Chinese dividend payouts are on the rise despite falling earnings

An improvement in cash flow management among mainland companies means the trend is sustainable, according to JP Morgan Asset Management

PUBLISHED : Wednesday, 14 September, 2016, 2:44pm
UPDATED : Wednesday, 14 September, 2016, 10:57pm

More and more Chinese firms listed in the mainland and Hong Kong are paying out dividends to investors despite tumbling earnings growth amid China’s economic slowdown, JP Morgan Asset Management said.

The trend has helped equity income investment for the first time outperform stock benchmarks during the past year, and looks sustainable thanks to the improving cash flow management of mainland companies, said Lilian Leung, manager of the JP Morgan China Income Fund that debuted yesterday.

“Although the economic growth is slowing down, the capital expenditure of Chinese companies is coming down as well. We start to see more of them are actually improving in terms of operating cash flow and free cash flow, which gave us more confidence that they can support the dividend payment,” Leung said.

The number of Chinese companies that paid a dividend, and the total amount, have risen dramatically over the past decade, data from UBS shows. The number of A-share listed firms that paid dividends reached 1,993 in 2015, up from 704 in 2006. The total amount paid surged to 831 billion yuan last year from 131 billion yuan (HK$152.3 billion) in 2006.

More [Chinese companies] are improving in terms of operating cash flow, which gave us more confidence that they can support the dividend payment
Lilian Leung, manager, JP Morgan China Income Fund

In the first half of this year, the combined net profits of the 2,911 companies listed in Shanghai and Shenzhen fell 4.1 per cent to 1.4 trillion yuan. That’s the worst aggregate interim in seven years.

Leung said China’s A-share listed companies paid an average of 30 per cent of net profit as dividend in 2015, while the ideal level, based on factors such as earnings growth and cash flow, is 50 to 70 per cent.

Chinese investors have been favouring growth stocks, but it may be high time to shift to income strategy under the current economic environment, she said.

JP Morgan’s new fund allocated 60 per cent of its capital to stocks in A shares and Hong Kong markets, and 40 per cent into bonds. Financials made up 25.5 per cent of the weighting in the equity sector, followed by the consumer discretionary and industrial sectors.

“We bought more banking stocks in Hong Kong due to cheap valuations and slightly more industrial and consumer stocks in the A share market,” Leung said.

Although flat earnings growth and serious bad debt problems may drag down the dividend payout ratio of mainland banks, the level was still higher than for other sectors. The industrial sector, with a 15 to 20 per cent payout ratio, has room to increase the level due to earnings growth driven by China’s infrastructure investment and better cash flow, Leung said.

With global central banks shifting from monetary easing to fiscal policy measures and the Federal Reserve likely to raise interest rates within the year, global bond markets have seen yields pick up. That will put pressure on high dividend stocks, which have been sought after by yield-hungry investors this year.

Japan’s benchmark 10-year government bond yield has risen from minus 0.048 per cent to minus 0.013 per cent so far this month, while the US 10-year government bond yield inched up from 1.57 per cent to 1.65 per cent.

“In developed markets the high-yield strategy has outperformed benchmark indexes for several years and it’s normal to see profit-taking for the moment, but for the A-share market, we think the trend has just begun,” Leung said.