Co-Managers of the Henderson Asian Dividend Income Strategy, Sat Duhra and Michael Kerley, provide a progress update on South Korea’s corporate governance standards and dividend culture. This progress is improving the dividend potential of the country and can be evidenced in recent dividend announcements for their holdings, enhancing returns for the strategy.
Late last year we highlighted some early signs of a dividend culture shift in South Korea, one of the lowest-yielding markets in Asia. In our view, this would drive a re-rating for a market that is also one of the most attractively valued in the region. Recent dividend announcements confirm an underlying shift in corporate attitude towards dividends. According to the Henderson Global Dividend Index (a long-term study into global dividend trends), South Korea was one of the best performing countries within the Asia Pacific ex Japan region. In 2015 total gross dividends rose by 20% with underlying growth* of over 40% (see table).
Asia Pacific ex Japan:
2015 annual dividend growth rate
Source: Henderson Global Dividend Index, February 2016.
A number of our South Korean holdings have recently reported improved dividend per share ratios and strong positive momentum – these companies now have dividend yields significantly higher than that of the broader Korean market (KOSPI Index). Among these holdings are Korea Electric Power Co (KEPCO), Macquarie Infrastructure Fund and KB Financial Group. This supports our belief that South Korean corporates are beginning to reward shareholders by adopting a strong dividend culture.
Following decades of unprecedented economic and social change, a combination of maturing corporates, a slowing China and weaker consumption trends have forced South Korean companies to look for alternate ways to reward shareholders. This has manifested itself in improving corporate governance and robust dividend potential.
A trip to Japan last month highlighted the contrast between the advances made by South Korea and Japan. There is no doubt that Japan has recently made some progress with respect to corporate governance initiatives, a renewed focus on profitability and awareness of investor appetite for dividends.
But while both countries’ reforms are moving slowly, the difference is that South Korea’s progress is driven by government legislation. An example is the excess earnings retention tax, which will apply to 2015 dividends; the aim is to encourage investment, dividends and wage increases. In addition, dividend income tax rates will be reduced to 9% from 14% with certain stipulations. In Japan, corporate governance initiatives are generally on a ‘comply or explain’ basis and, unlike in South Korea, the lack of hard-hitting reform on dividends has not significantly changed the behaviour of Japanese corporates.
Improving dividend outlook
One of the largest holdings in the Asian Dividend Income Strategy is KEPCO, which has a monopoly in electricity generation, transmission, and distribution. Operationally, the company has significantly benefited from generation mix improvement as nuclear plant utilisation rates are increasing, leading to significant cost advantages. In addition, debt reduction, falling commodity prices and greater focus on return on equity (RoE) has significantly boosted the company’s profitability. KEPCO’s recent dividend announcement surprised on the upside and subsequent share price appreciation has benefited our portfolios.
In summary, although we are currently slightly underweight South Korea with a weighting of around 13%, we have meaningful positions at an individual company level. We retain a positive view generally on the country given strong valuation support and companies’ greater focus on shareholder returns and dividends.
*Note: Headline dividend growth=change in total gross dividends
Underlying dividend growth =change in headline dividends adjusted for special dividends, change in currency, timing effects and index changes
References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.