Payouts Are In

With Covid-era recovery well underway for some, dividends are soaring—led by commodities and finance.

Profitability is on the rise—and so are corporate distributions. Global dividends were forecast to surge approximately 15.6% year-over-year in 2021, according to the Janus Henderson Global Dividend Index for Q3 2021, rebounding sharply from 2020’s Covid-19 crisis drop to surpass pre-pandemic levels in just one year.

And the records don’t stop there. Over 90% of companies worldwide either maintained or raised their shareholder payouts last year. The total in global dividends was forecast by Henderson to surpass the $1.45 trillion milestone set in 2019. “The pandemic caused $220 billion of global dividend cuts in 2020,” comments Piergaetano Iaccarino, head of Equity Solutions at Amundi. “And the reverse has occurred in 2021.”

The figures indicate that a global business recovery is well underway, argues João Daronco, a market analyst at Suno Research. “I see stock market numbers as an indication of short- and midterm expectations,” he explains. “Dividends, on the other hand, are guided by reality, which means real profitability. We are certainly living a prosperous moment for a lot of companies, and that’s what we see reflected in dividends.”

Rising dividend benefits show up across the economy, according to Erik Norland, senior economist at the Chicago Mercantile Exchange (CME). “Dividend payments provide a stream of income for a wide variety of investors, including pension funds, insurance companies, foundations and endowments, which they can use to match their liabilities and other commitments,” he comments. “Dividends also provide governments with tax revenue and are sometimes invested in new businesses via venture capital, helping new enterprises to expand.”

Regional Outlooks

Although the macro trend suggests a global phenomenon, 2021’s distribution rebound is filled with regional and sectorial subtleties. Annualized data reported by Henderson from Q3 2021—the last global earnings season to date—shows that North American companies were the clear laggards, with underlying growth rising 9.9%. Australian and UK shareholders, on the other hand, witnessed average growth of 97% and 59.9%, respectively. They are followed by emerging markets (31.3%), Europe, excluding the UK (28.8%) and Asia-Pacific, excluding Japan (28.8%).

China delivered mixed results (15.7%), surpassing the US in distributions but lagging in profitability. That happened primarily because of the BN property-developer crisis, which led most of that sector’s companies to cut payouts. As a result, a third of companies overall have lowered distributions for the year. 

Brazilian dividend growth was also strong, contributing heavily to emerging markets growth. According to data from XP Investments, a leading broker for the country, the average dividend yield in Bovespa (the country’s stock exchange) is currently 108% higher than the annualized average from 2008 to the present. Also, all of Brazil’s companies—100%—either raised or maintained dividend payouts for the year.

Policy, Markets Make a Difference

Data suggests that the divergence between North America and other regions was mainly propelled by two factors. One arose from the varying regulatory responses and mandates as the Covid-19 crisis wore on.

“In the UK, Europe, Australia and Singapore, financial regulators forced banks to slash dividends to conserve cash, even though many were willing and able to pay,” explains Ben Lofthouse, head of Global Equity Income at Janus Henderson. “These harsh measures were not implemented by regulators in Canada or the US.”

Many American companies had a second cushion. “In 2020, US companies managed to protect their dividends by suspending or reducing share buybacks,” says Amundi’s Iaccarino. “In Europe, dividends suffered a major cut in 2020. That reversed in 2021—thanks to the reopening, earnings recovery and removal of regulatory constraints—translating into much stronger growth.”

A second major factor impacting profitability and therefore dividends was surging commodity prices, which buoyed a handful of sectors. Mining companies were the absolute global dividend winners, distributing more than $54.1 billion in payouts globally in Q3 2021 alone—topping the full-year record for the sector, established in 2019. The sector was also responsible for 15% of the Q3 global total dividend distribution, Janus Henderson reported.

The Anglo-Australian BHP was comfortably the world’s leading dividend payer for the year, distributing close to $19 billion shareholders. Along with other mining giants, such as Anglo-Australian Rio Tinto and the Anglo-Swiss Glencore, the sector did the heavy lifting for two of the world’s steepest dividend rebounds (the UK and Australia).

In Brazil, mining giant Vale returned more dividends in 2021 than in the past six years combined, totaling $10.3 billion. Accompanied by state-owned Petrobras, which paid a record $11 billion in dividends, the commodity-backed companies helped push the average dividend yield of the Brazilian stock market to a record 7.5%.

“Commodities make up to anywhere between 30% to 40% of the Brazilian stock market,” says Jennie Li, equity strategist at XP Investments. “The rise in global commodity prices and the devaluation of the Brazilian real had an enormous impact on [commodity] companies’ profitability, as they are exporters and thus have their revenue in dollars. That led to greater average dividend distributions.” The story was similar around the world, with higher shareholder payouts from Russian aluminum company Evraz, South Korea’s Posco and Beijing-based PetroChina, to name a few.

The other sector to propel 2021’s rise in dividends was banking. While not yet reaching global pre-pandemic distribution levels, the industry was the main driver behind Europe’s and Singapore’s dividend rebound. In France, BNP Paribas’ restored dividend helped push a 93% rise for the year, while in Singapore, relaxed restrictions drove dividends higher for the entire sector.

The Financial Post reports that analysts at Hamilton ETFs, a Canadian investment manager focused on the global financial sector, believe that US and Canadian banks may be “keeping some of their powder dry when it comes to dividend increases.”

Can Dividends Continue Rising?

With dividends typically lagging earnings by a few quarters, 2022 should see further dividend growth from 2021’s global earnings recovery, according to Iaccarino. “We expect a more synchronized earnings growth trend for Europe and the US, with US dividends marginally lagging European dividends. The latter still have some dividend-normalization tailwind left, while the former can partially reinstate share buybacks,” says Iaccarino. “Overall, we expect dividends to have two major swings in 2022: one positive, coming from the full restoration of banking dividends; one negative, coming from a normalization of unsustainable high dividends from the mining sector, given their reliance on commodity prices.”

Another important factor for the global dividend equation is inflation. While the CME’s Norland says it may help push dividends higher, he also warns that in such an environment, real returns are lower than what the nominal figures show. “Inflation might be driving corporate revenues and dividends higher along with raw materials prices,” he comments. “The last time the US experienced severe and sustained inflation, dividends grew quickly, even as equity markets suffered.”

Iaccarino concurs: “In the last few years, the proportion of dividends paid by value/cyclical sectors has increased and as a consequence, the correlation between dividends and inflation has turned positive, making dividends a relatively good inflation-hedge tool. This also makes intuitive sense, considering dividends are paid out of nominal earnings, which tend to grow with inflation.”

Whether through robust earnings or inflation creep, dividend growth seems set to continue.