Dividends soaring after US firms go on buyback spree
A SLOWDOWN in world economic growth might be on the cardsc after a d downbeat ass assessment last week by the Int International Monetary Fund. dB But it is not denting some experts’ enthusiasm for income-friendly global investment funds, which rely on company dividend growth.
James Davidson, manager of the JPM Global Equity Income Fund, reckons opportunities for income investors are rife, especially in the US and the UK, two of the bestperforming economies.
More than half his fund’s portfolio of 62 stocks is invested in the US, with British firms, including BAE Systems and advertising giant WPP, the next most popular.
Davidson says the US has proved fertile ground for dividends for several reasons. Strong economic growth has fed through to higher profits, especially among big firms in the country’s S&P 500 index, enabling many to distribute more income to investors.
Also, record low borrowing costs have enabled companies to buy back shares cheaply. This has resulted in fewer shares in issue, often driving up the price and dividend because earnings are not spread so widely.
Finally, dividends are still only 30 per cent of earnings, compared with their long-term historical level of 40 per cent.
Davidson points to Home Depot – America’s equivalent of B&Q and a big holding in his portfolio – to show how share buybacks and strong revenues can act in the favour of investors. Last year, it embarked on a $7billion (£4.6billion) buyback and its share price continues to push new highs. Now, its dividend for the year to the end of January 2016 is forecast to grow by 20 per cent.
Though some market watchers believe such buybacks represent financial chicanery, prevent companies from investing and can hide corporate weakness, Davidson seems unfazed. He says buybacks – which were last this popular in 2007, just before the global financial crisis – would prove popular in Europe, where dividend yields are more attractive, but companies are not so keen to go down such a route.
‘It’s cultural,’ he says, ‘but with borrowing costs of 1 per cent and dividends of 4 per cent, it would make sense for some companies.’
The JPM fund pays quarterly income and over the past three years has outperformed the FTSE All-Share Index.