Shareholders can look forward to a big jump in returns from their investments in the Asia-Pacific region in 2022.
“Asia Pacific dividends are expected to continue their recovery into 2022 and we expect aggregate dividends to reach US$633 billion which would translate into a roughly 22% growth on the pre-pandemic levels,” IHS Markit’s associate director of dividend forecasting Mohammad Hassan told AsianInvestor in comments on research from the firm.
BNP Paribas’ Head of APAC Equity Research Manishi Raychaudhuri agreed with the findings.
“We are constructive on the dividend situation in Asia,” he said. “We believe many Asian companies are generating more cash than they can profitably invest – leading them to return cash to shareholders. This is also visible in the recent buyback exuberance in Hong Kong.”
Raychaudhuri also cited data from Bloomberg consensus estimates, which showed that the dividend yield for companies in the MSCI Asia ex-Japan index, after hovering between 1.90 and 1.95% in 2020 and 2021, is set to accelerate to 2.48% in 2022 and 2.63% in the following year.
Other analysts also agree, believing improved earnings are likely to buoy dividend payouts.
“Economic recovery remains robust through much of the region, which should be supportive for earnings,” said Alexander Treves, head of emerging markets and Asia Pacific equities investment specialist at JP Morgan Asset Management.
“Higher earnings should in turn result in higher dividend payments, even if payout ratios remain stable,” Treves added.
But the rate of earnings growth is likely to decline in 2022, due to 2020-2021 being a watershed period for high earnings growth after the Covid-19 pandemic crippled economic growth in 2020.
“The pace of the year-on-year increase in earnings is declining, partly because of a higher base than was the case for 2020-2021, and partly because of some slowing in China,” Treves said.
Fund managers do not expect dividend payouts to be cut in 2022.
“We don’t think there will be significant decline in Asian companies’ dividend payouts in 2022,” BNP’s Raychaudhuri said.
JP Morgan’s Treves also felt banks and financial services institutions, for example, may feel comfortable increasing payout levels as the economic recovery takes hold.
Fund managers also noted that companies would prefer to give better payouts rather than buy back shares because this would reflect better on the company and make more financial sense for investors.
Raychaudhuri felt that a company buying back its shares showed that its managers believed in its future and its shares were undervalued.
“Buybacks are usually a more efficacious way of supporting share prices in the short term, in our view,” Raychaudhuri added.
JP Morgan said the bank’s strategy was to focus more on dividend payouts compared to share buybacks.
“In our income strategies the majority of our holdings are in positions with an attractive dividend payout, which we can then pass on to our clients via distributions of income,” Treves said.
“We do have some positions where part of the consideration of the total return includes buybacks too, but those are in a minority as our clients appreciate actual cash payouts and through the year we do not pay out of capital,” Treves explained.
“Consistently high dividend payouts show the management’s commitment to consistent excess cash distribution and such stocks are more suitable, we believe, for long-term investment,” Raychaudhuri said.
Basic resources, technology and semi-conductors will continue to be strong growth drivers given their key role in global supply chains, according to IHS Markit’s Hassan.
Fund managers are also on the same track, favouring investing in companies that show stable and predictable growth, versus sectors that produce high but volatile returns.
“Growth stocks have taken much of the limelight for some years, and now we believe that some investors who have not looked at income strategies for a while in Asia will return to the asset class,” Treves said.
“Some of the headwinds facing growth stocks recently are a good reminder of the benefits of income for investors who appreciate less volatile returns and the benefits of cash income along the way,” he added.
Raychaudhuri believes growth can be found where large numbers of consumers are spending now.
“Our investment strategy is focused on cash generators in consumer discretionary and the technology, media and telecoms sectors,” BNP’s Raychaudhuri said.
“We also like financials as we think rising yields should support their interest margins going forward, he added.
The interest rate environment globally also made BNP cautious.
“Over the past couple of quarters we have reduced exposure to high dividend yield stocks, not because we believe that their dividend payouts would decline but because in an environment of rising interest rates, the attractiveness of a high dividend yield as an investment rationale usually declines.”
IHS also believes dividends will continue to rise at normalised levels in 2022, but cited a possible slowdown in the Chinese economy which could curb overall dividend growth in the Asia Pacific region.
This article has been updated to clarify JP Morgan's view that the rate of earnings growth, not rate of earnings, is likely to decline in 2022.