Helsinki Stock Exchange expects strong dividends in 2023 despite economic uncertainties

As the financial year draws to a close, investors' attention is focused not only on the last quarter's results and outlook, but also on companies' dividend proposals. Finnish investors' preference for dividends is understandable, as dividends have historically played a significant role in the returns of the Helsinki Stock Exchange. To illustrate this, we have shown below the development of the Helsinki Stock Exchange price and yield index (dividends reinvested) over the past ten years.

Despite a challenging year for the stock market in 2022 and recession fears, Helsinki Stock Exchange companies as a whole have continued to deliver very strong results in 2022. Reflecting this and the generally strong balance sheets of companies, dividends are expected to be quite generous again next year. In this article, we look at the expected dividend yield and absolute amount of dividends of the Helsinki Stock Exchange in 2023. We also look at which of the companies that we monitor are the biggest dividend payers in terms of dividend yield, and which companies are expected to grow their dividends the fastest. We remind you that investment decisions should not be made with only a high dividend yield in mind, as this may also indicate poor growth prospects, earnings cyclicality or a lack of investment opportunities.

Source: Bloomberg, data 12/28/2022

Dividend yield has risen above the historical median

The graph below shows the dividend yield of the Helsinki Stock Exchange over the last 20 years. The figure is calculated from the previous 12 months' dividends at the year-end closing price. In 2020, the collapse in dividend yields was largely explained by the COVID pandemic and dividend cuts, as well as higher valuation levels in general. In 2021, the dividend yield rose well above 2020 levels, but with valuation levels still high, the dividend yield remained well below the historical median. In 2022, the dividend yield has taken a clear upward turn, in particular due to falling valuation levels, and has already risen above the historical median. This is a natural consequence of the rise in interest rates, which is also reflected in the required returns for equities. In 2023, the dividend yield of the Helsinki Stock Exchange is expected to be around 4.4%, according to forecasts compiled from Bloomberg. The figure is calculated for all dividends of the Helsinki Stock Exchange in relation to the market capitalization of the stock exchange. Thus, the largest companies will naturally carry the most weight. The historical median dividend yield over 20 years is 3.8%.

The median dividend yield on 2022 earnings for companies monitored by Inderes is 2.6%. The lower figure is explained in particular by the fact that in the median the weight of small growth companies is the same as that of large companies. When companies that don’t pay dividends are excluded, the figure is 3.4%.

Source: Bloomberg, data 12/27/2022

Absolute dividend pot expected to continue to grow next year

In the graph below, we look at the development and forecasts of absolute dividends on the Helsinki Stock Exchange. As the pandemic receded, dividend taps reopened in 2021 and dividends paid in 2022 were already slightly above pre-pandemic levels. Despite the uncertainties in the economic environment, the dividend pot for 2023 is expected to exceed the 2022 level on the back of continued strong results. If the economic outlook weakens at the beginning of next year, companies' dividend proposals may naturally fall short of forecasts. Based on current forecasts, in 2023 Helsinki Stock Exchange companies are expected to pay out just under EUR 13 billion in dividends. In other words, absolute dividends are expected to increase by around 5% compared to 2022.

Source: Bloomberg, data 12/27/2022

Financial sector companies dominate the highest dividend yields

Next, we look at the highest dividend yields payable on 2022 earnings, collected from our share comparison tool. At the top of the list is Taaleri, which we expect to distribute additional dividends as it unwinds its overcapitalised balance sheet. In addition to Taaleri, several other companies in the financial sector are also included (Titanium, Evli, Alexandria). Companies in the sector are highly capital-light, allowing them to reward their shareholders with large dividends. However, an investor looking for a high dividend yield in the sector must counterbalance this with the cyclical nature of the sector's companies' results, which are often dependent on capital market developments. There are also other slow-growth companies that pay a significant proportion of their earnings in dividends. High dividend yields may also partly reflect market mistrust in companies' ability to pay dividends.

Source: Inderes, data 12/27/2022

Small growth companies are generally the fastest dividend growers

Finally, we look at the growth rate of companies’ dividends. We have calculated the highest projected annual dividend growth rates for the monitored companies for the period 2019-2023e. In other words, these projections contain forecasts, so the figures should be treated with caution. The growth rate is also significantly affected by the starting level of dividends, although we have eliminated a number of companies with exceptionally low starting levels in 2019. At the top of the list is Oma Säästöpankki, which stands out positively in its own sector in terms of growth rate. In general, the fastest dividend growers are mainly small growth companies.

Source: Inderes, data 12/27/2022