Ben Graham, the father of value investing, always advocated uninterrupted dividends over a period of at least 20 years as one of the most important factors investors should take into account when deciding in which companies to invest.
Many emerging market companies may not have been around for that length of time, but in a world where dividends are becoming increasingly important to investors, those paid out by emerging market companies have grown at breakneck speed in recent years, particularly between 2009 and 2011, according to Alex Crooke, director of value and income at Henderson Global Investors. More importantly, though, global dividends topped out a record $1.03 trillion in 2013, and Crooke—co-author of the first-ever report Henderson has published on dividends—foresees further growth in 2014, thereby sealing the importance of dividends as one of the main factors in international investing.
“We’re sort of going back to the way markets used to be,” Crooke said. “In the 1970s and 1980s, markets lost their way for various reasons, but now, as we see a greater desire for income, and we’ve got more retirees and people who are responsible for their retirement, the importance of dividends has grown, and successful companies that can feed the hunger for income, grow dividends and pay them out are doing well.”
Dividends are a “real measure,” Crooke said, and an easy standard to compare other assets like bonds against. Unlike the different measures that investors use to assess stocks (company price-to-earnings, for instance), dividends are not a relative number: They’re a measure of actual distributions at the shareholder level, and that’s all the more important in an age where income generation is so important to so many.
At the end of the third quarter of 2013, the Henderson Global Dividend Index (HGDI) peaked at 143.9, up significantly from the 100 level it started at in 2009. But though dividends have risen steadily since Henderson first started tracking the data, the path hasn’t been so clear cut and their trajectory has been marked by a great deal of volatility, Crooke said, and that will continue to be the case going forward.
The emerging markets, for instance, rode on a growth boom fueled mainly by commodities exports, and dividends from companies in these countries collectively rose by 106.6% on a full-year basis since 2009. But now, that dynamic has reversed, Crooke said, since the commodities run has come to an end and emerging markets have also been out of favor as recovery has taken a firmer hold in the U.S. and European economies. Furthermore, domestic issues in different emerging market countries, such as government intervention and the introduction of more populist, consumer-friendly policies in some countries, have also served to dampen the dividend-paying ability of companies in those countries.
“In Brazil, where companies have been struggling to pay dividends and even cutting them as a result of the peak in the commodities crisis, Petrobras [the state-owned oil company] has cut dividends a couple of times because the Brazilian government is requiring the company to sell oil at a low cost,” Crooke said. “Government intervention is a problem in a number of emerging markets and may come through more, particularly in countries like South Africa, where the government is keen on being re-elected, and the easy trade is to come down on companies in favor of the consumer.”
Before they can deliver strong dividends again, many emerging market companies also need to avail of the next phase of macroeconomic growth in their countries, and that will only happen once many countries enact structural reforms that will make them less reliant on short-term capital flows and more able to attract longer-term, sustained financing.
Of course, emerging market currencies do pose some risk, so “you have to be a stock picker and take a view on these markets, and not look at them in local currency terms, as currency moves can have a large impact on dividends,” Crooke said. “In the short-term, you can expect to see a lot of loss of value, so it’s best to have an active management policy.”
Looking ahead, then, Crooke expects the greatest dividend growth to happen in Europe and the U.S.
In Europe, the austerity programs that have been in place for the last two or three years are definitely easing up and companies in countries like Ireland, which had made large dividend cuts over the past years, won’t be cutting anymore, Crooke said.
“We may even expect dividends to grow in sectors like telecom, where there have been large cuts,” he said, “so the dynamic is going to be favorable and we would even expect profit growth to surprise on the upside and all of these factors will really ignite dividends.”
The Henderson Global Dividend Index Report is available at http://www.henderson.com/getdoc.ashx?id=25856