11 Mar 2019
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Dan Roberts, Portfolio Manager, Fidelity Global Dividend Fund
With the outlook for earnings growth and valuations precarious, Fidelity Global Dividend Fund Manager Dan Roberts discusses why dividends could be a valuable source of returns for investors in the year ahead. He outlines how he goes about identifying sustainable dividend payers that possess the competitive and financial strength to prosper across cycles.When thinking about future returns from global equity markets, it can be helpful to break the sources of investment return into three components: yield, growth and valuation change. The sum of these three components gives an investor their total return.
In very good years, for example 2017, a positive return will come from all three components. Last year, however, we saw a significant multiple compression due to a combination of rising US rates and the emergence of a more negative narrative around the health of the global economy. This resulted in an overall negative return from global equities in GBP terms last year, despite a positive contribution from earnings and dividends.
Interestingly, as the US Federal Reserve continued to raise rates in the fourth quarter, high-dividend strategies generally outperformed the broader market, which challenges the consensus assumption that rising rates lead to the underperformance of dividend-based strategies.
In terms of what may lie in store for investors over the coming months, given the uncertain outlook around valuations and growth, I think it makes sense to emphasise dividends as a component of total return, and to do so by investing in assets that trade at an attractive yield and will be well-supported throughout a range of economic scenarios.
It is important, however, to look beyond a high headline yield and hone in on those companies that possess the quality and resilience to deliver sustainable dividend growth over time. As a result, I do not simply invest in the highest yielding or cheapest companies, as a high headline yield can often be a sign of stress in the underlying business.
So, while I place significant emphasis on the price I am being asked to pay for a stock, I also demand certain characteristics from companies – such as a strong balance sheet, predictable cash flows and management that recognises the importance of good capital allocation – to help provide clarity over a stock’s true value and sustainability of its earnings and dividend.
In the case of the Fidelity Global Dividend Fund, this approach results in a portfolio that is cheaper than the market on a dividend yield and free cash-flow yield basis and similarly valued in terms of price/earnings ratio. However, the quality of the assets in the fund is higher than the market, with more resilient return profiles and a lower level of debt.
Revenues in sectors such as pharmaceuticals, consumer staples and utilities tend to be consistent over a cycle, meaning cash flows can grow even if the broader economy is slowing. Companies in these areas are therefore typically less sensitive to fluctuating levels of demand in the economy.
In terms of how this plays out at the individual stock level, I have a long-standing position in Dutch professional services company Wolters Kluwer, which was the fund’s top contributor in 2018. Notably, the stock does not offer a high headline yield, as it has a low pay-out ratio, but it has been slowly growing its dividend for several years. I see potential for this to pick-up as its move from print to digital completes and it continues to generate strong recurring revenues and stable cash flows. During 2018, it delivered organic growth ahead of expectations, leading to a strong share price performance.
Elsewhere, the fund has had more limited exposure to some of the more cyclical areas of the market, such as materials, capital goods, energy and banks. However, after a sharp fall in 2018, it is important to recognise valuations in cyclicals are now significantly lower. Late last year, I began to deploy capital into areas where it is possible to find high quality companies that possess the competitive and financial strength to prosper across cycles. It was possible (albeit for a brief period) to find such companies whose share prices had fallen more than 30% from their 2018 highs.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. The annual management charge for the Fidelity Global Dividend Fund is taken from the fund’s value, so it may give a higher income, but the fund’s capital may decrease, which will affect future performance. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in small and emerging markets can be more volatile than other more developed markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities but is included for the purposes of illustration only. Investments in Fidelity funds should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. UKM0219/23241/SSO/NA