As investors look to shore up their income amid a cost-of-living squeeze and market volatility, UK divided cover is getting back on track, according to Henderson International Income Trust (ticker: HINT.L) an investment trust listed on the London Stock Exchange that aims to provide a high and rising level of dividends as well as capital appreciation over the long-term from companies listed outside the UK.
Dividend cover is the ratio of a company’s income to its dividend payment and is a key indicator as to the sustainability of a company’s dividend.
Significant cuts in UK dividends during the pandemic provided a new, healthier base for payouts. UK dividend cover of just 1.0x on average between 2015 and 2020 was less than half the global average, indicating that companies had on average been overdistributing.
In 2021, UK dividend cover rebounded to 2.0x, still below the rest of the world, but it may exceed the global average in 2022 mainly as the rise in oil profits is not matched by the rise in its dividends.
HINT’s analysis also shows there has been no increase in yield traps – companies that have seductively attractive dividends that they are unlikely to be able to sustain. Despite the coming economic slowdown, HINT’s fund managers rate just one company in eight a yield trap – in line with this time last year and down from one in six before the pandemic. Risky sectors include chemicals facing high energy costs, real estate companies facing higher borrowing costs and miners facing falling commodities.
Global dividends will reach a record £1.25 trillion in 2022, up 13.1%
Looking more broadly, HINT research reveals that global dividends face the coming economic downturn better supported by profits and corporate cash flow than at any time since 2011.
Global net profits leapt 78% in 2021 to £2.85 trillion[1], while cash flow, which is core to a company’s ability to pay dividends, rebounded by a third. 8 companies in 10 saw profits increase. In 2022, profits will rise again. The US earnings season has consistently surprised on the upside. Meanwhile, around the world, energy companies and banks are among sectors reporting booming results. On the negative side, many mining companies have now started to see profits decline, reflecting lower commodity prices, and there are more profit warnings appearing in sectors sensitive to the consumer. HINT’s analysis of consensus forecasts puts global profits at £3.03 trillion this year, up 6.4%.
Dividends have recovered too, up 21.7% in 2021 to £1.10 trillion. In the first half of 2022, global payouts jumped a further 19.1% in sterling terms. Emerging markets saw the fastest growth, driven in particular by oil companies, while dividends in Europe rose strongly on the back of restored banking payouts and booming profits from consumer discretionary companies such as car makers. UK dividends also continued their recovery, though at a slightly slower pace than the wider world.
The second half of 2022 will no longer benefit from the easy comparison to H2 2021, when payouts in some sectors and some parts of the world were still affected by the pandemic. This means dividend growth is set to be slower than the first few months of the year. For the whole of 2022, HINT expects global dividend growth of 13.1%[2], easily a new record totalling £1.25 trillion.
Global dividend cover reached a ten-year record in 2021 and will stay high in 2022 – bodes well for 2023.
Notably, dividends are likely to rise a little more quickly than profits and cash flow this year, but they are extremely well supported by profits and cash. Dividend Cover describes the relationship between profits and dividends. At 2.6x it ended 2021 at its highest level in a decade. In 2022 it will dip slightly to 2.4x, though this is still above the historic average. Moreover, HINT expects companies to pay 41p in dividends for every £1 of cash they generate. From an industry perspective, almost every sector has seen dividend cover improve, while from a regional perspective, 7 countries in 10 saw cover improve in the last year, with an especially strong rebound in the UK, US and most of Europe.
Expert Comment – why dividends matter in inflationary times
Ben Lofthouse, portfolio manager of HINT and head of global equity income at Janus Henderson said: “Stock markets have been exceptionally volatile in 2022 as investors have attempted to calibrate how the energy crisis, supply-chain snarl-ups, the war in Ukraine and rising interest rates will impact the world economy. In uncertain times investors prize companies that generate plenty of cash in the here and now and which have more visibility on future earnings. These companies are often more likely to pay dividends to their shareholders. This explains why classic income stocks – companies that pay dividends – have performed so well in 2022.
“During inflationary periods it is important to find companies with good dividend cover, pricing power, cash flow, and modest borrowing, some of the factors used in our dividend trap analysis. If inflation and recession come at the same time, profits may fall, but history shows that dividend income is much less volatile than profits over time as companies flex the proportion of their profits they pay to shareholders. With dividend cover so high at this point in the cycle, we can have some significant confidence for 2023 that overall dividend payouts will prove resilient.
“Taking an international perspective that diversifies across different geographies and different sectors is a powerful means of delivering long-term investment returns.”
