Global dividends rose 5.1% to US$ 354.2 billion, breaking third-quarter records in the US, Canada, Taiwan, and India, according to a new report from Janus Henderson, whose Global Dividend Index also hit a new record of 184.4.
For Canada in particular, the third quarter was record-breaking, as dividends jumped 11.2% to US$ 10.2 billion on an underlying basis. Headline growth of 5.4% was held back by the weakening Canadian dollar.
Energy dividends rose fastest on the back of higher prices for crude oil, but banks and telecoms also did well. More than 90% of Canadian companies increased their dividends year on year, the report said.
“A total of US$ 40.54 billion was paid out in dividends by Canadian companies in the 12 months to end of September 2018, a record yearly payout for the country which is now the eighth largest dividend payer in the world”, says Jane Shoemake, investment director, global equity income at Janus Henderson. She adds that Canada has generally lagged behind other regions since 2009, but from the end of 2016 has made up ground thanks to its dividends growing far quicker than the global average.
“The earnings growth in 2018 has been very strong in Canada, we expect to close the year with earnings growth in the mid-teens, add to that, revenue growth has been strong, and margins have also expanded. So overall, it’s been a healthy year, and management teams have the flexibility to do many things – reduce debt, buyback shares, reinvest in the business, and yes, increase dividend”, say Patrick Reddy, manager of the Gold-rated Leith Wheeler Canadian Dividend Series F.
Will dividend growth continue?
“We expect dividends to continue to grow in Canada, but at a slower pace than 2018. Current consensus expectations for TSX earnings growth is roughly 12% for 2019, absent a major economic pullback or recession, which should support continued dividend growth”, says Vivian Lo, senior portfolio manager, equities at Foresters Asset Management, who manages the Gold-rated imaxx Canadian Dividend Plus Fund Series F0.
For 2019, Reddy expects dividend growth to be in the mid-to-high single digit range. He points out that as Canadian companies announce dividends at different points, sometimes annually, semi annually or quarterly, he looks at dividends for the whole year and not on a quarterly basis.
Another thing that has investors wary is the possibility of dividend cuts, especially as the first half of this year saw some high-profile cuts, notably Corus Entertainment's (CJR.B) 80% dividend cut in June, and CI Financial (CIX) nearly halving its dividend in August.
But investors should not worry, says Lo: “CI Financial also announced a concurrent share buyback program of up to $1 billion over the next 12-18 months. In our opinion, the dividend cut was not a reflection of deteriorating quality or profitability, but rather it was management’s intention to optimize its capital allocation as the stock was trading at record low valuation levels.”
She also says that focusing on “shareholder yield” is a more important metric than just simply “dividend yield” as it considers debt repayments and share buybacks, in addition to dividends, adding that dividend cuts are more unlikely in an environment of overall positive earnings growth, particularly for high quality companies with relatively lower payout ratios and sound balance sheets.
Challenges to dividend growth
Economic growth was strong in 2018, but is it likely that growth will continue at the same pace in 2019?
“There are several challenges that management teams will navigate in 2019”, Reddy says, pointing to rising truck and rail costs, steel price increases, oil price rises, increased wages and rising interest rates as some of the rising costs likely to impact margins going ahead.
“Having said that, a 10% earnings growth is still very healthy,” he points out.
Lo notes that while earnings growth momentum in Canada and the US is expected to slow in 2019, corporate earnings are still robust and the US consumer is very strong.
“Given that we’re in a rising interest rate environment, we’re focused on businesses with organic growth opportunities, strong balance sheets, and responsible debt repayment schedules”, she says.
Where to find value?
Reddy notes that as interest rates rise, rate sensitive stocks have fallen in price and now are at attractive valuations.
“We recently bought Rogers Communications (RCI.A) because it was too cheap to ignore”, Reddy says. He notes that although Rogers can grow its dividends over time, its capital spending plans have been conservative so far. Rogers has a dividend yield of 2.72%.
He also likes Great-West Lifeco (GWO) because “the business screams attractive right now”. He believes the company has the potential to raise dividends going forward.
Great-West is trading below Morningstar’s fair value estimate. “Canadian operations remain Great-West’s strength, with this region generating an adjusted annualized ROE of 21.0%. However, management noted that the company has achieved $180 million of the planned $200 million in cost reductions, suggesting the benefits from this program have largely been realized and returns could flatten going forward,” says Morningstar senior equity analyst Brett Horn.
Lo says she likes Canadian banks. She points out that the large banks remain strongly capitalized and are significant dividend payers, with an average dividend yield of 4.2% and payout ratios of 44%.
“Dividend growth is expected to continue in sync with EPS growth expectations in the mid-single digits. With EPS growth expected to exceed 10% in 2018, the banks have increased their dividends at an average rate of approximately 8% this year. Historically, Canadian banks have averaged a CAGR of approximately 10% between 2000-2017 across the group”, she says.
