© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Last updated: March 22, 2011 6:34 pm
Big dividend cuts as a result of the financial crisis have led to deep pessimism about the outlook for company payouts in Europe.
This pessimism is reflected in the dividend futures market, which is pricing in a fall in dividends every year until 2015.
“This sounds pessimistic to us,” said Karen Olney, European equity strategist at UBS, who recommends that investors should buy dividend futures in anticipation of bigger payouts than are currently being priced in by the market.
Alternatively, investors can get exposure via an ETF such as Lyxor’s Euro Stoxx 50 Dividends, launched in May 2010.
Nizam Hamid, head of ETFs strategy and deputy head of ETFs Europe at Lyxor, said the €116.4m fund, which has a total expense ratio of 70 basis points, provides exposure across the entire dividend futures market to 2015.
Mr Hamid said a huge gap had opened up between what the dividend futures market was pricing in for future payouts and what analysts expected.
“However, an investor would have to expect major changes in companies’ behaviour with regard to dividends before the current market forecasts for dividends to fall every year until 2015 to come true.”
UBS’s analysis suggest companies will make a 15 per cent higher dividend payout in 2012 than is currently being priced in by the dividend futures market, rising to 57 per cent by 2015.
Financial companies account for more than a quarter of the dividend pay-out expected from the Dow Jones EuroStoxx 50 index this year. Investors, however, remain deeply concerned about the outlook for the financial sector due to uncertainties about regulation, taxes and funding as well as the eurozone’s still unresolved sovereign crisis.
UBS says the dividend futures market is so pessimistic it is effectively pricing in zero dividends from all banks in the eurozone periphery in 2012 and a 50 per cent dividend cut by all other all other companies in peripheral Europe (Spain, Portugal, Ireland and Greece).
But following the biggest round of dividends cuts since the 1970s, dividend mometum (upgrades versus downgrages) has turned positive. In addition, European corporate profits are not likely to peak for a couple of years while cash levels have already risen close to a 20 year high (at 12 per cent of total assets) and gearing levels (net debt as a percentage of equity) have continued to fall. However, company payouts have sunk towards towards their lowest levels for 30 years, implying plenty of room to increase dividends.
“The futures eventually catch up with the dividend that will be paid so there is potential for a tangible cash reward,” said Ms Olney.
Please don't cut articles from FT.com and redistribute by email or post to the web.