Mark Williams

Can Asia offer shelter from dividend cuts?

Mark Williams

Income investors in developed stockmarkets could face very tricky conditions this year, with UK and European futures markets currently pricing in respective falls of 45% and 30% in total dividends as a result of Covid-19. Asian markets, however, are well positioned to provide some shelter from these cuts.

Even factoring in dividend reductions significantly beyond our expectations, we believe the Liontrust Asia Income Fund is still on course to yield comfortably over 4%.

There are three key reasons why we think Asian dividends will be less affected than other regions. Firstly, a lower proportion of corporate earnings were paid out as dividends than in other regions prior to the crisis; secondly, Asian governments tended to be swifter to contain the virus with potentially less economic damage, as they kept many businesses open while restricting individual movements; and thirdly, Asian countries have been quicker in re-opening their economies.

Lower payout ratios

Looking at payout ratios in more detail, these were already lower in Asia, meaning that they are less vulnerable to reductions as companies come under pressure to conserve cash and to rebuild balance sheets due to Covid-19’s impact. While developed world governments have in many instances placed additional pressure on companies to pay less out to shareholders – particularly when government support has been required – this has been much less prevalent in Asia (mainly restricted to Australia and New Zealand). Throughout most of Asia, the approach has been remarkably sanguine and is likely to remain so. Companies in general are tending to retain payout ratios, or even planning to continue slowly raising them in the coming years.

Bloomberg shows US S&P 500 companies paying out 59% of their earnings in dividends. They estimate the Asia Pacific region to be returning a lesser proportion, 47%, of their earnings to investors and only 42% if Australia and New Zealand are excluded from the calculation. HSBC estimated in April that when both dividends and share buybacks were counted, 92% of US earnings were returned to shareholders and it was 73% in Europe. This shows that Asian companies, although both paying decent dividends and increasingly embracing a dividend culture, were more conservative in the amount they returned to shareholders.

More resilient earnings

Compounding the downward pressure on payouts for some companies is the fact that earnings themselves will clearly be diminished by Covid-19. We have very little clarity on the scale to which earnings will be reduced because – until economies regain some semblance of normality – many companies are dependent on future government policies.

However, we think that earnings in Asia Pacific will be less negatively affected than in other regions. Governments here tended to be swifter to contain the virus and have also been quicker to re-open their economies and emerge from lockdowns. This potentially means they will see less economic damage; we are already finding that not all companies in Asia have been impacted as negatively as some headlines would suggest.

Prospects vary by country and sector

While we think Asian earnings will show some overall resilience to Covid-19 when compared with key developed economies, there will still be varying fortunes within the region. Each government in Asia has had its own individual response and economies already differed significantly, which will make for divergent outcomes within Asia as we move back to a more normal environment.

Due to this variance in prospects, we think it is possible to identify areas and countries within Asia that are less vulnerable to the pandemic’s disruption (and which we are comfortable to have exposure to in the Fund) as well highlighting those that are overly exposed and should be avoided.

We believe some areas of Asia’s economy will see V-shaped recoveries as pent-up demand proves to have been delayed but not destroyed. Technology, infrastructure and commodities stand out amongst these. Meanwhile, others will struggle to regain their past earnings, either due to enforced social distancing measures, increased debt burdens or lower discretionary consumption. The divergence between winners and losers will become clearer as governments move further towards normality.

A significant portion of 2020’s dividends will be based on pre-Covid earnings

The good news from a portfolio management perspective is that Asia’s focus on payout ratios means that a large proportion of 2020’s dividends tend to be based on pre-Covid earnings from 2019. This year’s earnings hit from Covid-19 lockdowns shouldn’t affect dividends for many Asian companies until 2021, which gives more time for any portfolio adjustments needed.

This should help us to mitigate any particularly unpalatable income reductions, but we will not be making large alterations to the portfolio purely to protect yield. Our focus is on total investment returns through targeting companies with good yields as well as growth prospects. This has always been what we seek in our companies.

We have made some shifts in the portfolio already, targeting the recovery by buying a Chinese property (Cifi) and a Chinese cement company (Huaxin), along with BHP (resources) in Australia. We have also tried to avoid some of the worst impacted by selling a Korean bank (DGB) and Chinese aircraft leasing company (BOC Aviation). We are likely to make some more changes going forward but will only do so as we see opportunities arising.

Volatility is to be expected as Asia recovers

It is important to recognise that we do not expect any recovery to be smooth. China may have re-opened its factories, but demand both locally and abroad remains far lower than they have seen historically. Likewise, while the region has contained the virus quite effectively, maybe in part due to previous experiences with SARS and other illnesses, already we have seen new cases re-emerge in Singapore, China and South Korea.

Notwithstanding this expected volatility, we think Asia has a very good chance of recovering more quickly than the developed world, with dividends less affected.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, May 14, 2020, 1:06 PM