* Payouts see biggest rise in real terms in 5 yrs-Henderson
* Further profit rises likely to keep payouts
* Bearish signals from market seen as overdone-analysts
By Lionel Laurent
LONDON, Aug 18 Europe's corporate earnings
recovery has increased dividend payouts by the most in five
years, data showed on Monday, and low interest rates and a
further rise in profits should keep payouts flowing.
Although recent geopolitical uncertainty in Ukraine and the
Middle East - combined with disappointing economic data out of
Europe - have in the short term deflated hopes for a strong
pick-up in corporate earnings, investors are betting the
recovery is still on track and dividends can grow.
European companies, excluding British companies, paid out
$153.4 billion in the second quarter, up 18.2 percent
year-on-year and the best performance on a constant currency
basis in at least five years, according to Henderson Global
Investors data tracking global dividends.
The second quarter is traditionally the peak season for
European dividends, representing three-fifths of the annual
payout, and was lifted this year by Europe's corporate earnings'
recovery. Companies listed on Europe's STOXX 600 index
posted a 10 percent rise in second-quarter profits, helped by
cost cuts and low borrowing rates.
Going forward, the euro zone's flat economic performance in
the second quarter has led European equity analysts to downgrade
their earnings forecasts. They now expect European company
earnings to rise 5.4 percent this year, down from initial
expectations in early 2014 for a rise of 11.8 percent, according
to Thomson Reuters Datastream.
Yet even 5 percent growth would still be good compared to
recent years when earnings flattened between 2009 and 2013. With
few obvious places for firms to invest their cash and with
investor sentiment on Europe cooling off since last year's
scramble to buy, some investors see the region's equities as
undervalued relative to companies' payout power.
"The European region is a pretty decent place for dividend
investors," said Talib Sheikh, fund manager at J.P.Morgan Asset
"Growth is not too hot but not too cold, rates are not too
high, the mergers-and-acquisitions cycle has yet to reach its
peak ... Companies are returning cash to shareholders."
European stocks currently trade at an average dividend yield
of 3.3 percent, more than 200 basis points above Germany's
10-year Bund yields, which slipped below 1 percent
last week for the first time ever.
This compares with an average dividend yield of 2 percent
for U.S. stocks, and a yield of about 2.4 percent for stocks
Spanish and French stocks are currently among the
top-yielding plays within the blue-chip Euro STOXX 50 index
: Repsol, Banco Santander, Inditex
, Vivendi and Total yield between 5
and 10 percent, according to Thomson Reuters data.
The financial sector's return to relative health has also
helped: France's BNP Paribas continued to pay a
dividend despite a hefty U.S. fine and crisis-scarred Credit
Agricole recently resumed dividend payments.
If banks' regulatory load lightens, payouts could grow,
Short-term market signals on European companies' long-term
dividend prospects have recently turned bearish in the wake of
worrisome geopolitical headlines and second-quarter euro zone
data showing Germany's economy shrank and France's stagnated.
Euro STOXX 50 dividend-futures contracts for 2015 through
2019 have fallen 1 to 8 percent from their respective June
highs, reflecting a recent sell-off on the cash market as the
Euro STOXX 50 index itself is down 8 percent from June highs.
Some analysts and investors, however, say this downward
slope of the dividend-futures curve over time is overly
They point to signs of an improvement in business activity
in the third quarter, and say the possibility of further
intervention from the European Central Bank to spur economic
growth and the overall trend of global economic recovery should
help sentiment recover.
"The further out you go on the dividend curve the more it is
traded on sentiment and the more you see a correlation with the
underlying cash index," said Arran Lamont, analyst at Citi. He
estimates dividend yields in Europe should grow by around 1.5
percentage points through 2018 to around 5.5 percent.
"The long end of the curve looks oversold."
The current environment does not mean dividend investors are
necessarily ramping up their allocations to Europe, said
J.P.Morgan's Sheikh, though he said overall dividend yield was
set to grow and that potentially cheaper valuations would help.
"You need to look at dividend yield and you need to look at
whether (European yields) can grow from here," said Sheikh. "We
think they can."
(Additional reporting by Blaise Robinson; Graphics by Blaise
Robinson and Vikram Subhedar; Editing by Susan Fenton)