Rudi’s View: Rotation, Dividends & Money 3

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Nov 22 2019

Dear time-poor reader: strategists are increasingly advocating investors adopt a bias towards cheaper "Value" stocks, plus dividends are growing globally, just not in Australia

In this week's Weekly Insights (this is Part Two):

-Is It Rotation Or Risk We Should Worry About?
-Are Dividends Telling The Story?
-Conviction Calls

-*NEW* Research To Download
-Rudi Talks
-Rudi On Tour

[The non-highlighted items appeared in Part One on Thursday]

Are Dividends Telling The Story?

By Rudi Filapek-Vandyck, Editor FNArena

You gotta enjoy it when research conducted by others offers more confirmation of your own share market insights and conclusions.

Local investment managers at DNR Capital dug deeper into the concept of buying cheaply priced blue chips on the Australian share market. Their main reference was the 1991 US Top Hit 'Dogs of the Dow'.

For those who are not familiar with the concept: US investor Michael O'Higgins published back then his discovery that buying share market underperformers was likely to generate market beating results as the laggards from last year turned into outperformers the next.

No, of course it doesn't work all the time, everywhere and under all circumstances. If it did, we'd all be rotating our complete portfolios at the end of each calendar year. Though that sounds counterintuitive by itself. The way the share market operates, all participants simply cannot be doing the same thing at the same time.

Returning to DNR Capital's research, typically a cheap blue chip in Australia is the one that offers a high yield, hence DNR's stock selection remained limited to the high yielders inside the ASX20.

In the words of DNR Capital, "the results were stark".

The Dogs of the ASX20 would have underperformed by circa -60 basis points over the ten years up until late 2018. Over the prior five years, that underperformance blew out to no less than -560 basis points.

Over the past year (2018), total return -even with the high yield and including special dividends- was a negative -7.3%. To which a cheeky DNR adds "fees excluded".

Year to date, meaning we started buying on December 31st last year and held onto the shares until the final day of September (when the analysis was concluded), the underperformance versus the broader market was yet another -2%.

On DNR's calculations, holding ANZ Bank ((ANZ)), BHP Group ((BHP)), CommBank ((CBA)), National Australia Bank ((NAB)), Rio Tinto ((RIO)), Scentre Group ((SCG)), Suncorp ((SUN)), Westpac ((WBC)), Wesfarmers ((WES)) and Woodside Petroleum ((WPL)) -the Dogs of the ASX20 at the end of last year- would have delivered 3% in additional income, including franking, but -5% less in capital growth.

One more additional insight from the DNR research: Over the last five years, yields from Materials and Energy companies have substantially increased, whilst for Consumer Discretionary, Utilities, Telstra ((TLS)) and Industrials companies, dividends have significantly declined.

And as I have been warning since the recent August reporting season: dividends from resources companies are now under threat because of lower commodity prices, plus the expectation that higher-for-longer iron ore prices won't be sustained.


Janus Henderson also released some research on dividends recently. On its numbers, total dividends paid out to shareholders hit an all-time record high in the US during the September quarter, while shareholders in Canada and Japan enjoyed record receipts for the quarter.

Now for the not so good news. Both Australia and China revealed their weakness throughout Q3. Shareholders in Australia were hit with a noticeable decline in dividends.

In China, nearly half of all companies in the index reduced their payout. In aggregate, there was still modest growth in Chinese dividends paid out, but that was dependent on large increases by two companies, reports the wealth manager.

In Australia, two out of every five companies in the index has been cutting dividends. Total dividends paid out have dropped to $18.6bn which, on Janus Henderson's numbers, represents the lowest pay out in US dollar terms since Q3 2010. Underlying, the decline was -5.9%.

It is Janus Hendersons' assessment that Australian companies have the lowest dividend cover in the world among the bigger economies. The direct consequence of this is that when the economy lands in a rough patch, corporate profitability goes backwards and without a sufficient buffer, those dividends cannot be maintained.

In similar vein, income investors in China feel more pain in the short term when economic adversity hits due to the fact that many companies in China have adopted a fixed payout-ratio policy.

Outside Australia, reports Janus Henderson, growth in dividends is slowing. The deceleration started in Q2 this year, continued in Q3 and is likely to slow further in 2020 as the global economic environment remains challenging. For the whole of calendar year 2019, Janus Henderson is sticking by its estimate that US$1.43trn will be paid out to shareholders globally. This would mark an increase at the headline of 3.9%, but underlying growth looks more like 5.4%.

While this is down from 8.5% underlying growth in 2018, it will still mark the tenth consecutive year of underlying growth in global dividends. Janus Henderson doesn't seem too worried about 2020, forecasting further slowing, but still growth in global dividends.

No specific forecast was given for Australia, but I think we can safely predict the picture for income investors in ASX-listed companies continues to look treacherous.


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