Investment Idea: European Dividends

Investment Idea: European Dividends

almost 5 years ago1 min

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📈 Stocks have had a good start to 2019, thanks to a pause in US interest rate rises, plus Chinese economic stimulus plans.

European shares have lagged – but that may change, according to Goldman Sachs. It thinks the fact they pay higher dividends than other regions’ stocks may increasingly attract investors.

🦌 Investors are hunting for returns: the rising stock market is expected to lose steam later this year, while bonds' popularity has lowered yields. The falling economic growth outlook encourages companies to buy back shares rather than invest in themselves.

Cash yield = dividend yield + buyback yield
Cash yield = dividend yield + buyback yield

European companies have relatively strong balance sheets, and therefore the ability to return more money to shareholders than their US cousins – particularly now the effects of US tax cuts are wearing off. And activist investors may increasingly pressure them to put this extra cash to use.

Cash as % of market cap (STOXX Europe 600 vs. US S&P 500)
Cash as % of market cap (STOXX Europe 600 vs. US S&P 500)

European companies generate more profit per dollar of investment than American ones – but investment has fallen close to Japanese levels. There, economic growth is really low 🇯🇵

Capital expenditure as % of sales
Capital expenditure as % of sales

Following the global financial and European debt crises, European companies may be seeing fewer attractive investment opportunities to grow their businesses – hence their rising payouts.

European companies’ dividend payout ratio
European companies’ dividend payout ratio

👻 There’s a risk that potential underinvestment comes back to haunt companies and investors in the form of lower profits and dividends in the future. But looking at individual sectors, most dividends have recovered from the last big drop – except for banks'.

Dividend per share now exceeds pre-crisis levels
Dividend per share now exceeds pre-crisis levels

Even when downgrading earnings, European companies rarely make big dividend cuts (apart from in a recession 😰). That means they're a potentially reliable income stream in unreliable times, says Goldman.

Less than 10% of companies cut dividends by more than 5%
Less than 10% of companies cut dividends by more than 5%
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