Sanlam Sustainable Global Dividend Strategy

Q3 2021

• The FOMC have signalled, barring any imminent bad economic data, that the taper will arrive in November and end next Summer. The “dots” show that half the committee have now said they expect rates to rise once next year. This confirms we are well in the mid/late cycle phase and 10Y Treasury yields rose at the end of the quarter.
• As interest rate increases become closer, we favour as balanced an approach as possible, understanding that we will be o/w yield and u/w growth, as we expect style leadership to remain inconsistent as interest rate increases get closer.
• Equity valuations remain expensive, but risk premiums generally favour equities over credit and government bonds. There is no alternative (TINA).

• Analog Devices updated investors on its capital allocation plans following its acquisition of Maxim Integrated in early September. The dividend policy has become more formalised with a free cash flow pay-out ratio of 40-60%. We forecast the company’s dividend growth to compound at over 10% over the coming years.
• Accenture reported a strong set of fiscal fourth quarter results and increased its quarterly cash dividend by 10%. The company has a policy to grow the dividend in line with earnings and has guided to EPS growth of 13-16% next year. We assume that annual dividend growth can remain at the 10% level for the next couple of years at least.
• The Board of McDonald’s declared a fourth quarter dividend of $1.38 per share representing a 7% increase over the previous quarterly dividend. This brings the quarterly dividend pay-out to over $1bn. This increase reflects confidence in their growth strategy. McDonald’s capital allocation policy is to return all free cash flow to shareholders over time through a combination of dividends and share repurchases.
• IFF increased their quarterly dividend to $0.79. This is the twelfth consecutive year that IFF have increased their dividend. IFF currently yields ~2.1%.
• UOB’s Board announced an interim dividend of S$0.60. The Monetary Authority of Singapore lifted the dividend cap on banks recently, allowing UOB to pay 60 cents, which compares favourably to last year’s interim of 39 cents, and the full year dividend of 78 cents. Banking regulators around the world are loosening restrictions on bank dividend payments. UOB currently yields 3.7%.
• Hong Kong Exchanges increased their interim dividend by over 26% to HK$4.69 reflecting the strong growth in their business this year. The company has a dividend policy of paying out 90% of its earnings each year.
• Bank OZK increased their quarterly dividend by ~5%, the forty-fourth consecutive quarterly dividend increase. Bank OZK yields ~2.8%.
• Merck paid a quarterly dividend of $0.65, an increase of ~7% on last year. Merck pays out around 50% of its free cash flow as dividends and we expect FCF and the dividend to continue growing at this rate over the next few years.

• Caterpillar announced that it will begin to offer generator sets capable of operating on 100% hydrogen, including fully renewable green hydrogen, in late 2021. Caterpillar continues to make investments aimed at improving the capability of hydrogen-power solutions and replicating them across engine platforms as this fuel will likely play a role in customers’ plans for a reduced-carbon future.
• Eaton announced that it is working with Microsoft to identify ways for data centres to integrate more renewable energy sources and support grid stabilization efforts by storing energy and providing energy services back to the grid. Data centres are at the heart of the digital economy but can also provide readily available, better means to support the grid.
• Eaton has also announced that its Vehicle division has partnered with leading fuel system manufacturer Ballard Fuel Cell Systems and the US Department of Energy’s National Renewable Energy Laboratory to develop heavy-duty truck fuel cell technology. This builds on Eaton’s commitment to decarbonizing the transportation sector.
• DSM announced that its four plants in Jiangsu province in China have joined the first batch of companies in the province to sign renewable energy power purchase agreements. The agreement puts all four sites on track to be powered by 100% renewable energy from 2022.
• DSM also announced an acceleration of its initial 30% greenhouse gas emissions reduction target, to 50% by 2030. DSM was one of the first companies to align its efforts with the latest science presented in the IPCC Special Report ‘Global Warming of 1.5°C of 2019. As part of this effort, DSM signed power agreements in July, which mean that its North American electricity needs will be met by renewable generation from the end of this year.
• Kering has taken the decision to stop using animal fur as of the Autumn 2022 fashion collections. In 2019 the company formalised and published a set of animal welfare standards that will continue as they concern other animal fibres and materials.
• Schneider Electric received top ranking for performance in its sector by Vigeo Eiris, the principal European environmental, social and governance (ESG) rating agency and part of Moody’s Group. Earlier this year Schneider Electric was recognized as the world’s most sustainable corporation in 2021 by the Corporate Knights Global 100 Index. External validation is key to highlighting sustainability credentials.
• Trane Technologies announced that Thermo King, its transport refrigeration unit, will deliver a fully electric product in every segment of the cold chain by 2023. The portfolio will include electric refrigeration solutions for truck, trailer, rail, air and marine transport. This will allow customers to transition to more sustainable solutions for their fleets.
• Procter & Gamble announced a change in CEO with Jon Moeller succeeding David Taylor. We applaud the change, as the company have separated the CEO and Chairman roles. We believe the board should monitor how the executive manage the company relative to the interests of all stakeholders. Having the chairman of the board and the CEO as the same person can create a conflict of interest, and we vote against any such arrangement at shareholder meetings. David Taylor will stay on as Chairman.
• Air Products, the industrial gases giant, and Cummins, the engine maker, announced plans to work together on accelerating the integration of hydrogen fuel cell trucks in the Americas, Europe, and Asia. Cummins will provide the hydrogen fuel cell electric powertrains, as Air Products begins the process of converting its global fleet of approximately 2,000 trucks to hydrogen fuel cell, zero-emissions vehicles. Air Products is a world leader in the supply and transport of hydrogen and sees hydrogen as the future for heavy duty segments of the transportation market.