An interesting aspect of the WisdomTree annual rebalance process is identifying trends in aggregate regional Dividend Streams® of major markets. As we just rebalanced our developed world Indexes, including Europe, we wanted to provide some insight into how Europe’s dividends grew in the 12 months prior to the rebalance.
The headline figure: Europe’s Dividend Stream grew 12.4% compared to the 2013 annual screening.1 Let’s look at how this has changed over time and the drivers of this year’s growth.
Figure 1: Behavior of Europe’s Dividend Stream—Two Consecutive Years of Growth!
• Unlike the Dividend Stream of the United States,2 which has been hitting new record highs recently, Europe’s Dividend Stream of $388.3 billion still must grow 22% to reach its 2008 peak (or similarly put, currently we are 18% lower than 2008 levels). Yet clearly, the Dividend Stream is off its 2010 lows, up more than 34%, signaling positive momentum.
• Financials experienced the greatest decline from 2008, going from approximately $160 billion in 2008 to approximately $86 billion in 2014. Financials must grow more than $72 billion (nearly 84%) from 2014 levels to surpass their 2008 peak.
To delve into this difference in the dividends of European Financials from 2008 versus 2014, we’d like to note that in 2008, about 220 firms qualified as dividend payers in the European Financials sector, compared with 170 firms today. Royal Bank of Scotland3 is perhaps the most notable dropout, contributing more than $10 billion to the Dividend Stream in 2008 but not paying a dividend since.
Factors Driving Dividend Growth
The 12.4% aggregate growth of the Dividend Stream masked some variability in growth at both a sector and a country level.
Figure 2a: Dividend Stream Growth by Country
Figure 2b: Dividend Stream Growth by Sector
• What Happened in Spain? In looking at figures 2a and 2b, the case of Spain literally leaps off the page, so we looked a bit more deeply into what was driving the 40% Dividend Stream growth figure. It’s worth noting here that Spain’s total Dividend Stream, slightly over $32 billion, is less than 10% of Europe’s total Dividend Stream, which we saw earlier is $388.3 billion. Broadly speaking, there are two drivers of Spain’s dividend growth:4
o Companies Re-initiating Payments: Telefonica SA5 and Endesa SA6 are two examples of this phenomenon. Both failed to make their dividend payments leading up to the 2013 screening date, so they were not eligible to contribute to Spain’s Dividend Stream. In 2014, Endesa SA had a Dividend Stream of over $2 billion, and Telefonica re-initiated an annual Dividend Stream to contribute more than $4.6 billion.
o Companies Growing Dividends Significantly: Repsol SA7 is an example of a firm that was included in Europe’s Dividend Stream in 2013, but that nearly doubled its dividend per share for this year’s screening date. Its contribution was over $1.7 billion.
This is the first of a series of blogs that will discuss our European Index rebalance. In future installments, we’ll dig into some specific Indexes and describe how the rebalancing process illustrates a real-time case study of smart beta at work.
1Refers to annual screening dates 5/31/13 and 5/31/14.
2Refers to the universe of the WisdomTree Dividend Index, with most recent Index screening date of 11/30/13.
3Royal Bank of Scotland is not a dividend-paying company and is therefore not included in any WisdomTree Dividend Index.
4For entire paragraph and subsequent two bullets, sources are WisdomTree, Standard & Poor’s and Bloomberg, with data as of 5/31/14 Index screening.
5As of the 5/31/14 Index screening date, Telefonica SA was prescribed to be a 1.09% weight in the WisdomTree International LargeCap Dividend Index, a 0.81% weight in the WisdomTree DEFA Index, a 1.30% weight in the WisdomTree DEFA Equity Income Index, a 1.64% weight in the WisdomTree International Dividend ex-Financials Index and a 5.77% weight in the WisdomTree Europe Hedged Equity Index
6As of the 5/31/14 Index screening date, Endesa SA was prescribed to be a 0.51% weight in the WisdomTree International LargeCap Dividend Index, a 0.37% weight in the WisdomTree DEFA Index, a 0.61% weight in the WisdomTree DEFA Equity Income Index and a 1.44% weight in the WisdomTree International Dividend ex-Financials Index.
7As of the 5/31/14 Index screening date, Repsol SA was prescribed to be a 0.41% weight in the WisdomTree International LargeCap Dividend Index, a 0.30% weight in the WisdomTree DEFA Index, a 0.48% weight in the WisdomTree DEFA Equity Income Index and a 1.24% weight in the WisdomTree International Dividend ex-Financials Index.
Important Risks Related to this ArticleInvestments focused in Europe are increasing the impact of events and developments associated with the region, which can adversely affect performance.Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty.Dividends are not guaranteed and a company’s future abilities to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.Performance, especially for very short time periods, should not be the sole factor in making your investment decision.