Back To Basics
JULY 27 - AUGUST 3, 2001
An economic recession is looming, stock market prices are sliding and bank deposit rates continue to fall. Where can you take shelter? Try boring-but-stable companies with good dividends
By CONNIE LING
You know a sea change is in the offing when granny's conservative strategy suddenly makes a lot of sense. In Singapore, investors are flocking to the new Optimix Sure Fund, which invests only in dividend-yielding companies in Asia and elsewhere. Punters had largely shunned boring-but-steady defensive stocks during the telecom and Internet mania, but they are now taking a second look as recession stalks the region and bourses take a beating. "Local markets will not go anywhere in the next two to three years," predicts Amit Thekar, a research accountant at SG Securities in Singapore. "They will grow in line with [corporate] earnings and dividends."
The good news is that a surprising number of companies have been consistent dividend payers even through the Asian financial crisis. These days, their cash payouts surpass the interest earned on bank deposits, which has been trimmed again and again as central banks cut lending rates to stimulate the economy. In Singapore and Hong Kong, says Julian Leung, a regional strategist with ING Barings, at least six of 10 stocks have a higher dividend yield than the annual interest on a savings account. There are also potential capital gains if growth stock investors and bank depositors bid up the stock price of the dividend payers.
For now, the steady payers are still at bargain levels. Hong Kong-listed Hung Hing Printing has been trading between HK$2.50 and HK$3.50 ($0.30 and $0.45) for much of the past three years. The annual dividend yield has stayed put at around 9% — meaning you get 9 cents on every dollar you spend buying the stock. (The yield is computed by dividing dividend-per-share with the stock price.) "Hung Hing has good management and a very long track record [of dividend payments]," says Norman Ho, a fund manager with Value Partners in Hong Kong. The company is in a relatively recession-proof industry. Hung Hing prints logos and other markings on carton boxes and stationery in Hong Kong and China. It earmarks about 60% of annual profit for dividend payments.
A track record is important, but investors should also gauge the company's ability to continue the payouts. SG's Thekar puts a premium on strong cash flow. The ideal dividend payer is a company in a net cash position operating a business that does not need a lot of capital reinvestment, such as tobacco and liquor. That's why Korea Tobacco & Ginseng Corp., Indonesian cigarette maker Gudang Garam and gin maker La TondeNa Distillers in the Philippines are analyst favorites. "Even in times of great uncertainty and no share-price appreciation, companies like Gudang Garam will still give you 3% or 4% dividend yield," says Thekar.
But picking a good dividend stock isn't only about the yield. Investors need to take into account the growth prospects of the business, the overall investment environment and the potential movements of the share price. The ideal combination is a stock that pays dividends and is also seen as a growth play, such as PetroChina. The oil company is one of mainland China's most profitable businesses. Its 2000 earnings are the highest among all Hong Kong-listed China stocks, says Value Partners' Ho. At the current stock price of HK$1.53, PetroChina's dividend yield stands at about 8%. If the stock price rises rapidly, which may happen if the frenzy for mainland plays is renewed, the yield can fall. Existing stockholders would gain from dividends and the price appreciation. But new investors who came in after the stock had risen to unsustainable levels could lose.
During uncertain economic times, steady payers can rise rapidly in price, trimming dividend yields. Investors typically seek shelter in utilities, for example, in a bear market. Hong Kong Electric has risen 18% in the past nine months, bringing down its dividend yield to 5%. Marc Tan, a fund manager with OUB Optimix Funds in Singapore, is wary of utilities for other reasons. "Quite a few power companies have invested heavily in Internet-related areas in the boom years," he says. Adds Thekar: "There's no certainty the diversification strategy will pay off. Global economic growth, even in China, is expected to slow down, and that will have an impact on electricity consumption. The typical Asian utility is still building plants and other infrastructure, so it may not have the cash for dividends after the capital expenditures."
One last piece of advice: The most consistent dividend payers, while historically stable companies, are still subject to the vagaries of the market, especially if they operate in volatile economies like Indonesia. They are not nearly as risk-free as bank deposits. The prudent approach is to construct a diversified portfolio, with dividend payers at the core and growth stocks, bonds and cash deposits at the periphery. The way granny does it.
SLOW AND STEADY WINS THE RACE
Tired of the 2%-a-year return on your bank deposits? Consider dividend-yielding stocks. Amit Thekar, a research accountant at SG Securities in Singapore, examined the balance sheets of 350 companies across Asia in search of undervalued stocks that have consistently paid dividends even during the Asian crisis. The following 15 cash-rich companies are even expected to increase the size of their dividends by 10% to 15% between 2000 and 2002 % Div. Yield 2001 (F) % Div. Yield 2002 (F)
HUNG HING PRINTING (Hong Kong) 9.9 11.1
CYCLE & CARRIAGE (Malaysia) 7.2 7.5
NATIONAL PETROCHEMICAL (Thailand) 7.1 8.3
KOREA TOBACCO & GINSENG (Korea) 6.7 7.6
KINGMAKER FOOTWEAR (Hong Kong) 6.6 6.4
SINGAPORE BUS (Singapore) 5.2 7.4
LA TONDENA DISTILLERS (Philippines)
4.8 5.4
TEXWINCA HOLDINGS (Hong Kong) 4.8 5.7
CEREBOS PACIFIC (Singapore) 4.4 4.8
CHINA PHARMACEUTICAL (China) 4.0 4.8
GUDANG GARAM (Indonesia) 3.9 4.5
HONG KONG & CHINA GAS (Hong Kong) 3.6 4.0
ST ENGINEERING (Singapore) 3.6 3.7
PTT EXPLORATION (Thailand) 3.2 3.3
GUANGDONG ELECTRIC POWER (China) 3.1 3.4
Forecast dividend yield was derived by dividing the forecast mean dividend per share, as tracked by Thomson Financial I/B/E/S based on the projections of Asia's brokerages, by the company's stock price as of July 12. All money figures used in the computation are in local currencies
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