Kera Van Valen

In times of economic and political turbulence, investors seeking stability and long-term value should focus on companies still issuing dividends, according to Kera Van Valen, portfolio manager of GSFM fund manager partner, Epoch Investment Partners.

“Companies with consistent, well-managed dividend policies signal financial health, disciplined capital allocation, and a commitment to returning value to shareholders, even during uncertain periods,” Van Valen said.

“History shows that companies with stable and growing dividends tend to outperform companies that either don’t pay a dividend or have an inconsistent dividend policy resulting in cuts or reductions to dividends,” she added.

A diversified portfolio of high-quality companies that can generate sustainable free cash flow and consistently return cash to shareholders in the form of dividends, share buybacks, and debt reduction can deliver outperformance over the long-term for investors.

Diversifying dividend investment styles and adding the other components of shareholder yield in this way can lead to a better risk-return profile.

The chart below shows how this works in action, with a strategy that targets an annual average yield split of between 4 to 4.5 per cent in dividends, 1 to 1.5 per cent in share buy backs, and at least 3 per cent from cash flow growth.

Source: Morningstar Direct

While a mix of yield sources may not always provide the highest returns in the short term, research shows that it will provide more downside protection in the long term, leading to better results overall.

“This strategy puts investors in a much stronger position to gain long-term risk-adjusted returns, allowing them to weather volatility and have a smoother ride through the market cycle,” Van Valen said.

Companies that grow and pay

Two examples of global companies that pay their investors a strong and sustainable cash flow are Coca-Cola Europacific Partners (CCEP) and Deutsche Telekom (DTE).

“CCEP sustains its cash flow by maintaining efficient product distribution and having a differentiated pricing architecture, giving consumers the ability to buy its products at different price points.

“DTE, on the other hand, is a good example of how debt reduction can be used to increase equity holders’ claims on company cash flows,” said Van Valen.

DTE owns a majority interest in US mobile operator, T-Mobile. Following T-Mobile’s 2020 acquisition of Sprint, the company focused on bringing debt levels down. This focus resulted in material cost synergies, boosting free cash flow levels and enabling deleveraging of DTE’s balance sheet.

“Ultimately Deutsche Telekom was able to increase its dividend rate and initiate share repurchases, enabling the company to regain majority ownership of T-Mobile.

“T-Mobile was then able to initiate a standalone dividend, returning significant cash back to the parent company and further benefitting DTE shareholders.”

Van Valen said the outlook for income from global investments remains robust for 2025 with more companies paying dividends.

“Regardless of the somewhat uncertain global economic outlook, due to the obvious geopolitical factors, we believe the dividend outlook is strong, and the current rate environment and strength in cash flows give corporates no reason to abandon sound capital allocation practices,” Van Valen said.

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Kera Van Valen

2023 has seen AI mania captivate investors, as a year-to-date bull run in global equities has been fuelled by rampant speculation on the future growth implications of the technology’s broad adoption however rising market indexes paint a somewhat misleading picture, says Kera Van Valen, portfolio manager for the Global Equity Shareholder Yield strategy at Epoch Investment Partners (TD Epoch).

The year’s rally has been remarkably concentrated, being largely confined to just a handful of mega-cap tech companies,” Van Valen says.

“Recent years have seen these firms’ index weights balloon alongside their price multiples and market caps; for example, Microsoft and Apple now make up nearly 10 per cent of the MSCI World Index, which is composed of over 1,500 stocks. High index weights coupled with outsized returns have led to just 7 stocks accounting for over 50 per cent of the MSCI World’s return through the end of the second quarter.”

Van Valen says the narrow market leadership poses a relative performance challenge for diversified equity managers.

“Indices meant to be representative of the broad market have seen their return profiles skew due to these concentrated position sizes, which presents difficulties for managers like us who emphasise the benefits of diversification in their risk framework and portfolio construction process.”

Managers who are focused on income have found the year’s market environment less supportive as well, says Van Valen.

“From an income perspective, it’s difficult since most of the tech companies leading this AI rally are growth oriented and don’t pay dividends.”

That said, while the AI trend has rewarded a small cohort of tech stocks most sharply, there are other pockets of the market benefitting from the theme. Van Valen notes that her portfolio is not absent exposure to AI and has seen ample participation in the year’s rally; however, she highlights the importance of not losing sight of fundamentals.

“The stocks that have been centre stage during this rally have seen their valuations skyrocket based largely on lofty expectations of future growth; however, there is limited fundamental backing right now. It will be important to watch how earnings unfold over the next several quarters.”

The Global Equity Shareholder Yield Fund’s positive net absolute return this year has been driven largely by its holdings in the information technology sector. The fund focuses on owning fundamentally strong, highly cash generative firms that prioritize returning cash to shareholders, and holdings that are thematically linked to AI are no different.

“One portfolio holding with exposure to the AI theme is Broadcom, a designer and manufacturer of digital and analog semiconductors focused on connectivity. The stock has benefitted from growing expectations for needed investment in networking to support nascent use cases surrounding generative AI. The company returns cash to shareholders via an attractive dividend with a target of paying out 50 per cent of free cash flow.”

Despite the buzz and market chatter, investors should remain cautious when chasing the most crowded AI trades that have already seen valuations pushed to precarious levels. Given the current macro-economic environment—with political uncertainty in the US, high inflation and interest rates, the likelihood of a recession, and the ongoing Russian-Ukrainian war—Van Valen believes the most reliable and best source of returns will likely be shareholder distributions.

“Companies that will outperform are those with strong market positions, a track record of maintaining and growing cash flow through economic cycles, pricing power and the ability to defend margins. We also look at corporate balance sheets that reflect high liquidity levels to support dividends and share repurchase capability.

“While earnings will likely be pressured by the current macro-economic backdrop, companies that hold these characteristics should prove capable of maintaining earnings growth despite the volatile environment,” says Van Valen.

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Kera Van Valen

There is currently no shortage of uncertainty in global markets, and it looks like things will remain that way for the foreseeable future.

The prolonged war in Ukraine coupled with escalating tensions between the U.S. and China continue to drive de-globalisation and stagnating economic growth. Recession risk remains elevated, as despite recent turmoil in the banking sector, central banks around the world are continuing the process of economic policy normalization. Attractive opportunities remain for equity investors, but to succeed in this environment will require a more hands-on approach to stock selection, with a heightened focus on business fundamentals.

With monetary policy more restrictive than it’s been in years, and likely not returning to the highly accommodative levels seen over the past decade any time soon, companies with a large share of their cash flows out in the future and a pressing need for capital injections to sustain growth will see valuations most significantly pressured when compared to more fundamentally sound peers. All signs point to the best opportunities being concentrated within highly cash generative, dividend-paying companies with healthy balance sheets and strong market positions. A portfolio constructed with these traits in mind will be well suited for the coming era of more fundamentally driven equity markets.

Portfolio pick – Novartis

The Epoch Global Equity Shareholder Yield portfolio invests in companies that grow free cash flow and allocate it intelligently. To illustrate what we are talking about, examples of companies that we hold in our portfolios are always a good place to start. One such stock worth highlighting is Swiss pharmaceutical company, Novartis. It’s a large company, with a market capitalisation of about $US200 billion, and it generated about $US50 billion in revenues last year.

The management team has been narrowing the focus of the business and has divested segments that are unrelated to their core interests of innovative medicines. This narrower focus has resulted in a much more dependable driver of growth in cash flow.

Novartis has exposure to different therapeutic areas across a number of geographies, which lends to more stability for the business. They have blockbuster drugs in oncology, in immunology, in cardiology, and in neuroscience. The company pays an attractive dividend which has been growing consistently and reliably for more than 20 years, and also regularly repurchases stock.

Portfolio pick – Coca Cola Euro Pacific Partners

Another great example of a holding in this strategy is Coca Cola Euro Pacific Partners (CCEP). It is the world’s largest independent bottler for the Coke franchise, with operations in Europe, Asia, and Australia. On a continuing basis, the company partners with Coke to optimise its product and price mix in each market, aspiring to have the ideal brand in the appropriate packages at the right prices in all target channels.

Nearer term, restructuring of the product offering and cost structure at recently acquired Coca-Cola Amatil will serve to accelerate free cash flow growth. Bigger picture, with strong brands and a diverse product portfolio, CCEP is well positioned to continue to drive growth in free cash flow through profitable revenue growth, volume, product innovation and marketplace execution. The company generates strong free cash flow and consistently returns cash to shareholders through an attractive dividend which is also supplemented by share buybacks and debt reduction. 

Wrap-up

When the market landscape is defined by uncertainty and volatility, as it remains today, it is crucial that equity investors adapt their approach and position their portfolios accordingly. The firms that will be able to navigate the challenges ahead, while maintaining growth in earnings and creating value for shareholders, will be those with robust cash flow growth, healthy balance sheets, and strong market positions. In our view, successfully identifying these traits and being more selective in equity allocations will lead to the best outcomes for investors.

By Kera Van Valen, managing director

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