Safe is now risky

Greg Dean's picture

While we digest the information we obtained from our recent business trip to Japan, I wanted to share a few thoughts on global interest rates. Amidst the recent Fed “noise” around rates in the U.S., I thought I would highlight what I believe was a shocking milestone reached over in Europe a few weeks ago. Both Henkel (€50B euro market capitalization – seller of household products) and Sanofi (€90B euro market capitalization – pharma company) managed to convince a group of fixed-income investors to pay them for the right to borrow money. Yes, you read that correctly. The investors will lend them a dollar and be guaranteed to receive less when the bonds come due. What makes this even more shocking is that both stocks have dividend yields of over 2%. This means that you could buy their equity and receive your pro-rata share of all future earnings, and the growth that comes with that, all while getting paid 2-4%. Or you could lend them €1.5B over three or more years and not even receive your money back. Seems pretty simple to us which one we’d prefer in terms of outcomes. (Side note: we do not hold either of these securities.) Steve has written on how we approach income differently and I encourage you to read it here.

For those of you who can’t believe this happened, here is a link to a Financial Times article on Henkel and Sanofi.  My favourite quote is the reference to the “greater fool” theory that is going on amidst these low/negative rates. Only time will tell how this level of euphoria ends but it sure reminds us of prior manias.


Submitted by Michael Cornacchia on

Do you still believe dividend growers to be a good investment relative to high-yield dividend companies?

Stephen Groff's picture
Submitted by Stephen Groff on

Hi Michael,

Given your question has to do with dividends; Greg passed your message over to me.

When it comes to dividend growers vs. high dividend yielders, we do not have the view that one is better than the other. We have some companies with high dividend yields and others that are yielding lower amounts, but have lots of growth ahead of them.

What makes one name more attractive than another is what we believe the total return will be over time. In some cases, the mature business (high yielders) is more attractive (both in terms of business quality and valuation) and in other cases it is the opposite. The key is that our time is spent on the companies themselves, while less emphasis is put on the dividend yield itself. We believe a bottom-up process makes sense as you are able to own companies you find attractive on a case by case basis, instead of simply owning large baskets of companies that have certain attributes (i.e. high yielders, dividend growers etc.)

Because of where interest rates stand today, there is significant investor interest in companies with higher dividend yields and also those that have a long track record of consistent dividend growth. Much of this buying is being done via ETF's. We continue to be selective and invest on a name by name basis, however we are finding that more of our companies tend to have lower yields at present, in part due to higher valuations among many of the “higher yielding” or “dividend aristocrat” type names.

Stephen Groff

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