- US dividend growth to decelerate despite higher payouts from banks and energy companies
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We are forecasting ordinary cash dividends declared by US firms to reach $628.3bn in 2019, up 8.1% from 2018. This rate of growth is slightly below last year’s 10.6%, but it is in line with the past three-years’ average of 7.8%. The projected slowdown in dividend growth for 2019 compared to 2018 is attributed to the materialization of tax cuts in 2018, which boosted corporate earnings substantially and led to double-digit dividend growth.
The stimulus from the tax cuts is expected to fade in 2019 and thus we anticipate US dividend growth to return to a more moderate pace. The pace of growth for 2019 is largely set by the top six dividend paying sectors: technology, oil and gas, healthcare, industrial goods and services, real estate and banks. Their payouts of $371.0bn is 59.0% of aggregate payouts from all sectors, up 8.3% year-on-year (yoy). We foresee weakness in the automobile and parts sector as the sector is expected to post the lowest dividend growth in 2019, with an increase of 3.2%. In 2019, the two main contributors, General Motors and Ford are expected to continue to pay flat dividends.
In 2019, we expect strong dividend growth to come from the banking and oil and gas sectors. The banking sector leads with the highest expected growth rate of 16.1%. We anticipate bank dividends to benefit from short-term rate hikes. In the oil and gas sector, we forecast growth to remain in the double digits, however, relatively more subdued in comparison to 2018. Overall aggregate dividends are forecasted to reach $70.0bn, making a strong comeback from depressed levels of $51.7bn observed during the 2016 oil crisis.
Technology is expected remain the biggest payer of dividends for 2019 as we are expecting companies to deliver dividends amounting to $77.3bn. Behemoths like Apple Inc and Microsoft Corp are projected to grow their dividends by 7.8% and 9.1% respectively in this coming year.
- European dividend growth losing steam on moderated payouts from top contributors
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The pace of European dividend growth will slow in 2019. Regular dividends declared by firms in 2019 are predicted to reach €428.7bn, up 7.3% from around €399.4bn paid by the same firms in 2018. This rate of growth is down two percentage points compared to last year, when payouts rebounded strongly from a commodity price crash and euro crisis.
We are expecting more than two-thirds of the European firms to announce higher dividends in 2019. However, we highlight that on aggregate, dividends from European firms are projected to exhibit lower growth rates than those in recent years. After two years of strong increase in payouts, driven by mining companies on the back of the recovery in commodity prices, dividend growth in the United Kingdom (UK) – the largest dividend payer in Europe – is expected to moderate in 2019. In Germany, dividend growth is projected to halve, dragged down by its biggest contributor, the automobiles sector. German automakers have struggled over recent months affected by the implementation of the new EU emissions regulation known as WLTP and their exposure to escalating international trade tensions. Switzerland is the only country among the top contributors projected to have accelerated growth.
The banks and oil and gas sectors are the top two contributors to European dividends, they account for over 25% of the payouts in this region. Aggregate dividends from banks are projected to grow 10.2% yoy and dividends from energy companies are estimated to grow by 8.1%, underpinned by stronger oil prices. It is worth noting that despite escalating international trade tensions, we foresee the automotive sector illustrating the highest yearly growth of 20.1%, although this is partly driven by the dividend resumption of Fiat Chrysler as major automakers such as Bayerische Motoren Werke AG and Daimler AG are set for muted dividend growth.
- APAC dividend growth underpinned by China, partially offset by other export-oriented countries
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Investors have enjoyed higher payouts from APAC companies in recent years and we expect the momentum to continue in 2019. However, growth is showing signs of slowing as we are expecting ordinary dividends to increase by 5.5% to $551.0bn. The impact of the trade war is evidently reflected on export-oriented economies such as Japan and Taiwan, as dividend growth rates in both countries are set to fall to 4.9% and -1.2% respectively. Japanese companies are remaining cautious on the outlook and therefore offer little optimism for our forecasts. For instance, Daikin Industries is expecting the trade war to cause a drag of JPY 7bn on its operating profit while Sumitomo Metal Mining revised its earnings guidance on the back of the lower than expected metal price due to trade disputes. Elsewhere, other country specific reasons, such as the expected reversion in payout ratios towards their respective historical level for Indonesian banks and lower projected dividends from Malaysia’s telecommunication sector are also weighing on dividends in APAC.
While the majority of countries in APAC are set for a single-digit growth rate, dividends from China remain strong despite the fallout from the US-China trade challenges, as the biggest economy in Asia is projected to report double-digit growth for the second consecutive year. The strong growth in dividends can be attributed mainly to solid growth in banking dividends as well as higher contribution forecast from a recovery in the oil and gas sector. The big four Chinese banks are projected to deliver positive dividend growth in the new year, as an expansion in net interest margins and robust asset growth more than offset the downside impact from an increase in write-downs and negative impact from the regulators’ crackdown on wealth management products. Oil and gas dividends will be lifted by higher payouts from PetroChina Co and China Petroleum and Chemical Corp (Sinopec), driven by expectations for improved earnings across the sector. All sectors except media are expected to contribute to growth.
- Emerging markets’ dividend growth set to outpace developed markets
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In recent years, emerging markets have expanded their dividends at a higher rate compared to developed markets and we are expecting this pattern to continue this year. Payouts from emerging markets account for around one-fifth of the dividends estimated for 2019 and are projected to grow by 6.1% to $369.9bn. A significant number of the largest paying firms within this segment of the market are mostly state-owned or bear a high level of government ownership, which causes their dividend policies to be influenced by government decisions and state budgets.
For instance, India has registered solid growth in dividends in recent years due to the government’s pressure to distribute higher dividends. While state-owned enterprises (SOEs) in the oil and gas sector and mining industry are stipulated to have a minimum payout ratio of 30%, SOEs such as Indian Oil and Coal India have payout ratios that are significantly higher than the mandated level amid earnings volatility, and this fuelled the solid growth in payouts over the period between 2016 and 2018. Similarly, the positive momentum in dividends from China could be an indication that SOEs are becoming more generous with their dividends as they adhere to the government’s call to improve their payouts. It was previously announced that SOEs would be mandated to contribute 30% of their profits to the state budget by 2020.
In the same vein, dividends from Russia, the third largest contributor to emerging market dividends, are heavily influenced by SOEs; the top three payers – Savings Bank of Russia (Sberbank), Rosneft Oil and Gazprom – are anticipated to account for around 43.6% of aggregate dividends. The top payer, Sberbank, has recorded a huge increase in dividends over the past five years and in 2019, the bank is forecast to pay aggregate dividends amounting to thirty times the dividends paid in 2015. The strong jump is mostly attributed to the bank’s intention to move its payout ratio to 50% as recommended by the Ministry of Finance in Russia. Elsewhere, expected increases in dividends from Russian stocks are driven by the two oil giants, Rosneft and Gazprom, as the Russian government, their main shareholder, is advocating for the companies to pay at least 50% of their earnings as dividends.
In the Americas, Brazil continues to dominate dividends. Top payers in the Latin American country are mostly banks, we are pencilling in a 15.7% jump in dividends from this sector in 2019. Petroleo Brasileiro (Petrobras) is the only SOE within the top five dividend payers and had recently re-initiated dividends in 2018 after a hiatus of four years. We are forecasting the oil giant to register a solid increase in 2019 on the back of the recovery in oil prices.
- US Banks lead sector growth, offset by tapering growth from banks in Asia
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The banking sector is expected to remain as the top dividend payer and we are projecting aggregate dividends amounting to $288.2bn for 2019, up from $270.3bn in 2018. This translates to a yoy growth of 6.6%, reflecting our expectation of a slowing growth in this sector as dividends in 2018 were around 15.2% higher on 2017. We noted that banks in all geographical regions are set for slowing growth.
Banks in the US are set to register healthy growth of 16.1%, although this is lower than the 22.4% increase illustrated in 2018, which was driven by the Tax Cut and Jobs Act passed in December 2017. This resulted in the decrease in effective tax rates to mid-20%, and therefore boosted profits and shareholder remuneration.
The top five dividend paying banks in the US, JP Morgan Chase and Co, Wells Fargo and Co, Bank of America Corp, Citigroup Inc and US Bancorp, have significant influence on the US banking sector’s dividend trajectory as they account for around 64.1% of the total payouts from American banks. Looking ahead, the Federal Reserve is expected to lift interest rates twice throughout 2019 and banks are likely to benefit. Indeed, consensus estimates are showing around a 10% increase in earnings, underpinning our forecasts for the coming year.
Three of the countries in APAC made it to the list of top contributors to the banking sector’s dividends - China ($39.1bn), Hong Kong ($25.8bn) and Australia ($17.8bn) claim the second, third and fourth spots, respectively. Still, banks in the region are expected to exhibit the slowest dividend growth, we are forecasting payouts from Asian banks to inch upwards by 4.2%, a contrast from the expected dividend growth from the banks in the US. While dividends from Chinese banks are set to register strong growth on the back of stronger fundamentals, this is partially offset by banks in Australia and Indonesia. Payouts from Australian banks are anticipated to grow at the slowest rate in recent years in local currency terms as headwinds keep a lid on strong profit growth. The expectation of a decrease in dividends from Indonesian banks stems from our assumption that banks will revert their payout ratios to their respective historical level. The jump in total dividends from Indonesian banks from 2016 and 2018 was associated with high payout ratios and special dividends paid as banks were trying to reduce their surplus in capital which was dragging their return on equity.
We foresee banks in Europe increasing their payout by 5.8% in dollar terms in 2019, lower than the 19.4% recorded for 2018. Dividends from banks listed in the UK are expected to outperform banks in the Eurozone, despite uncertainty around Brexit. Analysts expect the ECB to start raising the repo rate for the first time since 2007 in Q419, which will allow banks to expand margins and generate higher profits henceforth. Elsewhere, the sluggish dividend growth in the region is partly attributed to the change in Banco Santander’s dividend schedule. Instead of paying quarterly dividends, the bank indicated that dividends will be paid twice a year, which will lead to a decrease of 32.7% in payouts from Spain’s largest bank.
- Higher payouts supported by the recovery of oil prices off multi-year low
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We are expecting the oil and gas sector to remain as one of the top contributor to the global dividend growth in the coming year. Payouts from energy companies will account for around 10.4% of global dividends; we expect ordinary dividends to reach $187.9bn in 2019, up 9.0% yoy after two consecutive years of double-digit growth following the rebound of oil prices. While oil prices have dropped since the start of October, S&P Global is projecting oil prices to recover and to average $69.5/bbl in 2019 and $68.5/bbl in 2020, offering support for our estimates.
Energy companies in the US anchor the payouts in this sector, collectively we are expecting their dividends to grow by 10.5% in 2019. Exxon Mobil and Chevron Corp are the top two contributors in the region, and we are forecasting dividends from these two companies to increase by 5.2% yoy to $23.4bn. In Europe, dividends from Royal Dutch Shell are likely to remain flat as the company gives priority to their $25bn share buyback plan. BP Plc has recently resumed its dividend growth and we are expecting dividends to grow in a progressive manner over the short term. Total SA is projected to increase its dividend by 10% over 2018-2020, in line with its dividend policy announced in early 2018.
Alongside US and European energy companies, we are also expecting oil majors in China and Russia to be among the top payers within the energy sector. We expect stronger oil prices to underpin dividends from PetroChina, Sinopec and CNOOC Ltd and are anticipating them to collectively grow their payouts by $3.8bn. Similarly, Rosneft is estimated to increase its payouts to $5.3bn.
Notably, we see our forecasts on upstream companies in Australia as sustainable as improved fundamentals have prompted Beach Energy to guide a base dividend of AUD 0.02 per share over the next three years, despite turning from a net cash to a net debt position due to an acquisition; propelled Santos Limited towards its target debt level ahead of schedule and enabled it to re-initiate dividends for the first time since mid-2016 earlier this year; and allowed Oil Search to promise that it will continue to pay dividends alongside its expansion plans over the period between 2018 to 2023. These companies have low breakeven points, which will allow them to generate free cash flow consistently to adhere to their dividend policy through oil price volatility.
- Telecommunications sector continues to be the most vulnerable for the second consecutive year
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We are forecasting at least 11% of firms to cut their dividend in 2019. Most dividend cuts that will weigh in 2019 are premised on stock-specific reasons. General Electric is set to register the largest cut among stocks under our coverage as we are expecting the American conglomerate to cut its dividends for the third consecutive year to $347.9m, which translates to a $2.8bn decrease from the amount paid in 2018.
Telecommunications is the most vulnerable to dividend cuts in 2019; the sector has experienced suppressed dividend growth of 2.5% over the last three years and is expected to remain flat yoy. In the UK, 2018 payouts from the sector fell by 2.6% to €5.9bn, impacted by dividend cuts from Inmarsat Plc, TalkTalk Telecom and Kcom Group. The two biggest contributors, Vodafone Group (Vodafone) and BT Group (BT), which represent 97% of the payouts from the sector, are unlikely to grow their dividends and we even see rebasing risks. We see pressure on the dividend sustainability of Vodafone. Should the deleveraging (FY19 pro forma net debt to EBITDA ratio expected to be 3x) fail to materialise following the Liberty Global transaction, which is expected to be completed in mid-2019, we see a high likelihood of a dividend cut from the telecommunications giant. For BT, the weak free cash flow to finance the pension deficit is also bringing debate on the right level of dividends. In Asia, telecommunication giants are also facing mounting pressure from competitors and are trying to balance dividends with the need to preserve cash for investments. As such, the telecommunication sector is the only sector in the region that is projected to cut its dividends, we are expecting payouts to be reduced by 2.9% to $30.1bn. We see little upside potential to our forecasts as headwinds continue to weigh on earnings outlook of top dividend payers such as Singapore Telecommunications, Telekomunikasi Indonesia and Telstra Corp.
