Dividends: new era?
Dividends: new era?
Changes in the market
Over the past year, we have seen significant announcements from major companies such as Meta, Alphabet, Salesforce and Booking Holdings which have driven their share prices higher. These companies have all done one thing in common: initiated a dividend.
To dividend growth investors such as us, this is an extremely positive change in capital allocation by some of the world’s largest and most powerful businesses.
What has prompted this change?
We believe there are several reasons.
Firstly, the higher levels of interest rates means there is greater competition for investors’ capital, and there are few better ways to remind investors of your prodigious and high-quality cash generation than to return a portion of it through a dividend.
Another common trait that might have prompted this change is that these companies have very strong balance sheets. For example, at the time of writing (July 2024) Alphabet had $108bn of cash and securities on its balance sheet and the others are all net cash. Why not remind investors that they are extremely well financed?
It is also important to remember that the ultimate decision to initiate the dividend is made by the Board of Directors collectively. We have observed that as these companies have matured, the board composition has evolved. Whilst initially they had strong representation from those who helped “build” the internet, newer members typically have extensive listed company experience – and often with companies that have a long and rich history of paying dividends. It seems natural that they would be keen on dividends as a form of capital allocation.
Signals in initiating dividends
There are also idiosyncratic reasons why this makes sense for these companies.
In the case of Meta and Salesforce, both companies have been criticised in the past for either profligate capital expenditure or being overly acquisitive. By initiating a dividend, they have introduced a disciplining factor that should create a tension within the capital allocation decision making framework, leading to superior decision making whilst also reassuring investors.
Meanwhile, in the case of Alphabet and Booking Holdings we interpret a different type of signal: one of confidence. The message we think they want to convey to us is that they have won their markets (respectively, search and online travel) and believe their competitive advantages are now so strong that they can both reinvest and pay growing dividends back to shareholders.
Finally, it has also become more commonly understood that companies that pay a growing dividend outperform with superior risk adjusted returns1. Who wouldn’t want to be part of that?
1Source: Ned Davis Research, Inc. and Refinitiv, 31 Jan 1973 – 31 Dec 2023. Copyright 2024 © Ned Davis Research, Inc. All rights reserved.
Disclaimer
Dundas Global Investors is the trading name of Dundas Partners LLP. Dundas Partners LLP is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, the Securities and Exchange Commission (SEC) in the USA, and the Australian Securities and Investment Commission (ASIC) in Australia. The Authorised Corporate Director for the Heriot Investment Funds is Waystone Management (UK) Limited which is also authorised and regulated by the Financial Conduct Authority.
Dundas Partners LLP provides investment management services to clients in the UK, USA, Australia, and New Zealand. In this communication Dundas Partners LLP may be referred to as DGI, Dundas or Dundas Global Investors.
This document is a financial promotion and intended for professional, eligible counterparty and institutional investors only. The information presented is for the intended recipient(s) and is not to be share or disseminated without our prior approval. This material has not been prepared for retail clients.
Investors are reminded that the price of shares and the income derived from them is not guaranteed and may go down as well as up. Past performance is not a reliable indicator of future results. This document contains information produced by Dundas and sourced from others where stated. The images used are for illustrative purposes only. The views expressed are those of Dundas and are based on current market conditions. They do not constitute investment advice or a recommendation to buy any security which has been highlighted in this material. Although this communication is based on sources of information that Dundas believes to be reliable, no guarantee is given as to its accuracy or completeness.
In relation to FCA handbook ESG 4.3, Dundas does not market these funds as a ‘sustainability product’. Use of any sustainability related terms in describing the characteristics of the strategy, or inclusion of any third-party information which measures sustainability of our portfolios are for information purposes only.
For full information on fund risks and costs and charges, please refer to the Key Investor Information Documents, Annual & Interim Reports, and the Prospectus, which are available on our website (https://www.dundasglobal.com). Recent performance information is also shown on factsheets, available on the website.