The Dividends of the Asia Crisis

Dividends, the most reliable part of investing in equities, started with an Asian connection. They date to 1602 with the creation of the Dutch East India Company, the world’s first stock in the modern sense.

This company was formed after sea merchants were granted exclusive rights by the Netherlands government to establish colonies in Asia (East India) and trade there. While joint ownership in a company wasn’t new then, the innovation to divide profits periodically among all of the company’s stockholders was.

Over time, the concept of issuing dividends to stock owners became general practice. If your great-grandparents and grandparents owned BHP shares they probably held them for the dividends, not capital growth. But from the 1980s, this mindset changed in the US. Companies such as Microsoft decided to reinvest all earnings to generate maximum profit growth and a higher stock price rather than distribute some profits to shareholders (who were often employees). Microsoft now pays dividends but some companies still follow this strategy. Apple, the world’s largest company by market cap, hasn’t paid a dividend for 17 years but plans to from July this year.

Asian companies of yesteryear were generally tightfisted with dividends but more because they were typically family-owned companies with a tendency to waste the cash they generated on non-core operations or on poorly thought-out expansion plans including takeovers. But the Asia crisis helped changed that mentality and the ownership structure of companies; family holdings were diluted and companies were run to please foreign investors.

Now companies in the world’s fast-growing region put a higher priority on paying healthy dividends than do many Western companies. About 80% of Asian companies paid dividends in 2010, according to CLSA Asia-Pacific Capital Markets, compared with only about 60% in 2001. Over that time, the figure for US companies has hovered between 57% and 65%.

More companies paying dividends (and higher dividend-payout ratios from those that have for a while) have boosted the dividend yield on Asian shares. The dividend yield on a stock is a measure of the dividend per share as a percentage of the prevailing share price – it thus changes as share prices move (that is, the ratio rises as stock prices fall).

The average dividend yield for companies in Asia ex-Japan was about 2.6% on April 5, as measured by the MSCI Asia ex-Japan Index. This compares with less than 2% before the Asia crisis struck in 1997 and about 2.2% in 2007, according to Bloomberg data. The dividend yield on Asian shares, it must be said, has increased to around 3% at various times over the past 15 years when share prices tumbled.
The yield offered on Asian shares today compares favourably with the 2% yield offered on US companies in the S&P 500 Index and the 1.9% yield offered by Japanese companies in the Nikkei 225 Index. But it’s less than the 3.9% on the STOXX Europe 600 Index and the 4.7% for the Australian companies in the S&P/ASX 200 Index (which carry franking credits).

The dividend return on European companies reflects the large tumble in European stocks since the global financial and eurozone debt crises erupted from 2008. If you take MSCI data from 1999 to 2011, the total dividend return on Asia ex-Japan shares of 42% far exceeds the total dividend return on European shares (24.1%), US shares (13.6%) and Japanese shares (7%). Australian shares outshone the lot, with a 61.8% total dividend return. (Over this period, Asia ex-Japan and Australian shares were the only categories with positive price returns, as the graph below shows.)

Dividend yields vary across Asia. As measured by their main benchmarks, Taiwanese stocks carried a dividend yield of about 4.4% on April 5 while South Korean and Indian shares offered yields of 1.2% and 1.5% respectively.

Willing and able

In Asia, strong balance sheets, higher returns on equity and the more mature and more stable nature of their businesses have made companies more willing and more able to pay dividends.

Management teams across Asia are more motivated to pay dividends because they better understand that local, and especially foreign, shareholders like to see regular cash returns on their outlays, particularly from cash-rich companies that can easily fund expansion plans from earnings. Companies can pay dividends because profitability is higher now than a decade ago. Companies paid down debt after the Asia crisis and therefore less gross earnings are lost to interest payments.

Slower-growth companies, especially telcos and IT companies, typically have higher dividend-payout ratios in each stock market. After the technology bubble of the late 1990s, tech companies in countries such as Malaysia, Taiwan and Thailand decided they should offer investors a steady stream of returns. Some Taiwanese companies offer dividend yields of around 8% as their businesses are generating strong cash flows and they have no plans to expand capacity to any great extent over the next few years.

The faster-growing companies in Asia generally want to reinvest a sizeable percentage of their earnings to grow their businesses. So they have lower dividends, if any. For companies adding more stores or expanding production capacity, returns to shareholders will come largely from capital gains in stock prices rather than from dividends.

Sometimes higher dividends in Asia compensate for risk. During the political troubles in Thailand in 2010, some companies raised dividend payments to compensate shareholders for the political risks investors faced. In this way, dividends acted as a buffer to returns. But more often they are just part of the general returns of investing in Asian shares.

Given the upbeat economic outlook for Asia, the region’s companies are well placed to produce earnings that will support reasonable dividends and healthy increases in stock prices. That’s just as the Dutch East India Company apparently did for about 200 years after it was founded.

Composition of total returns for Australia, Asia ex-Japan, Europe, Japan and US (1999-2011,%)

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