After taking a hit during the pandemic, many U.S. dividends have returned to normal levels, as evidenced by the slew of increases that have been declared in 2021 as the economy recovers.
One Wall Street strategist is especially bullish, forecasting a 30% jump in S&P 500 index dividends from the end of 2020 through December 2022.
The market is concerned about “peak growth,” including earnings and the global economy, says Alastair Pinder, U.S. equity strategist at UBS. “Yet actually what’s interesting is that what isn’t peaking is dividend growth.” This is occurring, he says, following a stretch of “subdued growth” during the pandemic.
Pinder, who draws on fundamental and quantitative research and used a proprietary algorithm for predicting dividend revisions, is at the higher end for dividend growth forecasts on the Street. He has the S&P 500’s 2022 dividends at $74 a share, for example—or 16% above FactSet’s consensus estimate of $63.87.
His case for such a big increase in dividends rests on several pillars, one being his belief that consensus S&P 500 earnings estimates are far too low for this year and next.
Pinder expects S&P 500 companies to earn $206 a share this year and $232 in 2022, versus $196 and nearly $215 for the FactSet consensus.
He is forecasting the S&P 500’s dividend payout ratio—or the percentage of earnings paid out in dividends—to be about 31% by the end of this year and 32% next year, a little below the 25-year average of 34% that he cites.
Still, when combining that conservative payout ratio with the earnings growth Pinder predicts, there is “huge potential for dividend growth.”
He maintains that overall dividend expectations are low, pointing to the 1% annualized growth rate that the swap market is pricing from 2023 through 2028. He points out that it was recently pricing in $62 a share of S&P 500 dividends next year, well below Pinder’s forecast.
He is expecting upside dividend surprises for some companies, based on a proprietary computer algorithm he uses. Those surprises, he says, “are important because, over the past couple of earning seasons, the market is rewarding dividend beats while punishing misses more than it’s done previously.”
Dividend Upside
These companies have the potential for upside dividend revisions over the next 12 months, as determined by an algorithim used by strategist Alastair Pinder.
| Company/Ticker | Recent Price | YTD Return | Market Value (bil) | Dividend Yield |
|---|---|---|---|---|
| Morgan Stanley/MS | $96.07 | 41.5% | $176.9 | 2.9% |
| Goldman Sachs Group/GS | 374.23 | 42.9 | 127.4 | 2.1 |
| Brunswick/BC | 97.43 | 28.6 | 7.6 | 1.4 |
| Raymond James Financial/RJF | 130.19 | 37.5 | 17.7 | 1.2 |
| PulteGroup/PHM | 52.63 | 22.7 | 13.9 | 1.1 |
| Skyworks Solutions/SWKS | 192.07 | 26.7 | 31.1 | 1.1 |
| Deere//DE | 353.56 | 32.1 | 110.3 | 1.0 |
| Lennar/LEN | 100.90 | 35.4 | 31.3 | 1.0 |
Data as of July 28
Sources: UBS and FactSet.
There’s also the argument that equity income looks particularly attractive with bond yields so low these days. The 10-year U.S. Treasury note was recently at 1.26%, as bond yields have fallen in recent months.
In a research note, Pinder includes screens of companies that, based on his algorithm, are deemed to have a reasonable shot at upward dividend revisions in the near future.
The most useful factors in predicting upward revisions, he notes, are a stock’s yield, 12-month trailing earnings-per-share revisions, payout ratio, and trailing 12-month dividend growth. The accompanying table includes eight of these companies, all with yields of at least 1%.
They include household Wall Street firms such as Goldman Sachs Group (ticker: GS) and Morgan Stanley (MS), along with some smaller companies such as Raymond James Financial (RJF) and Brunswick (BC), whose products include boats and marine engines.
A plus for higher-yielding dividend stocks is that they are cheap overall. Based on forward price/earnings ratios, they recently traded at a 13% discount to the broader market versus their historical average, according to UBS.
One proxy for higher-yielding names is the S&P 500 High Dividend Index, which includes 80 high-yield companies culled from the S&P 500. They include Exxon Mobil (XOM), ConocoPhillips (COP), and Simon Property Group (SPG).
Still, Pinder cautions, a “high dividend yield is not always a good thing.” He suggests looking for companies that have solid dividend growth—not just big yields.
A key takeaway from his research: “The big thing for investors is that the companies that are paying out more dividends are being rewarded.”
Dividend Restoration Projects
Although Marriott International (MAR) has seen a strong increase in leisure customers, business travel continues to lag. Another pandemic casualty was Marriott’s dividend, which was suspended starting in last year’s second quarter.
“We’re focused on getting our leverage rates back in line to where we have traditionally been, which is a strong investment-grade company,” the company’s chief financial officer, Leeny Oberg, told Barron’s in a recent interview. “With the current momentum, we feel very confident about our ability to get there in a reasonable period of time. Once we’ve reached our targeted ratio levels, we’ll evaluate the opportunity for returning capital to shareholders.”
In March 2020, for example, Moody’s lowered Marriott’s senior unsecured credit rating to Baa3, at the low end of investment grade for that rating firm. S&P Global Ratings, meanwhile, lowered its rating in April of last year from BBB to BBB-, the lowest rung of investment-grade status for that credit rater.
In more typical times, Oberg says, Marriott has generated sufficient cash to fund its internal growth needs. As for capital returns, it has been “both through a modest cash dividend and through share repurchases,” she adds.
Oberg expects Marriott to return to that approach for capital returns. “But we will evaluate that as we get back to those ratio levels,” she says.
Wells Fargo (WFC), one of the few large U.S. banks that slashed its dividend during the pandemic, is continuing to increase its payout. The San Francisco–based bank this past week declared a quarterly dividend of 20 cents a share, double the 10 cents it has been paying. About a year ago, the company cut its quarterly disbursement to 10 cents from 51 cents.
The stock, which yields 1.7%, has returned about 50% this year, dividends included, through July 27, versus 18% for the S&P 500.
Write to Lawrence C. Strauss at [email protected]
