Current market conditions are proving to be challenging for all investors, but with many businesses cutting or cancelling dividends, and bond yields deteriorating further, income investors are increasingly under pressure. Chris Greenland, Fund Manager at Sanlam, discusses real assets, and why they could prove to be a good income generating alternative.
Real assets form the foundation of any functioning economy, and include tangible assets, such as schools, roads, hospitals, student accommodation, warehousing, and private rental housing; and renewable energy, such as wind farms and solar farms. Thanks to their strong financial profiles, lower correlation to equities, and resilient capital preservation characteristics, real assets are holding up well in these rather uncertain and unpredictable times. As a result, their stable dividends are likely to become attractive to income investors, given they have been let down by other parts of the market.
Resilient dividend policies
As businesses announce their latest set of results against the reporting background of Covid-19, an interesting phenomenon is coming to light. Dividend policies for both infrastructure and renewable energy have, so far, been largely resilient.
As you can see from in the chart below, nearly 90% of renewable energy companies in our portfolios have reaffirmed their dividends, and 80% of infrastructure companies have either reaffirmed, or are still to declare. In contrast, a third of companies in the FTSE 100 are either cutting, suspending, or deferring their dividend payments.
Across our real asset portfolio, nearly 70% of companies have re-affirmed their dividends, and of those that have made a cut, the average reduction is only 17%. This means that most dividend payments remain attractive given today’s low interest rate environment, which may persist for some time.
Pro-rata Dividend Distribution
Source: Sanlam, 29th May 2020
Why are real assets proving resilient?
Many infrastructure and renewable energy businesses benefit from contractual revenues in the form of long-term concessions, long-term power purchase agreements (PPAs), state subsidies, inflation-linked and upward-only leases, ‘take-or-pay’ contracts and rent guarantees. All of these provide visibility and predictability.
So far, only one of our renewables businesses has altered their dividend policy, despite their own challenges. While the energy sector has seen power prices falling across the UK and Europe due to the virus-induced drop in electricity demand, the strong wind availability over the first quarter has helped businesses offset the lower prices by delivering more wind power to the grid. Indeed, renewable energy generation is 15-22% ahead of budget across our businesses. Wind blows, the sun shines and dividends remain unaffected.
At the same time, parts of the infrastructure sector have shown a great deal of operational resilience, especially availability-based assets which continue to be vital for the public sector. These include hospitals, medical sterilisation facilities and other healthcare facilities. There are also businesses working closely with the government to provide essential services at this crucial time, such as schools. Providing the assets are made available for use, the owners of the building are paid. Admittedly, the sector has seen a little pain in demand-based assets, which have not been used during lock down, but holding a balance of infrastructure concessions that command availability-based payments has helped to cushion the impact on this sector.
As other areas of the market continue to face strong headwinds, so-called ‘alternatives’ are showing they can still deliver through all market cycles. Real asset dividends have looked more reliable and secure than other areas of the market, making them an attractive place to invest given what is happening elsewhere.
Issued and approved by Sanlam Investments. Sanlam Investments is the trading name for our two Financial Conduct Authority (FCA) regulated entities: Sanlam Investments UK Limited (FRN 459237), having its registered office at 24 Monument Street, London, EC3R 8AJ and Sanlam Private Investments (UK) Ltd (FRN 122588) having its registered office at 24 Monument Street, London, EC3R 8AJ.
Past performance is not a guide to future performance.
The opinions are those of the author at the time of publication and are subject to change, without notice, at any time due to changes in market or economic conditions