Alex Crooke heads Henderson’s Global Equity Income team, which consists of twelve professionals with an average industry experience of 16 years. In his case, he has been managing income generating strategies since 1997. In an interview with Funds Society, Crooke explains: "high dividend yielding stocks are not a fad, they have played an important role in the market for decades. Dividends are a very powerful strategy when investing in equities."
In fact, over time, dividends are responsible for a highly significant proportion of the total returns on global stock markets. In 2014, listed companies worldwide paid more than $1 trillion in dividends. They are also a good indicator of corporate health. In recent years, payouts of listed companies have continued to grow. The Henderson Global Equity Income team believes that this trend will continue as fundamentals in markets lagging the economic cycle, such as Europe, improve.
"Our strategy is truly global," says Crooke. The universe includes Asia and emerging markets, and stocks of all market capitalizations. "Right now we find better yield in Europe and Asia than in the United States, as well as better dividends among large-cap companies, compared to small and mid caps. Essentially, we have a yield of 3.4%."
In a world where interest rates are at historically low levels, a dividend culture is warranted, especially in those areas of the world where aging populations lead to increased demand for income-generating assets.
High and Rising Dividends
"Ours is a bottom-up investment process. The portfolio is constructed from a global universe of companies, which generate good dividend yields. In addition, we have found that companies that raise their dividend tend to perform better overall."
Crooke's team looks closely at companies that deliver good dividends, with a focus on analyzing whether they are able to increase cash flows over the next two or three years. "At the end of the day, a dividend is cash leaving the company, therefore, in order to have a dividend, there must be good cash generation."
During the investment process, the Global Equity Income team examines several factors, including balance sheet strength, capex needs, and cash generation, but without losing sight of the macroeconomic framework. An example of this is what’s happened with oil companies over the past year, "the macro environment suggested that the price per barrel could not be maintained above US$100 for a long period of time, but even at that price, we saw that many companies within the industry were financing dividend distributions with debt, instead of cash flow; they were handing out the results of future projects. For us, that was a warning sign indicating that it was best to steer clear of these companies, even though their dividend was high. "
A UCITS Strategy for a Three-Year Old UK Domiciled Fund
Alongside Andrew Jones and Ben Lofthouse, Alex Crooke manages the Luxembourg-domiciled SICAV strategy, which launched a year and a half ago as a mirror version of the existing Global Equity Income Strategy, domiciled in the UK. The launch of the UCITS Luxembourg version was driven by the low interest rate environment, which has seen increasing demand in Europe and Asia, as well as interest for such products in the US Offshore and Latin America market.
Overall, Henderson manages approximately US$15 billion in both regional and global Equity Income Strategies. Henderson began investing in income at the global level in 2006, and manages US$3.5 billion in its global dividend strategy domiciled in the United States, and about US$1 billion in the strategy domiciled in the UK.
QE in Europe and Japan should Act as Catalyst for Higher Dividend Yielding Stocks
This strategy, which has the MSCI World Total Return Index as its benchmark, typically has between 50 and 80 companies in the portfolio. "The United States represent 30% of the portfolio, an underweight position," explains Crooke. This positioning is more the result of valuation rather than one of dividend growth. "Since the United States launched its QE program, the popularity of stocks offering a good dividend yield increased, raising the price of securities in both equities and fixed income." Henderson’s Global Equity Income team, however, does see some interesting American companies, such as mature technology names like Microsoft and Cisco, which have "a good payout combined with strong cash flow generation." Another sector in which they are beginning to focus is that of US banks "which we think will be in a position to start paying better dividends."
But it is in Japan and Europe where Crooke sees the greatest opportunities. "The QE program is in its infancy, thus, the same rationale which pushed money in the US towards dividend stocks should also operate in Europe and Japan."
The average forecast yield of the companies which form the strategy is 3.8%, with an estimated dividend growth of 5 to 10%. "In the UK, for example, we see interest rates at levels below the average yield of the equity market; this is the situation throughout most developed world markets, except the United States. Now is the time to reconcile this difference."
The team's outlook for emerging markets is very cautious. The strategy’s allocation is less than 5%, although exposure is also gained through certain developed market companies with emerging market business streams.
Restructuring Companies, a Recurring Theme in the Strategy
Around a third of the stocks included in the portfolio are undergoing some form of restructuring. "Companies that have gone through a process of change to improve their fundamentals tend to behave well regardless of the economic cycle. Since we are not very positive about the global macroeconomic outlook, we focus on these types of businesses as well as companies in sectors uncorrelated with the economic cycle, such as pharmaceuticals or insurance."
A recurring concern when investing in dividends is to avoid "value traps". Some high-yielding equities can be more risky than their lower-yielding counterparts, particularly after a period of strong market performance when equity price rises push yields down. The high-yielding companies that are left can be structurally-challenged businesses or companies with high payout ratios that may not be sustainable. Crooke says that it is essential to analyse the sustainability of a company’s ability to pay income."We avoid investing in companies whose dividend policy is vulnerable to regulatory changes, the interest rate environment, declines in commodity prices, etc".
Does High Yield Debt Investment Compete with Dividends?
Crooke points out that investing in high yield bonds is currently not as attractive an option. "If you want high yields from fixed income, you have to look to heavily indebted companies. Those with a good credit rating don’t offer such attractive yields. In Europe, for example, 55% of companies offer better yields through dividends than through debt issues."
Furthermore, if inflation returns, the risk of rising rates is still there, and it may damage the performance of a fixed-income portfolio. "If you’re counting on a gradual reflation of the economy, we believe that it’s much better to be in equities than in fixed income," says Crooke.