In this article, Mike Kerley, Asian equity income portfolio manager, shares his views on whether Asian companies will follow the recently announced dividend cuts in the US, UK and Europe. He outlines his reasons for taking a positive view on dividend sustainability in Asia  amid the coronavirus uncertainty.  

  Key Takeaways

• Asian banks are generally well capitalised and have low dividend payout ratios, and in many cases are state owned where the governments rely on dividend income to bolster revenue. This suggests that Asia is less likely to experience the same level of dividend cuts seen in the US, UK and Europe.
• Asian companies seem relatively well positioned to pay dividends this year. The coronavirus impact has not been as severe as in some western countries; in China and South Korea lockdown measures are now being loosened and the economic momentum appears to be positive. Many Asian companies have large levels of cash, while the dividend payout ratio has room to grow as the region’s companies typically remain below their western peers.

March was a dreadful month for all equity markets, with wild swings in virtually all sectors, however Asia and especially China fared better than most. While the coronavirus looks to have peaked in China, South Korea, Taiwan and Hong Kong, cases are still rising in South Asia, with India, Pakistan and Indonesia the most immediate concerns.

For Asia, given that supply issues have largely been addressed, the biggest concerns now revolve around demand, specifically demand for the region’s exports. China is returning to work – official figures suggest around 85% of workers are back, with the focus more on manufacturing and essential services. Restrictions on movement in China have been relaxed but have not been removed. In terms of government action, interest rate cuts have been announced across most countries as well as fiscal stimulus; at the time of writing we still await details of the magnitude of fiscal support that China will provide.

How sustainable are dividends in general?

The recent cutting and cancellation of dividends by banks and other companies in the US, UK and Europe has focused investors’ minds on where dividends are at risk. In terms of banks, we have believed for some time that the sector was  more exposed in this downturn, firstly from lower profitability from falling interest rates, but also the potential of having to do ‘national service’ (a directive by the domestic government to act on its behalf)  through credit extensions that were not necessarily in the best interests of the banks or shareholders.

Within Asia Pacific, however, there is less need for these measures to be applied. If they are, Australia and Singapore could be the most likely candidates. Generally, Asian banks are well capitalised and importantly, have lower dividend payout ratios than some western peers*. In many cases they are state owned, where the governments rely on dividend income to bolster revenue. As an example, banks in China are more than 50% owned by the Ministry of Finance and have payout ratios of only around 30%, compared to around 40% for banks globally*.

Outside the banking sector, the areas which are more difficult to predict are government measures that could impact profitability and potentially dividends, such as if a form of corporate ‘national service’ were used to ease the burden on manufacturing or other areas suffering from lockdowns.  For example, in Singapore real estate investment trusts (REITS) are being impacted by government measures that have been introduced to provide a rent holiday for tenants impacted by the coronavirus. This will mainly impact retail mall operators, but is likely to also constrain dividend growth for the sector going forward.

Reasons for the positive view on Asian dividends

While companies’ earnings will undoubtedly come under pressure, we are confident of the Asian region’s ability to pay dividends in 2020 owing to the large levels of cash held by many companies and, most importantly, the lower levels of dividend payout compared to the West. Asia Pacific ex Japan has a dividend payout ratio of only around 35%*, far lower than in many western countries.

Another supporting factor for Asian dividend sustainability this year is the fact that in countries such as China, Hong Kong and Taiwan, dividends are only paid once a year, with some lag. Currently, these markets are reporting financial year 2019 earnings and dividends based on last year’s numbers, which was generally a decent year in terms of profitability, and before the coronavirus emerged. We have seen companies paying increased dividends both in line with earnings growth, and some have raised dividend payout ratios. Dividend surprises have come from diverse industries such as property, power supply, consumer and technology.

Conclusion

In our view, Asia looks better positioned to continue to pay dividends than many other regions. The coronavirus impact has not been as severe as in some western countries and in the case of China and South Korea, lockdown measures are now being loosened and the economic momentum appears to be positive. With the pressure on dividends in some key sectors in the UK and Europe, and the shadow hanging over the high yield credit market, Asia could stand out as a relative beacon of stability for the income investor who is struggling to find alternatives in this environment of record low interest rates.

*Source: Jefferies, Factset, Bloomberg. Dividend payouts – banks and region wide as at March 2020.