Aggregate dividends per share (DPS) were just over $50 at the end of Q2 2012. This level is the lowest since Q2 2010 and represented a year-over-year decline of 7.1%. Furthermore, fourteen of the sixteen underlying MSCI country indices experienced year-over-year declines in DPS, led by declines of greater than 20% in the MSCI Portugal, MSCI Greece and MSCI Finland indices (-50.3%, -46.6%, and -22.8%, respectively). The only country indices to show increases were MSCI United Kingdom (10.0%) and MSCI Denmark (5.7%). Furthermore, only two country indices showed the majority of constituents making equal or higher DPS payments in the trailing twelve-month period than in the period ending in Q1 2012: MSCI United Kingdom and MSCI Spain. On the sector-level, only the Energy (6.5%) and Materials (4.8%) sectors showed year-over-year growth in DPS, and no sectors had the majority of constituents making equal or higher DPS payments in the trailing twelve-month period than in the period ending Q1 2012.
Aggregate DPS growth has been low for some time. The five-year compound annual growth rate for aggregate dividends per share in the MSCI Europe index is -3.7%, and the three-year rate trails that of earnings per share by a wide margin (5.3% versus 31.5%). However, there are some current constituents of the index that have produced impressive medium-term DPS growth rates, and their share prices seem to have benefitted as a result. The top ten companies by three-year, compound annual DPS growth have had a market-cap weighted, average annualized return of 19.5% versus 8.3% for the all of the constituents of the MSCI Europe index.
Though an investor can’t capture returns that have occurred in the past, FactSet’s back testing application (Alpha Testing) shows that investing in groups with higher trailing growth rates would have generated superior, forward returns over the past ten years. Securities with three-year, compound annual growth rates in the top quartile of MSCI Europe securities with available growth rates had a monthly average return of 1.1% over ten years compared to 0.6% for the aggregate index and 0.5% for the fourth quartile. Furthermore, slight adjustments to the test factor did not have material impact on the thesis of the test. Using a five-year growth rate, average monthly returns for the top quartile were 1.0%.
Three companies that have had compelling medium-term DPS growth rates include Tele2 AB, Croda International PLC, and Novo-Nordisk A/S. Tele2 is a Swedish telecommunications company that has an outsized 10.5% dividend yield. While the company has underperformed the MSCI Europe index over 52-weeks, it has an annualized return of 23.8% over three years (with reinvested dividends). Over the five-year time frame, Croda International (a specialty chemicals manufacturer) has grown DPS by a compound annual rate of 30.9%, and its shares have returned 28.1% annualized over the same period. Finally, Novo-Nordisk did not register on this report’s screens because of its lower dividend yield (1.5%), but the Dutch pharmaceutical company has had a compound annualized DPS growth rate of 34.7% over five years and an annualized return of 23.8% in that same time frame.
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