“There is a definite shift in the way Asian companies are perceiving dividends. They see it as a big component of the total shareholder return. The increased payouts also increase investors’ confidence in the companies,” Duhra said in an interview with Fund Selector Asia.
Following the Asian financial crisis of 1990s, companies have learned to become more cautious and prudent with their cash management, Duhra said.
“At this point there is a lot of uncertainty globally and that manifests into the way the company management in Asia thinks.
“In that respect, management of Asian companies tend to be more cautious as they have been through tough periods like the [Asian financial crisis] of 1990s. They have learned to have low financial leverage and be more cautious with cash balances.”
Asia dividend culture
According to Henderson Global Investors recent report, dividend growth in Asia Pacific ex-Japan in 2014 was 2.9% headline (4.9% underlying), led by big dividends from Hong Kong companies like Cheung Kong and Hutchison Whampoa.
Only China had growth among the BRIC countries, accounting for the majority of emerging markets dividends.
Duhra, who manages the Henderson Horizon Asian Dividend Income Fund, said Australia and Taiwan offer some of the highest dividend yielding stocks in the region whereas markets like India and Korea are the lowest yielding.
“Australia does remain a very strong market for dividend yield. Pension funds are also investing in the market.”
The manager said less volatile and high yielding stocks are available in Australian banks and telecom companies along with infrastructure assets.
The Taiwan technology sector is another place to find high dividend yield due to the cash levels of the companies, he added.
“The lowest yielding region would be Korea. But even there you are seeing dividends going up. There is potential, but it is too early to see that kind of change in corporate culture.”
The Korean government’s measures that impose heavier taxes on companies’ cash reserves is seen promoting a dividend culture in the country, according to market analysts.
Coming to India, the manager does not find the market very friendly toward value and income investing.
“It is one of the lowest paying market in the region. The problem is that the market has risen so much and the dividend per share hasn’t grown. So, the yield has not grown.”
Having said that, he is positive on the overall macro environment in the country and said the fund house is trying to capitalise on divided yield opportunities. Currently Bharti Infratel is among the top holdings.
Duhra said his team is assessing more India exposure and as an example cited Coal India.
“Coal India has an incredible cash balance and it could benefit from policy reforms.
“We are looking at companies that are not stretched in terms of valuations. The companies that we looked at recently are all large-caps. We probably do tend to have a bit more of allocation toward mid-caps than our peers. But, we are aware of the liquidity issues with mid-caps.”
In terms of country allocation, China features as the top allocation in the Asian dividend income portfolio with a 22.1% weighting followed by Australia and Taiwan with a 17.7% and 13.7% weighting, respectively.
“In reality, we do not pay much attention to the country allocation because we follow a bottom-up approach.
“We do find good opportunities in China. Though we are aware of the macro concerns and structural issues there.”
Singapore and Thailand respectively have a 10.1% and 3.8% weighting in the portfolio, both overweight, according to the firm.
Inflows pushing stock valuations
In a low yield environment, investors have been increasingly seeking equity income strategies and Duhra said he is concerned that the inflows into capital markets will drive up valuations.
“All the new money is flowing into income products and they are chasing the same stocks.”
As a result, the manager is focusing on increasing exposure to dividend growth stocks.
Investment approach
The manager said he follows a consistent investment approach in trying to find out structural growth opportunities in the region.
Broadly, the portfolio contains two types of stocks. The first type is companies with strong operating cash flows, which are high dividend yielding but at the same time have low volatility and offer upside potential.
“Singapore REITs or Australian infrastructure assets fall in this category. We focus on the underlying cash flows of companies and not price-to-earning as a main source of valuation.”
The other part of the portfolio is the one that captures the dividend growth. These stocks might start with a lower level of yield than the average portfolio yield, but they have more potential to grow that dividend.
