Income-hunting: A focus on Asia

Markets across the globe have suffered increased volatility as a result of the COVID-19 pandemic, with income-seekers being particularly hard hit by recent corporate dividend-cutting, which has served only to exacerbate an already challenging environment of record-low interest rates and gilt yields on the floor. Whilst the impact of the coronavirus has been ubiquitous, not all regions have endured the pain at the same level of intensity, with Asia Pacific economies, in particular, exhibiting encouraging resilience.

Within the AIC Asia Pacific Income sector, Henderson Far East Income Limited offers the highest yield – currently over 7% (according to the Association of Investment Companies, as of August 2020). This, coupled with the fact that dividends are paid quarterly (in February, May, August and November), makes it a viable option for the income-seeking investor.

A decade of dividend growth

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The May 2020 Henderson Far East Income Asia Pacific Dividend Index confirms that payouts rose to a record £234.8bn in the year to April 2020, a headline increase of 0.4%. Whilst this was the shallowest rate of growth since at least 2010, this had little to do with the pandemic. Earnings showed almost no uplift in 2019, with global trade tensions dampening economic growth, giving rise to a direct, knock-on effect on dividends. Whilst two-thirds of companies maintained or raised their payouts, roughly a third reduced them (up from a quarter in the previous two years). On a longer-term retrospective, Asian dividends have more than tripled in the last decade, with the rest of the world merely doubling. Four of the world's largest 25 dividend payers, such as Samsung Electronics, come from the Asia Pacific region; in 2019, £1 in every £6 of global dividend payouts came from Asia Pacific, up from £1 in £9 a decade earlier. In contrast, the UK's share has fallen from £1 in £10 to £1 in £13 over the same period.

The 12-month horizon­­­­­­­

It’s well recognised that, in the year ahead, dividends are unlikely to reach pre-pandemic levels, although Asia is better positioned – a function of a number of contributory factors.

• Asia Pacific companies are well-positioned to pay dividends. Whilst there has been less direct government support than in the West, the COVID-19 impact has been less brutal, lockdown measures implemented to counter it had begun to ease even as they were tightening further in other developed economies, and the region as a whole has responded swiftly and efficiently, South Korea being a prime example. The consequent economic damage has therefore been intelligently minimised.
• Many Asian businesses have higher levels of insulation in terms of sustainability of cash on their balance sheets, and there is good headroom in the dividend payout ratio (the portion of profits paid out in the form of dividends). According to the October 2019 Henderson International Income Trust Global Dividend Cover Report, companies in the region typically distribute under 40% of profits to shareholders, compared to, say, over 60% in the UK and 50% in Europe where businesses are more constrained by highly levered balance sheets. It's a widely held view that this conservatism has roots in the fact that Asia has endured more crises than the West in recent years. Historically, it has been more focused on growth than dividends but, as companies mature, this is changing.
• In terms of dividend coverage, Asian companies are cash-rich, with nine times more net cash than the current level of dividends paid, compared to three and a half times for US and European companies (Source: Jefferies, Factset, Bloomberg. Dividend payouts – banks and region-wide, as of March 2020).
• In the larger markets, such as China, Hong Kong and Taiwan, payouts due in the coming months are based on 2019 earnings and it is largely anticipated that they will be honoured. Whilst 2021 dividends will undoubtedly be adversely affected by this year’s earnings hits, this gives more time for any portfolio adjustments required to mitigate any particularly unpalatable income reductions. Given that earnings growth in Asia is expected to be only marginally impacted in 2020, the impact on dividends should be similarly marginal.

The sector perspective

Given that overarching context, it seems worthwhile to identify sectors, areas and countries that are likely to prove less vulnerable to the pandemic, and those that are best avoided. Some areas of Asia’s economy will experience a V-shaped recovery as latent demand manifests itself once again.

The banking sector – the region's largest dividend payer, accounting for 28% of all payments in 2019 – is likely to prove resilient (other than in Australia). Regulators have, for the most part, not required Asian banks to suspend or cut dividends, unlike their UK and European counterparts, and banks in the region are generally well capitalised with low dividend payout ratios, and so are better placed to weather the unfolding crisis. Many banks are state-owned, and governments are reliant on dividend payments to bolster their coffers. China's largest banks are more than 50% owned by the Ministry of Finance and have payout ratios of circa 30%, compared to over 40% for banks globally. Contrastingly, Australian banks – which make up 40% of all dividends paid by quoted firms there, and have exceptionally high payout ratios ranging from 75% to 100% last year – have succumbed to regulatory pressure to curb dividends. Singapore has also restricted corporate payouts.

The sector mix across the Asia Pacific region is also more favourable in relation to the current economic climate than some Western markets – with a relatively high allocation towards technology, for example, and a low allocation to sectors dependent on discretionary consumer expenditure. Technology, infrastructure and commodities look set to fare well, whilst other sectors are likely to struggle to regain their past earnings as a result of the continuing enforcement of social distancing measures, increased debt burdens or lower discretionary consumption. Healthcare is another area which, for obvious reasons, will prosper, although the lack of large healthcare businesses within the region is a relative detractor.

Looking regionally

The most significant dividend cuts by far will be in Australia, but Hong Kong will also be impacted negatively by its large leisure and resorts businesses such as Sands China. South Korea looks likely to be least affected, as does Malaysia. Those countries looking potentially vulnerable include Singapore, China and Taiwan, although their frailty has yet to translate into tangible action and, overall, the vast majority of payouts by value from these nations are likely to materialise this year largely as expected.

Therefore, looking forward over the next 12 months, our best-case scenario – which assumes cuts only by those companies that have already announced them or are certain to do so – sees payouts falling by 17% to £196bn. Excluding HSBC (historically a very high dividend payer) and Australian banks, the best case is a decline of less than 10%. On a worst-case basis, dividends fall by 43% to £134bn, which factors in the elimination of all those companies we consider to be vulnerable. Needless to say, the actual decline is likely to be somewhere between the two, not least because some vulnerable dividends may be reduced or deferred, rather than cancelled altogether.

With regard to Henderson Far East Income, the total dividend for the trust for the financial year ending August 2019 was 22.4p per ordinary share, a 3.7% increase over the previous year's total of 21.6p per ordinary share, and well ahead of the equivalent 12-month figure for UK inflation of 1.7%. The Board believes that the impact of Covid-19 does not change the structural growth story for Asian dividends and has reasons to be confident that the positive trajectory will resume once the virus has been contained. Accordingly, it has declared a third interim dividend of 5.8p per share for the financial year ending 31st August 2020, a 1.8% increase over the 5.7p paid for the second interim dividend. 2020 was the twelfth successive year that the trust has increased its dividend.