Eric Labbé, Thematic equity manager at CPR AM
-Retrouvez l’article Dans des marchés chahutés, le dividende est ce qui reste quand l’investisseur a tout oublié de CPR en français sur action-future.com
The markets seem to have closed a 10-year bull cycle characterized by asset price inflation due to the various non-conventional policies of the central banks. Since September, operators have become aware that we are moving into a new world, or rather that we are returning to an old, « normal » world, without « quantitative easing », where the risk must be remunerated at its fair value. A paradigm shift, central banks will no longer be present in the event of a significant market downturn, and as Warren Buffet points out, it is when the sea recedes that we discover bathers without bathing suits….
The winners of this turnaround cannot, of course, be the same as those of the previous phase. The performance gap between growth stocks and value stocks has widened to levels that are no longer sustainable. Volatility, squeezed by torrents of liquidity, is reappearing.
However, this is not a « return to the future » in 2001. Corporate balance sheets are robust. The evolution of accounting rules, post-Internet bubble, protects us from fanciful arrangements by acquisition with an uncontrollable stack of goodwill and the junk debt that go with it; banking prudential regulations, post 2008, then 2011, have been considerably strengthened. But if companies and banks have learned the lesson, is the same true for investors?
So what can we do to limit the performance shortfall when we are locked into equities?
So back to basics: for a minority shareholder, the stock price is no more than the discounted value of future dividends. However, dividends, which are a real communication tool for the company towards its stockholders, are much less volatile than profits and are much better steered during a recession phase, which gives a defensive character to this type of strategy. I grant you, all this is much less glamorous than the story telling of Silicon Valley businesses that are growing at a high pace, but whose shareholder returns are based solely on the expectation of comfortable capital gains. Did you say 2001…?
To rephrase the famous words attributed to Herriot, the dividend is a bit like culture: it is what you remember when you have forgotten everything. As for dividend paying companies, investors have indeed unfairly neglected them in recent years, to such an extent that they are at the core of « value » investment strategies.
Who are they? High dividend paying companies generally belonging to industries whose activity is sustainable, in markets with barriers to entry, in sectors that have been established for a long time…
All comments and analyses reflect CPR AM’s view of market conditions and its evolution, according to information known at the time. As a result of the simplified nature of the information contained in this document, that information is necessarily partial and incomplete and shall not be considered as having any contractual value.
while maintaining transformation capacities. Thus, while inventing the sustainable city of tomorrow, Utilities are characterized by healthy balance sheets and recurring revenues that generate returns of… 5.5%, the same for the Insurance and Media industries, which can sometimes achieve returns of 6.5% or even 7%.
These returns seem so high compared to equivalent investment grade issuers that it is legitimate to question the causes of the levels achieved. Is it because the dividend is high or because the price is too low? In reality, the dividend is moderately growing, because of governance issues. In conclusion, it is often the clear undervaluation of the stock that justifies the return. Did you say value investing…?
But if the price falls, is it for a good or bad reason? If it is for a good reason the payment of the future dividend is not secured, whereas if it is for a bad reason (a market over-reaction), then we have an entry point. Identifying the next dividend and assessing its probability of actually being paid is at the heart of the management process of the CPR Invest Euro High Dividend, which should deliver a dividend yield of 6% in 2019. Select value stock with sustainable high-dividend is OK… but only with a high quality balance sheet.
But in a period of rising interest rates, what is the future for this type of strategy? Answering this issue is like predicting which growth rate: that of dividends, or that of discount rates, will grow the fastest. Alternatively, why will rates rise and what will be the impact on companies’ earnings?
If economic growth, which we anticipate decelerating but still expected in 2019, generates low inflation, then nominal corporate earnings will increase and with them the dividends distributed. At the same time, a Quantitative Tightening policy (QT) correctly anticipated by investors and monitored by the ECB will result in a moderate increase in interest rates. The increase in dividends will outweigh the increase in discount rates, and the strategy will continue to outperform.
For 2019, the high dividend strategy is therefore an advantageous alternative in the framework of defensive equity management in the context of a challenging market.
About CPR Asset Management:
CPR AM is an investment management company certified by the French Financial Markets Authority, an autonomous and wholly owned subsidiary of Amundi Group. CPR AM works exclusively in third-party investment management (for institutional, corporate, insurance, private banking, fund management, and wealth management clients). CPR AM covers the main asset classes, including equities, convertibles, diversified investments, interest rates and credit).
CPR AM in figures (End- September 2018)
– More than €49 billion in AuM
– More than 100 employees, more than one third of whom are involved in investment management.