Welcome back the dividend champions!
World in Motion – Global equities blog

Welcome back the dividend champions!

“Big Tech” received a lot of attention in 2023, but we don’t believe it’s the only sector with attractive investment ideas offering the desired capital return characteristics. The time for dividend champions is back!

Dividend champions have attractive free cash flow profiles – high and growing; exhibit intelligent capital allocation; and have a long-term focus on the sustainability of its market position. High free cash flow-yield stocks have generally outperformed over the long term and we believe investors should be considering a portfolio of dividend champions again.

What does a dividend champion actually look like?

tmsc logo
TSMC1 was the first firm in the dedicated semiconductor foundry space and allowed the growth of global fabless2 companies. Essentially, this allowed chipset designers to outsource the capital-intensive manufacturing process. Around 35 years on, TSMC is now the largest semiconductor foundry3.
We believe it has done this by seeking to narrow the gap to the cutting-edge technologies. It is now the primary manufacturer of chips, making a third of all the world’s silicon chips and you will likely find a TSMC chip in your phone and laptop. TSMC etches a quintillion transistors for Apple every six months in just one of its fabs. (By the way there are 18 zeroes in a quintillion if you were wondering.)

TSMC continues to invest heavily into the business, but its capital allocation process has evolved as its scale has given it a competitive advantage and it has focused more on capital return. The dividend growth rate has been an impressive 15% annualised over the past decade. The company has said it expects this to grow in line with free cash flow going forward.
inditex logo

Not everyone has heard of Inditex4, but almost everyone will be familiar with its main brand, Zara. Inditex is the largest fashion retailer in the world5. The company pioneered a nearshoring model which allows it to operate with shorter product lead times, quickly reacting to trends and running leaner inventories. 

During the pandemic this flexibility meant it could quickly move stock out of stores for sale online and, importantly, allowed it to grow e-commerce sales without damaging margins. As such, Inditex’s return on invested capital is high – more usually associated with a tech company than a retailer. It’s free cash flow generation is good, which could support a growing dividend.

Having pulled back on shareholder returns during the pandemic, this year’s dividend could be up to 60% higher than 20196.

These are just two examples of the sort of firms we look for. And as 2024 begins we will continue to research and analyse the market for similar quality businesses.

11 January 2024
Georgina Hellyer
Georgina Hellyer
Portfolio Manager
Jonathan Crown
Portfolio Manager
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1 Mention of specific stocks is not a recommendation. All intellectual property rights in the brands and logos set out in this slide are reserved by respective owners.

2 A fabless company develops and holds IP but outsources the actual fabrication of its hardware

3 All figures in this paragraph: https://investor.tsmc.com/english

4 Mention of specific stocks is not a recommendation. All intellectual property rights in the brands and logos set out in this slide are reserved by respective owners.

5 Reuters, Zara owner Inditex seen outshining H&M in fast-fashion showdown, 14 March 2023

6 Bloomberg analysis, November 2023/https://www.inditex.com/itxcomweb/en/investors/finance

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