Asian companies are paying dividends at a rate fast outpacing those in developed markets. Sat Duhra, Co-manager of Asian dividend income, explains the significance of this trend and why it should not be ignored.
1. Why would yield-hungry investors seek to invest in Asia Pacific over other regions in a world of falling cost of capital?
Cost of capital is indeed falling and this enhances the attractiveness of high yield strategies, however the combination of dividend growth and high yield is important as can perform across all cycles – whether interest rates are falling or rising. A pure high yield strategy tends to perform well when bond yields have fallen and interest rates are low but not so well when growth picks up and bond yields are higher, this is the advantage of dividend growth. Payout ratios are rising in Asia but are still at very low levels. This is very compelling because we own a number of high yielding stocks but payout ratios are still low hence there is much more room for dividend growth. The issue with developed markets is that payout ratios are already high so when earnings growth slows or falls then there is greater sensitivity to dividends which may be cut. However for Asian companies there is much less pressure in a downturn as the payout is already very low and not placing much pressure at those levels when earnings fall.
Even if Asian companies did not increase payout ratios, many companies now have fixed payout ratios so as earnings grow, then so does dividend per share (DPS). Asia is the fastest growing region globally and so this creates a very positive backdrop for corporate performance.
2. Some people believe that dividends are no match for yields that they can get from bonds, as the risk of a recession is growing globally, is there a case for Asian dividends in this case?
Bond yields are falling but Asia dividend income is rising, there is wider spread now between Asian equity dividends and US 10 year yields. The fears over inversion of the yield curve and potential recession that traditionally seems to follow is wide of the mark. Yield curve inversion by itself is not a sufficient condition for a recession to occur with any certainty, there needs to be other factors at play e.g. rising unemployment, a liquidity event, etc. Currently there is no evidence of this, however Asia is already the beneficiary of declining sentiment towards markets such as US and flows have been strong into Asia this year. An expected weakening US dollar should benefit South Asian markets in particular, in terms of sentiment and flows.
Equites in Asia still offer huge growth potential – even more ‘boring’ names such as infrastructure assets e.g. telecommunications infrastructure or toll roads are seeing growth which is much higher than similar developed market names given the higher inherent growth in Asian markets. Therefore even these type of stocks can give high yield and strong growth over time. This is the advantage of owning this over bonds, the current performance of these types of names in the portfolio is evidence of that. In an environment of rising volatility, rising concerns about geopolitics, oil price, US government policy and US Fed policy there has been very strong performance from high yield stocks in Asia – they have demonstrated capital and income growth and this is a key advantage of those holding equities in the current environment. Equity valuations in Asia are also compelling so over the long term there remains potential for capital and income growth in Asia, a reason to own equities in this region.
3. With the Federal Reserve’s dovish turn, is there a need for investors to seek dividend growth now that money seems cheap for longer again?
While we focus on dividend growth, roughly half of the portfolio consists of core stocks that are currently paying high dividends with the other half consisting of companies with potential to grow their cash flows and dividends (“dividend growth” stocks).
In the current environment of falling bond yields, high income stocks eg REITS, infrastructure assets and telecommunications have performed well though many dividend growth names in China have also excelled. Therefore, striking a balance between high dividend paying stocks and names with potential to grow cash flow and dividends is key, dividend growth names can contribute strongly to capital performance.
If bond yields continue to remain low, then ‘bond proxy’ types stocks could remain in favour. In the same vein, any shift in sentiment so that more growth-like stocks are favoured would also be beneficial for companies fitting the ‘dividend-growth’ profile. Importantly, regardless of the environment we may be facing, Asian companies have already made huge strides to increase dividends. This culture of paying dividends is now embedded in the corporate mindset and this is not about to change.
Note: Unless otherwise indicated, the source for all data is Janus Henderson Investors, as of 31 May 2019.