One of the main reasons people have, and continue to, invest in Asian sharemarkets is for the capital growth of the fast growing companies listed there. But that’s starting to change.
Australians investing in Asia are no longer just tapping the capital growth of Asian stocks, they’re also increasingly receiving significant share income through rising dividend payouts, notes fund manager Fidelity.
“We’re seeing more companies in Asia paying more dividends,” points out David Urquhart, Portfolio Manager of the Fidelity Asia Fund.
Mr Urquhart says “the combination of strong balance sheets and improving return on equity has seen Asian companies’ willingness and ability to pay dividends increase strongly over the past decade.
“The increased willingness to pay dividends is the result of management’s improved understanding that shareholders like to see a regular cash return on their investment, particularly from companies whose balance sheets are strong and that can comfortably fund their future capital expenditure to grow the business. Management also increasingly recognises that dividends provide a competitive advantage to attract investors, compared to companies that don’t pay dividends or lower payouts.
“The ability to pay dividends is due to improved profitability. Most Asian companies are in a much better position to pay dividends, due to stronger profitability, today compared to a decade ago. Having paid down debt from the relatively high levels seen during the ’90s, Asian companies are now better able to return some money to shareholders via dividends,” (as opposed to having a larger portion of pre-tax profits going to banks in the form of interest payments).
As to what countries, sectors and companies are paying better dividends, Mr Urquhart noted “typically the slower growth companies have the higher dividend payout ratios in each market. Telcos and utilities tend to have the highest payout as a percentage of earnings and also have the highest dividend yields.
“There are a number of companies in Taiwan with dividend yields of around 8% as their business are generating strong cash, and they have no large capacity expansion plans over the next few years.
“In contrast, the region’s faster growing companies typically want to reinvest a reasonable proportion of their profits to expand their businesses and so have lower dividends if at all. For retail companies this can be adding new stores, or for manufacturers it could be investing in expanding capacity and perhaps investment in research and development. For these companies with strong growth opportunities, it is expected that the returns to shareholders would largely come from capital gains and that dividends would grow more or less in-line with the growth in earnings they achieve.”
The Sydney-based Mr Urquhart notes there is still some way to go in terms of the region’s dividend growth. “The average dividend yield for companies in the Asia region is currently about 2.5%. This compares to around 4% for Australian companies.”
Dividend yields vary country by country and are quite diverse, he added, noting the Taiwanese market delivers an average dividend yield of 3% compared to India with an average yield of 1.1%.
Mr Urquhart noted “a key point of focus for investors is not necessarily what the dividend yield is today, but how quickly dividends can grow. Many investors focus on earnings growth, trends in profitability and ability of companies to generate of free cash flow as indicators of future dividend paying ability.”