Morgan Stanley Quants Say Stick to Quality in Asia for Dividends

(Bloomberg) -- Stock pickers in Asia seeking to preserve dividend income should focus on high-quality companies rather than attempting to time the market to capture a rebound in economic activity, according to quantitative strategists at Morgan Stanley.

Stock selection is becoming increasingly important as cash-strapped companies cut dividend payouts to preserve capital, strategists including Gilbert Wong wrote in a report dated May 17. Focusing on companies with strong balance sheets and other hallmarks of quality will prove more rewarding than moving between cyclicals and defensive stocks, a strategy that lagged during the past two decades even when executed perfectly, they said.

“We found that even if a strategy could correctly time a switch between cyclical vs. defensive dividend stocks, its performance would still underperform the dividend strategy sticking with quality growth,” the strategists wrote in the note.

Morgan Stanley Quants Say Stick to Quality in Asia for Dividends

The Covid-19 outbreak induced shutdown has compelled many companies to slash dividend payouts, putting pressure on a strategy favored by investors such as pension funds, endowments and retirees to maintain a steady stream of income over time.

Among the stocks favored by Morgan Stanley’s quant team to ride out the bonfire of the dividends are a number of Hong Kong and Chinese-listed real estate plays such as Sino Land Co., Seazen Group Ltd. and Longfor Group Holdings Ltd. They recommend avoiding Bendigo & Adelaide Bank Ltd., Bhd and Maxis Bhd.

The note also warned that companies that trim payouts can underperform the market for a year after announcing a dividend cut.

Morgan Stanley Quants Say Stick to Quality in Asia for Dividends

Morgan Stanley recommends focusing on companies with a low ratio of dividends to earnings, which may imply they can maintain payouts levels more easily.

“Those companies with high historical dividend growth, but with high payout ratios, have limited resilience to dividend policies in downturns,” the strategists said. “This is especially critical given current market conditions where the number of companies facing cash crunches is rising.”

©2020 Bloomberg L.P.

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