global Dividend Index forecast a 3% increase in dividends in sterling terms
- Additionally, one in five companies was identified as a yield trap pre-pandemic but this has now fallen to just one in eight. Yield traps were twice as likely to cut dividends in 2020
This all means dividend resilience has improved but this improvement is not reflected in the share prices of many dividend paying companies Dividend cover is set to rebound sharply in 2021 from 2020’s 11-year low as global profits recover faster than dividends, according to the latest global dividend cover report from Henderson International Income Trust plc (HINT), an investment trust for investors seeking income and capital growth in today’s low interest-rate environment. In addition, the 2020 shake-out that saw widespread dividend cuts means HINT now sees one third fewer yield traps than before – companies with a superficially attractive yield but which either cannot grow their dividends or may have to cut.
Last year, global profits fell by almost a quarter (-24%), taking earnings down to £1.62trillion, their lowest level since mid-2016. Almost six companies in ten globally (56%) posted lower profits. Earnings in the UK and Europe fell furthest, reflecting lengthy lockdowns and an unfavourable sector mix.
Meanwhile, dividends fell just 8% in sterling terms during 2020, despite the severity of the pandemic. Globally they totalled £906bn. UK and European payouts were cut hardest, but among larger-contributing countries, dividends from the US, Canada, Japan, China and Hong Kong were all up year-on-year. Worldwide, one company in three cut its dividend (34%).
The combination of sharply lower profits and relatively sheltered dividends meant that dividend cover, the ratio of profits to dividends which provides an important measure of dividend sustainability, fell to 1.8x, its lowest level since the financial crisis.
This is normal in a recession. Dividend cover fell in nine of the ten top-paying countries – those that make up £17 in £20 of the world’s payouts. It fell furthest in the UK, to 0.3x, meaning that profits were two thirds smaller than dividends paid. The UK’s low level was exaggerated by losses in the oil sector and cash flow held up better than profits, but even median (or typical) dividend cover among British companies was lower than any other comparable country, a trend which has persisted for most of the last decade. Dividend cover was highest in Japan, the wider Asian region and in North America.
This year, profits are jumping in most parts of the world. The market expects profit growth of 18% this year. Dividends will grow too. The Q2 Janus Henderson Global Dividend Index forecast a 3% increase in dividends in sterling terms. HINT therefore expects dividend cover to rebound to 2.1x this year, only a touch below the pre-pandemic level. Further consolidation in 2022 means the world’s companies will cover their dividends 2.3x next year, the widest margin since 2013. The UK will also see a recovery in dividend cover but will remain well below the global average.
There are fewer yield traps today too. As the world entered the pandemic, HINT’s analysis showed that one in five companies was a potential yield trap. These companies proved twice as likely to cut their dividends. HINT now judges that just one company in eight is a potential yield trap, and that these represent £19 in every £100 of global dividends, down from £22. Today’s yield traps will yield 6.7% on average over the next twelve months, compared to 2.8% for the global top 1,200 overall, this excessive yield signalling that the market has questions about the long-term prospects.
Ben Lofthouse, Fund Manager of Henderson International Income Trust Plc and Head of Global Equity Income at Janus Henderson, said: “For income investors, the last year has proved that diversification is extremely important – by sector, by region and by company. As we stand today, dividend resilience has improved markedly, but this is simply not reflected in the share prices of many dividend-paying companies around the world.
“Income is a vital component of an investor’s return, but income-paying equities only create value for investors if they are sustainable and growing. Well-run, profitable businesses that are both focused and efficient in their deployment of capital are most likely to flourish – dividends are a good indicator of such companies. Dividends fulfil a critical role as a bear-market protector in bad times, and a return enhancer when markets are stagnant at times of high valuations – like today.
“For income seekers, active fund management can add real value – we showed how the yield traps were a dangerous place to be when the unexpected happened – a pandemic. HINT was able to take advantage of its global mandate and focus on cash-flow generative businesses to navigate the pandemic with minimal impact on dividend cover. In addition, investment trusts’ ability to use reserves to smooth income through the cycle was an advantage for investors versus open-ended funds.
“The longer-term trend globally has been for dividend cover to steadily decline as economic growth has slowed globally post the financial crisis – a decade ago it was 3.0x. In part, this reflects the economic cycle. Dividend cover initially falls in a crisis and then rebounds, as it is today, before steadily dropping again as companies loosen the purse strings during better times. It also reflects a cultural shift towards dividend paying in parts of the world like Asia. A welcome trend.”