Europe Economy

And Now for the Good News: Dividends Are Back

Steve Sedgwick|CNBC Anchor

Are we really only 54 days into 2010? One crisis after another has taken its toll on investor nerves and equity markets have yet to regain the flat-line for the year but there is finally some good news out there. Dividends are clawing their way back!

Sharon Lorimer

After a year and a half of corporate cost-cutting programs, which have scythed shareholder payouts, a growing number of companies are feeling confident enough to increase dividends and reinvigorate the income story.

Nestle, flush with cash from assets sales, upped the 2009 dividend by 14.3 percent to 1.60 Swiss Francs ($1.7) per share.

Even among the beleaguered financials, payouts have grown in the current reporting season with the likes of insurers Axa, Swiss Re and Zurich Financial Services leading the charge as capital pressures have abated.

Erratic stock markets have continued to erode investor confidence as the financial crisis has morphed into a series of sovereign debt scares but, according to the analysts, dividends are making a strong comeback in Europe and there is big potential for more upside.

Panic Over?

Dividends paid by European companies fell by 29 percent in 2009, according to Nomura's Ian Scott. A large portion of this was in the financials but even outside of this sector, dividends fell 8 percent.

Scott believes that, historically, free cash flow dividend cover has been a good predictor of payout growth and yet last year this measure was still predicting dividend growth that failed to materialize.

"One conclusion that we could draw is that managements panicked in 2009, thinking the situation was worse than it actually was," he said.

For 2010 things are looking much rosier. ING's strategy team points out in its latest research that:

"At the half way stage in the European reporting season, 53 percent of European companies have beaten consensus dividend forecasts by 3 percent or more. Only 22 percent have missed by the same amount. This implies a net dividend surprise of +31 percent and ranks favorably relative to history."

Banks Clouding the Horizon

Scott agrees with the positive scenario, adding that the cuts to dividends in 2009 for non-financial companies were overly severe given the level of cash generation, pointing out:

"The dividend swap curve has moved upwards in recent months suggesting a less pessimistic outlook for dividends, but we think that there is still further to go and expect dividends to rise by 10 percent over the next 12 months."

The peak payout for dividends was recorded in April 2008 and, according to ING, we are still 30 percent below that figure with the increases being witnessed across a broad range of sectors amidst rising levels of cover for the payouts.

Fourteen sectors are paying dividends 10 percent or more below their peak payouts and nine are paying 25 percent or more. ING believes basic resources and industrials are prime candidates to increase payments substantially if the economy continues to show recovery.

Banks remain a blot on the horizon though. Nomura says the sector accounted for 30 percent of the Pan European dividend in mid-2007 and payouts here could remain suppressed for the near term due to higher capital base and possible new liquidity rules.