Dividends outstripped company profits last year but companies have ample room to grow their returns to shareholders, according to the latest dividend cover report from Henderson International Income Trust.
In 2022, global dividends and share buyback schemes increased by a quarter to record levels of £2.3trn, with the former accounting for a little more than half (£1.3trn) of this figure. This was up 20% on the previous year, while the latter was up a third.
Investors may prefer dividends and share buybacks to be paid for by a rise in profits and although profits also rose to new record highs of £3.1trn, some 50% higher than pre-pandemic levels, they did so much more slowly (5.8%).
Despite this trend of companies returning more to shareholders without it being backed up similar profit growth, firms have ample cover, the report found.
While the profit cover of dividends and share buybacks has declined from its 2021 record of 1.58x, it remains strong at 1.33x – a figure that is in line with the long-run average of the past decade.
Looking at just profits and dividends (stripping out share buybacks, which can be less predictable) dividend cover stood at 2.43x in 2022.
Although this was lower than the year before (2.76x), the report noted that 2021 was at an “exceptionally high level that was distorted by the pandemic”.
Ben Lofthouse, portfolio manager of Henderson International Income Trust, said: “Despite war, an energy crisis and soaring interest rates, dividends grew in 2022 and will grow again this year. Asset prices have been volatile, but dividends keep delivering and they remain very well backed by company profits.”
The report suggested that global dividends will grow 5.1% this year to £1.3trn but profits are expected to remain broadly flat. Even so, dividend cover will remain at 2.3x, down on last year but slightly above the historic average. Cover for dividends and share buybacks will be around 1.3x, in lines with historic norms.
Lofthouse said: “Dividend cover is a comfort blanket. If cover is good as profits grow, companies can increase the cash they hand back to shareholders. We expect to see global dividend cover above the long-run average this year so investors can feel reassured that the income on a diversified portfolios of international stocks is well backed by real company profits.
“Moreover, if there is any attempt to preserve cash in the event of a more severe economic downturn, history shows that companies will strive to protect their dividends and instead target share buybacks to make savings.”
As such, the Henderson International Income Trust manager said now could be a good time to buy into equities, despite some banks offering savings interest rates as high as 4.5% for the first time in more than a decade – a level that is similar to the yield on many international income stocks.
“With fears of recession stalking the headlines, investors might be forgiven for questioning whether equities are worth the risk at all. But there is a big opportunity cost in fleeing to the perceived safety of cash,” he said.
“Not only does today’s high inflation ensure that savings are still relentlessly losing purchasing power, but stock prices typically turn strongly upwards when markets judge that the global interest-rate cycle has turned from hikes to cuts. Nobody knows exactly when that will happen, but when it does it will do so quickly, wrongfooting those who opt to sit on the sidelines.”
He noted that dividends are a “critical piece of the puzzle” with dividend growth the key to building a strong portfolio.
Global dividends have more than doubled in the past 14 years and only fell during the 2009 recession and the first year of the pandemic.
He said dividend growth around 6% per year would result in a doubling of the dividend income an investor received from their portfolio every 12 years, while reinvesting these dividends can grow a savings pot “exponentially” over the long term.