Indeed a number of our own clients have been asking us why we do not own – as they do – huge amounts of ‘Incredible Income Inc.’ or whatever it might be, on account of its 8 per cent yield and stated intention to grow it further.So we take a look – of course we take a look – at Incredible Income Inc. or whatever it might be and have long since stopped being surprised when we find out the company funds its high yield by issuing more and more shares.
That is not to say this turns out to be the case 100 per cent of the time but there is enough of a trend for us to think it worth doing some further analysis. So we have.
We have taken all the US and Western European stocks capitalised at $1bn (£633m) or more in size and with a gross yield of 6 per cent-plus in the current year and then counted the number of instances over the past five years that any of these companies saw the number of shares it has in issue grow by more than its current dividend.
The resulting data is set out in the chart below and, as you can see, for more than three-quarters of European stocks, such an occurrence happened only once or not at all.
Furthermore, many of these instances will have had a genuine business reason – a high-profile example being the recapitalisation of various continental financial stocks required as a consequence of the recent Asset Quality Review.
Number of years in the past five when the share count grew by more than the current yield
Source: Bloomberg, Schroders analysis
For the US contingent, however, there is a completely different pattern, with more than half of them growing their share count by more than the current dividend in at least three of the past five years – and 13 per cent doing so in every one of the last five years. The corresponding figures for the European companies is 8 per cent and zero.
So what is going on with this continual share-issuing across the Atlantic?
With multiple share issues, a reasonable inference is that the company in question is taking the resulting capital, investing some and returning the rest to investors in the form of a high dividend – the rest, that is, minus slices for the taxman, for the investment bank organising the issue and for the separate management company that is increasingly to be found behind these deals.
In the spirit of Thanksgiving, a charitable conclusion for the significantly higher degree of what might be described as ‘dividend fabrication’ in the US might be that the country is the embodiment of capitalism and the customer gets what the customer wants. At the moment, the customer wants income and – hey presto – they get income.
Whether such a business model is sustainable is a completely different matter and indeed, for some, may bring to mind a different sort of scheme with a name that, ironically, sounds more European – and specifically Italian – than American.
Certainly anyone thinking of investing in any high-dividend US stocks really needs to look beyond the yield on offer and have a clear view on the underlying valuation.
Ian Kelly (pictured on page 1) is co-manager of the $2.3bn Schroder ISF Global Dividend Maximiser fund and writes on The Value Perspective. The views expressed above are his own.
