Goldman Sachs Sees S&P 500 Dividend Growth Much Higher Than Market is Pricing

June 24, 2021 7:34 AM EDT

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Goldman Sachs analyst Ben Snider projects S&P 500 dividends to increase by 4.5% annually on average over the next decade, driven by 6% growth in both 2021 and 2022.

This is much higher than the market consensus of 0.8% CAGR, including “just’ 1% in 2021 and 3% in 2022.

“Since 2005, S&P 500 annual dividend growth has averaged 3.5%. If the market-implied DPS of $63 in 2024 were to converge with our forecast of $72, that would represent a 14% return. Our longer-term dividend forecasts reflect even more upside versus the market, although liquidity is thin beyond the 2024 maturity,” Snider said in a note.

The analyst reminds investors that historically, earnings growth tends to translate into higher overall cash use and dividend growth that is realized with a lag.

“Our forecast implies that the S&P 500 payout ratio will converge towards its post-GFC average in 2021. The payout ratio reached a 12-year high in 2020 as the pandemic recession led corporate earnings to plummet. As earnings recover, we expect the payout ratio will gradually decline towards 36%. In other words, we do not assume dramatic dividend growth relative to earnings growth to arrive at a forecast well above what the market is pricing.”

For Snider, the post-pandemic year will see substantial dividend growth as seen in dividend actions so far.

“The rapid pace of dividend cuts and suspensions that characterized 2020 has abated. There have been only two dividend decreases this year (PEAK, -20% and XLNX, suspended), compared with 69 that occurred during 2020. At the same time, the pace of increases and initiations has rebounded, averaging nearly two per trading day in the first 5 months of this year. Through May 2021, S&P 500 dividends have realized 2% below DPS during the same period in 2020, but we expect dividends to continue to grow in the second half of this year,” he adds.

“Many companies that decreased their dividends in 2020 have yet to announce increases in 2021, suggesting that the post-pandemic rebound still has room to run. Of the 57 companies that decreased or suspended their dividends in 2020, 22 have resumed or increased their dividends. Consensus expects that 19 others will increase dividends by year-end 2021.”

Sectors like Health Care, Info Tech, Consumer Discretionary, and Financials should power the dividend growth as these four sectors accounted for 52% of dividends in 2020 and are expected to contribute 71% of S&P 500 dividend growth through 2022. The analyst expects usual suspects to lead the dividend growth in the coming years.

“Apple is the second-largest dividend payer in Info Tech and ranked as the fourth-largest payer in the S&P 500 in 2020 (behind Microsoft, AT&T, and Exxon Mobil). Taken together, the 10 largest dividend payers contributed nearly a quarter of index-level 2020 DPS. In April, Apple announced a dividend increase of 7% to $0.22 per quarter following blockbuster sales growth of 54%. This is consistent with the company’s usual annual dividend increases, and our Equity analysts expect the trend to continue in 2022,” Snider stresses.

On the risk side, he outlines potential tax reform as the greatest threat.

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