M&G Global Dividend Fund – dividend growth a challenge, but long-term prospects remain good

This fund aims to build a portfolio of global companies that can grow their dividends through thick and thin.

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  1. Rob Morgan

News of dividend cuts and cancellations is likely to be an enduring theme as 2020 progresses. Last year, global dividend payments rose to a record $1.43 trillion (£1.2 trillion), but this year they are likely to fall back. Inevitably, the impact of measures taken to curb the spread of Covid-19 will impact, and occasionally overwhelm companies’ balance sheets. It is a time when the resilience of businesses, and whole sectors, will be tested.

Income seekers, particularly the retired who use dividend income to supplement their pensions, should prepare themselves accordingly. Stuart Rhodes, manager of the M&G Global Dividend Fund advises a careful, selective approach to avoid dividend cuts and cancellations. Yet following the very sharp stock market correction that we have already seen in response to the tragic spread of the virus, he is also optimistic that some considerable opportunities are starting to emerge for longer term investors.

Mr Rhodes’s fund invests globally in businesses that have the potential to grow dividends significantly over time. Often this means accepting a lower starting yield in exchange for likely future growth in dividend payments, but he explains this approach generally offers better long-term returns. When companies increase payouts over time, through both good and bad times, the share price usually follows them upwards. This can lead to better long term returns in terms of both income and capital. Conversely, companies that are only able to maintain their dividends or, even worse, forced to cut them, are actively avoided, though inevitably this is difficult to achieve across a broad portfolio. Any business can fall victim to changing industry dynamics or misfortune.

Mr Rhodes categorises his portfolio into three ‘buckets’: ‘quality’, ‘assets’ and ‘rapid growth’. Quality companies (typically making up 40-60% of the fund) are those with disciplined and reliable growth strategies that can usually thrive despite what is going on in the wider economy. This includes more defensive areas such as pharmaceuticals and food producers. ‘Assets’ are economically-sensitive businesses whose earnings are less consistent but should still trend higher over time – energy or commodities companies for instance. These tend to represent a quarter to a third of the portfolio. Finally, in the ‘rapid growth” category are companies whose pace of expansion (and dividend growth) has the potential to surge thanks to a strong growth in a new market or product line. This is usually the smallest of the three components (at 10-20% of the fund) but one that provides important diversification and differentiates the fund from many of its peers.

According to Mr Rhodes, certain areas of the market have become “shaky” in terms of the dividend outlook. He suggests companies are going to be tested in a similar way in which they were during the Global Financial Crisis in 2008/09, in some cases more severely. For instance, any companies forced to access government funding to help get them through the period are not going to be paying a dividend. Other businesses that are laying off staff and struggling to make debt payments will also come under fire if they continue to distribute.

Despite this, Mr Rhodes is confident that his portfolio has the ability to continue to grow its income distributions to investors over the coming year, and he expects dividends cuts from fewer than five companies in a portfolio – out of over 40 firms. Given the manager’s emphasis on ‘stress testing’ companies’ ability to maintain payouts any cuts are a disappointment, even in such extraordinary circumstances. Ultimately, he plans to sell such businesses, though not immediately. Instead, he plans to await “sensible” valuations rather than sell at the point of maximum pain.

In terms of the immediate reaction to the threat posed by Covid-19, Mr Rhodes did slightly increase the fund’s small weighting in cash two weeks ago from 1-2% to over 5% as he anticipated that markets were too complacent about the economic damage that might be caused. In particular, profits were taken from areas that had done relatively well including Unilever, Siemens, Epiroc (a Swedish manufacturer of mining equipment) and Neste, a Finnish oil refining business. This reduced the number of the fund’s holdings to 43.

As markets fell Mr Rhodes started to shift the portfolio to take advantage of opportunities. Several companies he previously found too expensive in the ‘rapid growth’ category have, in his view, fallen to attractive, rarely seen levels. Purchases so far include Louis Vuitton owner LVMH, as well as ADP and Treasury Wine Estates, a winery business in Australia with considerable exposure to China. Longstanding holding VISA was also topped up, and it means that the amount in this bucket is now increasing from a low base of 12%.

At the same time, outperformers in the ‘quality’ bucket have been trimmed in order to rebalance the portfolio, including pharmaceutical giants Roche and Novartis as well as PepsiCo and Johnson & Johnson. A small number of companies in this bucket have underperformed, including packaging manufacturer Amcor and Bristol-Myers Squibb, and these have been topped up. This bucket remains the largest part of the portfolio.

‘Assets’, which represents the more ‘value’-orientated segment of the fund has seen some of the largest falls in recent weeks. It’s also the reason why the fund has underperformed peers that are more focused on ‘quality’ businesses. Mr Rhodes admits it has not been easy for many of these companies, but that areas such as energy and chemicals could surge on any news that the economic effects of the pandemic are wearing off. He believes “a lot of value is stored up” in this part of the portfolio, and that the businesses he holds are sufficiently robust to ride out the cycle. Exposure includes infrastructure businesses in the energy sectors, Gibson Energy and Keyera, and methanol producer Methanex.

Our view

Since the launch of the fund in 2008 Mr Rhodes’ philosophy of backing companies that grow their dividends while avoiding high yielders whose payouts don’t grow has been largely successful. The fund has been able to increase its payouts to investors healthily, and given its well-rounded approach, Mr Rhodes has been able to perform in a variety of market conditions – although it has also endured periods of underperformance and past performance is not an indication of future returns.

This will no doubt be a testing period, but we continue to believe the fund is an attractive proposition for those seeking a rising income over the long term. It continues to form part of our Foundation Fundlist of preferred investments across the major sectors.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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