Dividends to the rescue amid market carnage: Prudential

Equity investors are not yet out of the woods and should look for sources of return from other than price movements, says Prudential Asset Management.

According to Prudential’s director of global market strategy, Robert Rountree, this is where equity dividends come into play. “A solid dividend provides an income even if prices remain volatile,” he said.

Dividend payouts also tended to be more stable than the earnings from which those dividends are derived. He cited the example that over the past sixteen years, Asian companies in total, had increased their total payout ratio to maintain dividends even as their earnings came under pressure, according to an April 2011 report published by CLSA Asia Pacific Markets.

“Moreover, between 1999 and April 2011, dividends accounted for around 40% of the Asia ex-Japan total return. Share price rises accounted for the other 60%,” he added.

Furthermore, the cash held by Asian companies, had risen from around 19.5% of equity to an estimated 23.4% over the past decade, which should help convince investors that Asian companies generally had the capacity to maintain dividend payouts (with the risk that some may choose not to).

Recent selling had also brought Asia’s average price-earnings valuation (based on the MSCI Asia ex- Japan Index and the IBES consensus earnings forecasts) down to one standard deviation below its ten year average. Asia’s average book-price valuation had also fallen to one standard deviation below its ten year average.

“The combination of lower market valuations, based on less aggressive profit forecasts, looks increasingly attractive, to us,” said Rountree.

High dividends were therefore an attractive option amidst the market turmoil and would allow investors to position themselves for Asia’s solid growth outlook while receiving an income to soften the turbulent times in between.


This article first appeared in Professional Adviser Hong Kong.


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