Hong Kong's battered dividend investors go for growth stocks

[HONG KONG] Dividend investors are having to rethink their strategies in Hong Kong's stock market, as companies mired in a pandemic-driven recession are slashing payouts more than before.

Hong Kong's high dividend stocks have traditionally been favoured by retail investors as a source of income. But that strategy is now in question. Almost one-third of Hang Seng Composite Index members are either scrapping or reducing dividends this year, according to data through Aug 27 compiled by Bloomberg. That's the most since 2009, when 61 per cent of index companies did so in the aftermath of the global financial crisis.

Investors say they are reducing exposure to traditional dividend payers like banks and landlords to growth stocks in technology and health care. A gauge of stocks with high dividend yields has plunged 18 per cent this year, outpacing the Hang Seng Index's decline, and is near the weakest relative to that benchmark since 2008.

A dividend freeze has occurred globally. As firms opt to preserve cash given prolonged uncertainties of the pandemic, global payouts could shrink as much as 23 per cent this year - which would make 2020 the worst year for dividends since the financial crisis, according to a Janus Henderson Investors study published this month.

"It's a disappointing year for traditional dividend payers," said Sherwood Zhang, a portfolio manager at Matthews Asia. "Especially in industries in which investors used to look for dividend returns, such as banks and retail landlords."

The cuts in Hong Kong are particularly savage. Contracts allowing traders to speculate on dividend rates in the Hang Seng Index imply a reduction of about 19 per cent in 2020, compared to a 2 per cent drop for the S&P 500, according to calculations using futures maturing in December.

Some of the city's biggest dividend payers have slashed or stopped payouts. Blue chips including CK Hutchison Holdings and Swire Pacific recently announced payment cuts to shareholders, while HSBC Holdings said earlier there would be no handouts in 2020.

Matthews' Mr Zhang said he has recently further reduced exposure to traditional dividend payers, particularly financials, and lifted the portion of growth stocks in his portfolio to as much as 70 per cent. These "dividend growers" belong to industries like technology and healthcare - and can possibly increase payouts, according to Mr Zhang. Tencent Holdings, a stock which pays out about 10 per cent of earnings as dividends, is now the biggest holding in his China Dividend Fund.

Julie Ho, a portfolio manager at JPMorgan Asset Management, said she has cut exposure to bank and real estate investment trusts, where some companies have a "weaker long-term outlook" given the difficult environment. Technology, consumer discretionary firms and stock exchanges, make up 40 per cent of her Asia Equity Dividend Fund.

To be sure, many Hong Kong stocks still have high dividend yields. They're above 5 per cent for nearly half of the members of the Hang Seng Index, and it's more than 10 per cent for China Shenhua Energy.

But that's not necessarily going to sway investors at the moment. "If a stock doesn't have a great three-to-five year outlook, we won't like it no matter if its dividends increase or not," said William Fong, head of Hong Kong and China equities at Baring Asset Management Asia Ltd.

BLOOMBERG