Photographer: Chris Ratcliffe/Bloomberg

Traders Bet Europe Dividends Won’t Suffer Even as Profits Do

  • Dividend futures have fallen less than Euro Stoxx 50 Index
  • High payout ratios may threaten dividend sustainability: Citi

The gloom cast on European equities by lackluster earnings and economic uncertainty has yet to dent investor expectations for dividends as companies make the best of low borrowing costs to ensure they can maintain payouts.

While the Euro Stoxx 50 Index fell 9.5 percent this year through Friday, futures that bet on dividends three years from now have lost only 1.2 percent. That implies a payout yield of 3.6 percent, the highest since 2014 for the contracts relative to the equity measure. The equity gauge slipped 0.8 percent at 9:18 a.m. in London.

“Companies are more reluctant to cut dividends in order to keep investors happy, and at the moment they can borrow money to pay for their dividend at practically no cost,” said Antoine Iskandar, a fund manager at Paris-based Melanion Capital SAS, which specializes in dividend investing. “That could change with another big market sell-off, or in the absence of upwards revisions in earnings. Higher borrowing costs could also make it more difficult for companies to maintain this rate of dividend spending.”

Investors have been fleeing European equities this year as enthusiasm for the region faded on concern that its central-bank stimulus is failing to spur growth. Still, even with economic data missing projections and lackluster corporate profits, companies including energy giant Total SA and Italian explorer Eni SpA have sold a record amount of bonds to keep their payouts intact.

Dividend futures are contracts traded on Eurex that allow traders to speculate on dividend levels on a stock or index, or to protect against the risk of payouts changing within their portfolios.

The dividend yield for members of the Euro Stoxx 50 members remained between 3.5 percent and 3.7 percent since 2013, even as the recovery struggled to gather pace. Total said last month it would maintain its interim dividend, while Eni confirmed its 2016 payout. Volkswagen AG, which has put aside a whopping 16.2 billion euros ($18.3 billion) for charges related to its diesel-emissions cheating scandal, is still paying a token sum to shareholders.

The dividends are coming even as earnings at Euro Stoxx 50 companies have fallen about 20 percent in the past year. Analysts, who in January predicted profit gains for 2016, are now expecting a 1.3 percent decline. Managers have withdrawn money from European equity funds for 14 straight weeks, the longest streak since February 2008, according to a Bank of America Corp. note on May 12 citing EPFR Global data.

High dividends are still a risky temptation for income-starved investors who have struggled for returns amid record-low interest rates, Citigroup Inc. analysts, including chief global equity strategist Robert Buckland, wrote in a client note dated May 5. While dividends and earnings have decoupled during past profit slumps, higher payout ratios raise concerns about the sustainability of future dividends, they said.

“If analyst EPS forecasts are right, then current dividends should be payable,” the analysts wrote. “However, analysts have overestimated earnings in the past few years.”

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