Investors turn to dividend stocks

Investors turn to dividend stocks

By ALEXANDER RAGIR
AND MICHAEL TSANG


EMERGING market investors, anticipating the smallest gains in stocks of developing nations since 2003, are snapping up shares that pay dividends.


'When the market has gone up so much, it makes an awful lot of sense to get back to basics.'

- Templeton's Mark Mobius




Templeton Asset Management Ltd's Mark Mobius and Emerging Markets Management LLC's Antoine Van Agtmael, who together oversee about US$50 billion, say buying companies that offer the biggest payouts to shareholders - including Brazil's CPFL Energia SA and South Korea's Kookmin Bank - will help offset slowing returns.

The shift from growth stocks marks a turning point after money invested with emerging-market equity funds swelled sixfold to US$468 billion since 2002, according to Emerging Portfolio Fund Research Inc. Equities tripled in value, twice the rate in developed countries, during the same period, based on Morgan Stanley Capital International (MSCI) indexes. Merrill Lynch & Co and UBS AG recommend dividend stocks in Brazil, Taiwan and Poland, where inflation is under control and companies are improving management.

'When the market has gone up so much, it makes an awful lot of sense to get back to basics,' Dr Mobius said in a telephone interview. 'We've found good combinations of dividends and earnings growth. Even if the market does go down, we're in good shape.'

Dr Mobius said he favours dividend stocks in Taiwan, Brazil, Turkey and South Africa. He declined to identify specific companies.





Strategists at Citigroup Inc, Morgan Stanley and Merrill Lynch expect developing nation stocks will climb at their slowest pace in 2007 since the four-year rally began. The Morgan Stanley Capital International Emerging Markets Index, a benchmark for less developed countries with a market value of US$5.1 trillion, has averaged a 37 per cent annual gain during that span, excluding dividends.

The index eked out a 1.8 per cent advance last quarter, underperforming MSCI's measure for developed markets in the first three months of the year for the first time since 2003. The MSCI World index, a measure of developed nations with a US$31.8 trillion market value, added 2.1 per cent.

'It doesn't make sense in our view to see huge gains at this stage,' said Geoffrey Dennis, a strategist at Citigroup in New York. Emerging markets will be 'much more choppy and much more modest in returns'. He said price gains plus dividend payments will total 'no more than' 15 per cent in 2007 and lag behind developed markets.

Equities in emerging markets will have bigger price swings and smaller returns because earnings won't grow fast enough to keep shares cheap relative to less risky companies in developed markets, Mr Dennis said.

Companies in the MSCI Emerging Markets index trade at an average of 15.3 times reported profit, versus 17.3 times for developed countries - the smallest discount since March 2000, data compiled by Bloomberg showed. Meanwhile, companies in both indexes yield an average of 2.2 per cent of their share price in dividends.

Stocks that pay a higher dividend become more attractive when gains in share prices slow, as the dividend accounts for a larger percentage of the total return.

'When returns are slimmer, yields are in more demand,' Michael Hartnett, Merrill Lynch's chief emerging markets strategist, wrote in an e-mail. He predicted returns this year of 10-15 per cent for shares in developing countries in a note to clients last week.

For Greg Lesko at Deltec Asset Management, a US$900 million hedge fund based in New York, dividend-yielding stocks are a boon when swings in emerging markets increase.

'It's been a good cushion during these rocky times,' said Mr Lesko, who boosted his holdings of CPFL Energia, a Brazilian energy distributor, and Thai Oil Plc, the nation's largest refiner, last quarter when emerging markets had their biggest weekly decline in nine months.

The MSCI Emerging Markets slid 11 per cent in seven days from Feb 23 before climbing 13 per cent to a record 950.45 last week.

CPFL Energia's dividend almost doubled last year to US$660 million. The payout equalled 95 per cent of the year's profit. The stock has a total return of 3.2 per cent this year. Without the payout, the stock has fallen 2 per cent.

Thai Oil, which is expected by analysts to pay out 5.6 per cent of its market value in dividends this year, has returned 23 per cent. That compares with a 19 per cent climb for the stock itself and a 1.9 per cent advance in the SET Index of Thai shares.

In Taiwan, dividend yields are higher than interest on government debt, according to Lord, Abbett & Co's Vincent McBride. The TSEC Taiwan Dividend+ Index, which tracks 30 companies in the Taiwan Stock Exchange that provide higher-than- average payouts, has gained 6.9 per cent this year. That exceeds a 2.3 per cent advance in the island's benchmark Taiex index.

The indicated dividend yield for the Dividend+ Index is 6.2 per cent on a median basis, more than triple the 1.96 per cent yield on Taiwan's 10-year government bond.

The 30 stocks include Acer Inc, the world's fourth-largest computer vendor, China Steel Corp, Taiwan's biggest steelmaker, and Chunghwa Telecom Co, the island's largest phone operator.

'A lot of people go to Asia looking for growth, but you can make a lot of money looking at high-yield, low-priced stocks,' said Mr McBride, who co-manages the US$1.24 billion Lord Abbett International Core Equity Fund from Jersey City, New Jersey. He said dividend stocks make up a 'significant' proportion of the fund, including shares of Acer. 'It's always paid to look at companies in emerging markets with high yields.'

Falling interest rates in Brazil will increase demand for higher dividend shares as local investors shift money into equities, buffering declines in the stock market, according to New York-based Bear Stearns Cos. Companies in Brazil are required to pay shareholders 25 per cent of their earnings.

Bear Stearns recommended eight widely traded Brazilian stocks with dividend yields of at least 8 per cent in the past 12 months. Among them, Cia Siderurgica Nacional, Brazil's third- largest steelmaker, had a 12.2 per cent dividend yield, according to Bear Stearns. The stock returned 38 per cent this year.

The yield on Brazil's benchmark zero-coupon, local-currency bond due January 2008 slid 24 percentage points in the past nine months to an all-time low of 12 per cent on April 5.

Standard Life Investments, an Edinburgh-based firm that oversees about US$260 billion, boosted its holdings of Kookmin, South Korea's largest lender, and Lite-On Technology Corp, Taiwan's biggest maker of monitors.

Seoul-based Kookmin last month paid a record dividend of 3,650 won (S$5.92) a share, a sixfold increase from a year ago and equal to half of its profit last year. The company also pledged to give shareholders at least 30 per cent of its annual net income in cash in the coming years. The stock has jumped 14 per cent in 2007, quadruple the advance for the Kospi index.

Lite-On has boosted its payouts every year since 2000. The company's indicated yield stood at 5.57 per cent.

Dividends from Polish companies will climb because their yields are below government bonds even after record payouts linked to 2006 profits, Citigroup said.

While payouts for 77 Polish companies will increase 7.7 per cent to 11.2 billion zloty (S$5.9 billion) from 2005 and 73 per cent from 2004, they still represent just 2.4 per cent of the companies' market value, Citigroup said. - Bloomberg