After an acutely challenging period for income investors, the annual Evenlode Global Dividend Sustainability Report 2022 shows Evenlode’s select list of companies has surpassed the broader market in dividend growth. The fifth annual report also reveals one notable change to its list of ten companies poised to deliver reliable income streams over the next five years.
The index, compiled by Ben Peters and Chris Elliott, portfolio managers of the TB Evenlode Global Income fund, aims to identify quality compounding companies with resilient cash flows at attractive valuations. The duo selects ten companies with business models that enjoy market-leading positions in their industries, attractive economics, good cash flow, strong barriers to entry, and good potential for medium-to-long-term growth.
Dividends bounce back
The report shows global equities declared 7% more in dividends in 2021 compared to 2020, and the aggregate of dividends from Evenlode’s selected companies grew ahead of this. The equal-weighted portfolio of the companies on the list achieved dividend growth of 8.7%. Both the list and the wider market were heavily affected by the welcome resumption of dividends as pandemic pressures eased.
Commenting on the report, Ben Peters, co-portfolio manager of the Evenlode Global Income fund, says:
“This growth is particularly pleasing when you consider these companies were already paying a significantly higher dividend yield than the market.
“But to consistently deliver higher dividend growth is only one of the two aims of our list. The second is to provide growth with lower volatility than the market over time. This has been achieved, and the current list of companies has outperformed the MSCI World Index since January 2008, with notably lower drawdowns.
“Our list also outperformed in dividend growth terms over the course of the pandemic, with lower dividend drawdown than the market in 2020. Last year’s selection of companies, despite experiencing an aggregate 4.3% fall in dividend growth (2020 compared to 2019), showed notable resilience compared with the 8.8% decline for the companies that make up the MSCI World Index over the same period.”
The 10 companies’ performance is re-assessed yearly to re-establish their inclusion in the list. This year, just one company was changed, highlighting Evenlode’s process of locating high-quality, cash-generative businesses, with a focus on long-term sustainable income streams. The switch was made within the sustainable dividend list’s healthcare exposure, from Johnson & Johnson to Sanofi.
Chris Elliott, co-portfolio manager of the Evenlode Global Income fund, explains:
“The decision was driven by the more attractive valuation of Sanofi at current market prices. The 3.6% dividend yield is attractive and superior to the 2.3% delivered by Johnson & Johnson, and 1.5 times covered by the free cash Sanofi generates.”
The report also highlighted divergences between different sectors in relation to income paid to shareholders. The report showed the standout rebound came from the materials sector, where there have been significant special dividends from basic resources businesses on the back of very robust demand.
“Some of these businesses had naturally conserved cash by cancelling pay-outs during the early stages of the pandemic, so there is an element of catching up with their dividends, but there is clearly a mini-boom in the extractives industry,” Elliott notes.
Most negatively, the energy sector is seeing the effects of 2020’s very low oil prices feeding through, although the report highlighted that dividend increases are now being seen, as energy prices have recovered significantly.
“This sector is also coping with the longer-term transition to low carbon energy sources around the world, which is destined to fundamentally alter energy company business models and, thus, the dividends they are able to pay,” says Elliott.
He explained that despite the ongoing disruption to the global economy and the supply chains that enable it, businesses have, overall, started to learn to live with the coronavirus pandemic.
“The hardest hit sectors, including travel and leisure, continue to face ongoing challenges. Even with welcome support from governments and central banks, these challenges may last well into the new year. Meanwhile, the businesses in our index have seen improving prospects, enabling the reinstatement of dividends that were prudently cut in 2020,” he adds.
 Source: FactSet – USD data for the MSCI World Index, 1 Jan 2020 – 31 Dec 2021.
 Source: FactSet – USD data for an equally weighted portfolio of selected stocks, 1 Jan 2020 – 31 Dec 2021.