By Philip van Doorn, MarketWatch
(This is the fourth in a series about dividend stocks in today’s low interest-rate environment based on interviews with professional investors. Links to the other articles are below.)
In the middle of a series of articles about dividend-stock strategies, it’s good to include a contrary opinion of a money manager who questions the notion of focusing on dividends. Fabio Paolini, co-manager of the AMG Managers Pictet International Fund /zigman2/quotes/207445449/realtime APINX +0.31% , doesn’t believe dividend payouts offer any clue to the quality of a company or attractiveness of its shares.
“For us, the dividend is not a measure of value ... the dividend is a residual. It reflects how much management wants to pay out,” Paolini said during an interview.
Looking for quality
In their EAFE (Europe, Australia, Far East) strategy, which includes the AMG Managers Pictet International Fund, Paolini and his colleagues look for companies that appear to be well priced as long-term investments based on estimated cash flow streams and returns on capital.
At the end of the day a company is worth much more if you can reinvest with a high return of capital
Fabio Paolini, co-manager of the AMG Managers Pictet International Fund
“We want these companies to reinvest their cash flows in a profitable way, to generate a higher return.” This means if a company is paying out dividends from a high percentage of its cash flow, it may mean its management doesn’t see good opportunities to invest the cash for growth.
“At the end of the day a company is worth much more if you can reinvest with a high return of capital,” Paolini said.
He emphasized that in the U.S., it is also important to factor in share buybacks and consider them “in context,” because a high total return of capital is a good indication of slow growth ahead.
“The fact that interest rates are close to or below zero does not mean the stocks are more attractive. We think it is dangerous to think that way,” Paolini said.
As an example of the type of stock favored for the fund, Paolini mentioned Safran /zigman2/quotes/206963350/delayed FR:SAF -0.44% , the French manufacturer of engines for narrow-body passenger jets, which he discussed when we spoke in February 2018. The stock has returned 52% since Feb. 1, 2018 (the day before the previous article was published) through Aug. 29. It has a current dividend yield of only 1.39%.
Some high dividend yields
Despite urging investors not to be overly focused on dividend payouts, even with interest rates so low for so long, Paolini named three European financial stocks whose dividends happen to be high.
He calls the sector “interesting.”