China Stock Payouts Get Whole Lot Better, `Iron Roosters' Aside

(Bloomberg) -- One of foreign investors’ most popular domestic Chinese stocks provided a jolt last week when the company suspended its dividend. But that move masked what’s been a notable trend to increase payouts.

And that trend is likely to strengthen as onshore Chinese companies join MSCI Inc. international stock indexes, giving the incentive to make themselves more attractive by offering steady income streams. The nation’s securities regulator has made cracking down on "iron roosters" -- a Chinese saying for a stingy character -- a top priority in 2018. Authorities have for years pushed for higher dividends to help develop the equity market.

“We have seen lots of improvement among Chinese corporates over the past few years -- whether it’s from the state-owned enterprises or private companies” when it comes to dividends, said Janet Tsang, a client portfolio manager of emerging-market and Asia-Pacific equities at JPMorgan Asset Management. “There’ll be more room for improvement" in the payout ratio, she said.

Last week’s surprise omission of a dividend on 2017 results by Gree Electric Appliances Inc., China’s biggest maker of air conditioners, triggered a rapid reaction. The next morning, the company said Shenzhen Stock Exchange demanded to know the reason for the move. Hours after that, Gree said it would propose interim payouts for 2018.

The flap over Gree, which at one point had more than 8 percent ownership on the part of investors via the Hong Kong stock connect, was set against the following broader trends:

• Some 213 out of the 232 firms on a preliminary list for inclusion in MSCI stock indexes proposed to pay dividends for 2017, according to data compiled by Bloomberg
• Total dividends proposed amount to 826.3 billion yuan ($130 billion), or 34 percent of the companies’ combined profits
• That’s the highest payout ratio since 2010
• The dividend payout ratio for members of the CSI 300 Index, a gauge of large-caps, has been increasing since 2011, with firms paying at least 30 percent of their net incomes in dividends in the past three years.
• Almost 80 percent of the more than 3,500 firms listed in China’s A-share market have proposed cash dividends from 2017 earnings, the officially designated platform for corporate disclosures shows.

“Gree is just an individual case -- it won’t affect the broad trend,” said Dai Ming, a Shanghai-based fund manager with Hengsheng Asset Management Co.

China’s A-share market, at $7.4 trillion the world’s second-largest, is opening up, with quotas for foreigners being raised and MSCI inclusion under way. MSCI said domestic stocks would make up 0.7 percent of its global emerging-markets index after an initial group joined in two steps, in May and August. Goldman Sachs Group Inc. sees a potential $320 billion of inflows as China builds up to 100 percent inclusion in five to 10 years.

State-owned enterprises have been among the more generous on dividends, as policy makers have pushed them to pony up -- in part to expand revenue for public spending in areas such as healthcare. SOEs will be required to transfer 30 percent of annual profits to public finance by 2020. Private operators may need to keep up as foreign scrutiny rises.

“If I were a long-term investor, I would demand stable dividend payouts -- or else how would I even want to play in this market?” said Dai at Hengsheng.

--With assistance from Cheng Ma

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net, Amy Li in Shanghai at yli677@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Christopher Anstey, Ravil Shirodkar

©2018 Bloomberg L.P.

With assistance from Amanda Wang, Amy Li