Allianz Global Investors expects European companies to pay out EUR315 billion in shareholder dividends in 2017, eclipsing the record EUR302 billion paid by stocks in the MSCI Europe last year.
Dividends in 2016 had been depressed by a post-Brexit, weak pound sterling negatively affecting overall earnings and the political uncertainty looming around the European election season in 2017. But there are signals of an economic spring in many Euroland countries in 2017.
Due to the political uncertainty in Europe, short-term price fluctuations may be likely in the coming months. But, overall, Jörg de Vries-Hippen (pictured), CIO equity Europe, remains convinced that "Europe is too significant for problems to pose a fundamental challenge to its continued existence or, indeed, result in serious market turbulence. This also holds true for ‘election year 2017’, which may see key EU states like France, the Netherlands and Germany reshuffle their political card decks."
Cautious stock picking remains de Vries-Hippen’s top priority: "The uncertain political landscape makes it difficult to generally predict a growth environment for dividend stocks. You have to take a step back to see which trends become firmly established in countries where political change is afoot, like Italy."
At the company level, in-house analysts at Allianz Global Investors expect higher profits and improved margins across Europe. According to de Vries-Hippen, companies and investors in strong economies in countries like Germany should benefit: "Stable, continuous cash flows can be distributed through above-average dividend payments. As a result, investor trust in businesses with solid foundations, providing resilience in difficult times, should pay off."
Apart from German, Swiss companies are also known for this type of reliability. However, the head of European equities and fund manager will only act selectively within the universe of Swiss stocks: "The strong Swiss franc could put further pressure on traditional local companies. It therefore requires specific opportunities to invest in those companies at a fair price, that reliably re-invest in a stable shareholder base."
Such opportunities can arise quickly in a volatile electoral environment, for example around the presidential elections in France. "2017 will certainly not be an easy one for the Grande Nation. An unstable government in Paris not only results in the political engine of the European Union stuttering, but domestic companies also suffer from the situation. But some traditional French companies will be able to decouple from the political environment because of their international positioning," says de Vries-Hippen.
As soon as Article 50 is triggered as a result of Britain’s decision to leave the EU, British business will also be affected. Still, de Vries-Hippen doesn't believe there's too much reason for doom and gloom when it comes to the future of sustainable dividend payouts in the UK: "Quality companies have the advantage of being internationally well diversified. This means that their business already shows relatively little correlation with the UK political landscape."
The dividend expert considers economic policy in Northern Europe to be very solid, which is reflected in the stock markets of Denmark, Norway and Sweden. High-performing financial institutions, in particular, play a stabilising role in the economic system of Northern Europe. The latter, although enjoying close ties to the European Union, is based on separate currencies.
De Vries-Hippen is confident that dividends will remain an important investment alternative for investors in 2017: "Even if interest rates are likely to start to bounce back from their all-time low this year, they are unlikely to catch up with the return level of dividends soon."
The return level of the Allianz European Equity Dividend has averaged around 5 per cent, since launch in 2011.