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From the experts - Global

Alex Crooke

Where in the world?

Alex Crooke, head of global equity income at Henderson Global Investors, discusses where to look globally for the best opportunities – and what to avoid

Consistent dividend growth is generally a sign that a business is doing well and should provide investors with a degree of confidence. If dividends are rising steadily over time, then a firm’s earnings, cashflow and capital should also be growing.

Pay-out ratios identify the percentage of corporate earnings that are paid as dividends and can be an indicator as to whether a company has the scope to maintain or increase dividends. The pay-out ratio can be influenced by a number of factors, such as the sector the company operates in and where the company is within its growth cycle. As the chart below shows, the level of current pay-out ratios varies considerably between countries and regions – both at an absolute level and when compared to historical averages.

Pay-out ratios by region
Source: Citi Research – Global Equity Strategy, as at 31/01/16. *Median shown since 1996. LATAM = Latin America, Eur X UK = Europe ex-UK, CEEMA = Central & Eastern Europe, Middle East and Africa, DM = Developed markets, EM = Emerging Markets, EM Asia = Emerging Asia.

Although the pay-out ratio chart shows that opportunities exist for dividend increases in the emerging markets, the outlook for earnings and dividends remains uncertain and, at present, we are finding the most attractive stock opportunities for both capital and income growth in developed markets.

Within the developed world, Japan and the US have the greatest potential to increase pay-out ratios, although – with both markets currently yielding just over 2% – from a relatively low base.

An active approach is important

Conversely, pay-out ratios from certain markets, such as Australia and the UK, are above their long-term median. Companies from these countries are distributing a greater percentage of corporate earnings to shareholders in the form of dividends than they have done historically. This leaves the potential for dividend cuts if a company is struggling to grow its earnings.

One area of concern for income investors with exposure to UK and Australia is the number of large resource-related companies listed within these market indices. We believe that earnings, cashflow and ultimately dividends from these types of firms are likely to be impacted by recent commodity price falls.

Nevertheless, the UK in particular has a deep-rooted dividend culture and, outside of the challenging environment for the energy and resources sectors, is home to a number of businesses that are delivering sustainable dividend growth. Our approach is to invest on a company-by-company basis using an actively-managed process that considers risks to both capital and income.

Seeking dividend growth

Recent market volatility has affected share prices globally. Despite this, we believe attractive businesses with strong fundamentals and the potential for capital and dividend growth over the long term can be found across nearly all regions and countries.

Within our 12-strong Global Equity Income Team, we continue to seek companies with good dividend growth, and pay-out ratios that are moderate or low, which provides the potential for dividend increases. Typically, we avoid the highest-yielding stocks and focus on a diversified list of global companies that offer a sustainable dividend policy with yields between 2% and 6%.

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