China, Japan, and South Korea have all ramped up efforts to push companies for higher dividends and share buybacks. While Asia has long been chiefly a growth story for investors, can government reforms unlock the value of dividend stocks in the region?
The Chinese phrase “iron rooster” traces its origins back to the Qing dynasty as a rebuke to those who do not easily open their wallets. You are, it suggests, a bird made of iron from which not a feather can be plucked.
Fast forward several hundred years, and the term has been repurposed by Chinese officials and media over the past few years as criticism of listed corporates which pay no dividends.
“It’s sad to see some companies would rather be iron roosters sitting on piles of cash than share a feather with investors,’’ an opinion piece published in the official Shanghai Securities News said last April1.
The underlying message is serious: Chinese regulators are expanding efforts to push local companies to pay either higher dividends or to buy back more shares in a bid to make them more attractive to investors at a time when the country’s stock market is suffering from the shakiest economic outlook in years.
Beijing has unveiled a series of measures over the past year. In January 2023, China’s state assets regulator changed the main gauge by which it evaluates the performance of managers at state-owned companies from net profits to return-on-equity (ROE).
In order to get a higher ROE, a firm with excess cash may pay out more dividends. The nation’s securities regulator followed up in August by prohibiting controlling shareholders from selling shares in the secondary market if the listed company has paid little or no dividend in the past three years. Last month, the regulator said it would push companies to pay dividends several times a year.
The results have been meaningful, helped by the cuts many Chinese companies have made in spending on capital projects during the downturn. Dividend payments by members of the Shanghai Composite Index rose 13 per cent from a year earlier to RMB1.7tn (US$235bn) in 20232. State- and some privately-controlled companies alike are heeding the government’s call. Ping An Bank in March proposed to pay out RMB13.9bn (US$1.9bn) in dividends, raising its payout ratio for 2023 to 30 per cent, compared with an average of 12 per cent in the previous five years.
A tale of three countries
China isn’t the only Asian country seeking to improve stock valuations through better management practices. In Japan, corporate-governance reforms pushed by the late prime minister Shinzo Abe are gaining steam. At the end of February 2024, about 48 per cent of companies listed in the Tokyo Stock Exchange's prime section had publicly issued plans to optimise capital management3. The reform has been one of the major drivers for the stock market rally - with the Nikkei Stock Average surging to an all-time high last month.
In South Korea the government unveiled a “Corporate Value-Up Program” in February 2024 to reduce the so-called ‘Korea discount’. According to the plan, companies that prioritise shareholder returns will be given “bold incentives” and tax benefits. The plan, however, has fallen short of investor expectations with a lack of concrete details. While we wait for the finalised plan, we believe sustainable reforms should address issues beyond the stock market, such as inheritance tax.
These structural reforms are no coincidence. Chinese, South Korean and Japanese companies’ average payout ratios - the percentage of company earnings paid out in dividends - in the past five years have been 30 per cent, 32 per cent, and 40 per cent, respectively. The global average is 48 per cent; in Europe it is 64 per cent - so there is some way to go.
And the conditions for Asian companies to deliver more are in place: companies generally have healthy balance sheets, making them capable of returning dividends to investors or buying back shares. Beyond those corporate fundamentals, a greater proportion of the region’s population is aging rapidly, which will increase investors’ demand for steady, reliable returns from investee companies to build retirement nest eggs.
Dividend players back in spotlight
Importantly in a year of market volatility, stocks that pay dividends have done better on the back of these changes. China’s CSI Dividend Index - composed of 100 companies that have a good track record of dividend payouts - has jumped 8.3 per cent in 2024, in contrast to the broader weakness in the onshore equity market. Japan’s Nikkei 225 High Dividend Yield Stock 50 Index surged 31 per cent since July 2023, compared with the 20 per cent rise in the Nikkei 225 Index. The low bond yields available in both countries have also made dividend-paying stocks relatively more attractive.
A slowing global economy and a return to lower interest rates means the hunt for stable dividend yields has become an attractive strategy. And historical data show a focus on those which pay dividends is more than just a defensive play that works well in choppy markets. Over the past two decades, Asia’s high-dividend index outperforms the standard index in part thanks to its smaller drawdowns during periods of stress. About 56 per cent of the total return in the MSCI AC Asia Pacific ex-Japan Index comes from dividend income4.
While high dividend yields are appealing, there are dividend traps to watch out for - where a very high dividend yield attracts investors to a company which is in financial stress. Resilient earnings growth, strong balance sheets, and most importantly sound corporate governance, which ensures excess cash will be returned to shareholders, are the signs of good companies we look for.
It may take time for Asia’s “iron roosters” to change their ways. But at a time when the region’s reputation for growth has been shaken by volatility, even the shedding of a few feathers should unveil some new investment opportunities.
Sources
1 Shanghai Securities News, https://paper.cnstock.com/html/2023-04/28/content_1757419.htm, April 28, 2023.
2 According to iFinD data.
3 According to the Tokyo Stock Exchange (TSE).
4 According to data compiled by Fidelity International.
