Seven key dividend forecasts for 2018

Seven key dividend forecasts for 2018

January 2nd 2018

The pace of global dividend growth will increase in 2018, according to a bottom-up analysis of 7,500 firms by Dividend Forecasting from IHS Markit (Nasdaq: INFO), a world leader in critical information, analytics and solutions. Regular dividends declared by firms in 2018 are predicted to approach $1.64tr, up nearly 10% from the $1.5tr paid by the same firms in 2017. This is the third successive year of accelerating growth and represents the highest level since 2014. Our positive outlook is a reflection of the encouraging macro-economic backdrop, resurgent growth in Europe, and strengthening dividends from banks. The commodity price crash caused global dividend growth to stall in 2016, weighed down by dividend cuts from 16% of firms. With economists now predicting the best outlook for six years, and global PMI holding steady at a two-and-a-half year high, we expect just 8% of firms to cut their dividend in 2018. Dividends in the Eurozone are recovering briskly from the euro crisis. We expect accelerating growth across the "big-four" nations to boost the overall growth to 15% (9.2% in euros), more than double last year's rate. We will also see a fall in the number of firms paying scrip dividends ? where some of the dividend is paid in new shares, not cash ? which means that the growth in total cash payments is even more pronounced. The banking sector contributes the largest proportion of global dividends, accounting for 16% of payments in 2018 and growth is expected in each region. Notably, we are forecasting a return to growth for the large Chinese banks after two consecutive years of declining payments.

Confidential | Copyright ? 2018 IHS Markit Ltd

Dividend Forecasting

However, despite rising to record highs, global dividends are struggling to keep pace with surging equity markets, driving their forecast yield to the lowest level in almost three years.

1. US dividend growth will remain steady, albeit slightly below last year's level We are forecasting dividends declared by US firms to reach $582bn in 2018, up 7.7%. This is down slightly compared with growth of 8.7% in 2017, when the dividend growth rate rebounded to more than double after a year when cuts from the oil and gas firms weighed heavily. Whilst payments will continue to grow steadily, we expect the rate of growth to slow. This marginal slow-down in aggregate payments is fairly representative across the board: we expect double the number of firms to slow their dividend growth compared with those that will accelerate. We expect dividends from industrial goods and services firms, the third largest dividend sector, to grow by just 1.2%. GE's huge cut (down by over $3bn in 2018) is responsible for a large part of this slowdown, but growth looks sparse across the board. However IHS Markit US Manufacturing PMI showed a robust and accelerated improvement in business conditions during December, which could suggest room for dividend growth if it continues. At the top end there is still significant growth potential. Measuring dividend change in aggregate terms, five of the top ten global per stock changes come from US firms. Technology is the largest dividend-paying sector, accounting for 12% of payments. We expect the sector to continue to grow in 2018, boosted by increased payouts by Microsoft and Apple. We also expect Bank of America to declare a large increase. It remains to be seen how firms react to the Trump tax cuts, but the reforms could push the eventual dividend growth rate up to doubledigits. They are presumed to add to earnings; whether this boost stimulates investment, is used to pay down debt, or is returned to shareholders as dividends or buybacks remains to be seen. Since dividends can signal a firm's confidence in its future earnings capacity, it can be expected that at least some firms will declare more generous payments in the current bullish environment.

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Dividend Forecasting

2. Dividends in the Eurozone will continue to strengthen, outpacing the UK

We are forecasting that dividends in the Eurozone will grow at their fastest rate for three years. We are forecasting payments from Eurozone firms to top 200bn, up 9.2%. This is over 50% higher than the rate we saw in 2017 when payments grew by 5.9%. We expect France, Germany, Italy and Spain to each see an acceleration in dividend growth. The most dramatic changes come from southern Europe. We are forecasting Spain to increase dividends by 9.8%, after three consecutive years of declining levels. We expect Italy to demonstrate strong dividend growth, up 14.9%, underpinned by its banking sector. Nevertheless, Europe faces daunting political challenges that could dampen growth next year. In particular, prolonged political instability in Italy could lead to more challenges for its banks.

What is even more striking about the acceleration in aggregate dividends is that it comes while a number of firms are phasing out scrip dividend schemes. The proliferation of scrip dividends over the past ten years from some of Europe's most cash-strapped firms challenged the axiom that dividends need to be financed: at "peak-scrip" in 2016 over 85 firms declared scrip dividends worth a theoretical 63bn, but in practice only around half was paid in cash. In 2018 we expect this number to fall as low as 60 firms. Often used to defer difficult decisions or as a precursor to a dividend cut, it is correct to see a fall in their use as a positive indicator.

Following a strong boost of 14.3% in 2017 (helped by miners' dividend recovery), we predict a 5.9% rise in 2018 for UK dividends with a payout of ?88.5bn. Three areas are expected to drive that growth: mining companies are projected to keep increasing their dividends thanks to the recovery in commodity prices; banking, which is boosted by the resumption from Standard Chartered; and Insurance, where the three biggest companies in the sector will drive overall growth.

3. Asia Pacific dividends will post double-digit growth for a second consecutive year

Against the backdrop of stable commodity prices and an improvement in global economic outlook we are forecasting dividends from developed Asia Pacific firms to reach a multiyear high of $295bn, an uplift of 9.7% from aggregate dividends declared in 2017. This region has recorded higher dividend growth than both developed America and Europe in the past two years as firms have become more generous with their payout

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Dividend Forecasting

polices. Indeed, we expect a third of stocks will increase their dividends by over 10%. However, we expect the overall growth rate in US dollar terms to slow from the 10.3% recorded in 2017 because of a lack of growth from Australian dividends, the third largest market.

Japan is the largest dividend paying country in Asia, and we expect it to pay JPY 11.7tr for the upcoming year, up 9.3%. This will make it the fastest growing market in the world since 2013. This trend looks set to continue as economic data looks positive: it has recently recorded its seventh successive quarter of rising GDP, the longest uninterrupted run since 2001. Dividends are dominated by two export-driven sectors: automobiles and parts and industrial goods and services.

Dividends paid by Korean companies have seen rapid changes in recent years: corporate policies have been in a state of flux since lawmakers introduced a series of tax measures in 2014 aimed at encouraging companies to boost payouts. Incentivised by these new taxes, firms have delivered record breaking levels of dividends across all sectors. Dividend payout ratios ? the proportion of profit which a firm pay as dividends ? are still low compared with global norms. The average level is just 20%, compared with Japan (35%) and US (40%). At a stock level, Samsung Electronics' plan to enhance shareholder return is the most significant boost.

4. Emerging markets' dividends will outperform developed markets as the recovery continues

Dividends from firms in emerging markets outperformed those in developed markets in 2017 and we expect this also to be the case in 2018. We expect payments to reach $278bn, up 12.7%. Emerging markets are benefitting at an early stage in the global recovery cycle after several years of turbulence: the five-year annual growth rate is 3.2%, half the rate of 6.4% achieved by developed markets since 2012.

Dividends paid by emerging markets are interesting because the largest paying firms are state owned, so the evolution of corporate governance and dividend polices is directed by the governments with mandated minimum payout levels. We expect Chinese dividends to increase by 17.5% in dollar terms, in part due to the government's series of calls on transparent and stable dividend policies, as well as the steady economic growth realised in 2017.

Emerging Americas are forecast to record the fastest regional-level dividend growth in 2018, up 17.3% to $34bn. Brazil is the largest

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Dividend Forecasting

dividend paying market in the region and companies are stipulated to payout a quarter of profits. We predict payments in Brazil to grow by 24%. Ambev is significantly the largest individual dividend payer, and we are forecasting a payment of over R$9bn.

Russia is the largest dividend region in emerging Europe. It has a forecast yield over 5.5% due to political and currency risk. We are forecasting no growth for 2018, although at a stock level we are forecasting some of the largest changes. We expect the largest increase to come from Rosneft as it adopts a new dividend policy to distribute 50% of profits following the government guidance, instead of 35% as in previous years.

5. Banks are the largest contributor to global aggregate dividends

The banking sector contributes the largest proportion of global dividends, accounting for 16% of payments in 2018. Our outlook on the banking sector is uplifting; we expect payments to grow to 11.3% to almost $260bn, almost double the 6.4% growth recorded in 2017. This is the third consecutive year of growing momentum.

In the Eurozone, improvement in the macro outlook supposes a tailwind for growth in new loans (market estimates point to an average increase of 2.2% in new loans for 2018), even though the current environment of extreme low interest rate remains an obstacle for banks to reach healthy margins. In terms of regions, it should be pointed out our better relative expectations are focused in southern Europe, since enhanced capital ratios and disposals of toxic assets in the past years now allow banks to enjoy a more solvent position and therefore distribute profits to shareholders. We expect the highest boost in Italy (34%), where we expect 1.3bn additional dividends, amounting to 5bn. This is mainly due to Unicredit, which is expected to resume its dividend for next year, and to Intesa Sanpaolo where we foresee high dividend growth. Spanish banks have amended their dividend policies in recent years and we are now much more confident in their sustainability.

In 2018 we are projecting a return to growth for Chinese banks after two years of dividend contractions. All the big four Chinese banks Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial & Commercial Bank of China ? reported better results at Q3, generally attributed to improvements in margins, better than expected credit growth and improved asset quality.

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