The share payout crunch
PHEW. Shell and BP have held their dividends, despite the battering from the collapse of the oil price earlier this year and with BP seriously bloodied. Every wise investor in equities knows that the path to prosperity is to reinvest your dividends, for over the very long run, something like two-thirds of the real return on equities comes from dividends rather than capital gains.
So far this century nearly all the return has come in that form. So dividends matter. They matter especially right now, for in a world where ten-year gilts yield only 1.2pc and inflation seems set to rise to more than 3pc next year, the FTSE 100 companies overall yield just under 3.9pc, as well has giving some protection against inflation.
That is roughly in line with UK shares’ longterm average, which gives some comfort to investors. Maybe shares are a bit overvalued, but on this measure they can’t be grossly overvalued. But there are two vulnerabilities here.
First, the overall dividend cover is low by historical standards, for earnings are only about one-and-a-half times dividends. Two times would be safer. Second, the flow of dividends from the Footsie is massively dependent on a handful of high-payout companies.
Six of the ten largest companies in the index are yielding between a touch below 5pc and more than 7pc. Shell is the highest-yielder, closely followed by BP, which is why holding those two dividends mattered so much. Shell has not cut its dividend since the Second World War. That its shares should yield more than 7pc suggests that a lot of people expected it to do so.
But this is not just an oil thing. Leave Shell and BP aside, nearly half the dividend income from the top ten payers and several of the other giant high-yielders – HSBC, GlaxoSmithKline, Vodafone, AstraZeneca – are in different ways also under pressure.
HSBC is one of the strongest banks in the world, but its profits are still down on their 2007 peak and nearly 40pc come from Hong Kong, where it can’t really grow much more. Glaxo and AstraZeneca are both great companies but live in a world where profits from blockbuster drugs are waning and health budgets are tightening everywhere. And Vodafone is now in a mature market, for though data growth is very strong, all mobile operators struggle to charge for it.
To be clear, the Footsie giants give both a decent yield and a spread of risk. But not quite as much a spread as would at first sight appear, which is why investors should take heart that two of those giants seem confident enough to maintain payouts. Either that, or more glumly, they were too scared of the reaction if they didn’t.
Freedom fears
THE fear index – the Chicago-traded volatility index, called the VIX – is at a six-week high and it is easy to see why. There is the little matter of the election next week, plus the prospect of higher US rates in December, slowing world trade and so on.
One change yesterday was that Donald Trump moved ahead – in an ABC News/ Washington Post tracking poll – for the first time since May. This may just be noise, but the US business and financial establishment, which on balance is pro-Republican, but anti-Trump, must now take the possibility seriously on board.
So too must the rest of us, for we do have a dog in this fight. That dog is freedom of trade. The US, despite its powerful protectionist lobby, has been the main driver of greater trade freedom since the Second World War. Now both candidates speak against it. Hillary Clinton does so sotto voce, for though she helped frame the TransPacific Partnership deal, she now says it doesn’t ‘meet her standards’.
Trump, however, is up front. For starters, impose a 45pc import tax on Chinese goods and 35pc on Mexican. Now you could say this is just a negotiating ploy and there have in the past been informal voluntary restrictions on trade without derailing the whole process. Remember how Japanese cars were limited to 10pc of the European market?
But if America retreats from the vision that restrictions on trade should gradually and progressively be cut, then the great engine of post-war prosperity will weaken. We in Britain, as a trading nation embarking on our new relationship with the rest of the world, will suffer too.
Late rally
PLEASE don’t take this too seriously, but the US stock market doesn’t look good for Clinton. The performance of the S&P 500 index has correctly caught every election since 1984, and 84pc of those since 1928. If the index goes up in the three months before the vote, the incumbent party’s candidate wins; if down, the challenger’s. At the moment it is more than 3pc down since August 8. There is a week to go but clearly the lady needs a rally.