Some of the highest-yielding dividend stocks are hidden in less common sectors and markets. We highlight 14 Asian companies that could continue to perform well against a background of slowing growth.
Where’s the best place to find attractive dividends in today’s less than ideal market? Recently, some of the highest-yielding stocks – equities with dividend yields that are higher than most common benchmarks – have come from less common sectors and geographic regions. A number of unexpected names have been performing well so far in 2019, and the outlook for dividend growth stocks remains favorable for 2020 and 2021. Is it time to consider how they might fit with your portfolio?
First, let’s look at three key issues driving global markets.
Setting the context
1. Central banks continue to cut cash rates
We are in the middle of a series of interest rate cuts across the globe, having seen the end of the Fed’s tightening mode between 2016 and 2018. In the first three quarters of 2019, 60 central banks cut rates 113 times for a cumulative total of 47.21% 1, more than offsetting the hikes of 2018 that totaled 43.30% 1. As a result, stocks with decent, steady dividends are becoming increasingly attractive for investors. At the same time, their discounted cash flow (DCF)-based valuations are enhanced by falling cash rates.
2. Defensive stocks perform well in late cycle conditions
Defensive stocks continue to outperform the rest of the market, and many are high yielding. They tend to generate sustainable dividends over time, even in the face of economic downturn. This feature offers investors shelter from an increasingly unpredictable business environment.
3. Asian equities offer yield and value
More than one quarter of global bonds are trading on negative yields. The S&P 500, currently trading at 17x 2 forward price–earnings ratio (PER), offers an average dividend yield of 2% 3. The average dividend yield of Asian stocks is higher, partly because of their cheaper valuations. Notably, the MSCI Asia ex-Japan index is trading at just 13x 2 forward PER. Within the index, we find high-quality dividend growth stocks that can generate decent dividend yields, while also growing profits at the same time.
14 interesting Asian dividend growth stocks across sectors and borders
We highlight 14 Asian high-dividend stocks that have businesses spanning across different sectors and countries. Four of them are real estate investment trusts, three are in the financial sector, two are transport operators, two in consumer products and three in utilities.
Real Estate Investment Trusts (REITs)
Singapore-based AREIT SP and MINT SP are well leveraged to Singapore’s transition to high-tech manufacturing, e-commerce and/or data centers, while maintaining well-anchored existing properties in business parks, factories, office buildings and logistics centers. Both are increasing their interests in high-specification offices and factories, and are diversifying into other regions. They maintain healthy balance sheets and have strong track records for distributions and growth.
SCP AU has one of the strongest positions in the Australian property market. Its two major customers are Woolworths and Coles, the supermarket duopoly that dominates the Australian market and contributes half of the company’s rental income. Over 70% of the company’s assets 4 are in local neighborhoods, which perform defensively regardless of where we are in the economic cycle.
Fortune REIT is one of the key investors in Hong Kong’s retail shopping malls. It is defensively positioned in the local neighborhoods to focus on tenants with low cyclicality. Non-discretionary trades such as services and education, food and beverage and supermarkets represent a majority of the mix. Occupancy rates remain high, and they stayed at above 90% 5 even during the financial crisis. Rentals for the portfolio have never declined on a per square foot basis, demonstrating the resilience of the properties.
HSBC Holdings is the holding company for the long-time financial services operator HSBC Group. It is one of the most powerful global transaction and retail banks, and well diversified across various regions. It has strong capital levels, with a Common Equity Tier 1 (CET1) ratio of 14.3% 6 as of September 30, 2019. It is becoming more return focused as it looks to shift capital away from lower-return businesses, which is positive for the valuation going forward.
Bank of China provides a full suite of banking services to individuals and organizations. It has one of the strongest global networks among the big four Chinese banks, and its overseas business has benefited from cross-border business. Bank of China has low exposure to areas with high regulatory risks. The bank has defied market expectations, with sustained credit growth and decreasing exposure to non-performing loans. With revenue growth accelerating to 13% in the third quarter of 2019 from 10% in the first half of the year 7, Bank of China is continuing to strengthen its position.
QBE Insurance is an insurance company that underwrites various types of insurance policies, and is also engaged in investment management. The insurance premiums offered by QBE have grown significantly since 2018, and increasing claims are likely to drive a tailwind in growth for another two to three years. An internal efficiency improvement program, named “Brilliant Basics”, has also driven improved expense and claim ratios for every half-year result over the past two years.
Jiangsu Expressway is a highly diversified transport operator, with interests in toll highways, construction, maintenance services, car repair, catering and advertising. The company has continued to move away from interests in property development to focus on its core interests in toll highways, which is likely to improve earnings quality. With dividend yield steady at 5% 8 since 2011, and upgrades to electronic tolling systems, Jiangsu Expressway will improve traffic levels, lower labor costs and enhance profit margins in the long term.
Daqin Railway is the largest coal-dedicated rail transport operator in China. Coal transported via rail lines operated by Daqin captures around a 25% 9 share in China and around a 60% 9 share in Shanxi and Inner Mongolia. China’s focus on the “highway to rail” initiative will be a notable growth opportunity to Daqin, while coal operations will be a steady cash cow.
Hengan International is a holding company for several subsidiary businesses that manufacture and sell personal hygiene products. The company is China’s largest vendor of tissue paper and sanitary napkins, with major operations also in diapers and wet wipes. Hengan has enjoyed notable growth in online sales, which contribute less than 20% of the company’s total sales 10.
Sands China owns and operates hotels and casinos. The company has a notable exposure to the hospitality sector in Macau and operates one of the best-in-business mixes across its hotel, retail and casino interests. Compared with other peers, Sands China has most leverage to the mass market. New transport infrastructure in the Greater Bay Area, combined with its Londoner and Four Seasons suite upgrades, set a solid foundation for a favorable growth outlook for Sands China.
CLP is one of the two integrated power suppliers in Hong Kong, and owns and operates power generation, transmission and distribution services in Hong Kong, China, Australia and other regions of Asia. The company has a government-approved capital spending plan until 2023 and a pre-set tariff adjustment mechanism, providing a high level of visibility into its earnings outlook. Given the defensive nature of its business, cash flows have proven to be steady over the years.
HKT Trust is one of the largest telecommunication service providers in Hong Kong. Its products and services mainly include local telephony services, data and broadband. Having rolled out the most extensive fiber network throughout Hong Kong over the past decade, HKT consistently generates stable revenue and dividend growth given its leading share in an increasingly concentrated market.
Guangdong Investment is principally engaged in water supply, power and electricity, and infrastructure businesses in Hong Kong and mainland China. There has been high visibility to its revenue and earnings growth, thanks to its oligopolistic/monopolistic status in certain regions. Continued acquisition of new water projects, coupled with rich net cash of over HK$5 billion 11, should allow the company to sustain double-digit dividend growth going forward.
If you’d like to learn more about any of the themes and names presented in this article, please speak to your J.P. Morgan representative.
Asia dividend list summary
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1 Source: Central Bank News. Data as of October 1, 2019.
2 Source: Bloomberg Finance L.P. Data as of October 17, 2019.
3 Source: Bloomberg Finance L.P. Data as of November 7, 2019.
4 Source: Company filings. Data as of August 6, 2019.
5 Source: Company report. Data as of March 19, 2019.
6 Source: Company filings. Data as of October 28, 2019.
7 Source: Company report. Data as of October 30, 2019.
8 Source: J.P. Morgan. Data as of April 29, 2019.
9 Source: J.P. Morgan. Data as of October 17, 2019.
10 Source: Company filings. Data as of August 22, 2019.
11 Source: Bloomberg Finance L.P. Data as of November 6, 2019.
12 FY19e P/E is estimated price-to-earnings ratio for FY19. For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material.
13 FY19e P/B is estimated price-to-book ratio for FY19. For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material.
14 For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material.
15 FY19e ROE is estimated return-on-equity ratio for FY19. For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material.
16 Returns may be based in whole or in part on unaudited estimated values. Net returns are net of fund expenses, such as management fees. Returns to investors may differ from fund returns set forth herein as a result of class and series of interests held and time of investment. Past performance is not a guarantee of future returns and investors may get back less than the amount invested.