The dollar could be a drag on dividends

Darren A. Jaroch, CFA

Darren A. Jaroch, CFA
CFA, Portfolio Manager, 07/09/15

For U.S. dividend-paying companies today, the focus is on generating cash flow. The stronger U.S. dollar — and its impact on corporate earnings — will test the ability of companies to continue their dividend payments.

While companies are focused on cash flow, it’s important to note that payout ratios — the proportion of a company’s earnings that are paid as dividends to shareholders — remain at historic lows. Meanwhile, many U.S. businesses continue to hold massive amounts of cash on their balance sheets, which should bode well for potential dividend growth.

S&P 500 companies have been paying higher dividends

In my view, the most interesting dividend-growth opportunities can be found within the financials sector — the largest sector of the value-stock benchmarks. In March, we learned the results of the Fed’s annual stress tests. Capital plans were approved for all of the largest U.S. banks. These banks are now able to move forward with their plans to return cash to shareholders, either in the form of stock buybacks or increasing dividends.

Uncovering today’s value opportunities

Many value opportunities remain in today’s U.S. equity market, I believe, but it has become more challenging to find them. Value and growth stocks are offering similar valuations, and when investors believe they can get more growth for the same price, they will tend to favor growth stocks.

U.S. value stocks have been pressured, but as we employ sector research to dig deeper, we’re finding some compelling ideas, particularly among larger companies that are restructuring, spinning off unprofitable businesses, and putting in place initiatives that will improve their fundamental strength over time.