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A look into the treasure chest

By Christos Sitounis and Thomas Meier

- Marketing Communication -

Dividends are highly valued by investors and represent an essential component in the asset allocation of the overall return on equity investments. In times of low interest rates, in particular, investors look forward to attractive payouts and consequently there is a great deal of pain when, as in the pandemic year of 2020, there are reductions or even cancellations. We would like to take a look into the “dividend” treasure chest and examine not only the historical phases but also their current recovery.

In a study, UBS Bank analysed the contribution of dividends, assuming they are reinvested, to total returns in Europe. The result is impressive; according to the UBS study, dividends account for up to 60 percent of total returns over the long term. In addition, distributions offer investors an attractive payment stream in times of structurally low interest rates. Of course, the joy of dividends only exists as long as they are paid out. Based on the experience of the 2020 pandemic year, the pain of cancelled or reduced dividends still runs deep.

The oil magnate John D. Rockefeller once said that Standard Oil's regular dividend payments always gave him a great deal of pleasure. He probably wouldn't have been inspired to make this statement if his distributions had been irregular and of an uncertain amount. But how do dividend payouts behave in times of crisis and how does their recovery develop?

Let us first look at the onset of the global financial crisis from 2008 onwards. In 2008, the index stocks from the European STOXX 600 paid out dividends amounting to 246 billion euros. In the following year, 2009, the amount fell to 194 billion euros, a decrease of more than 20 percent in the dividend amount. Subsequently, it took a total of five years (see Graph) until new dividend highs were reached.

The recovery period of five years is linked to several complex aspects. Banks and commodity stocks, as well as energy stocks, which accounted for a high share of the distributions, took a long time to clean up their balance sheets or suffered from the decline in world market prices. Furthermore, companies have taken a long time to repair their balance sheets and achieve sustainably attractive (EBITDA) margins (see Graph). An additional, purely European, problem after the financial crisis was the euro crisis with the indebted peripheral states. All in all, these aspects led to a longer recovery phase.

Dividend amounts, which were reduced in the wake of the pandemic, have seen a much faster recovery. In the “Annus Horribilis” of 2020, dividends of 257 billion euros were distributed, a drop of 36 percent compared to the previous year. However, we already expect new record dividend amounts for 2022 (see Graph 3), i.e. only two years after the outbreak of the pandemic. In other words, the recovery has been much faster than it was after the last global crisis in 2008. This is due to several factors. First, the framework conditions at the macroeconomic and monetary level are different. The support measures taken by individual nations across all sectors of the economy, in particular their speed and scale, have contributed significantly to the recovery. Advantageous corporate loans and short-time work (Kurzarbeit) or working from home have had an equally large impact. Furthermore, central banks have flooded the markets with almost unlimited liquidity, with the first interest rate hikes now already on the cards in the US. At the corporate level, primarily due to supply chain disruptions and unabated high consumer demand, we are seeing inflationary pressures that we have not seen in Europe for more than 30 years. The inflation rate is threatening companies’ profitability, but they have already taken countermeasures through dynamic cost adjustments and price increases (see Graph).

Due to the continuing positive macroeconomic conditions and dynamic adjustments, companies across the board will reach or even exceed the profitability levels of 2019. Based on these expectations, they are capable of reaching new highs in terms of dividend amounts. Dividend hunters should therefore not miss the chance for attractive payouts.

Authors: Christos Sitounis und Thomas Meier, Portfolio Managers for the MainFirst Global Dividend Stars & the MainFirst Euro Value Stars



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