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 (NAS:APINX) , 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 (PAR:FR:SAF) , 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.”
“The banking sector in Europe has been very depressed for a number of years,” Paolini said, but now that “the regulatory headwinds are behind us,” because the banks’ capital levels are so high, quality franchises can be scooped up at low valuations.
So even though these three banks are suffering from low demand for loans and low interest rates, and are paying out nearly all their earnings in dividends, Paolini believes “the franchises are good” and “the payouts are sustainable in the short term.”
|Bank||Ticker||Dividend yield||Total return - 2019 through Aug. 29|
|Nordea Bank Abp||(OME:SE:NDA.SE)||12.22%||-9.9%|
|Intesa Sanpaolo S.p.A.||(MIL:IT:ISP)||9.78%||14.1%|
|Banco Bilbao Vizcaya Argentaria S.A.||(MCE:ES:BBVA)||4.68%||-4.5%|
For U.S. investors, there are American depositary receipts (ADRs) for all three:
• Nordea Bank Abp ADR (OTC:NRDBY)
• Banco Bilbao Vizcaya Argentaria S.A. ADR (NYS:BBVA)
• Intesa Sanpaolo S.p.A. ADR (OTC:ISNPY)
Saying the dividends are sustainable over the short term isn’t the highest vote of confidence. But all three of these banks are held by the AMG Managers Pictet International Fund now that Paolini and his colleagues have “put some money to work” in the space. He sees “good downside protection” for all three, adding: “should interest rates rise one day or the economy recover, we think the upside should be significant.”
He described Nordea Bank (OME:SE:NDA.SE) of Helsinki as a “pure retail” Scandinavian institution with “significant fee income” and called Intesa (MIL:IT:ISP) Italy’s most profitable bank, with close to half its revenue coming from fees. Significant revenue from asset management and insurance makes Intesa “resilient,” he said.
Banco Bilbao Vizcaya Argentaria (MCE:ES:BBVA) derives about 40% of its revenue from Spain and has large operations in Mexico and other regions of Latin America. “It has weakened significantly on interest rates and fear of Argentine contagion,” Paolini said.
The AMG Managers Pictet International Fund has $289 million in total assets, which is a tremendous decline from $2.1 billion when Paolini was interviewed along with his co-managers in February 2018. He said the decline took place because one very large institutional client decided to move from active strategies to passive strategies. “So all the money that came in from them, in roughly one year to 18 months, came out,” he said. He added that the remaining investors in the fund were “fairly diversified.”
Here are the fund’s 10 largest holdings (out of 62) as of July 31:
|Company||Ticker||Total return - 2019 through Aug. 29||% of fund||Dividend yield|
|Asahi Group Holdings Ltd.||(TKS:JP:2502)||16.2%||3.2%||2.16%|
|Royal Dutch Shell PLC Class B||(LON:UK:RDSB)||2.4%||3.0%||6.75%|
|Square Enix Holdings Co. Ltd.||(TKS:JP:9684)||42.3%||2.9%||1.02%|
|JD.com Inc. ADR Class A||(NAS:JD)||46.9%||2.4%||0.00%|
|Anheuser-Busch InBev SA/NV||(BRU:BE:ABI)||50.6%||2.4%||1.46%|
|ASML Holding NV||(AMS:NL:ASML)||47.0%||2.3%||1.05%|
More about dividend stocks in a world of low interest rates:
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