Global dividends are set to hit a new record this year of £1.25trn as net profits are expected to rise, while payouts have never been safer, according to research by the Henderson International Income trust.
Profits rose 78% in 2021 to £2.85trn but are expected to improve again this year, with the US earnings season surprising to the upside throughout the year.
The only sectors with negative predictions were mining, where profits have started to decline reflecting lower commodity prices, and all sectors sensitive to the consumer, where more profit warnings are appearing.
Despite this, analysis by the firm suggested global profits could reach £3.03trn. This should translate to dividends, which were already up 21.7% in 2021 following a disastrous 2020, when companies held back cash to survive the Covid pandemic.
In the first half of 2022, payouts were already 19.1% higher on the previous year in sterling terms and look set to continue to rise throughout the year, albeit at a slower pace.
“The second half of 2022 will no longer benefit from the easy comparison to H2 2021, when payouts in some sectors and some parts of the world were still affected by the pandemic,” the report said.
“This means dividend growth is set to be slower than the first few months of the year. For the whole of 2022, we expect global dividend growth of 13.1%, easily a new record totalling £1.25trn.”
This data is seen as a good omen for the many investors who have preferred income over growth strategies in 2022 for concerns around inflation, recession and the global economy.
It should be noted however that much of this may come from the currency impact. Overseas companies tend to pay their dividends in dollars, which have appreciated significantly against the pound this year.
It was a double-whammy of good news for income investors, as dividend cover, or the ratio of a company’s income to its dividend payment, has also improved.
This hit a 10-year high at the end of 2021, reaching 2.6x payouts and the report suggested this could remain high, although it has slipped to 2.4x in 2022.
From an industry perspective, dividend cover has improved in almost every sector; while from a regional perspective it was up in seven countries out of 10 over the past year.
There was an especially strong rebound in the UK, US and most of Europe, but the former caught the eye of Ben Lofthouse, portfolio manager and head of global equity income at Janus Henderson.
The report revealed increasing levels of dividend cover in the UK, signalling improving sustainability of company dividends in 2022 and 2023.
Companies were averaging cover of 1x the dividend between 2015 and 2020, indicating a greater likelihood of dividend cuts. This year, a 2x ratio is expected.
Albeit below the global average, this rate is viewed as healthy, as it permits companies to safely pay out dividends and possibly allow for reinvestment. It is possible that the ratio might exceed the global average later in the year, as the rise in oil profits has yet to be matched by the rise in its dividends.
Lofthouse said investors have favoured companies with pricing power, good cash flows and modest borrowing, and which have more visibility on future earnings – in other words, companies that are often more likely to pay dividends.
“With dividend cover so high at this point in the cycle, we can have some significant confidence for 2023 that overall dividend pay-outs will prove resilient,” he said.
This would be the case even if the UK went into recession, he argued, noting that “if inflation and recession come at the same time, profits may fall, but history shows that dividend income is much less volatile than profits over time as companies flex the proportion of their profits they pay to shareholders”.