The importance of dividends

It must be an age thing.  An old City observer, like myself, writes in the FT today about the importance of dividends and how we’ve lost sight of equity performance by over-focusing on share price growth.

He talks about the view in the mid-80s that dividends were a key, if not the key, part of a shareholder’s return. I have strong recollections of being taught the same as I entered the City in the early 1980s, with one grey-haired merchant banker telling me that the metric he always watched was dividend cover (the mulitiple by which earnings cover the payment of dividends), and he stressed the importance of this in falling markets.  We’ve lost our way on this over the years as we’ve all turned our focus on share price growth, which the FT writer today interestingly ascribes to indexation and the trend towards share buy-backs.

I’m with him.  In this market, look for the steady dividend payers with good earnings cover (at least two times).  Then look for good defensive market positions and/or growth prospects in emerging markets.  That takes you to  the likes of Diageo, GSK, BAT, Reckitt Benckiser, Vodafone and Pearson as being core holdings in any porfolio, with the likes of RSA thrown in for its 8.5% yield and trading at around book value.


Political intervention time in the eurozone

It’s that time again.  The pattern goes something like this, and it shows why investors are loathe to put their money on what seem like banker bets (such as the collapse of the euro, which has seen many a hedge fund lose its shirt over the past two years).  The markets (particularly the bond market vigilantes) drive the value of a financial instrument such as a 10 year Spanish or Italian sovereign bond to breaking point.  When all seems lost and the breaking point seems finally to be reached, in comes the ECB, EC or whatever other life-saving body to announce some ground-breaking measure (it was the long-term refinancing option or LTRO last time) which dramatically changes the lie of the land.  For a short few weeks, everybody thinks the problem might be solved – in other words, it’s RISK ON again and the markets charge north.

With Spanish 10 year bonds yielding 6.7% today, deep into the danger zone, and Italian bonds also now above 6%, the moment for the politicians/central bankers to intervene is upon us again.  So expect an announcement of a radical sort any time now as another rabbit is pulled from the hat, but my guess is that the market won’t be quite so quick to believe the central bankers’ claim that they’ve solved it this time.  They’ve come to realise that the sticking plaster solutions to the eurozone don’t work for longer than a couple of weeks and that major surgery is required which may even threaten the life of the patient.  The fundamentals are out the window and nobody has a clue what anything is worth any more.  Not easy being an investor in these markets.


Euro planning

So at last the politicians are getting round to making plans for the euro’s demise.  They’ve been in denial, of course, because they have to be; the moment they concede that they’re making plans for the failure of the euro project is the moment that they concede that the game is up, and that’s when the panic really sets in.  But planning is required, because the maelstrom of euro failure and contagion fall-out is upon us and the inevitability of it all becomes more apparent by the day.  And incredible though it may seem, there really are no plans in place for the financial tsunami that’s about to hit us.  Is it back to drachmas and escudos, nord-euros and sud-euros, or ECB money printing and eurobonds?  Nobody has a clue.  Which means that when the tsunami does strike, the damage will be much worse than any of us can imagine.  But what is interesting is how little of this is priced into the markets.  All the warning signs are blinking on red, red, red alert, but the FTSE still starts with a 5 and the dollar still trades at 1.25 to the euro.  Not for long on either count, I think.