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28-12-2011, 04:21 AM
Business Times - 28 Dec 2011
A year for dividend investing in Asia
A convergence of global and domestic influences means 2012 will be an opportune time to invest for dividends in the region, says LEE KING FUEI
AMID the upheaval in global financial markets, it is useful to take a step back and re-assess one's long-term investment strategy.
While fears of a cyclical slowdown in China may put many investors off the region, the reality is that the bigger-picture trend of stronger economic growth driven by urbanisation, industrialisation and positive demographics will continue to unfold across Asia over the next two decades. Here, we discuss why now is an opportune time for long-term investors to develop their portfolios in Asia through a dividend-investing strategy.
Despite the market's obsession with share price appreciation, historically, almost two-thirds of long-term equity returns in Asia have come from dividends.
Unlike share price appreciation - which is affected by a myriad of factors including non-fundamental influences such as sentiment and momentum - dividend return represents actual cash paid out by companies to their shareholders.
In addition, because dividends can only be paid out of earnings, which are in turn driven by the economy, dividend return tends to have a stronger correlation with existing economic conditions than share price appreciation (see Chart 1).
Investors seeking exposure to the multi-decade Asian economic growth story would do well to pay close heed to the dividends that they are capturing from their equity investments.
Critics of income strategies wonder why they should bother with boring dividends when they are really lusting after the exciting growth story of Asia. After all, Gordon's Model tells us that only companies that have run out of growth projects to invest in, pay dividends.
Try telling that to the executives at Astra International, an Indonesian motorcycle distributor that has steadily raised its dividend payout from nil to 45 per cent over the last decade, while growing its earnings more than 10-fold.
The real world is a very different place from theory. Because managers of companies have better information about their future prospects and loathe cutting dividends, they will often only pay high dividends today if they are comfortable that their expected earnings in future are strong enough to sustain the high payout.
This is also why, in practice, companies that have high dividend payouts usually experience much faster subsequent earnings growth than their low dividend-paying counterparts (see Chart 2).
Academics coined this phenomenon the 'dividend-signalling effect'. Our research shows that this dividend-signalling effect is particularly strong in Asia, and can last as long as four years in markets like Singapore (see Chart 3).
In a region laden with corporate governance landmines, focusing on dividends when investing in Asia has the benefit of helping investors avoid potential blow-ups. By returning excess cash to shareholders as dividends, companies avoid the temptation to squander that money on value-destructive investments, while subjecting themselves to more stringent levels of stakeholder scrutiny when they next tap the markets for funds.
Because dividends can only be paid out of real earnings and real cash flow, focusing on dividends helps investors avoid companies with dubious earnings, as these companies are unlikely to have the actual cash required to make dividend payments. Owing to these factors, companies with strong dividend payouts tend to possess higher corporate governance standards in Asia.
With high dividend-paying companies having stronger future earnings growth and better corporate governance, it is little wonder that over the last 20 years, high dividend-yielding stocks have outperformed both the market and low-yielding stocks in Asia.
That said, the benefits of investing for dividends are not unique to Asia. Studies have shown that in the US and Europe, dividend-investing strategies also outperform. However these benefits seem to manifest themselves strongest in Asia, with the Asian strategy delivering returns several times that of their global, US, Japanese and European counterparts over the last decade.
A convergence of global and domestic influences has meant that now is an opportune time to invest for dividends in Asia. In addition to boasting the strongest economic fundamentals in the world, the region also has one of the highest dividend yields globally; second only to Europe where the unfolding debt crisis continues to raise questions about dividend sustainability (see Chart 4).
The region also benefits from current low interest rates as a result of Asian central banks pegging, or managing, their exchange rate policies against the US dollar.
Until monetary policies in Asia are altered so that the low interest rates in the US are not imported into the region through its exchange rates targeting, the huge divergence between Asian dividend yields and domestic interest rates represents a unique opportunity for investors to enter the dividend-investing strategy at little opportunity cost.
As shown in Chart 5, investors now get to receive regular dividend payments from Asian corporates that far outstrip the interest rate payments that they would otherwise have received on their bank deposits, while continuing to participate in potential future share price appreciation - a clear win-win situation (if there ever is one in the world of finance!).
Our research shows that the current environment represents one of the best times to adopt a dividend-investing strategy. Just as the strategy underperforms in the period leading into a bubble climax (i.e. when the market discards fundamentals and chases hope), the strategy outperforms very strongly for an extended period of time after the crisis as the market repents its past mistake of ignoring fundamentals.
This was true at the end of the Asian crisis and after the technology bubble, and continues to be the case following the 2008 credit crisis. In fact, we believe the Asian crisis fundamentally changed the regional corporate landscape, and was the catalyst for the current dividend trend (see Chart 6).
Undoubtedly, the corporate restructurings that followed the crisis led to higher corporate profitability, burgeoning cash flows and low debt levels which have given rise to the higher dividend payouts we see today.
The writer is fund manager for Asian equities at Schroders
A year for dividend investing in Asia
A convergence of global and domestic influences means 2012 will be an opportune time to invest for dividends in the region, says LEE KING FUEI
AMID the upheaval in global financial markets, it is useful to take a step back and re-assess one's long-term investment strategy.
While fears of a cyclical slowdown in China may put many investors off the region, the reality is that the bigger-picture trend of stronger economic growth driven by urbanisation, industrialisation and positive demographics will continue to unfold across Asia over the next two decades. Here, we discuss why now is an opportune time for long-term investors to develop their portfolios in Asia through a dividend-investing strategy.
Despite the market's obsession with share price appreciation, historically, almost two-thirds of long-term equity returns in Asia have come from dividends.
Unlike share price appreciation - which is affected by a myriad of factors including non-fundamental influences such as sentiment and momentum - dividend return represents actual cash paid out by companies to their shareholders.
In addition, because dividends can only be paid out of earnings, which are in turn driven by the economy, dividend return tends to have a stronger correlation with existing economic conditions than share price appreciation (see Chart 1).
Investors seeking exposure to the multi-decade Asian economic growth story would do well to pay close heed to the dividends that they are capturing from their equity investments.
Critics of income strategies wonder why they should bother with boring dividends when they are really lusting after the exciting growth story of Asia. After all, Gordon's Model tells us that only companies that have run out of growth projects to invest in, pay dividends.
Try telling that to the executives at Astra International, an Indonesian motorcycle distributor that has steadily raised its dividend payout from nil to 45 per cent over the last decade, while growing its earnings more than 10-fold.
The real world is a very different place from theory. Because managers of companies have better information about their future prospects and loathe cutting dividends, they will often only pay high dividends today if they are comfortable that their expected earnings in future are strong enough to sustain the high payout.
This is also why, in practice, companies that have high dividend payouts usually experience much faster subsequent earnings growth than their low dividend-paying counterparts (see Chart 2).
Academics coined this phenomenon the 'dividend-signalling effect'. Our research shows that this dividend-signalling effect is particularly strong in Asia, and can last as long as four years in markets like Singapore (see Chart 3).
In a region laden with corporate governance landmines, focusing on dividends when investing in Asia has the benefit of helping investors avoid potential blow-ups. By returning excess cash to shareholders as dividends, companies avoid the temptation to squander that money on value-destructive investments, while subjecting themselves to more stringent levels of stakeholder scrutiny when they next tap the markets for funds.
Because dividends can only be paid out of real earnings and real cash flow, focusing on dividends helps investors avoid companies with dubious earnings, as these companies are unlikely to have the actual cash required to make dividend payments. Owing to these factors, companies with strong dividend payouts tend to possess higher corporate governance standards in Asia.
With high dividend-paying companies having stronger future earnings growth and better corporate governance, it is little wonder that over the last 20 years, high dividend-yielding stocks have outperformed both the market and low-yielding stocks in Asia.
That said, the benefits of investing for dividends are not unique to Asia. Studies have shown that in the US and Europe, dividend-investing strategies also outperform. However these benefits seem to manifest themselves strongest in Asia, with the Asian strategy delivering returns several times that of their global, US, Japanese and European counterparts over the last decade.
A convergence of global and domestic influences has meant that now is an opportune time to invest for dividends in Asia. In addition to boasting the strongest economic fundamentals in the world, the region also has one of the highest dividend yields globally; second only to Europe where the unfolding debt crisis continues to raise questions about dividend sustainability (see Chart 4).
The region also benefits from current low interest rates as a result of Asian central banks pegging, or managing, their exchange rate policies against the US dollar.
Until monetary policies in Asia are altered so that the low interest rates in the US are not imported into the region through its exchange rates targeting, the huge divergence between Asian dividend yields and domestic interest rates represents a unique opportunity for investors to enter the dividend-investing strategy at little opportunity cost.
As shown in Chart 5, investors now get to receive regular dividend payments from Asian corporates that far outstrip the interest rate payments that they would otherwise have received on their bank deposits, while continuing to participate in potential future share price appreciation - a clear win-win situation (if there ever is one in the world of finance!).
Our research shows that the current environment represents one of the best times to adopt a dividend-investing strategy. Just as the strategy underperforms in the period leading into a bubble climax (i.e. when the market discards fundamentals and chases hope), the strategy outperforms very strongly for an extended period of time after the crisis as the market repents its past mistake of ignoring fundamentals.
This was true at the end of the Asian crisis and after the technology bubble, and continues to be the case following the 2008 credit crisis. In fact, we believe the Asian crisis fundamentally changed the regional corporate landscape, and was the catalyst for the current dividend trend (see Chart 6).
Undoubtedly, the corporate restructurings that followed the crisis led to higher corporate profitability, burgeoning cash flows and low debt levels which have given rise to the higher dividend payouts we see today.
The writer is fund manager for Asian equities at Schroders
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
