Has the stock rally spurred by Mario Draghi’s quantitative easing gone too far? Based on financial contracts betting on future dividend rates, the answer is yes.
While the Euro Stoxx 50 Index has climbed 17 percent since the start of the year, expectations for dividend growth have risen about one-third as fast, according to futures. Contracts allowing traders to speculate on dividend levels in the benchmark gauge trade on the Eurex exchange.
The gap, currently the widest of any time in the past six years, reflects skepticism that European Central Bank stimulus will do as much for corporate profits and the economy as it has for asset prices.
“Dividends are earnings driven, they’re not QE driven,” Antoine Iskandar, who helps oversee more than $100 million at Melanion Capital SAS, said by phone from Paris. “Draghi won’t come and buy dividend futures.”
Some of Europe’s biggest sources of dividend largesse, including Banco Santander SA and Eni SpA, have slashed payouts this year.
Analysts have lowered 2015 profit projections since the beginning of the year. They now predict Stoxx Europe 600 Index companies will boost earnings by 5.9 percent this year, down from estimates for a 9.7 percent increase in January.
The payout rate for companies on the Euro Stoxx 50 fell to a low of 3.1 percent last month, about half of what it was in 2011, according to data compiled by Bloomberg. While the gauge posted its best first-quarter gain since 1998 and rallied to a high on April 13, generic two-year dividend futures on the index rose at a slower pace, up 5.3 percent.
The Euro Stoxx 50 added 0.1 percent on Thursday.
Investors are still better off with stocks than bonds, according to Michael Barakos of JPMorgan Asset Management. The Euro Stoxx 50 now yields five times more than 10-year German bunds, and analysts project dividends will increase at least through 2017.
“Dividend growth just hasn’t had a chance to catch up yet,” said Barakos, the London-based chief investment officer of European equities. He predicts the region’s companies can increase their payouts by 10 percent in 2015.
Euro Stoxx 50 members have less room to increase their payout ratios -- the measure of how much of profits are distributed through dividends -- as they are already higher than those of benchmark gauges in the U.S. and Japan, according to Societe Generale SA’s Kokou Agbo-Bloua. Earnings growth has also been subdued because economic growth in the euro zone hasn’t been significant, Agbo-Bloua said.
“There’s no cap for equity prices, whereas dividends are capped by their payout ratios,” said Agbo-Bloua, the global head of engineering and strategy for Societe Generale in London. “The trend in Europe has been one of balance-sheet repair, which means dividend-growth prospects are compromised to some extent.”