You might think that share prices would take a hit if talks to form a government break down in acrimony, heralding months of political limbo. But on Monday, November 20, the day after the Free Democrats pulled the plug on coalition talks with Chancellor Angela Merkel, Germany’s top bourse barometer, the DAX, just kept on rising.
There’s a simple reason why – the earnings and dividends of the 30 blue-chip stocks listed in the DAX are surging to record highs this year. Global growth is firing on all cylinders and that’s offsetting fears about political uncertainty at home. According to Handelsblatt estimates, DAX company dividend payouts for 2017 will reach a total of €35 billion ($41.8 billion), the biggest payout ever in German corporate history, up €4 billion, or 12 percent, from the year before.
A total of 23 DAX companies are increasing their dividends, and the rest are keeping them unchanged. Eleven will likely pay out more than €1 billion each while two automakers BMW and Daimler together pay out a combined €6 billion. “The companies can easily afford their dividends thanks to the strong economy and earnings,” said Commerzbank analyst Andreas Hürkamp. Auto group Volkswagen as well as BASF and Bayer, both chemical companies, and many others are increasing their net earnings far more than their dividends.
On average, the 30 DAX firms have generated a more than 50 percent rise in net profit to around €90 billion this year, which is almost €20 billion more than in the last record year of 2007, before the financial crisis struck. Companies are able to bring their full export strength to bear because, for the first time in a decade, all the world’s regions are booming at the same time, even Europe, pummeled for years by a debt crisis but now powering ahead.
“For years profits stagnated because the growth engine was always sputtering in one big region or another,” said Mr. Hürkamp. If China wasn’t slowing down, it was Europe with important buyers of German goods such as France, Italy or Spain. But that’s now changed and global growth is projected 3.5 percent this year, stronger than at any time in the last six years. The three top automakers — VW, Daimler and BMW — will likely rake in a combined net profit of more than €25 billion this year, more than ever before because German cars are selling like hot cakes in Europe, Asia and America.
Profits are outpacing dividend increases, meaning that the average DAX payout ratio — defined as dividends paid out to shareholders relative to net income — is set to fall from more than 50 percent to less than 40 percent. International standards call for about 50 percent, which is also the ratio investor lobbies demand. The lower the payout ratio, the more firms have left to invest, which is good news for German automakers. They in particular have been shaken by waning public faith in diesel technology and are racing to catch up with international rivals who are ahead in e-mobility. Playing catch up will cost billions in research and development.
BMW Chief Executive Harald Krüger has warned shareholders not to expect huge payout increases because the group is investing billions in electric mobility and digital change. In the third quarter alone, BMW invested €1.2 billion in research and development, up 16 percent year-on-year, and it plans to expand its development budget to as much as €7 billion in 2018. And VW has said it plans to invest €72 billion in the coming five years, of which €34 billion is to go into digital technology, self-driving and e-mobility. It will probably dole out less than €2 billion to shareholders out of a 2017 net profit that will likely double to €11 billion – a meager 18 percent.
Munich Re is an exception in the earnings trend. It’s expected to earn a profit of just a few hundred million euros in 2017 thanks to hurricanes Harvey, Irma and Maria – known collectively as “HIM” – that ravaged the southern US in August and September, and triggered a surge in insurance claims that landed at Munich Re’s door as the insurers’ insurer. As a result, the company reported a net loss of €1.4 billion in the third quarter. Its 2017 income won’t be nearly enough to keep the annual dividend unchanged at last year’s €1.3 billion.
But Chief Financial Officer Jörg Schneider had a pleasant surprise for shareholders after reporting the hurricane losses. “Why shouldn’t we pay an unchanged dividend?” he said. The slide in profits was no reason to scrap the dividend because the company had built up reserves in previous years.
It has indeed amassed a claims equalization reserve of €10.1 billion so it could easily afford an unchanged payout. Perhaps more importantly, it hasn’t cut its dividend since 1969. Investors who have held its shares since then have received annual yields of 4 percent and more — and the company is evidently loathe to break with that tradition.
It’s not altruism. Key shareholders such as big pension and investment funds demand steady payouts to ensure dependable returns for their customers. Wall Street has some glittering examples of faithful dividend payers. Coca Cola and Johnson & Johnson have increased their dividends each year without fail since 1963. 3M, the maker of the yellow Post-it notes, has done so since 1959. Pampers maker Procter & Gamble has been increasing its dividend for the past 60 years and tobacco giant Philip Morris for over 80 years.
Investors in German government bonds have received no yield for years.
And take Eli Lilly: the company founded in 1876 by its namesake soldier and pharmacist. It’s now among the world’s top drugmakers, employing 42,000 people in 125 countries. It’s paid dividends since 1885, even during the first and second world wars, and the 1929 Wall Street crash. German companies can’t compete with that kind of tradition. However, investors in Munich Re, BASF, Allianz, Daimler and BMW and several others score annual dividend yields, defined as how much a company pays out in dividends each year relative to share price, of more than 3 percent.
Even though the DAX has almost quadrupled since 2009, the average dividend yield for DAX companies has remained constant at 2.8 percent, its long-term average. That’s because earnings and hence dividends have kept pace with share price gains.
Compare that to the virtually non-existent yields on bonds. Investors in German government bonds have received no yield for years and a corporate bond with an average credit rating of BBB and a maturity of three to five years has a yield of just 0.9 percent. So shares pay almost two percentage points more.
The shares of BMW, Daimler and Deutsche Telekom for example now pay dividend yields of more than 4 percent while their bonds yield less than 1 percent. This imbalance is one of the main reasons for the endless worldwide bull market for shares as cheap money floods stock markets in search of returns. Global share prices have been rising since March 2009 and that’s unlikely to change, at least not as long as company profits and dividends keep increasing while interest rates remain mired close to zero.
Ulf Sommer writes about companies and markets for Handelsblatt. To contact the author: firstname.lastname@example.org