December 14, 2011 / 5:48 AM / 6 years ago

Analysis: Dividends to the fore as investment theme in Asia

7 Min Read

HONG KONG (Reuters) - Investing for income rather than growth in Asia is likely to pay dividends for investors nursing wounds after a rough 2011 and staring at an uncertain outlook next year.

A focus on dividend payouts by Asian corporates, considered by many as a somewhat defensive strategy, runs contrary to the popular notion that investing in the region is all about chasing earnings-driven momentum.

But with economies across Asia slowing, forecasts for corporate profits being cut as headwinds from Europe persist and investor appetite for yields still growing, market watchers say a defensive stance on equities might be on the money.

"In Asia, not many people look at dividends. But going forward, because of the rangebound market, dividend yield will be the main return for a while," said Li Cong, who helps manage more than $5 billion as chief investment officer of Asia-Pacific at Mirae Asset Global Investments (HK).

In a move that suggests this could be a global theme, Goldman Sachs on Tuesday struck a deal to acquire a mutual fund specializing in dividend-paying stocks, citing investor demand for income-generating strategies to sustain them in turbulent, no-growth markets.

With the acquisition, Goldman will now offer its first dividend-growth stock fund, an indication of growing customer demand for safety and income over risk.

Dividend Funds See Inflows

This year in Asia, money managers such as JPMorgan Asset Management, UBS Global Asset Management and Invesco have launched dividend-focused funds in an attempt to tempt investors into putting money to work in stocks that offer the relative safety of a steady yield even in volatile markets.

And many existing dividend-oriented funds have seen net inflows. The $2.7 billion OkasanAM Asia Oceania Good Dividend Growth, the largest fund in the space in Asia, saw estimated net inflows of about $520 million in 2011 up to end-November, data from industry tracker Lipper showed.

The $1.9 billion Matthews Asia Dividend Fund and the $1.9 billion Newton Asian Income GBP Inc have received estimated net inflows of $216 million and $792 million, respectively, over the same period, the data showed.

Investors are already seeing results. While the MSCI Asia-Pacific index was down 15.4 percent up to November, the Matthews Asia Dividend Fund lost 9.5 percent and the Newton Asia Income Fund was down just 3.7 percent. Mutual funds focused on the region were down 16.4 percent.

'Not So Sexy but...'

Ivan Leung, chief investment strategist of J.P. Morgan Private Bank in Asia, said the current trend of investors willing to reward value more than growth meant that high-dividend paying companies look attractive.

"Even if the market refuses to upgrade the PE multiples, we can just sit there with high-growing dividend names and collect their stronger earnings growth and dividends, even if it's 2 or 2.5 percent more than other companies."

"It's not so sexy of course, but in a Warren Buffett-like 10-year investment period, that will compound," said Leung.

To be sure, simply focusing on high dividend yields is unlikely to be the best strategy and checking on sustainability of those payouts as well as earnings growth to ensure cash flows remain healthy is crucial.

According to Thomson Reuters Starmine, 114 companies in the Asia-Pacific region have dividend yields of 10 percent or more. But investors have to be cognizant of "dividend traps," said Nigel Tupper, head of Asia-Pacific equity strategy at Bank of America Merrill Lynch in Hong Kong.

For example, Taiwanese hardware maker Acer Inc sports a dividend yield of 10.5 percent but that is largely because of its near 60 percent decline in the price of its shares this year as its industry outlook remains grim.

Shares of Hong Kong's R&F Properties yield 11.7 percent but with the property market in Hong Kong and China set to enter a rough patch the sector may not be the best one in which to seek safety.

A screen of Asian stocks that are over a $1 billion in market value, have dividend yields of more than 5 percent and also have forecast earnings for next year that are higher than three-quarters of their industry peers is a much smaller one, with only 19 candidates.

For full list, click - link.reuters.com/nyp55s

Real estate and financial companies from Australia and Singapore feature prominently in that list, suggesting investors might want to allocate some money to the region's more developed markets that are seen as more stable.

Australia's Commonwealth Property Office, a listed trust that invests in commercial property, yields 5.7 percent and the unit's price is up 19 percent this year.

"Longer-term growth in dividends has to be underpinned by long-term growth in earnings," said Jesper Madsen, lead manager of San Francisco-based Matthews Asia's regional dividend portfolio, in an e-mail.

"When being a dividend-focused investor in Asian equities, it is not just a matter of investing for high yields. Asia, as a region, offers investors the potential for dividend growth alongside attractive yields," said Madsen.

Cashed Up

Low debt levels and high cash balances at Asian companies suggest dividend payouts are sustainable and could even grow in coming years.

Companies in Asia-Pacific, on average, have a debt-to-equity ratio of just 0.49, half that of their peers in the euro zone and a third of peers in North America, according to Starmine.

At the same time, a slowing global economy is likely to weigh on corporate earnings.

Over the past three months expectations for forward 12-month earnings for the MSCI Asia Pacific ex-Japan are down over 5 percent, on average, according to Thomson Reuters I/B/E/S.

Fears of government intervention and regulatory changes are also causing companies in Asia and Europe to refrain from spending despite improved balance sheets since the global financial crisis.

Matthew Sutherland, Fidelity Worldwide Investment's head of research for Asia-Pacific, told Reuters in an interview that companies in Asia ex-Japan were sitting on about $1 trillion in cash and were inclined more towards paying dividends.

Fidelity analysts said roughly 84 percent of companies they covered had either dismissed M&A entirely to drive growth or were only considering it on a small scale.

Editing by Muralikumar Anantharaman

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