Global dividends are in the midst of a “marked slowdown”, Janus Henderson Investors has warned, with the weakening economic environment expected to cause dividend growth to splutter in 2020.
The latest edition of the Janus Henderson Global Dividend Index found that dividends grew 2.8 per cent in the third quarter of 2019 (on a headline basis) to reach a record $355.3bn. But this expansion was at a slower pace than that seen in the past couple of years.
On an underlying basis – which strips out special dividends, currency movements and other one-off factors – dividends grew by 5.3 per cent. This is in line with long-term trends but is down on the high levels seen in 2018.
Total dividends, annual growth per quarter (%)
Source: Janus Henderson Global Dividend Index
Jane Shoemake, investment director of global equity income at Janus Henderson Investors, said: “A slowdown in global dividend growth, more in-line with long-term trends, is underway.
“We have been cautioning investors all year that the rapid income growth they have enjoyed over the last couple of years was set to return to more normal levels. A softening global economy is beginning to have an impact on corporate earnings and, in turn, on dividends. The trend began in the second quarter and continued in the third.”
Janus Henderson has left its 2019 forecast for global dividend payouts unchanged at $1.43trn, which is equivalent to a 5.4 per cent underlying rise – down from 8.5 per cent in 2018.
However, the report argued that dividends “are still growing comfortably” despite the recent slowdown as they remain in-line with the long-term trend.
“For next year, slower profit growth will impact dividends but with interest rates at their current low levels, equities will continue to provide a valuable source of income for investors, even if the rate of dividend growth is less eye-catching than in the recent past,” Shoemake added.
Janus Henderson Global Dividend Index by region
Source: Janus Henderson Global Dividend Index
When it comes to the UK, dividends grew by 2.9 per cent on a headline basis during the third quarter, to reach $34.3bn. This was boosted by special dividends paid by Royal Bank of Scotland as well as mining groups BHP and Rio Tinto, which helped to offset the negative impact of sterling’s weakness against the dollar.
On an underlying basis, however, UK dividend growth in the third quarter was just 0.6 per cent. This was dragged down by a £1.9bn cut from Vodafone, which is trying to preserve capital to reduce its debt levels and invest in 5G.
“A sluggish UK economy, and no dividend growth from some of the UK’s largest multinationals, such as Royal Dutch Shell and HSBC, were also behind the failure of UK dividend growth to match the global average,” Janus Henderson said.
The US was the only region where third-quarter dividends hit an all-time record high. Payouts there were up 8 per cent on an underlying basis, significantly ahead of the global average.
However, there are signs that a slowdown in profit growth is starting to impact dividend payments and a rising proportion of US businesses held their dividends flat in the third quarter. One in six US companies kept their payouts flat, up from one in 10 during the first quarter, but there were “very few” outright dividend cuts last quarter.
Telecommunications giant AT&T will be the largest dividend payer in the US this year, returning to the top spot for the first time since 2012 is thanks to its acquisition of Time Warner in 2018. The combined company will pay out close to $14.9bn in 2019, although oil major Royal Dutch Shell will remain the world’s largest payer for the fourth year in a row.
Dividend payouts by region
Source: Janus Henderson Global Dividend Index
In Europe ex UK, the third quarter is the seasonal low point for dividends. This means that big changes at one or two companies and technical factors can have a disproportionate impact on the quarter’s payout rates.
Janus Henderson pointed to Banco Santander’s switch from quarterly to semi-annual payments, which was only partially offset by other companies making similar moves, including Nokia’s adoption of quarterly payouts, as being a factor.
“This all meant that the headline total was artificially depressed by timing changes. Index changes also had a negative impact,” Janus Henderson said.
“Without these technical factors, and adjusting for the weaker euro, European dividends were 7.1 per cent higher on an underlying basis. One-third of this growth came from only three companies, however – Unibail-Rodamco-Westfield, ACS and Equinor. This increase was faster than the second quarter, when the bulk of European dividends are paid, but will not be enough to bring European growth up to the global average this year.”
Asia-Pacific ex Japan has lost its position as the fastest growing region for dividends for the first time since mid-2017, losing its place to North America as the slowing global economy took its toll on the region.
“Lower profits flow through very quickly to dividends in this part of the world because most companies operate a fixed payout ratio dividend policy so when profits fall, dividends fall in tandem,” Janus Henderson explained.
In Japan, the third quarter is seasonally less important as it accounts for just $1 in every $7 paid throughout the year. There was a 15.1 per cent headline increase in payouts last quarter, but this is not representative of the whole year.
Janus Henderson’s research noted that every single Japanese company in its index increased their dividend in the third quarter, but one-eighth of the growth came from one company: Chugai Pharma.
“Our index shows that Japanese dividend growth now almost exactly matches that of Asia-Pacific and North America to join them as one of the fastest growing regions over the last decade, reflecting a significant cultural shift in corporate Japan towards distributing profits to investors,” the asset management house said. “For the full year, Japanese dividends will outpace the wider world for the third year in a row.”
Finally, dividend payouts in emerging markets rose 7.3 per cent on an underlying basis. Chinese companies distribute four-fifths of their annual dividends in the third quarter. This makes the country the quarter’s third biggest payer after the US and the UK.
But Janus Henderson added that the slowdown in the Chinese economy is affecting the dividend-paying capacity of its companies, meaning half of the firm’s in its index have lowered their payouts year-on-year.
There was good dividend growth in Russia and South Africa last quarter, but many other emerging markets saw declines – including Brazil and India.