PARTNER INSIGHT: Royal London Asset Management (RLAM) equities trio Richard Marwood, Henry Lowson and Martin Cholwill talk about the future of company dividends and how sustainable they are in the current economic environment.
Talking to Investment Week editorial director Lawrence Gosling as part of a new series of video interviews, Richard Marwood said determining the sustainability of a company's dividend requires playing it "stock by stock" to see how robust an individual company is.
One of the most important attributes the manager of the Royal London UK Growth fund looks for when assessing dividend growth is a "good hedge against inflation".
He said: "Part of what will drive nominal dividend growth in the future is where we are in terms of inflation. We have been in a low inflation world but maybe we are now at a point where that could start to pick up again.
"We are going to have to watch out for businesses that can continue to grow dividends and outstrip the rate of inflation to give that hedge against higher prices in the future."
Meanwhile, Henry Lowson added pricing power is one of the attributes the team looks at to give some idea of the sustainability of a company's returns.
As manager of the RLAM UK Small Companies fund, Lowson finds names in his investment universe have the potential for pricing power but do not impose it as such, rather preferring to stay "relevant over the long term".
He said: "Often in small-cap, companies can have pricing power because they have a more innovative product or service on offer and therefore can challenge the incumbent.
"But at the same they are trying to build market share so it is not something they are going to necessarily exercise at the outset."
Martin Cholwill, manager of the group's £1.9bn UK Equity Income fund, said companies will always have pricing power as long as they are delivering value to their customers, but noted inflation could become an issue going forward.
He said: "Inflation in the sysem could be an issue as those companies with pricing power will be able to pass it through, while for those who are more price takers and do not have that kind of strength and market position - there is potential for pressure on profit margins.
"It is not a 'one size fits all' so you need to look at individual companies and their positions within their markets," Cholwill added.
Commenting on whether or not inflation is likely to shift away from the 3% level any time soon, Cholwill said there does not seem to be inflationary pressure on a global level.
"Deflation is still an issue globally. But from a UK point of view, the reason we are seeing a pickup in inflation is due to currency weakness following the EU referendum, though I think that is probably washed through the system now," he said.
"The pressure is on consumer spending power and wages growing less quickly; it is those immediate pressures that may ease in the short term but in the medium term, if sterling remains weak, then there is the potential for inflation to come through."
Industry Voice: The sell-off in emerging markets this year has created a more favourable environment for Asian income funds, allowing them to deliver strong returns relative to the index and display their ability to mitigate risks to investors' capital....
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