Companies around the world are rewarding shareholders with the highest dividends in more than two decades compared with bond interest payments, even after the best start to a year for equities since 1994.
The 1,610 stocks in the MSCI World Index paid an average 2.7 percent of their share price in dividends as of last week, according to data compiled by Bloomberg. That compares with the 2.6 percent yield on the Bank of America Merrill Lynch Global Corporate Index of 10,034 investment-grade bonds and 6.1 percent for 2,652 securities in the Barclays Global High-Yield Index. The gap versus the junk-bond index is the narrowest since at least 1995, the data show.
Bears say dividends don’t matter when stocks are near the most expensive level compared with estimated earnings in more than two years amid sluggish economic growth and looming polls in Italy and Germany. Bulls say yields of more than 10 percent on Limited Brands Inc., owner of the Victoria’s Secret lingerie chain, and GDF Suez SA, Europe’s largest utility by market value, mean equities remain undervalued.
“If you buy some quality equity, you can buy the dividend and get some dividend growth with it,” Jacob de Tusch-Lec, who helps oversee $19 billion at Artemis Investment Management LLP in London, said in a phone interview on Feb. 5. His Artemis Global Income Fund has beaten 99 percent of peers over the past year. “With bonds, you are not protected against inflation, you are selling any upside and you are not getting any income growth. Investors have been going lower and lower down the risk curve to get yield, but at one point some of those credit assets are no longer much safer than equities.”
The MSCI World climbed 5 percent in January, according to data compiled by Bloomberg. The index of stocks in 24 developed markets fell 0.5 percent last week and dropped 0.2 percent to 1,407.9 as of 8:17 a.m. in London today. It returned 128 percent including dividends from the market bottom in March 2009 through yesterday, according to data compiled by Bloomberg. That compares with a 132 percent surge in the Barclays High-Yield debt gauge.
Since the financial crisis of 2008 pushed the world into a recession, central banks from the U.S. to Europe and Japan have cut interest rates to near zero and bought unprecedented amounts of bonds to drag down yields and spur an economic recovery. Cash held by MSCI World companies climbed to $3.4 trillion in 2012, the most in at least seven years, from $2.1 trillion in 2006, according to Bloomberg data.
Stocks have paid out less than bonds for much of the past five decades as equity investors focused on the potential for capital appreciation rather than income. The dividend yield on the MSCI World averaged 2.1 percent between 1997 and the collapse of Lehman Brothers Holdings Inc. in September 2008, according to Bloomberg data. That compares with the 5 percent average yield paid by the Bank of America global corporate debt index and 10 percent on the Barclays junk-bond index.
“The search for yield has pushed the rates in credit to such a point that it’s quite difficult to see enormous value,” Matthew Merritt, who helps oversee $360 billion as head of multi-asset teams at Insight Investment Management in London, said in a Feb. 6 phone interview. “It’s guiding people towards equities, not necessarily because it’s an incredible environment for equities but because there is some support for equities.”
Valuations compared with profits are rising. This year’s 5.4 percent advance in the MSCI World has left the gauge trading at 13.8 times its members’ estimated annual earnings, near the highest since December 2010, Bloomberg data show.
Concern over the strength of the global economy, U.S. budget negotiations and elections in Europe may trigger investor flight, according to Mike Turner, head of global strategy and asset allocation at Aberdeen Asset Management Plc in London.
U.S. lawmakers must reach a deal by March 1 to stop a package of automatic federal spending cuts that may slow growth in the world’s largest economy. In the run-up to Italian elections Feb. 24-25, Silvio Berlusconi, who has pledged to roll back Prime Minister Mario Monti’s austerity policies, narrowed the lead of front-runner Pier Luigi Bersani to within the 4 percentage-point margin of error in an opinion poll published Feb. 6. Germans may go to the polls in September.
“The uncertain macro environment will prevent a massive rotation out of bonds and into equities,” said Turner, whose firm oversees $314 billion. “There’s a natural affinity to own equities just from an income advantage, but ultimately you are unlikely to have major damage in the bond market because keeping rates extremely low is a key point in monetary policy.”
Dividends are poised to climb to the highest levels since at least 1998. Companies in the MSCI World will boost payments by 3.8 percent to a combined $39.43 a share this year, up from a low of $29.58 in 2009, according to more than 5,000 analyst estimates compiled by Bloomberg.
Investors withdrew more than $600 billion from equity mutual funds between 2007 and 2012 and added $1.1 trillion to bond funds, according to the Investment Company Institute in Washington. Now, investors are returning, based on data from Cambridge, Massachusetts-based research company EPFR Global. U.S.-domiciled stock funds attracted a net $57.4 billion in January, the best month since at least 1995. Bond funds had inflows of $20.7 billion, the lowest since December 2011.
The gap between the Barclays Global High-Yield Index’s yield and the MSCI World’s payouts narrowed to 3.4 percentage points last week from 17.1 at the height of the financial crisis in 2008, according to Bloomberg data. The 3 percent spread in January was the smallest on record.
“With high-yield spreads at current levels it’s hard to make a valuation case for the asset class compared to high dividend,” Jason Collins, the London-based head of European equity at SEI Investments Co., said Feb. 5. His firm has $195 billion under management. “This is particularly so given the lack of inflation protection that high-yield debt offers compared to equity, which offers the potential of both dividend growth and capital appreciation.”
Limited Brands paid $5 a share in dividends last year, 10.4 percent of its stock price, data compiled by Bloomberg show. The dividend yield has climbed from 6 percent in 2010 even as the shares more than doubled. The Columbus, Ohio-based retailer’s 10-year notes yield 4.8 percent.
GDF Suez paid 1.5 euros a share in 2012, yielding 10.1 percent, up from 2 percent in 2005. The Paris-based company’s 2017 bonds yield 1.38 percent.
“Increasingly, dynamic capital allocators are being forced to consider equities,” according to Jonathan Stubbs, a London- based equity strategist at Citigroup, who says European equities will climb as much as 30 percent in the next two years.
“To get those returns from bonds is impossible at these levels,” Stubbs said in a Feb. 6 phone interview. “To not buy equities here you’d have to be a big macro bear.”
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