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PUBLICATION
Jan 17, 2020
Seven key dividend forecasts for 2020
Global dividends will hit record highs in 2020, according to Dividend Forecasting data from IHS Markit (NYSE: INFO), a world leader in critical information, analytics and solutions. Based on a bottom-up analysis of around 7,700 stocks, global dividends are predicted to grow by 5.5% to $1.9tr in 2020 despite headwinds such as Brexit and the US-China trade war.
Although dividend growth decelerated in 2019, due to the challenging economic and geopolitical landscape, our estimates suggest that companies are more optimistic this year, with central banks around the world implementing monetary stimulus measures to boost sentiment; from the US to Russia to Australia, central banks are lowering interest rates in a bid to spur consumption and investments. <span/>The anticipated increase in dividend growth rate is consistent with the latest PMI reading and the view of IHS Markit that global growth will stabilise in 2020.
All regions are expected to register higher dividends this year. We are predicting strong growth from the US and Asia Pacific (APAC), at 7.1% and 5.5% respectively. Dividends from Eurozone economies are projected to increase at a slower pace of 3.5%, due to headwinds such as the new EU emission regulations and the revision in capital contribution principle restrictions in Switzerland. Our dividend forecast for the US is underpinned by our bullishness in dividends from the Technology, Oil & Gas and Health Care sectors. APAC dividends are driven by mainland China and Hong Kong, offset by export-driven economies such as Taiwan and South Korea, reflecting the mounting pressure of the US-China trade war on the profitability of companies in these two regions.
Banks remain as the top contributing sector to global dividends and while we are expecting distributions from the lenders to grow by 6.0% from the year before, we see some level of downside risk to our estimates as a low interest rate environment hampers the growth of the sector. Elsewhere, we are most upbeat on dividends from the food & beverage sector and see the payouts from automobiles & parts sector as the most vulnerable.
1. US dividends to continue to trend upwards
We are forecasting ordinary cash dividends declared by US firms to reach $662.1bn in 2020, up 7.1% on 2019. This rate of growth is in line with last year's increase of 8.1% but falls short of the 2018 growth of 10.6%. The deceleration in dividend growth realized in 2019 was mainly attributed to a slowdown in earnings growth, compared to 2018 earnings growth, which was boosted by tax cuts.
Looking ahead, we are expecting 2019 dividend growth to carry over into 2020, despite muted earnings and an unsettled trade war limiting potential. The top five sectors anchoring dividend payout in 2020 are Technology, Oil & Gas, Industrial Goods & Services, Healthcare and Banks. We are forecasting that these five sectors will maintain a steady dividend payout, accounting for 51% of the forecasted US aggregate dividend, or $340bn, up 8.5% year-on-year (YOY). Conversely, we foresee substantial deceleration in aggregate payout growth for the Insurance sector, from 11% to 4% in 2020, on the back of Progressive Corp's dividend policy change.
In 2020, we expect the highest dividend growth to come from the Construction & Materials sector, and the Financial Services sector. Although the Construction & Materials sector is amongst the more sensitive sectors to the ongoing US-China trade war and economic slowdown, we anticipate the sector will register the highest YOY dividend growth of 20.1% in 2020, driven by projected dividend increases from Sherwin Williams and Watsco Inc. In the Financial Services sector, we expect robust dividend growth to continue in 2020 as dividends are forecasted to reach $37.8bn. We maintain an attractive view within diversified financials, namely on discount brokers and exchanges. The market volatility that carried into Q1 FY19 benefited retail trading activity, trading revenues and net interest revenues. As such, we expect these firms will make similarly sized increases after four quarters of steady payments, boosting the YOY growth for the sector above 10%.
2. European dividend growth to remain low in 2020
The pace of European dividend growth is expected to accelerate modestly in 2020. Regular dividends declared by firms in 2019 are predicted to reach $500bn, up 3.5% from around $483bn paid by the same firms in 2019. This rate of growth is slightly higher than last year's growth of 2.0%, reflecting the continual impact of dimmer global economic outlook.
We are expecting more than sixty percent of the European firms to announce higher dividends in 2020. However, we highlight that on aggregate, the increase projected is still lower than the multiyear high growth rate of 15.5% illustrated in 2018. Growth of 2020 payouts is expected to be marginal in the United Kingdom (UK) while in Germany, dividend growth is projected to come to almost a standstill with a decline of around 1.0%, dragged by a slowdown in Automobiles sector, its biggest contributor. German automakers have struggled in recent months, affected by the new EU emissions regulation. The ongoing economic concerns and increased competition, exacerbated by the US-China trade war, have forced automakers like Daimler AG and Bayerische Motoren Werke (BMW) to revise their projections. Switzerland is the only country among the top contributors projected to have notable growth. However, Swiss companies' dividends will be impacted by the change in capital contribution principle restrictions, whereby companies can pay from capital reserves only when they pay an equal amount from taxable portions.
The Banking and Oil & Gas sectors are the top two contributors to European dividends, accounting for over 30% of the payouts in this region. Aggregate dividends from banks are projected to grow 8.0% YOY and dividends from the energy companies are estimated to grow by just 4.0%, partly weighed on by the tepid dividend outlook of oil majors, BP plc and Royal Dutch Shell. Given economic uncertainties, we predict defensive sectors like Industrial Goods and Services and Utilities to outperform other sectors in terms of dividend growth.
3. APAC dividends to grow, offset by distributions from export-driven economies
Dividends in Asia Pacific are expected to notch up another year of growth to a record USD 553.4bn in 2020, representing an increase of 5.5% on 2019. Amid the uncertainties stemming from the ongoing trade dispute and Brexit, growth in payouts have moderated in 2019. However, our estimates for 2020 reflect a more sanguine outlook for investors in the coming year, underpinned by the outsized growth expected from mainland China, Hong Kong SAR and India. We are also expecting that more companies will initiate or resume dividend payments than suspend their dividends. Like previous years, payouts from the region will be anchored by mainland China, Japan and Hong Kong SAR.
Japanese dividends are expected to exhibit a modest growth of 2.0%, which pales in comparison to the jump of 12.2% in mainland China and 9.4% in Hong Kong SAR. Our estimates suggest that companies in these two markets remain unfazed by the ongoing social unrest and trade war. Chinese banks anchor the payouts from mainland China, and we expect the positive growth momentum to continue over the short term, supported by improved asset quality and favourable earnings outlook. The amendment in tax policy in 2019 is also set to deliver benefits to the insurance companies in China, boding well for future dividends. Indeed, we foresee leaders in this sector, namely Ping An Insurance Group and China Life to disgorge cash to shareholders generously this year. In South Asia, we are upbeat on payouts from Indian companies, underpinned by higher dividends expected from banks and a few of its key state-owned enterprises.
Growth from these three countries will however be offset by the decline projected from export-driven economies such as Taiwan and South Korea, as the impose of tariffs on Chinese goods has adversely impacted the sales of various technology-related companies in these two countries. While chipmakers have offered mixed signals in their outlook, our estimates reflect the expectation that companies in the two east Asian economies will become more conservative with their payouts in the coming year. Notably, we are predicting a dividend cut in the rival to Samsung Electronics, SK Hynix in South Korea and computer parts manufacturers, Nanya Technology and Quanta Computer in Taiwan.
4. Emerging markets to modestly outperform developed markets
This year, we foresee distributions from emerging markets to increase by 5.7%, modestly higher than the 5.5% reported by companies in developed markets. Major companies in emerging markets tend to be state-owned or bear a high level of government ownership and therefore, dividends are typically influenced by government policies.
APAC dominates the payouts from the emerging markets, with the two most populous territories in the world, mainland China and India spearheading the growth of dividends. Investors in China are expected to continue to benefit from the robust growth in the economy and we foresee state-owned companies from basic resources, Oil & Gas, and banking sectors in India to continue to be generous with dividends.
Elsewhere in Europe and America, Russia and Brazil are the largest contributors in the respective regions. The Russian government has been advocating state-owned companies to distribute 50% of its earnings to shareholders by way of dividends. We noted that Sberbank and Gazprom, two of the largest Russian enterprises have yet to reach this target, signaling that there is further room for dividend growth in the forthcoming years. In Brazil, we expect banks to remain as the largest payer, in line with the historical pattern, and are predicting that the majority of the state-owned companies will continue to pay higher dividends.
Developed markets' dividend trajectory is heavily influenced by distributions from the US as they account for almost half of aggregate dividends. However, the positive momentum seen from the US and countries such as France and Hong Kong SAR are projected to be offset by the moderate outlook from Australia and Japan in Asia, and Germany in Europe.
5. Banks the largest contributor to global aggregate dividends
Consistent with the pattern illustrated in recent years, banks are expected to remain as the top dividend payer, representing around 16% of the aggregate payouts projected in 2020. We are projecting the aggregate dividend to be at $298.7bn. For 2020, we are forecasting dividends distribution to increase by 6.0% YOY, partially driven by American banks. Our forecast is underpinned by the positive results from the Dodd-Frank Act Stress Test results on the largest US banks, enabling them to raise dividends over the short term.
We are also upbeat on the dividend outlook of banks in APAC and Europe. While our estimates show that we are cautious on dividends from Australian banks, this is outweighed by our optimism in Chinese, Indian and Korean banks. In Europe, banks drive dividend growth in the region and we see higher payouts from banks in the UK, Spain and Italy.
However, we highlight that risk has increased as the Federal Reserve cut interest rates thrice this year. This dampens the outlook of banks as they would grapple with falling interest margins which could cause a drag on growth. Nonetheless, the Federal Reserve has signaled that they would be holding interest rates steady over the short term, providing some reprieve for lenders in 2020. Moreover, banks today are better capitalized than they were a few years ago and this provides banks with some level of flexibility when it comes to decisions on dividends; being well capitalized allow banks to be more generous with dividends as they do not need to meet capital shortfall.
6. Food & Beverage staging a comeback in dividends
We were bullish on the dividends from energy companies last year as we were expecting the recovery in oil prices to boost payouts from the Oil & Gas sector. This year, we are expecting the Food & Beverage (F&B) sector to register the highest YOY increase, after declining by 1.9% in 2019; the strong comeback in dividends is mostly attributed to company-specific factors. Payouts from the F&B sector will amount to $73.9bn in 2020, representing around 4.0% of global dividends. The contributions from the US, Europe and APAC are fairly equal.
In the US, F&B companies are projected to pay $26.9bn this year and behemoths in this sector are penciled to pay higher dividends. Despite the fall in consumption of soft drinks, we are seeing higher distributions from Coca Cola, which has consistently increased its dividends every year regardless of earnings growth and Pepsico, which is on track to meet the organic revenue growth target of 4.0%. The growth in dividends from this sector is also supported by the stabilizing of payouts from Kraft Heinz, which slashed its dividends significantly the year before; fellow peer Mondelez International is projected to increase its dividends for the eighth consecutive year, in line with the favourable earnings outlook.
The narrative is slightly different in APAC as three out of the top five dividend payers in APAC's F&B sector are alcohol-related companies. The dividend trajectory is heavily influenced by mainland China's two largest liquor company, Kweichow Moutai and Wuliangye Yibin as they represent one-fifth of the payouts from APAC's F&B sector. For 2020, we predict dividends from these two companies to jump 17.5% YOY. We are also optimistic on the dividend outlook of liquor companies from other countries in the region. For instance, we are seeing higher dividends from Kirin Holdings and Suntory Beverage & Food Limited in Japan and are expecting an initiation in dividends from the newly listed Budweiser Brewing Company APAC. Apart from the beverage companies, Wens Foodstuff is a notable highlight as the third largest dividend payer of APAC F&B dividends and is likely to benefit significantly from the elevated pork prices in mainland China.
Leading fast-moving consumer goods company, Nestle SA underpins the growth in Europe's F&B sector. The company is the largest payer in Switzerland and has a shareholder friendly dividend policy; Nestle aims to maintain or increase dividends in absolute value in Swiss Franc. As such, we are expecting dividends to continue on its upward trajectory in the forthcoming years. Shareholders are also set to receive a dividend bonanza from the company as Nestle promised to return around $20bn to shareholders by 2022, which could be in the form of a share buyback or special dividends.
7. Automobiles & Parts replaces Telecommunications as most vulnerable sector
The Telecommunications sector was the most vulnerable sector in 2018 and 2019 due to its subdued outlook. However, we are expecting Automobiles & Parts to be the most vulnerable sector in 2020 as we are predicting dividends from this sector to contract by around 5.3% to around $46.4bn. Although the sector only contributes a fraction to global dividends, it is imperative to note that the expected cut in dividends is centred around major household names. The bearish outlook in dividends signal that the sluggish car sales registered in 2019, partially attributed to the decrease in demand in mainland China, could potentially continue in 2020. Automakers in APAC and Europe account for around 85% of the dividends from this sector.
We are expecting dividends from APAC Automobiles & Parts sector to fall for the second consecutive year, to $24.7bn. Japan and mainland China are two major car manufacturers in the region, and both are set to distribute lower dividends. Nissan Motors is a key highlight for Japan, as the company withdrew its guidance for the year and slashed interim dividends by a massive 65% after reporting a steep decline of 73.5% in earnings in the first half of FY20. We see little upside potential for this automaker, and consequently, our downbeat estimates for Nissan also imply that we will be expecting a cut in dividends from Renault SA. Peers such as Suzuki Motors and Mitsubishi Motors have also registered lukewarm results in their latest filings, and while they have maintained their dividend guidance, their tepid results suggest that there is some level of downside risk to our estimates in 2020. Elsewhere, we are projecting cuts to dividends from SAIC Motor and Great Wall Motor in mainland China on a bearish earnings outlook. The cut in subsidy by the Chinese government could further weigh on the prospects of this sector over the short term.
In the same vein, we are also expecting dividend cuts from major German and French automakers in Europe as shareholders are set to receive $2.3bn lower dividends this year from these companies. Like their peers in APAC, European car manufacturers also suffer from flagging auto sales and the outlook for German automakers is exacerbated by the new EU emission regulations. Notably, various industry giants have implemented new initiatives, such as job cuts to offset the increase in costs relating to transitioning to the new car technology. In line with the subdued outlook, we are projecting the top two dividend contributors in Germany, Daimler AG and BMW to cut dividends in 2020.
How accurate were our dividend forecasts for 2019
We measured the accuracy of our forecasts for 6,500+ stocks that were within our forecasting coverage in the entire period between January 1st, 2019 and December 19th, 2019. Our projection on the first day of the year stood at $1.76tr compared to the actual amount paid of $1.74tr (converted at constant currency), implying an accuracy rate of 101.1%. A breakdown of this ratio is as follows: Americas (100.4%), Europe (100.8%) and APAC (102.2%). Breaking down the aforementioned figures, our estimates pointed out higher-than-actual payments, mainly underpinned by lower-than-expected earnings amid the global economic slowdown as well as the escalation of the US-China trade war.
To measure the forecasted error, we also calculated the absolute error to exclude the netting-off effect in the aggregate level. This returned a global figure of 10.33% and the breakdown is as follows: Americas (6.19%), Europe (11.11%) and APAC (14.98%). These numbers are aligned with the variability of the dividend distributions present in each market.
S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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