Market views: Dividend cuts to come in Asia
From airlines and banks to oil producers, companies worldwide are under pressure to cut shareholder payouts in order to preserve capital to keep their businesses running amid the coronavirus crisis.
But institutional investors such as insurance firms and pension funds rely heavily on dividends as a source of income – and one that is even more crucial in the current low-yield environment.
So it’s not surprising that proposals to suspend dividends have sparked consternation – as exemplified by the fierce debate over the major UK banks’ decision to do so and JP Morgan's warning that it might follow suit. HSBC’s Hong Kong shareholders are even reportedly considering legal action against the London-headquartered group.
Hence the ‘dividend crisis’, as some have dubbed it, is already affecting Asia. Investors will now be extremely concerned about the extent to which companies in the region will reduce payouts.
Here four equity market experts outline their thinking on the subject.
Hugh Young, head of Asia Pacific
Aberdeen Standard Investments
As yet most Asian governments have been fairly laissez faire with the private sector as regards dividends, albeit increasingly interventionist elsewhere. However, Asian markets will clearly now be adversely affected by dividend cuts.
The bulk of our [investee] companies have a calendar year-end and the final dividends have already been declared, so the concern is for the year ahead and obviously varies from business to business, though the risk is clearly to the downside.
The sectors most vulnerable to government intervention would be financials, especially key banking institutions, as we’ve seen in the UK.
Companies in India – which is not generally a dividend market – usually have a March year-end, and we expect dividends to be under pressure.
Similarly in Australia, which is generally a June year-end and is a key Asia-Pacific yield market, we’re expecting a fair bit of downward pressure, especially as corporates in Australia tend to run a more aggressive balance sheet. We have already seen a raft of equity raisings there.
Dividends have started to come under pressure in many markets. In Europe, markets seem to be predicting a 50% cut; in the US about 30%.
I anticipate that Asia will also face dividend cuts but that they will likely be smaller than those in either of these geographies. The reason is that the virus has so far had less of an economic impact on Asia. China appears to have been relatively successful at containing the outbreak, as have other countries, perhaps due to their familiarity with the challenges.
The one sector where we are already seeing dividend cuts in Asia, and where I fear there may be more, is in banking. Regulators are likely to lean on banks to defer interest payments or possibly forgive debt. The strain put on balance sheets may require banks to retain capital they would otherwise have paid out.
Even when we do see dividend cuts, it is possible to protect yourself against the worst of it by avoiding highly levered companies or highly cyclical ones. High yield can often be a sign of high financial or operational gearing. Sticking to moderately yielding companies with sustainable growth outlooks and clean balance sheets is a prudent policy.
Sean Darby, head of global equities
From a worldwide perspective, with most developed government bond yields flirting with zero, a slashing of service and energy company dividends will mean an unprecedented drop in payout ratios. It is quite feasible that global earnings growth will drop 20%, but the dividend payout ratio could drop by more than half.
In Asia, Japan may be hit particularly hard. Following [prime minister] Shinzo Abe’s declaration of a state of emergency [on April 7], we expect earnings there to plunge, but there could be a far more dramatic impact on dividend payout ratios.
These have been climbing since the 2008 global financial crisis as Japanese companies became more focused on ESG. Similarly there has been an increase in share buybacks, which has left the running yield (buyback plus dividend) well above Japanese government bond yields. Indeed, the Nikkei 225 dividend swap has stumbled dramatically.
Investors should consider stocks that we believe will provide sustainable income, such as [graphite maker] Tokai Carbon and [chemicals maker] Tosoh Corp, while avoiding companies that might be prone to dividend cutting.
The good news is that in general Japanese companies have extremely high dividend cover and low gearing.
Mike Kerley, director of pan-Asian equites
Janus Henderson Investors
While earnings in Asia will undoubtedly come under pressure, the region looks better positioned to continue to pay dividends than many other regions.
Asian banks are generally well capitalised and have low dividend payout ratios, and in many cases are state-owned, where the governments rely on dividend income to bolster revenue. This suggests that Asian banks are less likely to experience the same level of dividend cuts seen in the US, UK and Europe.
Beyond financials, Asian companies seem relatively well positioned to pay dividends this year. The coronavirus impact has not been as severe as in some western countries. In China and South Korea, for instance, lockdown measures are now being loosened and the economic momentum appears to be positive.
Moreover, many Asian companies have high levels of cash on their balance sheets, while the dividend payout ratio has room to grow.
With a continued focus on providing sustainable yield, we have taken several actions recently: reducing bank exposure across the board; increasing holdings to beneficiaries of lower interest rates, such as direct property and property Reits; raising exposure to high-yielding stocks, such as telecoms and infrastructure Reits; and increasing China exposure, as we think it is best positioned to emerge from the virus.