Schroders' Laud warns on global yield crisis

Schroders’ Sonja Laud has warned investors are facing a global yield crisis, and she expects cash to flow out of government bonds and into equities in the hunt for dividends.

The equity income manager said the US market has become a crowded trade for income seekers, as the S&P 500 hit an 80-year payout ratio low of 27% in 2011, forcing investors to look for dividends in an ever-shrinking pool.

High yielding companies paying dividends of 4% or more comprise only a very small percentage of the market, Laud said. 

“There is a global yield crisis. We are seeing a mismatch in the US with payouts at an 80-year low and treasuries yielding 1.8%. If Microsoft offered a 5% yield, there would be a huge rush to it from treasuries. I am not expecting this to happen overnight, but there is cash out there,” she said.

“How much more money can Bill Gross manage? How much more money can flow into bond funds given that yields are not attractive?”

Generally, Laud prefers to look for opportunities in the broader universe of Europe and Asia instead of the US.

She has 53% of her £75m Global Equity Income fund in high yielding stocks, while the other half of the portfolio focuses on companies with a lower starting yield but where she sees better valuations and more growth potential.

Her aim within the fund, which has just moved into the IMA’s new Global Equity Income sector, is to generate a 200bp premium over the market.

She has some traditional dividend payers in the portfolio but is beginning to add some more cyclical names at the margins where she sees better prospects for growth in payouts.

“Classic income names in sectors such as pharmaceuticals and tobacco trade at premiums to the market, but this ignores the fact that the potential for dividend growth in other areas is very encouraging,” she said.

“We do still own a big chunk in GlaxoSmithKline, for example, as we do not think the market has appreciated what the CEO Andrew Witty has done for the firm, or taken into account it has cleared a patent cliff, for example.”

Laud also owns traditional income payer Vodafone within her top 20 holdings, pointing to its high level of cashflow from its stake in wireless business Verizon and its international presence.

The latest Dividend Monitor report from Capita Registrars highlighted Vodafone as the top UK income stock for 2012, as it is set to contribute nearly one-tenth of all dividends in the market, toppling oil giant Shell.

Laud also holds tech behemoth Microsoft, which is cash, yields 2.6%, and could grow its dividend, as well as restructuring story Lockheed Martin, yielding 4%.

“Pharmaceutical stocks Pfizer and Sanofi are traditional in their yield profile but at the valuation level there is a lot of room for the shares to appreciate,” she added.

Laud has been adding to Chinese energy firm CNOOC and offshore rig builder Keppel Corp in anticipation of payout growth.

Meanwhile she has sold fast food retailer McDonald’s as it was one of the best performing stocks in the index, she said. “It was trading on 19x earnings and a 2.5% yield so I thought there was not much room for it to appreciate.”

In 2011, being overweight healthcare benefitted the fund, while consumer staples also contributed to performance. The main detractor to returns was not being invested in the IT sector, Laud said.

Over the three years to 23 January, the fund returned 42.7% against a Global Equity Income sector average of 39.8%, and a 49.2% return from the MSCI World, according to FE data.

The portfolio had a payout ratio of 38.6% for 2011, compared to 32% for the MSCI World index.

Laud said she is happy with her positioning as long as macroeconomic data continues to surprise on the upside. “If macro indicators such as ISM, inflationary data and new orders data turned down, we would rethink the cyclical part of the portfolio,” she said.

“In 2011, ISM data was a good indicator of where the market was heading, although obviously there could be external shocks I cannot predict.”