Dividend growth remains historically strong with another record of cash payments expected for 2015.
M&A activity heats up, fueled by buyers looking for fundamental growth, global positioning and tax advantages in an attractive interest rate environment.
In the second quarter, worldwide mergers and acquisitions challenged the 2007 record as large cap companies boosted market share through mega deals. In 2014, corporate share buybacks also increased close to 2007 levels as companies repurchased $450 billion of shares. Dividend growth remains historically strong with another record of actual cash payments expected for 2015.
There were several high dividend equity positions with M&A activity. Time Warner entered talks with Charter Communications after a failed merger attempt with Comcast and the Heinz-Kraft merger was completed. Some takeover approaches were rebuffed. Cigna so far rejected Anthem’s $53.8 billion acquisition proposal, Williams Companies rejected a $53.1 billion offer from Energy Transfer Equity LP and drug maker Mylan is attempting to resist a $50 billion takeover bid by Teva Pharmaceutical. The current activity is fueled by buyers looking for fundamental growth, global positioning and tax advantages in an attractive interest rate environment. This is in contrast to the mega deal days of 2007, which were fueled by private equity-backed leveraged buyouts.
The Fed Waiting Game
In the beginning of a Fed tightening cycle, the highest dividend yield sectors such as Utilities and Telecom tend to underperform but eventually outperform as the economy moves closer to a late economic stage. Historically, rising long-term rates have benefitted dividend-payers over non-dividend payers.
The portfolio is currently underweight the highest yield sectors while focusing on the attractive universe of dividend growers that we believe will continue to perform during a rate tightening cycle. In the second quarter the top sectors were Healthcare +2.43%, Consumer Discretionary +1.56% and Financials +1.23% while the worst sectors were Energy -6.70%, Industrials -2.77% and Utilities -2.59%.
Sources: NDR, FactSet, S&P IQ
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