Global Dividend Disconnect
While there’s been a lot of talk on Wall Street about improving earnings and economic growth, the truth is those talked-about improvements are not being reflected in global dividend growth. Executives usually think long and hard about how much cash they really have available to send out in dividends.Once they pay or increase a dividend, investors expect them to pay at least that much the next year. Basically, dividends are where the rubber meets the road in terms of business performance.
In the S&P 500 last year, dividends only grew 4%, and globally it’s even worse, dividends grew less than 1%.* In the several years prior to last year, S&P 500 dividends had grown close to 8%. You can’t extrapolate too much from dividend payments for one company in one sector, but when you see dividend growth slowing across both the U.S. and global markets, it’s telling you something.
Since management of these firms are cautious about future growth, and they have a better read on actual business performance than stock market investors, we also are cautious about overall market levels and stock prices.
It doesn’t do much good to chase pricing gains that are here today and gone tomorrow. The way you reduce the risk of fleeting gains is to link the pricing gains to the dividend growth. As markets rise and investors get more speculative, it’s even more important to maintain your discipline of linking increasing dividend cash flows to increasing stock values. Whenever investors get away from this fundamental law of finance, they usually have bad results.
In terms of our portfolio strategy, we noticed the trend in slower dividend growth about two years ago. Since then, we have been reducing our exposure to companies whose stock prices have been bid up by investors but who are exhibiting slower dividend growth. Essentially we are removing holdings where we think there is a fundamental disconnect between price appreciation and dividend growth. We have also been adding companies where we think the dividend growth prospects are better. While global dividend growth was less than 1% last year, fortunately, for the companies currently in our model, per share dividend increases were about 7% last year.
There is a lot that goes into dividend analysis, but fundamentally, rising dividends drive rising prices, and if the dividends don’t rise much, we can’t expect as much in sustainable total returns. That’s been true for individual businesses and the market in general. Our goal is to increase the odds that the gains we have are sustainable. In the language of our industry, we are seeking a better “risk-adjusted” return.
That’s why you’ll continue to hear us talk about our pursuit of meaning and growing dividends, even if other investors in the market don’t seem so concerned about it.
*Barron’s 2/18/17 Global Dividends, 2016 a Year to Forget