While dividend growth in the Asia-Pacific region has slowed down more recently, it may not fall as much as other countries and could be an attractive area for UK investors looking for income, according to Janus Henderson Global Investors’ Mike Kerley.
Income investors around the world have been reeling from global dividend cuts, whilst those in Asia are likely to be less severely impacted.
Kerley, portfolio manager of the £443m Henderson Far East Income investment trust, said Asia-Pacific companies are still well positioned to pay dividends this year.
“There has been less direct government support than in western countries,” he noted. “But the coronavirus impact has not been as severe either and lockdown measures began to ease even as they were still tightening in the world’s most developed economies.”
Dividends in Asia-Pacific rose to a record £234.8bn in the year to end-April, increasing by 0.4 per cent. Sluggish economic growth and increasing global trade tensions meant this was the slowest increase in dividends for a decade.
The hit on company profits and subsequent slow growth had a direct knock-on effect on the ability to pay dividends. Despite this, almost two-thirds of companies around the region raised payouts or held them steady year-on-year, whilst a little over one-third reduced them.
Interestingly, it was Australia where the bulk of the dividend cuts came from.
Through a combination of reduced one-off special dividends, as well as reductions from some big payers like HSBC which cancelled its April payments on the instruction of the Bank of England in response to the pandemic.
Excluding HSBC and Australia, payout growth in Asia Pacific was 6.6 per cent, beating the rest of the world by two percentage points.
Asia Pacific dividends
Source: Henderson Far East Income
The rising power of Asia-Pacific during the last decade goes hand in hand with rapid dividend growth. Rising profits have accompanied expanding pay-out ratios, which has enabled dividends to more than triple in a decade, while the rest of the world has seen a little more than double.
Four of the largest 25 payers in the world now come from the region, including Samsung Electronics. In 2019, Asian companies paid £1 in £6 of the world’s dividends, up from £1 in £9 in 2009. It’s been a role reversal in the UK, which has seen its share drop to £1 in every £13, down from £1 in £10 in 2009.
“Many Asian companies have lots of cash and low debts and only pay out typically two-fifths of their profits as dividends, meaning the dividend has room to grow or can be more easily protected,” said the Henderson Far East Income manager.
“This contrasts with over three-fifths in the UK, where dividends could fall as much as 56 per cent this year,” he added.
Forecasting during the pandemic is increasingly difficult amidst the uncertainty. So instead, Henderson Far East Income looked at the likely best case and worst case for Asian dividends over the 12 months to the end of April 2021.
This includes Australia and giant HSBC, where even in one of the better case scenarios, dividend payouts fall 17 per cent to £196.3bn.
The worst-case scenario factors in the elimination of all those Henderson Far East Income considers to be vulnerable too. Analysts predict that this would deliver a decline of 43 per cent to £133.6bn.
As mentioned, a large proportion of the impact can be felt from Australia, in particular from its banks. Australia has a very mature banking industry catering to a heavily banked population and have felt a pressure that hasn’t been seen in Asia.
“Outside Australia and New Zealand, the banks have not been pressed by regulators to cut or suspend dividends,” he said.
While Australia and New Zealand together can expect dividends to fall somewhere between one-third and a half over the next year, the rest of Asia (excluding HSBC) could see a best-case scenario decline of just 9 per cent in payouts, with a worst-case fall of 38 per cent.
Dividend growth and contribution by country
Source: Henderson Far East Income
“Across Asia the sector mix is also more favourable than in some western markets, for example with a relatively high contribution from technology and a relatively low contribution from consumer discretionary sectors,” he added.
Income investors feeling the pressure would be encouraged by the stream of positive news coming out of Asian companies. Considering that in countries like China, Hong Kong and Taiwan, companies are distributing last year’s profits largely without interruption.
“Earnings undoubtedly will come under pressure, but we believe the large gap between earnings per share and dividend per share is likely to ensure dividends are more sustainable in Asia than other regions,” Kerley concluded.
Performance of trust vs sector YTD
Source: FE Analytics
Henderson Far East Income has made a loss of 10.81 per cent year-to-date, while the average peer in the four-strong IT Asia Pacific Income sector has lost 10.10 per cent.
“Overall, we are confident in the ability of the companies we own in the Henderson Far East Income portfolio to pay dividends,” the portfolio manager said. “Even factoring in worst-case scenarios for revenues and cash flow, a lot of our holdings have cash in the bank and no debt, as well as low dividend pay-out ratios.”
The trust has a yield of 7.1 per cent, is 1 per cent geared, is trading at a 2.1 per cent discount to net asset value (NAV) and has ongoing charges of 1.11 per cent, according to the Association of Investment Companies – as at 15 June.