Registered users can save articles to their personal articles list. Login here or sign up here

Best value remains offshore

Security-filtering helps to identify companies best positioned to deliver growing dividends.

Despite a backdrop of robust economic growth in 2018, market returns across the globe were disappointing. The decline was driven by a slowdown in economic activity coupled with investor fears around the possibility of a recession, given US interest rate hikes. Escalating geopolitical tensions, ranging from trade wars between the US and China to uncertainties around Brexit, further dampened investor sentiment.

Best value remains offshore

Despite these uncertainties, we continue to believe that the best value remains offshore by investing in blue-chip multinationals that are market leaders in their industries. They are best positioned to capitalise on long-term trends such as consumerism, automation and ageing demographics. They also fare well throughout the interest rate, business and economic cycles, given their defensive characteristics and resilient business models.

The share prices of the world’s best dividend payers came under pressure in 2018. Although the dividend growth outlook of these stocks remains intact, prices still declined. The table below highlights the current yields of a few of these companies versus their historic averages.

Dividend yields of the world’s best dividend payers

 

Current

Historic average

Pfizer

3.3%

2.8%

Unilever

3.2%

2.8%

Medtronic

2.2%

1.3%

L’Oréal

1.7%

1.5%

3M

2.7%

2.6%

Stock selection

We adopt a security-filtering process to identify the companies best positioned to deliver reliable and growing dividends. This process consists of multiple filters, but there are three critical screens, namely economic, industry and company-specific.

Companies that make it through this process have strong brands, pricing power, robust balance sheets and cash flows, and produce goods and services that are integral to their customers. These characteristics are often underappreciated in good times, but increasingly valued during adverse market conditions.

The price one pays for long-term returns is short-term volatility

Such conditions were seen in 2018, where fears around rising interest rates resulted in investors scrambling to sell stocks in order to lock in gains made in prior years. This behaviour depressed markets, particularly in the first world, in sectors usually considered to be safe and steady.

In times like these emotions can get the better of investors, causing them to doubt their initial investment strategies. Sensationalist journalism and market ‘chatter’ adds to the panic. Consequently, many investors opt for the safety of cash. 

With volatility likely to continue in 2019 as markets adjust to a world of higher interest rates, we encourage investors to stick with their financial plan.

Long-term view

To avoid hasty decision-making, one must think long-term. From this perspective volatility appears far less daunting.

Look at 3M as an example, one of the world’s premier industrial companies with an enviable track record of growing dividends and shareholders wealth. Over the last three months 3M’s price is down almost 10%. When viewed from a short-term perspective, this can create panic. However, from a long-term perspective, such declines are nothing out of the ordinary for 3M investors.

The table below highlights 19 quarters when 3M’s price lost more than 10% in value.

Previous quarters in which 3M’s share price lost more than 10% of its value

Q2’81

Q1’84

Q3’86

Q4’87

Q1’88

Q3’90

Q4’97

Q3’98

Q2’01

Q3’02

-13.1%

-11.8%

-11.5%

-21.3%

-10.7%

-10.3%

-11.2%

-10.3%

-13.8%

-10.6%

Q3’98

Q3’04

Q2’05

Q2’08

Q3’08

Q4’08

Q1’09

Q3‘11

Q2’18

Q4’18

-10.3%

-11.2%

-15.6%

-12.1%

-15.8%

-13.6%

-13.6%

-24.3%

-10.4%

-9.6%

Income growth leads to capital growth

Although share prices can be volatile, over the long-term price growth is ultimately driven by dividend growth. Thus, large price declines of companies that can reliably grow dividends typically represent good buying opportunities.

Currently, the world’s best dividend payers are trading on relatively high dividend yields and offer good value. Although market volatility is disconcerting, when viewed from a longer-term perspective it likely represents a good buying opportunity.

Preston Narainsamy is an investment professional and a member of the Actuarial Society of South Africa. 

The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

COMMENTS   7

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

Nothing you’ve written is wrong but you’re still not going to beat a passive strategy, especially offshore. SPIVA research proves that. A multi-factor ETF portfolio will beat an equity portfolio over time, almost guaranteed. If you like themes, buy thematic ETFs rather than individual stocks. If you think ageing populations is a winning theme, buy iShares Ageing Populations ETF. If you like Healthcare, buy Vanguard Healthcare ETF. If you like digital disruption and tech innovation buy iShares Exponential Technologies ETF. Self driving cars: Global X Autonomous & Electric Vehicles ETF (DRIV). Robotics: iShares Automation & Robotics ETF. I can go on and on. ETFs don’t mean you can’t lose money so you need to do your homework.

Div Yield is just one tool in a large toolkit of value determination.

Dividend also depends on industry, product cycle, tax regimes etc so it’s not really that reliable these days.

How about looking for price you pay for expected growth? That may give hints on if under or overpriced?

Also, no reason to assume offshore offers better than SA… unless you can provide evidence. Would be helpful to South Africans to know how to buy these companies mentioned too.

Missing in the story is the buying up from U.S, C.B, and Europe, E.C.B, to prop up local value. Locally impossible. For reason of dependency on toys like planes, and the rest, like health.

There are mutual funds that gives a ‘monthly divident’ of 3% and has been doing it for more than 5 years continuously.

The article is short and cannot address all of the comments mentioned. However, I will try to address some of the questions. Although the dividend yield is only one metric. We only look at the dividend yield as our investment philsophy centres around income and companies that can produce reliable growing income. Why income? Because over the long term, price growth is ultimately driven by income growth. Hence the dividend yield is of value, because if one can identify companies than can reliably and consistently grow dividends, then one would look at securing that income stream at the appropriate price (i.e. when the dividend yield is trading above its historic average. Expected growth is very hard to gauge, because one can only foresee possibly a few years at most into the future. From a long-term perspective, it does not make sense for us to look at expected growth. If one has to gauge the value or price paid based on growth, then we would need to apply a DCF model into perpetuity, which again, we don’t think we can see that far ahead. So please understand that our investment philosophy drives our view.

In terms of the ETF question, we are not trying to beat any portfolio. We are benchmark agnostic and want to give investors both a predictable and acceptable outcome – again pointing to our philosophy. Because of the income focus, we would not look at tech or resources as an example because it is very difficult to get a feel of earnings growth from such companies and they are also more susceptible, in our view to disruption and change – again, not ideal for us, given our income focus.

Regarding the offshore offering more value than SA-centric stocks, we totally believe this to hold. Economic fundamentals are deteriorating in SA. GDP growth remains subdued and the outlook for growth subdued. Synonymously, subdued GDP growth, should translate to subdued returns in general;. Furthermore, SA is largely at the mercy of the globe given its 40% forein bond ownership, which makes SA susceptible to large capital outlooks – hence volatility will be a feature of our local markets. Remember, junk status is still on the card for SA in our view. Policy uncertainty is still there. Corporates are not willing to commit money into the economy. The consumer is constrained (seen in recent results of food retailers). The consumer is 60% of our economy from a demand-side perspective. Unemployment is still high, inflation risks are still on the upside, the consumer has a 70% debt to disposable income. We see constrain here.

Government is also constrained, as well an investments and other components of out GDP. So we are not excited about SA.

The globe on the other hand is still growing globally, albeit at a lower rate than investors expected. Furthermore,as mentioned in the article, we like the blue-chip multinational dividend payers. Because of the track records, we can expect growing income and as a result, growing share price over the long term.

Load All 7 Comments
End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

GO TO SHOP CART

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2