The UK isn’t the only region to boast strong dividend growth prospects in this year’s second financial quarter, according to Henderson’s Global Dividend Index report.
The research found that, while headline dividend growth fell in many regions due to the strong dollar, underlying dividend growth has been impressive and has accelerated faster than expected.
Currencies vs dollar over 3months
Source: FE Analytics
Japan and Europe fared particularly well, having seen underlying dividend growth of 16.8 and 8.6 per cent respectively. The UK shouldn’t be shunned either, as it has seen an underlying dividend increase of 7.9 per cent.
As such, the Henderson report emphasises that investors should avoid panicking over headline growth figures which, with the exception of the US, have been negative for every region since the first quarter.
“Exchange rate movements were the largest factor pushing headline global dividends lower,” the report stated. “Over the longer term, changes in the exchange rates tend to even out, meaning investors have been able to disregard them.”
“In the short term, however, the moves can be significant. This is certainly the case at present. The euro, yen, Australian dollar and some emerging market currencies were all around a fifth lower against the US dollar during the second quarter compared to the same period in 2014. Sterling was down 10 per cent against the US dollar.”
Overall, currency deducted 12 percentage points from the growth rate in the second quarter, which was the equivalent of $52.2bn and was the largest impact the exchange rate has had in any quarter to date, according to Henderson’s research.
Currencies in Asia hardly moved at all as they are heavily linked to the US dollar, yet the region still followed a similar pattern to other areas of the market – Asia Pacific ex Japan, for example, saw a 24 per cent fall in its dividends at a headline level yet its underlying growth was 9.5 per cent.
“Unlike other regions, exchange rates were not the principal factor explaining the headline decline, apart from Australia where there was a significant impact,” the report continued.
“Most of the adjustments were in Hong Kong where there were much lower special dividends compared to a year ago, and Sands China and BOC [Bank of China] both allowed their large payments to slip into July, just missing the second quarter. Despite a sharp headline fall, there was modest underlying growth in Hong Kong of 1.3 per cent after taking these one-off factors into account.”
South Korea saw a 15.6 per cent increase in dividend payouts on a headline basis and a substantial 37.4 per cent increase on an underlying basis, mostly due to index changes. Funds with large weightings in Samsung Electronics and Hyundai Motor will have reaped the most benefits of the payout increase.
Within the Investment Association universe, three Asia Pacific ex Japan funds hold both of these stocks in their top 10 – Fidelity Asian Special Situations, Old Mutual Asian Equity Income and Old Mutual Pacific Equity.
Performance of funds vs sector in 2015
Source: FE Analytics
Beating Asia Pacific ex Japan in terms of underlying growth, however, is Japan, which saw only a 7.1 per cent decline in year-on-year headline growth despite the sharp fall of the yen on average in the second quarter this year compared to Q2 2014.
Performance of Japanese yen over 1yr
Source: FE Analytics
This was because Japanese companies continued to increase the amount they paid to shareholders, meaning underlying dividend growth was 16.8 per cent.
“Even if, as we cautioned in our last report, growth could not match the breakneck speed of the first quarter, the much larger seasonal importance of the second quarter makes this level of growth more meaningful,” the team overseeing the Henderson Global Dividend Index said.
A Japanese company that has managed to rapidly boost its dividend growth is Toyota Motor, which was the largest dividend payer this quarter having increased its payout by 25 per cent and therefore managing an increase in dollar terms.
Japan funds that have the largest weightings in Toyota Motor and have a yield above 1 per cent include trackers such as HSBC Japan Index and Royal London Japan Tracker, as well as City Financial Japanese Opportunities and HSBC MERIT Japan Equity.
Performance of funds vs sector in 2015
Source: FE Analytics
Another region that has been hit by a weak currency but has managed to show positive dividend growth this quarter is Europe ex UK – the Henderson team points out that the second quarter is particularly important for the region as many European companies pay one dividend per year.
“For global investors it is unfortunate it has coincided with a much lower euro exchange rate against the US dollar,” the report said.
Headline dividends have fallen year-on-year in the region and are currently down 14.3 per cent to $133.7bn, but underlying dividend growth is at 8.6 per cent.
The team at Henderson says European financials have played a big part in this, as the sector has begun to return to higher dividend levels and has been particularly strong on an underlying basis.
In the Investment Association universe, the European income funds that hold more than a third of their portfolios in financials at the moment are FP Argonaut European Income, FP Argonaut European Enhanced Income, Schroder European Alpha Income and Invesco Perpetual European Equity Income.
Performance of funds vs sector in 2015
Source: FE Analytics
Financials have proven to be lucrative across the board in this quarter, due to financial companies increasing dividends as a result of increased confidence levels. The fact that UK banking giant Lloyds Group paid its first dividend this quarter since the financial crisis is a prime example of this.
“This is not to say the industry is heading rapidly to pre-crisis levels, but the process of normalisation is accelerating,” the report explained.
“Financial dividends rose 0.3 per cent at a headline level year-on-year, far outperforming the 6.7 per cent global headline decline. Financials account for roughly a quarter of annual dividends, so improvements in this industry can make a real difference to the total.”
In fact, financials and technology were the only two sectors to see headline dividends increase this quarter, with technology dividends growing the fastest overall at 15.9 per cent year-on-year on a headline basis.
The overall region that has seen by far the most impressive dividend growth is the US, which saw headline growth of 10 per cent and means this is the sixth consecutive quarter of double-digit increases for the region. On an underlying growth basis, North America achieved a 9.3 per cent increase.
“The US remains the undisputed engine of global dividend growth but there are positive developments in many parts of the world. The UK looks more encouraging after an expected subdued start to the year, but Europe and Japan in particular are doing increasingly well, the former boosted by recovery among financials and better economic news,” the team at Henderson said.
“As a result, we are upgrading our forecast for underlying growth this year and are now looking for an increase of 7.8 per cent (previously 7.5 per cent). We now expect global dividends of $1.16trn this year, which is down just 1.2 per cent at a headline level.”
“The strength of the US dollar against all major currencies explains this marginal headline decline.”
