According to Yarrow, while currency pressures have been a significant headwind for multinational dividends in recent months – a statement borne out by the latest edition of the Henderson Global Dividend Index – for these headwinds to continue to have the same impact as they have done over the past year, they would have to go significantly lower, something he feels is unlikely.
It is partly for this reason that Yarrow continues to like multinational, branded consumer goods players like Unilever, which remains the fund’s largest holding at 7.6%.
“The multi-nationals have fallen out of fashion somewhat in recent months,” he said, “a trend that has been accentuated by the growth in interest domestically focused mid-caps.”
He expands on the point in the fund’s latest factsheet, pointing out: “Consumer goods companies like Unilever and Reckitt Benckiser are tentatively seeing improving demand after a prolonged period of weakness, and currency effects have finally swung to being a tailwind from a prolonged headwind.
But, he added: “It is a mixed picture though, with the foreign exchange movements constraining disposable incomes in some emerging economies in addition to more general slowdowns in some of these markets.”
Looking ahead, Yarrow said he and co-manager, Ben Peters, continue to like asset-light, highly cash generative businesses as, in the current, uncertain market, such characteristics provide a buffer to dividends.
However, while he remains positive on the outlook for such companies, he does point out that equity returns are not as attractive as they were a few years ago and cash positions have come under pressure.
He is also dismissive of the term ‘bond proxies’, a concept that he feels is dangerous.
“They are very different instruments. One shouldn’t be buying an equity in the hopes that it will act like a bond, it should be bought on the expectation that it will deliver long term total returns,”
He explained further that, while much comment has been made about the impact the recent sharp fall in bond yields has had on equity valuations in recent years, it is important to remember that the big move has taken place in the bond market.
“To put it simply, quality equities with dividend growth potential are still available on attractive valuations and good starting yields,” he said, which is a reassuring fact in an uncertain world.
