Why CLP and HK Electric will still be able to feed dividend-hungry investors after return cut
The power utilities reached an agreement with the government in which the cap on return will be cut to 8 per cent in 2019
CLP Holdings and HK Electric Investments, two income-generating stocks popular among the city’s retirees, are expected by analysts to be able to pay investors dividend yields of 3.7 to 4.6 per cent at current share prices under the new regulatory regime, despite a revised lower return from 2019.
The government said late last month that it had reached an agreement with the city’s two duopoly power utilities over the extension of the so-called “scheme of control [SoC]” regime, under which the cap on return on net fixed assets will be slashed to 8 per cent in 2019 from the current 9.99 per cent.
Although the change will result in a one-off profit drop in 2019, the companies are expected to see modest profit growth in subsequent years since their fixed assets will increase as they build more natural gas-fired generators to replace coal-fired ones to meet the government’s more stringent emission standards and environmental goals.
HK Electric, whose sole source of profit is its regulated utilities business in Hong Kong, would see profit drop just over 20 per cent in 2019, while CLP, which sources only 65 per cent of its profit from the business may see a smaller drop of 16 per cent in 2019, according to estimates by UBS head of Asian utilities research Simon Powell.
Analysts expect the duo to maintain their dividend yield – payout as a percentage of share price – at levels that will maintain investors’ interest.
“CLP can maintain its absolute dividend per share by raising payout to 61 per cent in 2019 [from 55.7 per cent last year],” said Elaine Wu, executive director of Hong Kong and China utilities equity research at JPMorgan in a report.
“It did the same thing last time when SoC return was cut in 2009.”
After its annual shareholders meeting last Friday, CLP chief executive Richard Lancaster told reporters that with stronger performance of its overseas operations and continued growth of power demand in Hong Kong, the firms aims to maintain its 50-year track record of paying stable to higher dividends.
Wu projected the duo’s regulated fixed assets to grow by 1-2 per cent annually in the next five to ten years.
The maximum permitted return was slashed from 13.5-15 per cent to 9.99 per cent in the previous round of regulatory regime revision in 2009, when developed economies entered an era of ultra-low interest rates.
Wu’s view is shared by Citi’s head of Asia utilities equities research Pierre Lau.
“We think CLP shareholders – the Kadoorie family being the largest – would rather not see a dividend cut from the company,” he wrote in a note.
But HK Electric, an investment trust obliged to pay its owners all of its distributable income, would probably have to prune its dividend per share by 20 per cent, Wu said.
Still, she expects its dividend yield to remain at a relatively high 4.6 per cent in 2019, compared to 5.9 per cent in 2018.
The new return was at the high end of the government’s previous target and in line with estimates by analysts, who said the pruned return still compares favourably to other developed economies for regulated utilities.
For example, returns of regulated power transmission and distribution firms range between 5.5 per cent to 6.8 per cent on shareholders’ equity, according to Hu Xinmin, principal at Hong Kong-based electricity industry consultancy Lantau Group.
The extension of the regime’s term from 10 years previously to 15 years was a “positive surprise,” Wu told the Post, adding that Hong Kong is one of few economies that have such long “return visibility” for energy utilities, compared to between five and eight years in Britain and Australia.
“Besides, the Hong Kong regime is transparent and profit is easy to estimate, given all of the fuel costs can be passed through to consumers and the five-year capital expenditure plan gives good visibility of asset bases on which returns are calculated,” she said.
CLP has risen 1 per cent since the new regime was announced and closed Friday at HK$81.6, while HK Electric climbed 3.7 per cent and last traded at HK$7.06.
HK Electric has gained 30 per cent since it was spun off as a separate listed firm from Power Assets in January 2014. CLP has risen 38 per cent in the same period.