* European dividends priced for contraction
* U.S. dividend futures implying 10 pct growth
* Ex-financials Europe dividends seen growing
* European earnings forecast to remain stable
By David Brett
LONDON, July 23 The ballooning gap between
expectations for future U.S. and European company dividend
payouts could be set to close as the market has priced in a much
gloomier scenario in Europe than justified by current payouts
and earnings forecasts.
Expectations for payouts in Europe have crumbled on mounting
concerns over global growth and corporate earnings, and the
region's dividends are now priced for steep contraction of 15
percent over the next four years and no growth after that.
By contrast, U.S. payouts are expected to grow around 10
percent over the coming four years.
But some say the European outlook is too gloomy.
"The slope of the European dividend maturity curve suggests
a bearish interpretation of future dividends to come from banks,
telecoms and utilities, which we find overdone," Barclays
European equity strategist Edmund Shing said.
The bearish pricing of European dividend futures - which
track the payouts from all the companies in the Euro STOXX 50
index during a calendar year and convey exposure to dividends
rather than to share prices - re f lects concerns about the euro
zone crisis and the relative economic health of the two regions.
But some analysts say the gap with the United States is
starting to look unjustifiably wide, not least because U.S.
economic data remains patchy, at best, and with top U.S. firms,
including Xerox and Ebay, issuing profit
Across all business sectors, average dividend payouts in
Europe are running at around 42 percent of earnings, far higher
than the 33 percent seen in the United States, which means
investors in Europe get a bigger slice of the bottom line.
Financials, telecoms and utilities - the biggest euro zone
dividend payers - are handing out more than their five-year
average. The dividend yield, which measures a company's payout
relative to its share price, on the Euro STOXX 50 is
5.3 percent, compared with S&P 500 companies on 2.6 percent and
negative real yields on government bonds.
European payouts may even pick up, as cash-rich companies
baulk at investing in new factories and hires, given the weaker
backdrop, and instead look to keep investors sweet by passing on
"In the non-financial sectors you might even see an uptick
in dividend ... Equities are not capital stocks for the next few
years through fear of deleveraging, so with the outlook for
growth the way it is you might as well pay out your earnings (to
keep people investing)," said Robert Quinn, European strategist
at Standard & Poor's equity research in London.
The prospect of a shift in the European dividend outlook may
create trading opportunities.
When the spread between U.S. and European dividend
expectations gets particularly wide, investors look to sell
exposure to U.S. payouts and buy those of European companies via
the futures market.
"You could buy Europe and sell U.S. if you wanted to do a
hedged trade. That would probably make a decent profit," Tristan
Hanson, head of asset allocation at Ashburton, said.
Ashburton, which has around 1.1 billion sterling ($1.7
billion) under management, has been investing in long-dated Euro
STOXX 50 dividend futures, from 2016 to 2021 , which
they think are trading at unjustifiably cheap valuations.
Part of the reason for the anomaly is due to the popularity
in Europe of so-called structured products, which offer exposure
to the stock market but with limited risk.
These do not usually include dividend exposure, which the
structured product provider tends to sell on via dividend
futures, pushing down prices through over-supply of the
"Europe's got a depressed economic outlook which in itself
is putting downward pressure on dividends. In addition,
structured product flows are also applying further downward
forces on European dividend future prices," said Simon Carter,
head of European equity derivatives options research at Deutsche
"In the U.S. you have a stronger economic backdrop pushing
up dividend growth expectations. Variable annuity fund hedging
activity also acts to push up longer-dated U.S. dividend
futures, which causes the dividend growth curves in the U.S. and
Europe to align in opposite directions," he said.
But the discount still looks very steep compared to earnings
expectations. Looking at current share prices and forward
earnings per share, the market is implying a compound annual
earnings contraction of 3 percent in developed Europe over the
next five years, compared to growth in the United States of
around 3.6 percent.
"The market needs to absorb a little earnings and corporate
disappointment in the first half (of 2012) because of the
slowdown, but I think overall the outlook for earnings is
reasonable and the outlook for dividends even better," Richard
Jeffrey, chief investment officer at Cazenove Capital