Dividend digging in Asia

It is small wonder dividend paying stocks are coming back into vogue. Bond yields, for so long producing well above equity dividends in terms of income, are now so low and even negative in the cases of several sovereign bonds that the steady income from equity yields now looks especially attractive.

The German government ten-year bond yield, to take just one example, is now -0.6%; compare that to the MSCI Asia Pacific ex Japan index which has a current dividend yield of 3.1% (Fig 1). Globally, this has put dividend yielding stocks back into the spotlight but is Asia being neglected?

Fig 1: MSCI Asia Pacific ex Japan Quarterly Dividend Yield versus selected government bond yields (%)1

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A perception is that Asia doesn’t pay good dividends. After all, goes the argument, Asia is a growth region and growth stocks don’t pay dividends. Right? Wrong. As Fig 2 shows, except for Australia and its well-developed franking system, Asia is the largest dividend paying region in the world in terms of percentage of index returns.

Fig 2: Total Return (including dividends) and Price Return (excluding dividends) by regions2

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There are a handful of reasons for this, not all of which may be appreciated by global investors. First, after multiple years of expansion, corporates in Asia have large amounts of cash on their balance sheets, leading to pressure from shareholders to do something with it. One option is an acquisition but with sometimes elevated prices and national protectionist policies, this isn’t always possible.

This leaves either share buybacks, popular in the US, or dividend payments, favoured in Asia. Dividends are favoured in Asia as companies here tend to maintain better corporate debt leverage vis-à-vis their developed market counterparts while they also need to keep capital expenditure (capex), research & development and cash levels relatively high to cushion macroeconomic gyrations.

The result is that dividend yields in the region are higher; Asia also hosts some of the single biggest dividend payers, including the world’s largest – China Mobile – that in 2018 distributed US$9bn in dividend payments.

In fact, Asia is packed with high quality, well managed, established companies that regularly pay out dividends to shareholders, and an investor who wants a steady income as he/she waits for share prices to rise should look for these stocks or funds that invest in dividend payers.

Long-term trends favour the yield plays

In the years since the 2008 Global Financial Crisis, equities have had a fantastic run both in terms of price return and increasing dividends. As mentioned, this has left an awful lot of cash on corporate balance sheets, so it may be tempting to think that, should the world’s equity markets enter a downturn, cash will start to shrink and dividends along with them.

But countering this, over the long-term, there are other factors at play that could see dividend payments maintained or even increased, certainly in breadth, if not in depth too. For one, demographic changes in Asia mean that an older generation will need to be provided for by investments made today, and the channel for that in the equity market is via cash dividend payments from stocks.

We have already seen this shift happen in one country in Asia - Korea. There, those who fought, and indeed those who were widowed, in Korea’s war in the early 1950s are now at retirement age and have medical and housing bills to pay. This has meant the stock market, which facilitated the drive for industrial growth in the 1980s and 90s, has given way to the need for extra income – and those high-growth companies of 20-30 years ago now pay for this in terms of dividends to the state’s coffers. Going forward, we expect Korea’s National Pension Service's, the largest investor in the Korean stock market, adoption of its 2018 stewardship code to be a key driver for corporate governance reform and increased dividend payments that at least meet regional standards.

The same trend happened in Singapore, albeit for different reasons, but the result is identical: Singapore is now one of the highest dividend payers in Asia. And the trend is only set to continue. The demographic shift in Korea will likely be mirrored in China and elsewhere in Asia, so we think the idea of Asia being the centre of the dividend paying world should continue.

What makes a good dividend stock

Not all stocks pay dividends. To start with, it is true many corporates in Asia are still in the high-growth phase and they want to redeploy their capital back into the business to spur future growth. In this case, investors have to rely on a gain in the stock price to realise profit.

However, if Asia is so packed with good dividend payers, what follows is a rather obvious question: what makes a good dividend paying stock in Asia?

To start with, investors should look for sustainable earnings growth. This means a company with a steady revenue stream from ongoing operations. For this, utility companies are often cited as good examples, and this is the case in Asia too.

Second, balance sheet strength. This has multiple layers and requires a “deep dive” into the company’s accounts. Investors should question whether the company’s short-term assets can pay off its short-term liabilities; or does the company carry excess debt compared to its equity. A dividend paying stock generally has high cash and low debt levels, and/or low capex levels. This isn’t set in stone of course, and investors need to be careful not to write off investing in a company because of a one-off item, but one should always investigate whether the dividend payment is sustainable over time. And for that, it needs to have a strong and stable balance sheet.

The third point follows from this: a company generally has to have a strong free cashflow yield. This means the company can generate regular sales that puts cash in the bank and is not reliant on other balance sheet assets such as ‘intangibles’ on a strong brand, or long payment deferrals that could cause a fluctuation on the cash line.

Fourth, does the company have a good track record of increasing dividend payments? If so, it would be a strong candidate to continue to be so in the future too. And conversely of course, if a company has a record of cutting dividends, investors should be extremely diligent in their investigations into why it was forced to make those cuts.

Inevitably, certain types of stocks lend themselves to being good dividend payers. Utility or telecom stocks have a steady cash income, are mature companies with an often-long track record of dividend payments, and predictable (within reason) capex. Banks and insurance companies too can have fairly steady income streams which make dividend payments steady, if not always spectacular, while property stocks also have consistent revenue income from tenants.

But there are less obvious good dividend payers in the Asian markets that investors may not realise. Industrial groups such as Sinopec or China Merchants Port have a good track record of dividend yields above 5%; and Tech Hardware companies such as Catcher, Lenovo and Samsung Electronics also have established track records of paying at or above benchmark yields.

Both these sectors are not traditional yield-paying ones but here in Asia, they go to prove the point that if investors dig just a little, they’ll find plenty of good dividend payers.

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