|The new fixed income?|
Low interest rates could turn dividends into the new ’it’ investment for Americans. But even with the shrinking Selic, Brazil is nowhere near there yet
With interest rates at extremely low levels in the U.S., gone is the time when you could get high returns and shield your assets against inflation with little risk. A new era is dawning, a world of older people in search of hassle–free fixed income. Faced with that scenario, BlackRock, the world’s biggest asset manager, pontificates in a study released in March: dividends are the solution. In Means, Ends and Dividends — Dividend Investing in a New World of Lower Yields and Longer Lives, the firm hails corporate profit distributions as the new fixed income. According to United Nations data, there are 738 million retirees worldwide. Projections put that number at 2 billion by 2050. Meanwhile, in Japan, England and the United States, returns from ten–year federal bonds have dropped lower than the average dividend yields of blue chip stocks.
For this and other reasons, BlackRock keeps its eye out for companies that pay dividends often — like Coca–Cola, for instance. The soft drink manufacturer doles out some of its profits every three months. In 2002, the payout was US$ 0.20 per share; in 2012, the amount reached US$ 0.51 per share, enough to light dollar signs in the eyes of dividend hunters. According to Nick Nefouse, a specialist at BlackRock’s equities division, dividends should increase over time and be paid on a regular basis. These characteristics eliminate the evil specter of investment–corroding inflation: in the ten years from 2002 to 2012, cumulative inflation in the U.S. was 28%, while Coca–Cola’s gross dividend yield rose 155%. If an investor had bought one share in the company at US$ 34.02 on March 5, 2009, its lowest price after the 2008 downturn, then held it until May 22 when each share traded for US$ 74.19, he or she would have received not only the stock’s 118% appreciation in value, but also US$ 5.79 in dividends (17% of the share’s price at the time it was bought). Inflation over the same period was approximately 7%.
It’s no coincidence that the BM&FBovespa is urging Brazilian companies to pay dividends not just regularly, but often. The exchange itself is thinking of setting the example by paying dividends on a monthly basis starting in 2013, as opposed to quarterly as it does now. BM&FBovespa chairman Edemir Pinto believes that paying higher dividends, or at shorter intervals, could be attractive for "orphans" of the high Selic (Brazil’s primary interest rate, see story on page 4).
Yield–starved American investors are slowly turning to funds that focus on good dividend –paying stocks. At IShare, BlackRock’s ETF trading division, amounts invested in dividend funds climbed to 26% of the total equity managed by the firm in the last quarter of 2011. One year before, they had accounted for a mere 6%.
In Brazil, the 63 dividend funds monitored by the Brazilian Financial and Capital Markets Association (Anbima) reported a total net equity of R$ 4.684 billion (about US$ 2.3 billion) in April 2012. The category represents 3.35% of the 1,882 funds operating exclusively with company equities, yet boasted the biggest 12–month increase in net equity (33.8%) across the 12 types of equity funds existing in Brazil. Although the advance is a good sign, dividend funds continue to lag well behind the number–one champions of net equity expansion — Brazil’s 274 fixed–income index funds, which grew 58.61% to reach a net equity of R$ 101.9 billion (about US$ 50.5 billion). It’s easy to see why. While dividend funds paid an average yield of 16.02% over the past 12 months, fixed–income index funds reached 20.67% (funds tied to the lowest–risk index, the interbank rate known as DI, yielded 11.57%). Such stellar performance can be explained by the ample availability of NTN–B treasury bonds, which pay a pre–fixed interest rate plus Brazil’s extended consumer price index (IPCA). These bonds, which are a shield against inflation and pay guaranteed returns, tend to appreciate in value when national interest rates are expected to go down.
LIMITED EXPANSION — Despite its recent growth, the dividend fund industry is still quite scrawny in Brazil and may remain undernourished compared to fixed income funds or equity funds with freely built portfolios. One of the explanations for this may be investors’ perception of Brazil. "We are an emerging country, and this means that the focus is on growth investments, not dividends", comments Ricardo Almeida, a finance professor at Insper. The investors contacted by CAPITAL ABERTO confirm Almeida’s view. "At some companies, dividends are meaningless next to growth potential", states Otávio Vieira from Fides Asset Management, who says that profit distribution is a part of the investment decision process, but far from the main focus.
Meanwhile, Brazil’s individual investors tend to show greater interest in the safety of getting a fixed income from their stock investments — after all, professional asset managers are paid to explore the investment jungle and dig up hidden treasure, not to sit back and enjoy the comfort of guaranteed yields. But it may take a few years before individual investors learn to love dividends. In all likelihood, Brazilians will only migrate to new assets after they’ve had a chance to process the new macroeconomic scenario of controlled inflation, low primary interest rates, and meager returns from savings accounts. According to FGV finance professor Ricardo Rochmann, a culture of individuals investing in high dividend payers — akin to the little old lady popularly used in the U.S. to represent the average–person investor — will probably only consolidate itself in the next generation of investors. In his opinion, the poor performance of 2007’s IPOs created a higher aversion to risk: "Many investors ventured into the stock market for the first time during that period. Then the crisis came, and many were left traumatized", he observes.
Fears aside, Rochmann believes that irregular payouts are another hurdle to be overcome before dividends can become the new interbank rate. To illustrate the difference in how Brazilian and American investors are treated, he cites U.S.–based International Paper. The company pays quarterly dividends with the precision of a Swiss clockmaker: always in February, May, August and November, always US$ 0.25 per share, without fail since 1995. The situation only changed between May 2009 and February 2011, a period when dividends fell to US$ 0.025 to US$ 0.188 per share due to the economic downturn. Things returned to normal in May 2011, but instead of the traditional US$ 0.25, International Paper now pays US$ 0.26 to repay investors for what it failed to deliver. Those who bought shares in the company on March 6, 2009, when they were trading for US$ 3.80, are very satisfied today. Today, those investors get US$ 1.04 per share per year in dividends, and the stocks have been trading for about US$ 30. "In Brazil, you can’t rely on the same stability", the professor assesses.
His point is well illustrated by an analysis of the companies with largest representativity in the IDIV — the São Paulo exchange’s dividends index, calculated by Economática. Very few companies pay a fixed dividend or interest on equity capital (a type of profit distribution that involves a more favorable tax treatment for companies). At Banco do Brasil, for instance, interest and dividend payouts vary greatly both in periodicity and value. Five dividend distributions and four interest payouts were made in 2011, all of them with different values, even considering the taxes that investors pay on gains from interest on equity capital. Per–share dividends from Vale have fluctuated within a R$ 0.32 to R$ 1.07 range (roughly US$ 0.15 to US$ 0.53) since 2007. Even the BM&FBovespa used to pay variable dividends — as of August last year, however, the exchange’s shareholders have received a constant yield of R$ 0.12 per share (about US$ 0.06).
Despite the constancy of American companies, they’re no strangers to putting dividends on hold when a crisis rears its head. According to data from Standard & Poors, 14 companies in the S&P 500 have taken that measure and 62 reduced their dividend yields between 2008 and 2009. "Investors punish companies in these situations", highlights BlackRock’s Nefouse. British Petroleum is one good example: it failed to pay its quarterly US$ 0.84 dividend in November 2010, and then reduced the per–share yield to half the usual value in February 2011. The British company made this decision as it struggled with the financial and environmental damage from a gigantic oil leak near the U.S. coast of the Gulf of Mexico. It’s hard to measure how much of the slide in BP stock prices is due to its tarnished reputation and how much can be blamed on dividends. Nefouse defends that the dividend cuts played a good part in driving investors away. BP shares, which used to trade for about US$ 60 before the disaster, were quoted below US$ 40 on May 24.
Brazilian investors are now glimpsing a world with nearer to "normal" interest rates, and they’ll likely start seeing corporate dividends with new, more appreciative eyes. But it will take time. It will all depend on the attitudes of professional asset managers, on individual investors acquiring a greater taste for risk, and on companies’ willingness to become more predictable and dependable dividend payers. Nevertheless, the American experience remains a source of inspiration for the future. Maybe one day, when investors get more familiar with the stock market, dividends will become the new fixed income for Brazil, too.