After Friday’s sharp re-pricing in European stocks on both the Brexit and trade fronts, the question is: does this rally have legs? The fact that the S&P 500 ended well off its session high on Friday and that index futures are mixed this morning could be a sign that the “phase one” deal between the U.S. and China might not be a major boost after all. As for Brexit, let’s see what happens in the coming days. But beyond that, the earnings season that kicks off this week could provide a good indication of what may come next for stocks. And the question of dividend sustainability will be taking center stage.

Dividends are a function of profit, and the problem is: there is no profit growth right now. Morgan Stanley strategists expect European companies to report a 2% fall in earnings per share in the third quarter, and they say expectations for the fourth quarter are still too high. Bottom-up analysts have been relentlessly downgrading estimates most of the year, and especially over the past six months.

Henderson International Income Trust has analyzed a decade of data from the world’s 1,200 largest listed companies, accounting for 85% of profits made and dividend paid, representing a hefty $1.3 trillion. Their results show a fifth of the payouts may be unsustainable, setting a “dividend trap.” In fact, about 50% of the highest yielding companies are at risk of cutting these shareholder returns, they say.

Dividend cover, a measure of sustainability for payouts, has been falling because of “normalization” in some industries, but also because profit growth is slowing as the economic cycle matures, according to Henderson’s analysts. About 70% of the companies examined experienced a reduction in dividend cover over the past five years.

Geographically, the U.K. and Europe have lower dividend cover than the U.S. or Japan, but that’s always been the case. This is explained by dominant mature industries and a high payout culture, particularly in the U.K., while buybacks are the preferred way of providing shareholder returns in the U.S., Henderson points out.

A potential global recession could put further pressure on earnings, and the analysts expect dividend cuts to become more common under these circumstances, particularly in continental Europe. Investors have started to experience it this year, with significant revisions at Daimler, Deutsche Bank or Vodafone.

Looking at payouts, the Euro Stoxx 50 dividend yield is currently at 3.8%, while it remains elevated for the FTSE 100 at 4.9%

In the meantime, Euro Stoxx 50 futures are down 0.3% and S&P 500 contracts are up 0.1% ahead of the European open.


  • Watch U.K. stocks as Prime Minister Boris Johnson’s attempt to secure a Brexit deal ran into trouble after the European Union warned the talks were still a long way from a breakthrough and some of his political allies distanced themselves from his plans.
  • Watch German defense stocks and suppliers as the country’s government won’t authorize any new shipments of arms to Turkey, which is engaged in military action in Syria, Foreign Minister Heiko Maas told Bild am Sonntag.
  • Watch exporter stocks after China’s exports and imports shrank more than expected in September, as existing U.S. tariffs and the ongoing slowdown in global trade combined to undercut demand.


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