As economies recover and markets even exceed expectations, this summer has proved an extraordinary one for investors, many of whom have enjoyed significant dividend pay-outs. Julian Broom, our Chief Investment Officer, explores whether these super dividends are sustainable over the coming months.
Dividends are of course the mark of success for investors; a tangible return on the risk you’ve chosen to take with your money. This time last year we faced an unparalleled situation in investment markets with fears over deflation and long-term projections leading to many companies choosing to reduce, postpone or cancel their dividend pay-outs. Widely respected companies, including Royal Dutch Shell, followed this strategy, and the UK’s central bank even instructed banks to cancel dividends. Investors were nervous, but hopeful that a market recovery, in whatever form, would see them well.
Today, that patience has been borne out. In fact, we’ve seen nothing short of an about-turn, with markets performing strongly, economies bouncing and a raft of super dividends being declared. NatWest announced a £3 billion dividend and share buyback programme; a good indication of the strong position which many banks are finding themselves in, and helped significantly by the economy, wider lending margins, house price rises and credit quality fuelled by a boost in household savings as a result of lockdowns. Commodities including Anglo American, BP and Shell have followed suit, supported by good recovery programmes and strong demand.
A dose of realism
So how sustainable is this situation? Should we get used to bumper dividends over the coming quarters? Quite simply, let’s be realistic – this super dividend state can’t last. And with that knowledge comes the reminder that, with any investment, it’s important to focus on total return; a combination of both capital appreciation and (where part of the mandate) dividend income. Ultimately when investing the aim should be on long-term growth, with dividends acting as the additional windfall along the way.
Don’t forget too that dividends have been an area for scrutiny in recent years. Before the pandemic there had been concern about rising dividend levels and the need for companies to employ some semblance of common sense. Perhaps this bumper summer goes some way to consolidate that line of thinking.
It’s also important to consider management strategy. Ultimately, should companies be offering to pay out their cash profits via dividends or should there be a focus on capital reinvestment to ensure there’s a solid framework for future success? Bear in mind that it’s not necessarily a bad thing if companies chose not to engage in dividend income increases, provided they are using the cash to reinvest for the future long-term benefit of the company. And with many of these big players the home of personal wealth in the form of pension funds, it’s worth inspecting what they do with their cash profits.
Indeed, in the last year many companies have been forced to take a good hard look at their operations, adapting strategies to ensure they are fit for the future. This is true of course for many of the traditionally big payers who could almost be counted upon for dividend payments. Those involved in fossil fuels need to pivot to shift towards operating as integrated energy providers, and others in ‘unacceptable’ sectors such as mining, must be mindful of the work they have to do to incorporate environmental, social and governance practices.
Our own approach
With thousands of investors, The Fry Group has long followed a manager selection process which focuses on an ability to generate long-term, sustainable total returns. Our portfolios naturally have a bias to more ‘pro-cyclical’ companies like energy and financials, which have historically been strong generators of investment income. That said, we follow the belief that it’s important to have a blend of manager style to help balance the shape of the portfolios and to weather all economic outlooks – including exposure to some ‘growth’ managers. A large part of our process now focuses on proactively asking managers about their approach to ESG and how they are actively engaging with those companies who are embarking upon their own transitions to carbon neutrality by 2050.
To discuss any aspect of your own investment portfolio please contact your nearest office.