Income investors can expect ‘nirvana’ from Asian equities in the next five years as dividend growth exceeds earnings growth, Mike Kerley, co-manager of the Henderson Far East Income investment trust, told Sub35 delegates at The Bonham, Edinburgh.
Asian companies have low debt, high free cashflow and low dividend payout ratios – averaging 35% compared to 80-100% for the largest income stocks in the UK.
“If those earnings get cut, and let’s face it the UK is not the most robust economy and there’s a lot of uncertainty… those dividends are at risk,” said Kerley.
“If you have a big gap between earnings per share and dividends per share, it suggests your dividends are more sustainable.
“It also means there’s a chance for those dividends to rise higher than the level of earnings, so you get dividend growth exceeding earnings growth – for an income investor that’s a kind of nirvana.”
He is seeing a lot of “dividend surprise” – companies raising their dividends unexpectedly – which is acting as a catalyst to share price growth. While many Asian companies are choosing to pay special dividends, he expects more companies to adopt regular and progressive dividend policies.
Big Brands
Although political uncertainty and slowing global growth paint a less rosy picture for Asian companies than there was a year ago, Kerley says short-term headwinds do not detract from the long-term growth opportunity.
“There are still some tailwinds – valuations are cheaper in Asia and we still have that underlying growth story,” he told the audience.
“It’s not as strong as it was, but compared to the UK, US and Europe over the next five, 10, 15 years the story for Asia is a lot more compelling.”
The “big story” is the opportunity to invest in the brands of the future. He likens the potential growth trajectory of companies like Anta Sports, the third largest sportswear apparel brand in China behind Nike and Adidas and among his trust’s holdings, to the rise of Hyundai and Samsung, two Korean companies.
“You wouldn’t have bought a Hyundai car or Samsung TV 20 years ago, but these are now top tier brands that we consume on a regular basis.
“Within 10 years you will find Chinese goods in your stores – not just low end and cheap, it will be medium and high end as well.”
Chinese companies are spending an “impressive” amount of money on research and development (R&D) – more than Europe and the US and within five years will be spending more than those countries put together.
“This isn’t just R&D on manufacturing facilities, but in areas that will be really important in our lives – like healthcare and new energy. It’s new age R&D.”
Five selling points
Henderson Far East Income:
- Diverse income stream at country and sector levels
- Net dividend yield of 6.1%, highest in the sector
- Compound dividend growth of 6% per year over 12 years
- Revenue reserves equivalent to 64% of dividend cover
- Consistently traded at a premium and issued shares since 2009