Microstrategy evalu@tor in action Desh Peramunetilleke
[email protected] (852) 26008293
Mahesh Kedia (852) 26008291
Shrikant Kale (852) 26008489
1 March 2013
Global
Microstrategy Asian dividend-wave picks Asustek (2357 TT) Bank of China (HK) (2388 HK) China Mobile (941 HK) IAG (IAG AU) PTT (PTT TB) Global dividend-wave picks Itau Unibanc (ITUB4 BZ) Japan Tobacco (2914 JP) McDonald’s (MCD US) Microsoft (MSFT US) P&G (PG US) PepsiCo (PEP US) Reckitt Benckiser (RB/ LN) Roche (ROG VX) Siemens AG (SIE GR) Toyota Motor (7203 JP)
Dividend wave 2013 A global theme for all seasons www.clsa.com Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com
Microstrategy
Contents Executive summary ............................................................................ 3 Investment highlights ........................................................................ 6 Summary of case studies and screens ................................................ 8 Global dividend overview ................................................................. 12 Case studies ..................................................................................... 29 Appendices 1: Yield characteristics ........................................................................ 160 2: Yield and payout ............................................................................ 166 3: EPS versus DPS growth ................................................................... 167 4: Dividend tax .................................................................................. 168 5: Performance table .......................................................................... 178 6: Rating of high-yield stocks .............................................................. 180 7: Dividend-wave stocks ..................................................................... 186 8: Basel-3 guidelines ......................................................................... 188 All prices quoted herein are as at close of business 18 February 2013, unless otherwise stated
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Executive summary
Dividends are now a way to enhance returns, not just a barometer of safety
Dividend-wave strategy combines yield with sustainable growth
Our Asian portfolio based on this strategy has outperformed consistently
EM dividend statistics Total dividend-distribution of US$250bn last year
52 companies paid more than US$1bn each
56 companies paid more than US$500m each
300 stocks with >3% dividend yield
High-yield stocks underperform during rising interest rates . . . . . . but are attractive to income investors. . . . . . as they yield over 5% and deliver positive capital gains
Dividend-yield stocks are not in bubble territory
DPS revision star-rating framework to identify sustainable yields
1 March 2013
Microstrategy
Dividend wave 2013
We have been longstanding advocates of dividends with a singular focus on capturing total returns over the long term. We believe our persistence has paid dividends with most investors now focusing on yield as a way of enhancing returns beyond the widely held view as a barometer of safety. However, if you are yet to be convinced, we hope the case studies presented in this report will inspire you to take comfort in the concept of an asset that can appreciate while still providing distributions that exceed cash rates. This report revisits our proven approach to dividend investing through our Microstrategy ‘dividend-wave total-return portfolio’, combining dividend yields with sustainable growth to capture the best of both worlds. Our main picks, based on our dividend-wave strategy, have strong balance sheets, solid cashflow, high consensus-forecast yield and the ability to deliver the expected payout, and yet retain sufficient earnings for reinvestment to fund future dividend payments. This strategy outperformed the MSCI Asia Pacific ex-Japan index by 5.1% in 2012 and by 35% since its launch in May 2010. Our tactical call to switch out of expensive defensives into dividend-paying high-quality cyclicals ie, Shadow defensives from mid-to-end 2012 also outperformed. Further, companies with a strong track record of consistently growing dividends, our Dividend champions, have delivered 18.5% total returns since May 2012. Furthermore, emerging markets continue to be in a dividend sweetspot with depressed capex, growing cashflows and historically low gearing. Our analysis shows that last year, 88% of the MSCI Emerging Market (MSCI EM) universe paid dividends (totalling US$250bn) compared to less than half at the start of the decade. Given the slower growth environment, emerging-market highyield stocks are developing into a new asset class poised for further rerating. China itself has come a long way from being considered as an oasis of growth to the biggest pool of cash dividends (US$77bn) in emerging markets. Indeed dividends from state-owned enterprises (SOE) have become an important topic in China’s policy agenda enhancing its sustainability. For investors, this further enhances the attractiveness of yield stocks in China, which have outperformed by 21% per annum since 2000 and 8% per annum since 2008. However, with receding global macroeconomic risks and rising interest rates on the horizon, income investors are likely to face headwinds compared with the past couple of years. But, we highlight that investors need to also take into consideration the severely depressed yields of the higher-quality fixedincome securities, which could continue to drive fund flows towards high-yield stocks. Income and absolute-return investors should also take into account the fact that top-quintile stocks within MSCI World have an average dividend yield of more than 5% and have delivered an average 1.4% return per month during periods of rising bond yields, ie, falling bond prices. Finally, a word of caution. Like many prudent investors, we are concerned by the wider interest in dividends turning from a passion into an obsession. While the structural story in support of dividends remains intact, some investors might feel that we are already in bubble territory, given the significant rerating of high-dividend stocks over the past couple of years. Our analysis dispels this notion and suggests that only certain pockets of the highyield universe such as defensives remain expensive, while the wider universe offers sustainable yields at attractive valuations. We encourage investors to use our seven-factor DPS revision star-rating framework to identify such inexpensive sustainable-yield stocks globally, while avoiding the value traps.
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Source: Factset, Datastream, CLSA Asia-Pacific Markets
Jul 12
Jan 13
Jul 11
Jan 12
Jul 10
Jan 11
Jul 09
Jan 10
Jul 08
Jan 09
Jul 07
Jan 08
Jul 06
Jul 05
Jan 07
2014F
2013F
2012F
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
1994
2014F
2013F
2011
2012F
2010
2009
2008
2007
Jan 06
2012
2011
2010
2009
2008
2007 2006
1.0 0.6
Banks
Energy
Tech HW
Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
Cons dur
Semis
Cap goods
Utilities
Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
0.2
Property
0.9
Dec 07
11 11 11 11 11 11 11 11 11 11 11 11 11 12 12 12 12 12 12 12 12 12 12 12 12 12 13 05 Jan 02 Feb 02 Mar 30 Mar 27 Apr 25 May 22 Jun 20 Jul 17 Aug 14 Sep 12 Oct 09 Nov 07 Dec 04 Jan 01 Feb 29 Feb 28 Mar 25 Apr 23 May 20 Jun 18 Jul 15 Aug 12 Sep 10 Oct 07 Nov 05 Dec 02 Jan
12F
11A
10A
09A
08A
07A
06A
05A
04A
03A
02A
01A
00A
99A
98A
Source: Factset, Datastream, CLSA Asia-Pacific Markets
1.4
0.8
(900)
40
1.8
Materials
Flows in January have been strong
3.6
LT avg Current Trough
Cons svcs
1.0
Peak
Autos
0
(600)
Defensives are trading at 39% permium to cyclicals versus the historical average of just 15% since 2000
(x)
2.5
FBT
1.1
2.2
Financials
CS (x FBT)
300
(300)
Increase in number of companies paying dividend in EM augurs well for future dividend contribution to total returns
50
1.2
Defensives
Dec 06
60
Cyclicals
1.3
600
Relative PE of high-yield stocks for Asia ex-JP sectors
12M-fwd PE (rel to region, x)
1.4
900
70
2006
1.5
(US$m)
1,200
80
2005
Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
1,800 1,500
MSCI EM MSCI DM
90
Asian defensives at 39% premium to cyclicals
Dec 05
(% of stocks paying dividends)
100
Flows to dividend funds remain strong
Dec 04
More companies paying dividends in EM
Dec 05
Europe Japan
Dec 04
DM
Dec 03
World
Dec 02
Aust AsiaxJP USA
2004
2
Dec 01
EM
2005
0
(50)
2003
4
Dec 00
(50)
2004
20
2002
0
2001
6
Dec 03
(20)
2003
40
2000
50
1999
8
Dec 02
10
2002
60
1998
10
100
40
12
80
Europe Japan
Capital intensity has been stable for USA and Europe but has been falling for Asia ex-Japan
2000
Currency
AsiaxJ USA World
28.0, 21.3, 26.8, 20.7
14
Net gearing ratios are at trough levels
100
(%)
16
World
1997
70
Japan
1999
150
Europe
USA
Retail
100
AsiaxJ
Transport
200
(%)
Capital intensity has been falling for Asia
1998
130
100
2000
Dividend
250
120
50
120
EPS
Mind the gap, reversal is imminent
140
100
140
PE
300 EM and Australia have highest dividend contribution to ther total return since 2000
160
Asian stocks do not have a debt burden
Contribution to US$ total return since Dec-00 (ppt)
350
190 160
Europe
Asia ex-JP: Dividend key to total returns
Dividend return
180
200
1996
Price return
1.5
DPS
200
Dec 01
(%)
UK
Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
Dec 02
Dec 01
Dec 00
Dec 99
EM dividend return - Highest since 2000 220
AsiaxJ
(8)
0
Annl OPF (since 2012) Div yld (L5Y avg, RHS)
SAf
Annl OPF (since 2008) Div yld (Now, RHS)
260
220
250
2001
2.0
(6)
100
EPS
240
150
World
(4)
Aust
200
2.5
HK
(2)
USA
300
Brazil
0
EM have seen highest growth among regions followed by Asia ex-JP
300
280
1997
3.0
400
EM Japan
Div fin
2
350
Europe USA
Telecom
3.5
AxJ DM
Indexed FY0 value
300
Jul 04
4
Japan
500
400
4.0
6
Taiwan
600
4.5
DPS index rebased to 100
Dec 00
High-dividend-yield stocks in EM and Asia ex-JP have delivered far superior performance relative to regional peers
700
450
Jan 05
8
5.0
MSCI Asia Pac ex-JP: Dividend growth will catch up
1996
10
Sing
800
(%)
China
900
(%)
12
Asia ex JP DM
1995
Europe EM USA
1994
(Q1 index)
1,000
EM and Asian dividends have grown fastest
Health (L1)
Since 2008, high-yield best in Asia worst in Europe
Dec 99
EM, Asia high-yield stocks have done best
Dividend wave
Jan 04
Global overview
1995
Dividends illustrated
Microstrategy
Investment highlights
Dividend-yield strategies can outperform across economic cycles
PE and earnings certainty are two key factors for a cycle-switching strategy
Investment highlights
Economic cycles have a significant impact on the performance of dividendyield strategies. In the graphic below we show a normal economic cycle based on the OECD definition. Our studies show that high-yield stocks usually underperform only during the “expansion” phase of the cycle. However, dividend investors can take comfort that when combined with other factors, dividend-yield strategies can outperform in every economic cycle. Microstrategy global dividend-yield-cycle strategy
OECD definitions: Expansion: Above 100 and upward sloping Downturn: Above 100 and downward sloping
OECD cycle (above 100)
Dividend-wave strategy OECD cycle (below 100)
OECD definitions: Slowdown: Below 100 and downward sloping Recovery: Below 100 and upward sloping
Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
Dividend wave criteria Wave 1 Market cap >US$4bn (US$1bn for Asia) 3M ADTO >US$5m (US$1m for Asia) Wave 2 Dividend yield >3% (>2% for US/Japan) Sustainable growth >5% (>3% for Japan)
However, for investors that have a longer-term view, we recommend our through-the-cycle dividend-wave strategy that aims to capture the best total returns by mixing sustainable yields with growth. The stocks in our dividendwave portfolio have high consensus 12-month-forward yield (average yield of 4%), high sustainable growth, strong balance sheets, solid cashflow, strong DPS revision star-rating and the ability to deliver the expected payout and yet retain sufficient earnings for reinvestment to fund future dividend payments. On the next page we present the top-25 stocks by market cap from our Asian and global dividend-wave portfolio, which we plan to rebalance quarterly. Microstrategy - Dividend-wave strategy
Wave 3 DPS star rating >=4 Net gearing 10
0 (5) (10) 0-2
2-4
4-6
6-8
8-10
>10
(15)
¹ Using current MSCI universe with estimate yield a day before the FY result. Source: Factset, CLSA Asia-Pacific Markets
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Microstrategy
Section 2: Case studies
South Africa, Malaysia and Singapore have surprised positively on average
Market and sector gap Based on the 2000-11 data, the markets that are quite likely to surprise positively on their high-yielding stocks are South Africa, Malaysia and Singapore. The average dividend-yield of more than 3% yield stocks in these markets has averaged above 5.0% during 2000-11. On the other hand, the markets most likely to disappoint on their high-yield stocks are Japan, Germany and Brazil. While Germany and Japan are low-yielding markets, Brazil has promised the highest average yield over the last decade. Figure 190
Markets¹ - Average difference in estimated versus actual yield (2000-11)
6.5
(%)
Actual yield
Estimated yield
Diff (RHS)
(%)
13.6 11.1
8
JP
GR
BR
TH
(6)
PH
3.0
TW
(4)
ID
3.5
US
(2)
UK
4.0
World
0
EM
4.5
CN
2
AU
5.0
HK
4
IN
5.5
SG
6
MY
6.0
SA
Japan, Germany and Brazil have disappointed the most
¹ Current MSCI universe with an estimated annual yield of 3% or more a day before the FY result included in the study. Source: Factset, CLSA Asia-Pacific Markets
Consumer-driven EM sectors have generally surprised positively
Among emerging markets, consumer-driven sectors such as retail, food and drug retailing, and consumer services have stood out in terms of their ability to surprise on estimated yields. Some bigger cyclical sectors such as energy and materials have also managed to surprise, highlighting that investing in cyclical emerging-market sectors may be rewarding. However, some of other cyclicals such as tech and transport, defensives such as telecoms and financials have disappointed on their estimated yields during the last decade. Figure 191
Financials and cyclicals such as tech and transport have disappointed
EM sectors - Average difference in estimated versus actual yield (2000-11)¹
6.5
Estimated yield
(%)
Actual yield
Diff (RHS)
(%)
17.4 16.2 12.2
6.0 5.5 5.0 4.5 4.0 3.5 (9.3)
Software
Semis
Telecom
Cap gds
Transport
Tech HW
HPP
Div Fin
Banks
Auto
Materials
Insurance
Pharma
FBT
Cons dur
Media
Utilities
Energy
Property
Cons svc
Healthcare
Fd & drug
(8.7)
Retail
3.0
7 6 5 4 3 2 1 0 (1) (2) (3)
¹ Current MSCI EM universe with an estimated annual yield of 3% or more a day before the FY result included in the study. Source: Factset, CLSA Asia-Pacific Markets
100
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Section 2: Case studies
Dividend increase signals strong future earnings growth
12. Do dividend cuts or increases have a price impact?
Our analysis of the relationship between dividend changes and operating characteristics of the firms suggest that dividends contain rich information about the future performance of a company. Further, our results also support the notion that dividend increases are indicative of future strong earnings growth; and so while a dividend increase signals an improvement in a company’s performance, a decline suggests a worsening of its future profitability, and hence dividend action has a direct bearing on stock prices. Figure 192
Best result achieved during two-week period around dividend announcement date
Stock performance in two-week period around DPS increase date
2.5
(% 2W outperformance)
2.0
Increase in DPS lead to consistent outpeformance each year
World
EM
1.5 1.1
1.0
0.8
0.5 0.0 (0.5)
2003
2004
2005
2006
2007
2008
2009
2010
2011
Avg
Note: Current MSCI universe of stocks. An increase refers to dividend growth of more than 10%. Source: Factset, CLSA Asia-Pacific Markets
Dividends have direct bearing on stock price
Our analysis shows that during the past decade, a 10% increase or cut in DPS has resulted in notable out/underperformance for global and emergingmarket stocks. On average, the companies that have raised DPS have delivered a 1ppt outperformance during the period from one week before the dividend announcement to one week after. On the other hand, stocks that cut dividends by more than 10% underperformed during the two-week period around the announcement. Figure 193
Stocks with DPS cuts have underperformed
Stock performance in two-week period around DPS cut date
0.2
(% 2W outperformance)
World
EM
0.0 (0.2) (0.2) (0.3)
(0.4) (0.6)
DPS cut has lead to underperformance in most years
(0.8) (1.0) (1.2)
2003
2004
2005
2006
2007
2008
2009
2010
2011
Avg
Note: Current MSCI universe of stocks. A cut refers to dividend de-growth of more than -10%. Source: Factset, CLSA Asia-Pacific Markets
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Section 2: Case studies
Dividend surprises drive stock outperformance
Performance post DPS announcement Our analysis on the dividend surprises post results highlights that the dividend surprises do not just impact the estimate versus actual yield but they also lead to price action. Figure 194 shows that when companies surprise positively, not only do investors receive excess dividend yield but also witness capital appreciation of their investments. While normally dividend surprises are linked to EPS, a company can also surprise by increasing payouts. Figure 194
Best result achieved during two-week period around dividend announcement date
Stock performance in two-week period around DPS surprise date
3.0 2.5
(% 2W outperformance)
World
DPS surprise lead to consistent outpeformance each year
EM
2.0 1.4
1.5
1.3
1.0 0.5 0.0 (0.5)
2003
2004
2005
2006
2007
2008
2009
2010
2011
Avg
Note: Current MSCI universe of stocks. Only 3% or more yielding stocks that surprised by more than 10% considered for this study. Source: Factset, CLSA Asia-Pacific Markets
Dividend announcements have direct bearing on the stock price
Our analysis shows that during the past decade, a 10% surprise or disappointment in DPS has resulted in notable out/underperformance for global and emerging-market stocks. On average, the stocks that have surprised on DPS have delivered a 1.4ppt outperformance during the period from one week before the dividend announcement to one week after. On the other hand, stocks that disappointed on dividends by more than 10% underperformed during the two-week period around the announcement. Figure 195
Stocks with DPS disappointments have underperformed
Stock performance in two-week period around DPS disappointment date
1.2
(% 2W outperformance)
World
EM
0.8 0.4 0.0 (0.4)
(0.1) (0.3)
(0.8) (1.2)
DPS disappointment has led to underperformance in most years
(1.6) (2.0)
2003
2004
2005
2006
2007
2008
2009
2010
2011
Avg
Note: Current MSCI universe of stocks. Only 3% or more yielding stocks that disappointed by more than 10% considered for this study. Source: Factset, CLSA Asia-Pacific Markets
102
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Section 2: Case studies
Factor exposure study similar to dividend lifecycle stages
Identifying stocks like to disappoint To identify factors that drive disappointment, we conducted an exposure analysis similar to our earlier examination of dividend lifecycle stages. Figure 64 shows the factor exposure of high-yield stocks within emerging markets that disappointed by more than 10% on their DPS during results, compared with stocks that were either in line or surprised positively. The analysis shows that stocks with negative earnings revision, relatively low earnings certainty (higher estimate dispersion), lower growth expectations, relatively lower FCF conversion, lower profitability, higher gearing and higher capital intensity are more likely to disappoint on their estimated yields. These factors are similar to those we found that are likely to drive earnings disappointment. Figure 196
EM - Factor exposure of high-yield stocks that disappointed vs those that didn’t
(Exposure - disappointments relative to others, x)
EPS rev
Sustg
Earn cert
EPSg (N2Y)
FCF conv
ROE (N2Y)
ROE (L3Y)
0.0
Capital int
1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70
Gearing
Some of factors are identical to those that signal EPS disappointment
Note: Current MSCI universe of stocks. Only 3% or more yielding stocks considered for this study. Source: Factset, CLSA Asia-Pacific Markets
Earnings revisions and certainty stand out for both EM and World
A similar analysis for the global high-yield universe also shows similar factors that are likely to drive disappointments versus those that are likely to surprise positively by 10% or more during a DPS results announcement. Figure 197
Global and EM factors are quite similar
Global - Exposure of high-yield stocks that disappointed vs those that surprised
1.20
(Exposure - disappointments relative to positive surprise, x)
1.10 1.00 0.90 0.80 0.70 0.60
EPS rev
EPSg (N2Y)
Earn cert
Sustg
ROE (L3Y)
FCF conv
ROE (N2Y)
Capital int
Gearing
0.0
Note: Current MSCI universe of stocks. Only 3% or more yielding stocks that disappointed by more than 10% considered for this study. Source: Factset, CLSA Asia-Pacific Markets
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Microstrategy
Section 2: Case studies
13. Will Basel 3 weaken dividend sustainability of banks?
The GFC highlighted the need for a robust financial framework that can deal with risk-management aspects of the banking sector more effectively. Against this backdrop, Basel-3 guidelines aim to improve the ability of banks to absorb shocks arising from financial and economic stress and strengthen their transparency and disclosures. The implementation of these measures will start from 2013.
GFC has necessitated a need for having robust financials framework
The upshot of these measures has been the various methods employed by the banks to raise the capital to comply with the new guidelines. Cutting the payout ratio is one of them. In that context, our question aims to analyse the general financial health of global banks and differentiate the ones that will witness smooth transition versus the ones that will face headwinds and could resort to disruptive options such as payout cuts. Few banks have already made use of that option. Public Bank from Malaysia has already cut its payout ratios to meet regulatory requirements. Figure 198 highlights some of the efforts (including payout cuts) undertaken by banks to comply with respective country guidelines. Figure 198
Various efforts undertaken by banks to meet Basel-3 requirements
Banks are implementing measures to comply with Basel 3 requirements
Country
News
Italy
Weakest capitalised banks in Europe, UniCredit, Intesa Sanpaolo and Monte dei Paschi commented that to beef up capital, halving the historical dividend payout ratio is perfectly possible.
Philippines
Monetary Board approved the implementation of guidelines for the 1 January 2014 adoption of the revised capital standards under the Basel-3 Accord and mandated that banks not able to meet the new capital guidelines will not be allowed to issue dividends.
Malaysia
Public bank BHD lowered its dividend guidance for 2013 to comply with stricter capital requirements.
USA
United Bancorp slashed its quarterly dividends to half in order to reserve capital for Basel 3
Source: CLSA Asia-Pacific Markets
We have also analysed the historical published tier-1 CAR ratio in various regions and countries and found Asian banks have maintained steady tier 1 CAR ratio since 2005. This is particularly credible as Asian banks have stricter regulations on classification of capital as opposed to their European peers. While the improvement can be seen with US and European banks since GFC, it is hard to gauge the same under Basel 3-definitions.
European banks tier-1 CAR are overstated under Basel 3
Figure 199
Figure 200
Basel 3 - Implementation roadmap starting 2013
Published Tier-1 CAR for various regions
10
18
(%) Sequential rise in core tier-1 CAR
9 8
14
6 4
12
Basel 2
10
3 2
8
1
6 2005
0
Asia ex-Jp banks have steady tier-1 CAR
16
7 5
(%)
2012 CET 1
2013
2014
2015
Conservation buffer
2016
2017
2018
2019
Countercyclical buffer
2006
2007
2008
2009
World
AxJ
Latam
USA
Australia
Japan
2010
2011 Europe
Note: Aggregate tier-1 CAR is calculated using bottom-up freefloat adjusted methodology for tier-1 CAR ratio of banks with market cap >US$1bn in respective regions and market. Basel-3 guidelines will be in place starting 2013. Source: CLSA Asia-Pacific Markets
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Microstrategy
Section 2: Case studies
Basel 3 requires CET 1 capital to be predominant form of capital
Under Basel 3, common-equity 1 capital (CET 1) is the predominant form of total capital required for tier-1. Two new buffers: a capital conservation buffer and a countercyclical buffer will be introduced, which will act as an extra cushion to CET 1 capital, raising the ratio to 7-9.5%. The newly introduced leverage ratio of 3% will also help banks to monitor the buildup of leverage. Basel-3 regulations provide guidelines for minimum percentages for capital and leverage ratios but central banks adopting Basel could have more stringent requirements for their respective country banks. All the countries have time until 2015 to fully implement tier-1 CAR requirements as per Basel 3. After 2015 two additional buffers namely capital conservation and countercyclical will kick in. However, it is important to note that each national regulator has significant flexibility to amend the level of ratios and the implementation roadmap.
Figure 201
Differences between key ratios under Basel 2 and Basel 3 Existing Basel 2 Key ratios
Basel 3
Common Total Total equity tier 1 capital tier 1 (inc tier 2)
Minimum
2.0% 4.0%
Capital conservation buffer
Counter-cyclical buffer
Total capital (inc tier 2)
8.0%
8.0%
4.5%
6.0%
-
2.5%
2.5%
2.5%
2.0% 4.0%
8.0%
7.0%
8.5%
10.5%
-
Total range
Total tier 1
-
-
Minimum plus Conservation buffer
Common equity tier 1
-
-
0 - 2.5%
0 - 2.5%
0 - 2.5%
2.0% 4.0%
8.0%
7.0% to 9.5%
8.5% to 11.0%
10.5% to 13.0%
Note: More details on Asian markets in Appendix 8. Source: CLSA Asia-Pacific Markets
Based on the last published tier-1 CAR, Taiwanese, Korean and Chinese banks may have to tighten their balance sheets if they wish to comply with Basel-3 levels. Australian banks typically maintain a boundary CAR and prefer dividend payout of approximately 75%. The Philippines and Singapore are among the healthiest countries in Asia with published tier-1 CAR of 13.5%. Figure 202
Taiwanese, Korean and Chinese banks may have to tighten their balance sheets
Published tier-1 CAR in various regions (FY0)
14
(%)
13
Published tier-1 CAR
Total tier-1 (max)
Total tier-1 (min)
Total CET 1
12
11%
11 10
8.5%
9 8
7%
7
Taiwan
Korea
China
Australia
Thailand
Malaysia
India
HK
Japan
Indonesia
Philippines
Singapore
6
Note: Tier-1 CAR (max) is sum of total tier-1 CAR (6%) plus conservation buffer (2.5%) plus max countercyclical buffer (2.5%). Tier-1 CAR (min) excludes counter cyclical buffer. These are minimum guidelines by Basel, though countries do differ on their own guidelines during implementation. Source: CLSA Asia-Pacific Markets, Bloomberg
1 March 2013
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Microstrategy
Section 2: Case studies
Banks will face a significant additional capital requirement
Banks will face significant new capital requirements, the bulk of which will come from either raising common equity, or in worst case, cutting dividends. Basel 3 also mandates that banks that do not meet the conservation buffer, which is designed to give them an extra source of capital to draw on during a crisis, will be subject to restrictions, such as limits on dividend payouts. The introduced leverage-ratio requirement may also limit banks from swelling balance sheets. In light of these mandates, Australian banks may feel the pressure in maintaining such high cash payouts, however it is also important to note that most of these cash dividends are reinvested back for the tax benefit purpose. Figure 203
USA and European tier-1 capital is overstated compared to their Asian peers
Banks - Dividend payout versus Tier-1 CAR ratio
(%) 59.0
Payout
55.0
HK
Australia(10.1,74.6)
Malaysia
51.0 47.0
Singapore
43.0 39.0
Thailand
35.0 31.0
Taiwan
27.0
UK France
China
23.0
India
19.0 15.0
Japan
10.0
11.0
Germany
Indonesia
Russia 9.0
Switzerland
Brazil (16.1,33.3)
12.0
Philippines
USA Tier CAR I Ratio 13.0
14.0
Note: MSCI Countries average Pay-outs for year 2012-14 is used and compared with 2011 tier CAR-1 ratio. Source: CLSA Asia-Pacific Markets, DataStream, Bloomberg
Payouts for all regions have been negatively revised since May 2011
The global dividend payout forecast for 2013 has already been moderately cut since May 2011. The global economic slowdown is also partly responsible for this cut, but the stringent Basel-3 requirements could exacerbate the problems for banks. This could lead to acceleration in the payouts cuts. Within regions, US banks have been cut the least, while Latam’s payouts are down the most, followed by Japan and Europe. Figure 204
Latam payouts have been cut the most
Dividend-payout forecast revisions for 2013 since May 2011 for major regions 0
(1)
(2)
(3)
(4)
(5)
2013 payout forecasts have been negatively revised for all the regions since may 2011 (%)
(9.1) USA
APxJ
World
Europe
Japan
Latam
Note: Dividend payout forecast revisions for period May 2011 to Jan 13 are calculated by bottom up aggregation of 2013 payout forecasts for Banks in respective region. For Europe, we have excluded Bank Santander SA from analysis as its payout is revised positively due high negative EPS rev caused by loans restructuring in last 2 year. Source: CLSA Asia-Pacific Markets, Factset
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Section 2: Case studies
Stocks with least and most risk from Basel 3 We have analysed MSCI World Banks and diversified financials tier-1 CAR ratio and total CAR to gauge the effect on their dividend payout after Basel-3 implementation. Well capitalised banks have either higher tier-1 CAR ratio or higher equity-to-asset ratios which make them unlikely to cut dividends post Basel-3 implementation, whereas banks which have less tier-1 CAR as compared to Basel-3 targets coupled with dividend payouts greater than 25% might feel pressure in sustaining the same payout level.
Identifying global banks with highest and lowest payout sustainability
Dividend payout (average FY1 and FY2)>25%
Equity to asset >3% Figure 205
MSCI World - 15 well capitalised banks with payout more than 25% (sorted based on published tier-1 CAR) Code
Name
Cty
Sector
Mkt cap Tier-1 CAR
Total CAR
Eq/assets
Payout
ROE
12MF
(US$m)
(FY0, %)
(FY0, %)
(FY0, %)
(N2Y avg
(N2Y avg
Div yld
%)
%)
(%)
UBSN VX
UBS
CH
Div fin
63,379
21.3
25.2
3.6
36.4
8.0
1.7
CSGN VX
Credit Suisse
CH
Div fin
38,939
19.5
22.3
3.9
32.9
10.9
2.9
STAN LN
Standard Chartered
UK
Banks
64,917
13.7
17.6
6.8
38.6
12.5
3.1
UOB SP
UOB
SG
Banks
24,850
13.5
16.7
8.8
39.9
11.8
3.4
RY CN
RBC Canada
CA
Banks
91,809
13.1
15.1
4.8
46.1
18.4
3.8
ICICIBC IN ICICI
IN
Banks
23,817
12.7
18.5
10.1
27.7
13.0
1.8
JPM US
JPMorgan Chase
US
Div fin
188,108
12.6
15.3
8.3
26.6
10.2
2.8
2388 HK
Bank of China (HK)
HK
Banks
36,062
12.5
16.9
7.5
63.0
14.8
4.6
BBL TB
Bangkok Bank
TH
Banks
14,212
12.2
15.4
11.3
39.1
13.5
3.5
MAY MK
Maybank
MY
Banks
24,259
11.8
15.4
7.6
73.0
15.0
5.9
WFC US
Wells Fargo
US
Banks
185,058
11.8
14.6
10.2
28.4
12.7
2.8
HDFC IN
HDFC
IN
Banks
23,340
11.6
14.6
11.5
37.8
21.8
1.4
HSBA LN
HSBC
UK
Banks
207,305
11.5
14.1
6.2
48.5
10.5
3.9
HLBK MK
Hong Leong Bank
MY
Banks
8,365
11.3
15.5
7.2
33.9
15.5
2.5
SCB TB
SCB
TH
Banks
19,975
11.1
14.5
9.6
36.0
24.8
2.9
Figure 206
MSCI World - 15 poorly capitalised banks with payout more than 25% (sorted based on published tier-1 CAR) Code
Name
Cty
Sector
Mkt cap
Tier 1 CAR
Total CAR
Eq/assets
Payout
ROE
12MF
(US$m)
(FY0, %)
(FY0, %)
(FY0, %)
(N2Y avg
(N2Y avg
Div yld
%)
%)
(%)
USB US
US Bancorp
US
Banks
63,593
10.8
13.1
9.7
29.6
15.4
2.6
PBK MK
Public bank
MY
Banks
18,240
10.8
14.1
6.5
45.0
21.7
3.6
FITB US
Fifth Third
US
Banks
14,079
10.7
14.4
10.9
28.1
10.7
2.8
AMM MK
AMMB
MY
Div fin
6,094
10.5
15.0
10.0
42.5
14.1
3.8
WBC AU
Westpac
AU
Banks
97,175
10.3
11.7
6.6
81.0
14.9
5.7
BBVA SM
Banco Bilbao Vizcaya ES
Banks
55,738
10.3
12.9
6.4
51.6
10.7
5.6
CMA US
Comerica
US
Banks
6,643
10.1
13.1
10.6
26.7
7.1
2.0
1398 HK
ICBC
CN
Banks
242,108
10.1
13.2
6.2
34.2
21.1
5.0
UCG IM
UniCredit
IT
Banks
33,129
9.3
12.4
5.6
27.9
2.5
1.4
UBI IM
Unione di Banche
IT
Banks
4,379
9.1
13.5
6.9
29.0
2.2
1.4
024110 KS
IBK
KR
Banks
6,553
8.9
11.7
7.1
25.5
7.7
3.6
2892 TT
First Financial
TW
Banks
5,266
8.3
10.9
6.1
29.0
8.1
2.0
3968 HK
CMB
CN
Banks
48,212
8.2
11.5
5.9
25.1
20.4
3.3
CHILE CI
Banco de Chile
CL
Banks
15,798
6.9
12.9
8.0
60.6
22.7
4.4
5880 TT
TCF
TW
Banks
4,672
6.1
10.3
4.1
27.3
5.9
1.7
Source: Factset, CLSA Asia-Pacific Markets
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14. What is the impact of tax on dividends?
Tax policy can have impact on the dividend payout policy
Country’s taxation policy plays a crucial role during decision-making process of a corporation’s dividend policy. Management has to deliberate over various viable options, being mindful of the tax implications on existing shareholders. Management always has the option to either pay dividends (common or special) or buy back the stock. However, the choice between the two can also be a function of the country’s tax regime. The company can always opt for dividends, if the dividend tax incidence on their shareholders is less than capital-gains tax and vice versa.
Analysing USA’s tax history to establish its relationship with dividends
In light of this relationship between the dividend tax and dividend policy, our previously stated question aims to identify the historical evidence related to the dynamics of the two variables. We have used the USA as a case study for the analysis, as it offers the longest history of both dividends and capitalgains tax and other pertinent dividend related statistics.
Dividend tax in USA has consistently fallen from 90% in 1954 to current 20%
In Figure 207, we highlight the dividend and capital-gains tax in the USA since 1954. It is interesting to note that during the early 1950s, the dividend tax rate (highest marginal tax rate charged to individuals) was 90% versus the 25% on capital gains. Against this stringent tax regime, following a high dividend payout policy is unlikely for corporates. However, since then, the dividend tax rate has witnessed secular contraction. Indeed in 1986, the gap between the dividend tax and capital gains narrowed to zero, removing any disadvantage associated with paying dividends. But, ironically, during the same decade, a new corporate action, called buybacks, started gaining traction with management and investors. Although the buybacks were a pittance during the late 1980s, they gained critical mass during the 1990s and surged past dividends after 2000.
Tax cuts have resulted in improvement in dividend statistics in USA
Therefore, against the backdrop of surge of buybacks relative to dividends, the impact of taxes seems negligible. However, a detailed analysis presents a much clearer picture and highlights that a reduction in the dividend tax rate has impacted the corporates dividend culture, although it has not come at the expense of buybacks. We have also analysed the impact of dividend taxes on the evolution of equity income funds as a separate asset class in the USA. Figure 207
Dividend and capitalgains tax in USA since 1954
Dividend and capital-gains tax in USA since 1954
100
(%)
Dividend tax
90
Capital-gains tax
80 70 60 50
Spread between dividend and capital-gains tax
40 30 20
Capital-gains tax
1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
10
Source: CLSA Asia-Pacific Markets, US tax policy centre, OECD
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Few companies paying dividends during high tax regime pre 2003
The impact of the change in dividend tax structure is evident in Figure 208. Our analysis highlights that after the dividend tax cut of 2003, US corporates have undergone a structural change in terms of dividend paying ability. The number of companies paying dividends has witnessed almost a step-change since 2003 and more importantly they have continued to make gain until the outbreak of GFC. The change in tax regime has also brought about a change in the number of companies witnessing positive revisions to future dividends, highlighting consensus’s optimism towards future dividend payouts. It is no surprise that DPS index too grew in concurrence with the general optimism around dividends. Figure 208
Post 2003 the dividend culture has undergone a paradigm shift
MSCI USA - Tax impact on number of companies paying dividends 250
500 Dividend tax cut to 15%
High dividend tax of 39.6%
450
200
400
150
350 100
300 No. of dividend paying companies
250
50
No. of companies with +ve DPS rev (RHS) DPS Index (RHS)
Dec 11
Dec 09
Dec 07
Dec 05
Dec 03
Dec 01
Dec 99
Dec 97
0
Dec 95
200
Note: No. of companies with positive DPS revisions is calculated based on average number of companies with 3month positive DPS revisions for 1 year period. Source: CLSA Asia-Pacific Markets, Factset alpha tester
Equity income funds invest in stocks with good history of sustainable dividend payouts.
Surge of new equity income funds post the 2003 dividend tax cut The dividend tax cuts also led to the resurgence of new asset class, namely global equity income funds. Our analysis highlights that during 1993 to 2002, the average number of funds launched was six. However, post the dividend tax cuts in 2003, the number has shot up to 17. Figure 209
Launch of new equity income funds surged since 2003
35
(No. of funds)
(%)
Number of equity income funds launched Dividend tax rate (RHS)
30
45 40
2012
2011
2010
2009
2008
2007
2006
2005
10
2004
0
2003
15
2002
5
2001
20
2000
10
1998
25
1997
15
1996
30
1995
20
1994
35
1993
25
1999
Number of new equity income funds increased post tax cut in 2003
Note: Active equity income open-end funds are taken into consideration. Source: CLSA Asia-Pacific Markets, Bloomberg
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Effect of tax on dividend yield
Effect of tax on dividend yield in USA The dividend tax rate also has demonstrated strong relationship with dividend yield in the USA. Our analysis on S&P’s dividend yield and dividend tax shows an inverse correlation between the two. The USA’s dividend yield consistently fell between 1986 and 2000 in response to the high tax rate. However, after 2003, the dividend yield is making a structural shift upwards. Reduction in tax rate during 2003 led to the expansion in yield from 1.6% to 2.3%. Although recently dividend tax rate has marginally increased from 15% to 20%, it is still significantly lower than its historical average and should not affect yield. Figure 210
Inverse correlation between dividend tax and dividend yield for US
Relationship of dividend tax and dividend yield in USA
45
(%)
Dividend tax
4.0
(%)
S&P dividend yield (RHS)
3.5
40 Continuous reduction in yield due to higher tax rate
35 30
3.0 2.5 2.0
25
1.5
Increase in dividend tax rate resulted in compression of yield
20
Lower taxes reuslted in expansion of yield
1.0
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0.0
1988
10
1987
0.5
1986
15
Source: CLSA Asia-Pacific Markets, US tax policy centre, Robert Shiller
Key differences in dividend tax for local and foreign corporates
Differences in dividend tax charged to local and foreign corporates Taxes on dividends are always the main concern for investors. In Figure 211, we highlight the difference in dividend taxes that are charged to local and foreign corporates.
Figure 211
Summary of withholding/ dividend tax on corporates Country UK
Local
Foreign
-
-
Brazil HK Sing Philippines Taiwan Turkey Japan India
16.2
30.0 20.0 15.0 20.4 16.2
South Africa Russia Indonesia Thailand Malaysia Australia USA China Korea
15.0 9.0 15.0 10.0 -
15.0 15.0 20.0 10.0 30.0 10.0 22.0
-
30.9 15.8
France Germany
Comments
Neither withholding tax nor dividends are included in annual taxable income.
Withholding tax on foreign corporate is applicable.
Withholding tax for both local and foreign corporate is applicable. Partial dividends (50%) are included in annual taxable income and charged at 20%. Dividends are included in taxable income and charged at 25%, no withholding tax.
Dividends are included in taxable income and charged at 35%. Partial dividends (5%) are included in taxable income and charged at 30%.
Note: All the numbers includes surtax where applicable. 1 India: Long-term capital gains and DDT is 15% plus 5% surtax and 3% education cess finally makes total tax incidence of 16.22%. 2 Malaysia: Assuming majority of companies have migrated in to STS. 3 Australia: Assuming fully franked dividends. Source: CLSA Asia-Pacific Markets, Regional tax authorities.
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No withholding tax on local corporates in most countries
For local corporates there is no withholding tax for any country except India, South Africa, Russia, Indonesia and Thailand whereas foreign corporations in the UK and developed Asia fall under a tax-haven trajectory and developed countries like the USA, France, Germany, Italy and Korea are highly tax oriented nations.
UK, Brazil, Hong Kong and Singapore are the most tax-efficient countries
The UK, Brazil, Hong Kong and Singapore are the most tax-efficient countries in terms of corporate dividends. All four have eliminated double taxation as they rely heavily on overseas investments and the subsequent distribution of dividends back to parents by companies operating outside their jurisdictions.
Malaysia has until December to adopt STS
The USA, China, Korea, France, Germany and Italy include dividends in net assessable income. However, Malaysia and Australia do not levy withholding tax but include dividends in net income. In Malaysia, we have assumed most companies have migrated to a single-tier-system (STS), hence companies paying dividends will no longer withhold anything from recipients. However, corporations in Malaysia have until December 2013 to adopt STS.
NDET only applicable in Taiwan and Philippines forcing higher payouts
To neutralise a company’s dividend distribution decision, a non-distributed earnings tax charge (NDET) is prevalent only in Taiwan and Philippines. NDET encourages companies to increase payouts rather than hold back cash on balance sheets. This may be another reason for the average payout ratio to be about 80% in Taiwan. However, more companies in the Philippines tend to retain more to funds as they are in growth phase.
Dividends are taxed either by including individual’s income or by withholding tax at company level
Dividend and capital-gains tax rates on local residents Every country has its own rules with regards to taxation. Some governments prefer withholding tax on dividends by corporates before distributing them to shareholders, as this prevents tax evasion, whereas some tax laws require shareholders to include the dividends in their annual income and pay taxes accordingly. In this section, we attempt to show dividend and capital-gains tax applicability on residents. Figure 212
France has the highest tax rate for dividends and capital gains
Dividends and capital-gains-tax rate on local residents
60
Dividend tax
(%)
Capital gains tax
50 40 30 20 10
Asia Pac free
Europe
America
Turkey
South Africa
Brazil
USA
Russia
Germany
UK
France
Korea
Taiwan
Thailand
Philippines
Indonesia
Australia
India
China
Japan
0
Middle East
Note: Higher tax rate plus surtax taken into account for all the countries. Indonesia levy 0.1% of transaction value as capital-gains tax for residents. Capital gain related assumptions: - 1) In Korea, we have assumed gains are from transfer of listed stocks. 2) In case of India, capital gain is not taxable if transaction is subject to STT. 3) In China, only exception is ESOPs which are taxable. Source: CLSA Asia-Pacific Markets, Regional tax authorities.
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Singapore and Hong Kong does not levy tax on capital gain and dividends
No long term capital gain levied in most of the Asian countries. Capital-gains taxes on corporates are always higher compare to individuals
High capital-gains tax rate lengthen investors holding period
Corporate capitalgains tax
Regional average of capital-gains tax for developed markets is higher compare to Asia
In Figure 212, we have classified the dividend and capital-gains tax into four regions; Asia Pacific (including Japan), Europe, America and the Middle-East. Singapore and Hong Kong are the best in Asia for not levying tax on dividends and capital-gains tax. In terms of long-term capital gains taxation, Asian countries like China, India, Indonesia, Thailand and Malaysia are tax friendly countries as they do not levy long-term capital gains taxes on resident individuals subject to few tax-related assumptions mentioned in the note of Figure 212. Our study shows, capital-gains tax on corporates are always higher compared to resident individuals in each country except Taiwan, the UK and France where capital-gains tax on individuals is charged based on marginal income tax rate. All European countries require individuals to include the dividends in taxable income and subject to tax based on respective marginal rates. The USA has recently increased dividend and capital-gains tax to 20% and introduced additional medicare tax of 3.8% with immediate effect. Prior to 2003, the USA had a dividend-tax rate that was far above that of most other developed nations. Lastly, in addition to issues related to the double tax, a lower rate on capital gains can be justified on policy grounds because high capital-gains tax rates lengthen investors holding period and the capital-gains tax is a taxed on both real and inflationary gains. Corporate capital-gains tax rates Most capital gains is realised from the sale of securities. In this subsection, we have discussed tax on the sale of securities. A capital-gains tax is levied on the profit realised from the sale of a stock. Not all countries implement a capital-gains tax and most have different rates of taxations for corporations. Figure 213 shows that the regional capital-gains-tax average for developed markets is higher than in Asia-Pacific markets. The likes of Hong Kong, Singapore and Malaysia do not impose taxes on long-term capital gains. Capital-gains tax for corporations in France and the USA is the highest among all the developed nations. On the other hand, developing nations like Philippines and India levy the least. Figure 213
Capital-gains tax in various countries with regional average
Capital-gains tax in various countries with regional average 40
Regional average
Capital gains tax
(%)
35 30 25 20 15 10 5
Asia Pac Free
Europe
America
Turkey
South Africa
Brazil
USA
Russia
UK
Germany
France
Philippines
India
Taiwan
Thailand
Korea
Indonesia
China
Japan
Australia
0
Middle East
Source: CLSA Asia-Pacific Markets, Regional tax authorities.
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15. Will companies return the cash back to shareholders?
Who has extra cash and how would they pay it out
There are two key questions that matter to a global dividend investor. Firstly, who is carrying the cash balance in excess of the immediate operational and strategic requirements? And secondly, how are they likely to dispense with the excess cash? We look through the financial statements of the top 2,500 stocks globally (MSCI AC World constituents) to answer these questions.
Asian companies carry the most cash, and have less need of it going forward
Our analysis suggests that despite the significant absolute cash amounts with US companies, it’s Asian companies that are carrying the most excess cash compared to assets. We also find that Asian capital intensity is falling as capacity utilisation remains low and margins at a multidecade trough. Finally, given Asia’s total debt-to-equity ratio is the lowest, there is little chance that companies will focus on deleveraging their balance sheets. Hence, despite the volatile free-cashflow conversion rate, we are convinced that with excess cash balances and reducing demands on cash, Asia presents a strong case for structural dividend growth.
USA will favour buybacks, Europe will conserve cash and Japan will increase capex
We also believe that given management’s compensation structure, US companies are likely to continue using the buyback route to distribute excess cash. However, Europe will continue to focus on building the depleted cash reserves as the EU-crisis continues to threaten a long period of below-normalgrowth, if not a recession. Japanese earnings, especially exporters, seem to be turning the corner as the weaker yen drives increased revenue and margins. Japan also has the lowest capital intensity but as margins improve, we expect an increase in capex and acquisitions to capture improved growth opportunities.
Top global companies are sitting on US$4tn in cash
In Figure 214, we show the cash balances of the current MSCI AC world constituents (ex-finance) without any adjustments. The data cannot be used for a YoY comparison as the number of companies with data changes every year but it does highlight the growth of cash on the balance sheets globally. The chart shows that the top companies have close to US$4tn of cash. The USA, which is close to 50% by weight for MSCI, leads the charge followed by Europe. However, it is interesting to note that Asia has been catching up fast with the rest of the world. Figure 214
USA is the biggest contributor but Asia has been catching up
MSCI World (ex-finance): Breakdown of cash and cash equivalents by regions
4,500
(US$bn)
USA
Europe
AsiaxJ
Japan
Others
4,000
317
Significant cash build up since GFC US$4tn by end of 2011
3,500 3,000
584 774
2,500 2,000
1048
1,500 1,000
1278
500
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
Source: Factset, CLSA Asia-Pacific Markets
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China is the largest cash hoarder in Asia with US$286bn in 2011
A similar analysis for Asia suggests that China is by far the largest cash hoarder in Asia with US$286bn in 2011. In Figure 215 we show the cash balances of the current MSCI Asia ex-Japan constituents (ex-finance). We believe that China’s cash reserves would rise further as capex slows. Asean has also been increasing its cash balance at a rapid pace and its holdings are much closer to those of Korea. Even Indian companies have been hoarding cash and have close to US$77bn in 2011. We believe that these balances are a signal that Asian dividends are sustainable. Figure 215
Asean’s cash hoard is rising fast and already close to Korea
MSCI Asia (ex-JP, finance): Breakdown of cash and cash equivalents by markets
900
(US$bn)
China
Korea
Asean
Taiwan
India
HK
800
56
China has the most cash while Asean is catching up fast with Korea
700 600
77 102
500
117
400
136
300 200
286
100
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
Source: Factset, CLSA Asia-Pacific Markets
Cash to total assets has increased universally since GFC
The cash-to-total-assets ratio is a more useful measure to track the level of excess cash on balance sheets. In Figure 216 we show that global cash balances have risen since the GFC as companies have been hoarding cash and capex growth has slowed. Asia has the highest cash-to-total-asset ratio but the USA has witnessed a significant increase in its cash-to-total-assets ratio since the GFC. If Asia’s ratio were to rise to the global level of 10%, Asia would end up distributing US$180bn of extra cash, compared with the 2011 dividends and buybacks of US$129bn (ex-finance). Figure 216
Asia has the highest cashto-assets ratio and should return some of the extra cash to investors
MSCI (ex-finance): Cash to total assets trend
16
(%)
AsiaxJ
Europe
USA
Japan
World
Despite the increase in buybacks in the USA, cash balances are too high, Asia and Japan also have lots of cash
14 12 10 8 6
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
4
Source: Factset, CLSA Asia-Pacific Markets
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Tech and pharma have the highest cash build up
We also examined the sectors to understand the drivers of the cash hoarding. In Figure 217 we plot the cash-to-total-assets ratio in 2011 for different sectors and compare it with the average over the past 10 years. Our analysis suggests that shorter product-life-cycles and research-and-development (R&D)-driven tech and pharma sectors have constantly hoarded higher cash balances to facilitate the development of new products either through organic or inorganic routes. Long durations and asset-heavy sectors such as property, energy, telecom and utilities have the lowest cash-to-assets ratios. We also find that cash-to-assets ratios are higher than in the past for the majority of sectors with pharma witnessing the biggest drop followed by HPC. Figure 217
Most sectors have witnessed an increase in cash balances
MSCI world sector cash to total assets: Last reported versus past 10-year average
(%)
30
2011
Avg (02-11)
(ppt)
Diff (RHS)
4
Most sectors have witnessed an increase in the cash levels compared to the assets
25
3 2
20
1
15
0
10
(1)
Property
Utilities
Energy
HPC
Media
Telecom
Comm svc
Fd stp ret
FBT
Materials
Transport
World
Cons svc
Auto
Retail
Healthcare
Cons dur
Pharma
Cap gds
(3)
Tech Hw
0
Semis
(2)
Software
5
Source: Factset, CLSA Asia-Pacific Markets
FCF conversion is set to be robust in the future
We believe that these cash reserves will continue increasing since the freecashflow conversion ratio in the immediate future is set to better the historical average. In Figure 218 we compare the 2013-14F average freecashflow ratio with the historical average for different regions. The charts suggests that while the USA has the highest cash-conversion ratio, Asia and Japan are set to witness a significant increase in their free-cashflow conversion ratios, further boosting cash reserves. Figure 218
Asia is set to witness the most improvement
MSCI (ex-finance) FCF conversion: Comparing estimates with history
100
(%)
Avg (13-14)
90
Avg (02-11)
Asia'a FCF conversion ratio is set to improve the most
80 70 60 50 40 30 20 10 0
USA
Japan
World
Europe
AsiaxJ
Source: Factset, CLSA Asia-Pacific Markets
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Section 2: Case studies
First use of cash is to deleverage but companies have already done that
Companies don’t need to deleverage further One of the key reasons we expect payouts to increase is because there aren’t alternatives for the efficient use of the cash. The first potential use of cash is paying off the debt but we find that after deleveraging through the 1990s to 2007, companies have reasonable debt levels and do not need to deleverage further. In Figure 219 we show the trend in total-debt-to-equity ratios across markets and Japan is the most geared while the rest of Asia is the least. It highlights that Japanese companies have been deleveraging despite the persistently low interest rates. Indeed if the new monetary policy in Japan drives yields higher, we could witness further deleveraging for Japan. But for the other regions, further deleveraging could result in inefficient capital structures and hence they are unlikely to use cash to reduce debt. Figure 219
Total debt to equity has been stable since 2006 except for GFC
MSCI (ex-finance): Total debt to equity trend
200
(%)
AsiaxJ
Europe
180
USA
Japan
World
Japan most geared, Asia the least and the global deleveraging has stopped
160 140 120 100 80 60
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
40
Source: Factset, CLSA Asia-Pacific Markets
Net gearing ratios are set to be even lower
In Figure 220 we show the net debt to equity trend for various regions. The charts highlight that net gearing ratios are much lower and that the forecasts suggests that net debt-to-equity could reduce further to ridiculously low levels if companies do not utilise the cash on their balance sheets. Figure 220
Companies must payout more to improve ROEs
MSCI (ex-finance): Net debt to equity trend
(%)
140
AsiaxJ
Europe
120
USA
Japan
World
Net gearing ratios are at trough levels
100 80 60 40 20
2014F
2013F
2012F
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
Source: Factset, CLSA Asia-Pacific Markets
116
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1 March 2013
Microstrategy
Section 2: Case studies
Most sectors, especially the most geared ones, have deleveraged over the past 10 years
In Figure 221 we compare the current total debt-to-equity of different global sectors with the past 10-year average. It shows that most sectors have witnessed a drop in the overall gearing ratio, with the previously highly geared sectors such as autos, capital goods and transport driving the trend. However, utilities stocks are now the most geared with total-debt-to-equity ratio is only marginally lower than the 10-year average, suggesting that they are most likely to drive any further deleveraging. Tech and energy have the lowest gearing ratios, which have been stable over the past 10 years. Overall, we find that most sectors do not have any urgent need to deleverage except for utilities. Figure 221
Utilities has not deleveraged and now have the highest gearing
MSCI world sector total debt equity: Last reported versus past 10-year average
180
(%)
2011
Avg (02-11)
(ppt)
Diff (RHS)
The most geared sectors have also witnessed the biggest drop in total debt-to-equity ratio
160 140
30 20 10
120
0
100
(10)
80
(20)
60
Semis
Software
Energy
Pharma
Tech Hw
Cons dur
HPC
Retail
Fd stp ret
Materials
Healthcare
Cons svc
FBT
World
Comm svc
Media
Telecom
(50)
Property
0
Cap gds
(40)
Transport
20
Auto
(30)
Utilities
40
Source: Factset, CLSA Asia-Pacific Markets
Net debt-to-equity ratios have fallen even more across sectors
We highlight a similar analysis of the net-debt-to-equity ratio across global sectors in Figure 222. Indeed for all sectors, current net-debt-to-equity ratios are lower than the past 10-year average. We also find that most sectors have witnessed a 20ppt or more drop in their net-debt-to-equity ratio. With tech in a net-cash position, we believe they are likely to drive any global effort by companies to return the cash back to investors. Figure 222
MSCI world sector net debt to equity: Estimate versus past 10-year average
(%)
Avg (13-14)
Avg (02-11)
(ppt)
Diff (RHS)
10 0 (10) (20) (30) (40) (50)
Tech Hw
Software
Semis
(60)
Pharma
Cons dur
Retail
Healthcare
Energy
HPC
Fd stp ret
Materials
World
Cons svc
Comm svc
FBT
Cap gds
Media
Telecom
Property
Most sectors have witnessed a decrease in net gearing ratio
Utilities
140 120 100 80 60 40 20 0 (20) (40) (60)
Transport
Utilities could deleverage at expense of dividends
Source: Factset, CLSA Asia-Pacific Markets
1 March 2013
[email protected]
117
Microstrategy
Section 2: Case studies
In a low-growth world, higher capex may not be an attractive option
Unlikely to increase capex The second-most important use of cash is to increase investments - either through capex or mergers and acquisitions (M&A). We focus more on the capex side as M&A is a much more stock/sector/market specific phenomenon. For example, the USA remains the hotbed for M&As since insiders hold little of the company while in emerging markets, companies rarely have low insider holdings and those insiders such as promoters may not be willing to sell at any reasonable price. However, if we assume capex to be a proxy for M&A, we find that capital intensity (capex/sales) has dropped the most for Asia but has been stable for the rest of world at around 6-7%. And with the world entering a new slower growth phase, we doubt that companies will find increasing capex or M&A an efficient use of cash. Figure 223
Global capital intensity is stable but it has been falling for Asia
MSCI (ex-finance): Capital intensity (capex/sales) trend
(%) 16
Europe
AsiaxJ
USA
Japan
World
28.0, 21.3, 26.8, 20.7
Capital intensity has been stable for US and Europe but has been falling for Asia ex-Japan
14 12 10 8 6 4
2014F
2013F
2012F
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
2
Source: Factset, CLSA Asia-Pacific Markets
Among sectors, most have similar capital intensity as in the past
In Figure 224 we compare the 2012 forecast capital intensity with the 10-year average across sectors. We avoid using 13-14F since capital intensity is structurally underestimated by analysts to the tune of 1-2ppt at the start of the year. Our analysis shows that capital intensity is stable for most sectors and where it has increased, the rise is quite small (1-2ppt). Figure 224
Even for those with increases, the extent of increase is quite small
MSCI world sector capital intensity: 12F versus past 10-year average
18
(%)
2012
23.9
Avg (02-11)
16
(ppt)
Diff (RHS)
2
For most sectors capital intensity is lower than the long-term average
14 12
3 1 0
10
(1)
8
(2)
6
(3)
4
(4)
2 0
(5)
Healthcare
Fd stp ret
Cap gds
Retail
Cons dur
Tech Hw
HPC
FBT
Software
Comm svc
Pharma
Auto
Cons svc
Media
World
Semis
Materials
Transport
Energy
Property
Utilities
Telecom
(9.3)
Source: Factset, CLSA Asia-Pacific Markets
118
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Microstrategy
Section 2: Case studies
Operating cash flow growth set to be robust
Robust operating cashflow growth Up to now we have discussed how cash balances are unusually large and there are hardly any opportunities for its efficient use other than paying it back. One could argue that the uncertainty about future cashflows could be the reason that they continue to hold on the cash, despite not having much use of it. However, in Figure 225 we highlight that the operating cashflow growth for 13-14F is set to be same or higher than the historical average for all regions except Asia ex-Japan. Even for Asia, the actual cashflow-growth level is only lower than Japan, which is high due to the low base in 2012. Figure 225
Asia’s growth to slow but is still higher than US and Europe
MSCI (ex-finance) operating cashflow growth: Comparing estimates with history
(%)
14
Avg (13-14)
Japan's operating growth is set to be robust over the next two years, followed by rest of Asia
12 10
Avg (02-11)
8 6 4 2 0
Japan
World
AsiaxJ
USA
Europe
Source: Factset, CLSA Asia-Pacific Markets
FCF cover of dividends has been comfortably above one for most regions except Asia
We also checked the ability of companies to pay existing dividends out of the current free cashflow, and thus not having to raise any debt. We found that since the 2000-01 slowdown, only Asia has found it difficult to cover dividends without raising debt. However, our data also shows that future payout expectations are quite low, driving improvements in dividend cover for all markets. With cash balances already higher, we expect the positive surprise for the payout ratios in 2013-14. Figure 226
For Asia FCF cover is set to improve as capex growth slows
MSCI (ex-finance): FCF cover (FCF/dividends) trend
6 5
(x)
AsiaxJ
Europe
USA
Japan
World
FCF cover for Asia is set to improve but remains volatile
4 3 2 1 0
2014F
2013F
2012F
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
(3.4)
1997
1995
(5.5)
1994
(2)
1996
(1)
Source: Factset, CLSA Asia-Pacific Markets
1 March 2013
[email protected]
119
Microstrategy
Section 2: Case studies
Increasing payout is a straightforward way to not allow cash to accumulate in future
Dividends or buyback Now that we have established that companies are mostly likely to increase the return of cash to investors, the only question that remains is the route that the companies will take. One of the easier ways would be to increase the payout ratios, thus enhancing the distribution of future cashflows and prevent cash from accumulating at a similar rate as in the past. In Figure 227 we show that consensus expects payout ratios to fall in 2013-14 for most markets except the USA. We believe it is unlikely that payout ratios will fall further for Asia and the USA. For Japan, we see increased capex as a threat to the payouts. Also for Europe the already high payouts and need to conserve cash could drive payouts lower. Figure 227
Expect Asia’s payout to increase while Europe and Japan’s could fall
MSCI (ex-finance): Dividend payout trend
55
(%)
AsiaxJ
Europe
USA
Japan
World
50 45 40 35 30 25
2014F
2013F
2012F
2011
2010
2009
2007
2006
2005
2004
2003
2002
2001
15
2008
Europe's payout is the highest while Asian payout set to increase to 36% in 2012
20
Note: Japan’s 2008 data is an outlier and hence not plotted. Source: Factset, CLSA Asia-Pacific Markets
USA is key market from a buyback perspective
From a buyback perspective, the USA remains the key market as it is motivation and the capability to do buybacks while for Europe, cash conservation will take the lead. For Japan, we believe that domestic companies will continue with buybacks while exporters will focus on capex. For Asia, we still believe the immediate focus will remain on dividends as highlighted in our freefloat and tax study later in the report. Figure 228
Europe will continue to focus on cash conservation
MSCI (ex-finance): Buyback payout trend
100
AsiaxJ
(%)
90
Europe
USA
Japan
World
Buybacks common in US and Europe but hardly used in Asia
80 70 60 50 40 30 20 10
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
For Asia ex-Japan and Japan, we have smoothed the outliers (2001-2 and 2008). Source: Factset, CLSA Asia-Pacific Markets
120
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1 March 2013
Microstrategy
Section 2: Case studies
Highlighting cashflow situation of different yield and payout buckets
Balance-sheet and cashflow characteristics of yield stocks In Figure 229, we show the balance sheet and cashflow characteristics of the different yields and payout ranges for investors to ascertain the sustainability of dividends. For example, the table shows that while stocks with more than 7% yield may seem attractive, they also have the highest gearing. Figure 229
MSCI world - Current balance sheet and cashflow ratios (median values)
FY0 Cash /tot asset (%) 0-20 20-40 40-60 60-80 >80 All FY0 FCF conversion 0-20 20-40 40-60 60-80 >80 All FY0 Tot debt to equity (%) 0-20 20-40 40-60 60-80 >80 All FY0 Net debt to equity (%) 0-20 20-40 40-60 60-80 >80 All FY0 Capital intensity (%) 0-20 20-40 40-60 60-80 >80 All 2013F Cash payout (%) 0-20 20-40 40-60 60-80 >80 All Payouts
Payouts
Payouts
Payouts
Payouts
Payouts
Higher yield companies has less excess cash
7 na na na 39.8 48.5 44.6
All 8.7 18.9 29.8 41.1 57.5 23.1
Note: Dividend yield is 12-month forward and payout is FY1 data. Source: Factset, CLSA Asia-Pacific Markets
1 March 2013
[email protected]
121
Microstrategy
Section 2: Case studies
Stocks with excess cash and strong cashflow In Figure 230 and 231, we highlight the companies with excess cash and strong cashflow within MSCI World universe. These stocks have positive freecashflow yield, high free-cashflow conversion and strong track record of freecashflow yield higher than dividend yield. Other factors such as gearing, cashto-total assets, capital intensity and payout were also considered.
Stocks with high FCF conversion and strong FCF>dividends track record
Figure 230
Stocks with excess cash and strong cashflow (Asia Pacific ex-Japan, Japan and Europe region) Code
Name
Cty Sector
Mkt cap 12MF FCF yld FCF Conv FCF>Div Gearing Capital Payout Cash 12MF 12MT (US$m) Div yld (FY0, (L5Y Track (FY0, Int (FY1, To TA PE PB (%) %) avg,%) record %) (FY0, %) (FY0, (x) (x) %) %)
Asia Pacific ex-Japan 941 HK
China Mobile
CN Telecom
220,930
4.0
7.5
79.5
16/16
(46.9)
23.4
43.7
35.0
11.0
1.9
700 HK
Tencent
CN Software
64,608
0.5
2.1
101.0
8/9
(44.7)
17.1
11.4
46.3
24.2
9.3
INFO IN
Infosys
IN
Software
29,959
1.9
4.2
74.2
16/17
(61.9)
4.5
30.1
54.0
15.8
4.2
CSL AU
CSL
AU
Pharma
28,549
1.9
2.9
74.4
14/16
3.3
7.0
40.9
19.9
21.2
7.9
2412 TT
Chunghwa Telecom TW Telecom
24,696
5.1
6.6
121.9
10/12
(19.4)
12.6
92.7
16.5
18.0
2.0
TLKM IJ
Telkom
ID
Telecom
19,075
4.9
8.6
102.0
16/17
14.9
19.4
61.3
10.5
13.2
3.5
035420 KS NHN
KR
Software
9,738
0.3
2.5
80.0
10/10
(56.2)
6.7
5.4
46.7
17.8
6.3
HCLT IN
HCL Tech
IN
Software
8,995
1.7
3.7
68.0
8/9
(3.4)
4.3
21.2
13.4
12.6
4.0
4904 TT
Far EasTone
TW Telecom
8,288
5.4
5.8
153.8
10/12
(14.6)
11.6
98.6
14.5
17.9
3.3
270 HK
Guangdong Inv
CN Utilities
5,176
3.0
7.1
134.1
14/17
1.3
25.3
38.5
10.2
13.2
1.8
ITMG IJ
ITM
ID
Energy
4,809
6.6
11.0
82.8
5/6
(56.7)
2.9
85.7
38.8
12.0
4.2
PTBA IJ
Bukit Asam
ID
Energy
3,648
4.6
9.4
115.2
11/11
(83.3)
2.2
53.8
59.0
11.9
3.7
3008 TT
Largan
TW Tech HW
3,512
2.8
3.9
89.5
8/10
(54.8)
15.1
39.7
45.4
14.3
5.1
FLT AU
Flight Centre
AU
Cons svcs
3,168
4.1
8.9
87.1
12/14
(114.9)
2.8
57.1
51.5
14.1
3.6
9437 JP
NTT docomo
JP
Telecom
63,115
4.4
6.9
108.1
12/14
(12.6)
16.9
49.0
12.9
10.9
1.1
4502 JP
Takeda Pharma
JP
Pharma
40,658
3.9
7.5
113.0
14/14
5.2
4.1
83.9
12.7
24.6
1.8
6954 JP
Fanuc
JP
Cap gds
30,561
1.3
3.4
92.8
14/14
(64.9)
8.2
30.8
56.3
23.9
2.8
4503 JP
Astellas Pharma
JP
Pharma
23,318
2.8
4.8
78.1
13/14
(29.4)
6.6
59.0
21.4
18.5
2.1
4689 JP
Yahoo Japan
JP
Software
22,854
1.1
3.9
99.3
14/14
(55.2)
4.8
19.8
45.8
18.7
4.0
1605 JP
Inpex
JP
Energy
21,203
1.4
13.8
126.9
6/7
(16.4)
5.9
13.4
22.0
11.0
0.8
6861 JP
Keyence
JP
Tech HW
16,859
0.2
3.2
97.5
14/14
(58.2)
1.8
5.5
55.1
22.8
2.3
6971 JP
Kyocera
JP
Tech HW
16,623
1.5
4.2
124.9
16/19
(26.0)
3.8
34.0
24.0
16.3
1.0
4452 JP
Kao
JP
HPC
15,005
2.3
5.4
173.3
13/14
(5.6)
3.7
48.0
13.3
20.8
2.5
4523 JP
Eisai
JP
Pharma
12,492
3.9
6.5
118.9
12/14
37.6
3.0
84.1
18.7
19.9
2.6
9735 JP
Secom
JP
Comm svc
10,906
2.3
3.9
87.6
12/14
(29.4)
8.1
34.6
23.3
14.7
1.5
8113 JP
Unicharm
JP
HPC
9,792
0.7
3.3
59.5
13/14
17.4
6.2
19.8
18.4
26.8
4.2
9613 JP
NTT Data
JP
Software
8,585
2.1
7.3
143.3
13/14
35.9
10.8
39.7
11.1
16.7
1.2
4543 JP
Terumo
JP
Healthcare
8,323
1.3
4.2
82.4
14/14
32.0
6.3
24.6
11.4
18.4
2.0
4817 JP
Jupiter Telecom
JP
Media
8,237
2.6
9.2
184.5
8/8
14.6
17.4
45.2
13.7
17.5
1.6
1878 JP
Daito Trust
JP
Property
7,879
4.2
11.5
99.3
13/14
(66.7)
0.3
49.9
39.7
11.8
3.7
2267 JP
Yakult Honsha
JP
FBT
7,287
0.7
2.1
74.3
12/14
(7.8)
6.6
26.1
19.9
34.9
2.5
2651 JP
Lawson
JP
Food & drug
7,257
3.1
7.3
91.2
11/13
(15.6)
7.6
57.2
15.8
18.0
3.0
7309 JP
Shimano
JP
Cons dur
6,339
1.2
2.6
92.4
12/12
(40.8)
9.3
23.1
36.8
19.0
2.7
4506 JP
Dainippon SP
JP
Pharma
5,607
1.5
8.1
124.3
13/14
5.0
2.5
46.0
20.0
25.8
1.5
EAD FP
European Aeronautic FR
Cap gds
38,360
2.6
7.4
187.7
12/14
(52.2)
4.5
32.6
11.0
12.6
2.8
HEN3 GR
Henkel Vorzug
DE
HPC
38,334
1.5
4.1
117.4
16/17
14.5
2.5
24.6
14.3
16.2
2.9
SCHP VX
Schindler-Hldg
CH Cap gds
17,148
1.8
3.3
146.6
15/17
(67.4)
1.9
38.8
34.8
21.3
5.1
DSY FP
Dassault Systemes
FR
Software
13,900
1.0
5.1
148.5
15/15
(53.1)
2.0
22.7
36.2
21.9
4.8
SW FP
Sodexho Alliance
FR
Cons svcs
13,409
2.6
6.8
139.0
18/19
41.1
1.7
49.0
11.4
18.6
3.4
SOLB BB
Solvay SA
BE
Materials
13,314
2.9
7.3
142.4
15/18
18.3
6.3
38.2
13.8
12.9
1.5
PUB FP
Publicis Groupe
FR
Media
13,048
2.0
7.6
147.5
15/16
(8.9)
2.0
27.8
13.2
14.2
2.3
WOS LN
Wolseley
GB Cap gds
12,786
2.5
5.6
121.5
16/19
2.8
1.0
37.9
11.5
15.0
2.1
BRBY LN
Burberry Group
GB Cons dur
9,507
2.3
3.7
78.9
10/11
(39.0)
8.2
41.2
34.0
18.0
6.1
LISN SW
Chocoladefabriken
CH FBT
9,114
1.6
2.7
84.1
15/17
(30.0)
4.2
43.4
19.7
27.8
5.0
GEBN VX
GEBERIT
CH Cap gds
9,073
3.2
4.6
97.2
14/14
(32.9)
5.0
63.9
25.5
19.7
6.0
Japan
Europe
Source: Factset, CLSA Asia-Pacific Markets
122
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Microstrategy
Section 2: Case studies
US cash hoarders Figure 231
Stocks with excess cash and strong cashflow (USA) Code
Name
Cty Sector
Mkt cap 12MF FCF yld FCF Conv FCF>Div Gearing Capital Payout Cash 12MF 12MT (US$m) Div yld (FY0, (L5Y Track (FY0, Int (FY1, To TA PE PB (%) %) avg,%) record %) (FY0, %) (FY0, (x) (x) %) %)
AAPL US
Apple
US
Tech HW
427,693
2.4
9.6
115.8
16/19
(24.6)
6.0
23.7
16.5
9.7
3.3
GOOG US Google
US
Software
249,362
0.0
5.1
110.4
9/9
(59.3)
6.5
0.0
51.3
17.0
3.5
MSFT US
Microsoft
US
Software
229,866
3.4
12.5
115.4
18/19
(77.0)
3.1
31.9
52.0
9.2
3.1
ORCL US
Oracle
US
Software
168,601
0.7
7.5
126.9
19/19
(32.5)
1.7
9.8
39.2
12.0
3.6
KO US
Coca-Cola
US
FBT
166,426
3.0
4.7
88.7
19/19
49.0
5.8
51.7
19.2
17.2
5.1
CSCO US
Cisco System
US
Tech HW
109,247
2.7
9.2
125.9
19/19
(63.2)
2.4
28.3
53.1
10.2
2.0
INTC US
Intel
US
Semis
104,821
4.3
9.2
100.6
18/18
(9.2)
nm
46.7
21.5
10.7
2.2
EBAY US
eBay
US
Software
72,425
0.0
3.5
131.1
13/15
(23.4)
8.9
0.0
25.4
20.2
3.5
MMM US
3M
US
Cap gds
69,087
2.5
5.3
96.1
18/19
8.1
5.0
37.0
13.4
14.9
3.9
NWSA US News Corp
US
Media
64,700
0.7
3.9
79.2
17/19
23.6
2.8
10.5
17.0
15.4
2.7
AMGN US Amgen
US
Pharma
64,608
2.3
6.0
108.8
18/18
12.9
nm
25.8
44.3
11.4
3.2
MON US
Monsanto
US
Materials
54,159
1.5
4.2
88.7
13/13
(12.8)
5.4
32.3
17.7
21.2
4.4
HON US
Honeywell Intl
US
Cap gds
53,457
2.4
4.8
142.1
18/18
17.1
2.3
33.1
12.6
13.9
4.7
EMC US
EMC
US
Tech HW
51,852
0.0
10.0
174.4
17/18
(19.9)
5.7
0.0
16.2
12.7
2.2
ACN US
Accenture
US
Software
48,983
2.3
8.1
151.0
12/12
(160.2)
1.2
38.0
39.9
16.6
10.1
NKE US
Nike
US
Cons dur
48,429
1.8
2.6
83.3
16/19
(32.5)
2.5
31.8
24.3
18.9
4.5
TXN US
Texas Ins
US
Semis
36,659
2.5
7.7
107.3
16/19
15.7
3.9
48.4
19.8
18.8
3.4
TJX US
Tjx Cos
US
Retail
32,948
1.3
3.2
98.4
18/19
(25.4)
3.5
18.1
19.3
15.7
9.3
VMW US
VMware
US
Software
32,786
0.0
5.2
195.7
5/5
(72.8)
5.1
0.0
43.7
23.0
5.4
AGN US
Allergan
US
Pharma
31,543
0.2
2.9
82.6
17/19
(24.0)
nm
3.9
32.3
22.1
5.9
ITW US
Illinois Tool
US
Cap gds
29,119
2.4
5.2
114.0
18/18
21.5
nm
35.4
14.4
14.5
3.3
MOS US
Mosaic
US
Materials
26,073
1.6
3.9
55.7
5/6
(23.0)
14.8
23.3
22.8
12.9
2.0
SYK US
Stryker Corp
US
Healthcare
23,807
1.6
6.0
94.3
19/19
(29.5)
2.4
22.9
31.8
14.5
3.0
EL US
Estee Lauder
US
HPC
23,575
1.4
2.9
96.8
17/17
(2.2)
4.3
36.4
20.4
22.2
8.1
DELL US
Dell
US
Tech HW
22,985
2.1
19.1
120.0
19/19
(62.4)
1.1
8.2
33.3
8.3
2.3
ADBE US
Adobe Systems
US
Software
18,693
0.0
6.4
148.6
19/19
(30.5)
6.2
0.0
35.5
26.2
2.8
SHW US
Sherwin-Williams
US
Materials
16,718
1.0
3.4
137.5
19/19
45.8
nm
22.0
13.9
20.7
10.6
BDX US
Becton Dickinson
US
Healthcare
16,300
2.3
6.6
96.7
18/19
48.0
7.2
34.1
19.2
14.9
3.9
GPS US
Gap
US
Retail
15,686
1.6
4.7
119.9
18/19
(8.0)
3.8
21.8
25.4
12.6
4.8
NOC US
Northrop Grumman US
Cap gds
15,558
3.6
14.2
121.8
17/19
0.7
1.3
32.8
14.5
9.2
1.6
AMAT US
Applied Materials
US
Semis
15,453
2.5
9.7
148.0
16/19
0.1
1.9
58.6
16.0
18.4
2.3
RL US
Ralph Lauren
US
Cons dur
15,100
0.9
3.8
110.0
13/15
(23.9)
4.0
18.3
21.9
19.1
4.3
SYMC US
Symantec
US
Software
15,004
0.3
9.7
177.1
18/19
(23.0)
4.2
0.0
24.7
11.8
3.0
CF US
CF Industries
US
Materials
14,407
0.7
12.2
129.7
8/8
9.0
4.1
5.6
13.4
8.5
2.3
COH US
Coach
US
Cons dur
14,312
2.5
7.4
102.2
13/13
(44.9)
3.9
30.2
29.5
12.1
6.5
ROST US
Ross Stores
US
Retail
13,276
1.1
3.0
94.9
18/19
(33.5)
4.8
15.5
19.7
15.3
7.4
BBBY US
Bed Bath
US
Retail
13,274
0.0
7.1
91.6
18/19
(44.9)
2.6
0.0
30.7
11.5
3.1
ADI US
Analog Devices
US
Semis
13,153
2.6
4.9
108.2
17/19
(73.9)
4.9
56.9
69.4
20.0
3.3
ZMH US
Zimmer Hldgs
US
Healthcare
12,943
1.0
6.7
94.9
12/12
4.5
5.9
13.1
17.3
13.0
2.4
MAT US
Mattel
US
Cons dur
12,900
3.4
9.1
96.8
16/19
5.7
nm
49.9
20.5
14.4
5.1
NTAP US
NetApp
US
Tech HW
12,892
0.0
7.9
187.5
15/17
(96.3)
6.5
0.0
56.6
14.7
2.9
STJ US
St Jude Medical
US
Healthcare
12,843
2.4
7.2
85.8
16/18
46.1
nm
26.0
13.0
11.1
2.9
STX US
Seagate
US
Tech HW
12,194
4.4
17.9
91.3
9/11
21.3
4.3
27.5
21.0
6.3
3.7
HUM US
Humana Inc
US
Healthcare
11,774
1.2
12.0
129.7
17/19
(72.0)
1.1
13.5
46.6
9.7
1.4
JNPR US
Junpier Networks
US
Tech HW
11,533
0.0
2.0
140.0
12/13
(26.4)
9.5
0.0
29.0
18.3
1.6
TDC US
Teradata
US
Software
11,272
0.0
4.1
119.3
6/6
(25.6)
5.6
0.0
23.8
19.6
6.3
APH US
Amphenol
US
Tech HW
10,834
0.6
4.8
100.1
19/19
31.4
3.0
10.5
18.1
18.2
5.0
ALTR US
Altera
US
Semis
10,680
1.1
4.6
114.9
17/19
(77.3)
3.5
26.1
66.1
22.3
3.4
EW US
Edwards Life
US
Healthcare
10,432
0.0
2.3
77.9
13/13
(22.4)
nm
0.0
23.5
25.4
6.9
Source: Factset, CLSA Asia-Pacific Markets
1 March 2013
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123
Microstrategy
Section 2: Case studies
16. Will buybacks dominate the global landscape?
Globally companies bought-back shares worth US$490bn in 2011 . . .
. . . versus US$181bn in 2009 and US$335bn in 2010
Over the past decade, buybacks have evolved as a secular theme across developed markets. Globally companies bought-back shares worth US$490bn in 2011, of which 95% came out of developed markets (DM), while the emerging-market (EM) contribution was meagre. This growing significance of buybacks in DM warrants a closer scrutiny of the dynamics at play, both in DM and EM. With our previous question, we aim to identify the preconditions that are essential for the evolution of buybacks and more importantly for them to become successful. We also focus on identifying the underlying characteristics that separates EM from DM and extend the analysis to highlight the circumstances under which the current diverging gap between the two regions could converge in the future.
Buybacks have proliferated at the expense of dividends
It is not surprising that the proliferation of the buyback culture within the DM markets has come at the expense of its concurrent theme, the dividends. Although both buybacks and dividends have witnessed steady improvement over the past decade, the former has clocked a faster growth rate. This structural shift from dividends to buybacks is evident in the USA; the market is worth examining simply owing to its size and the explosive buyback growth it has witnessed since the early 1990s, when buybacks were still in nascent stage while dividends dominated. However, from there onwards buybacks started gaining significant traction with corporations and investors and were favoured ahead of dividends. Indeed in 1998, buybacks superseded dividends and the trend continued unabated until the GFC.
Global analysis of 82,744 buyback transactions to identify their key underlying characteristics
Against this backdrop, the key question is what has led to this profound shift in the market dynamics causing buybacks to gain such significant popularity over dividends. The answer lies in understanding the reasons why companies prefer buybacks to dividends. Our analysis of 82,744 buyback transactions across the globe since 2007 highlights that the bulk of the companies engaged in buybacks primarily for four reasons: undervaluation, both relative to their own history and to the market; excess cash or low gearing and lack of investment opportunities commensurate with the current ROE generated by the business; to avoid the commitment associated with the “sticky” dividends due to volatile nature of the future cashflows; and high promoter holding versus professional management. In Figure 232, we highlight the divergence between the EM and DM buybacks. Figure 232
Developed markets prefer buybacks more than emerging markets
MSCI regions and markets (ex-fin) - Buyback versus dividend payout (5Y avg) 60
Dividend payout (07-11A avg, %)
Taiwan
Australia (14.9, 69.7)
Switzer'nd (37.2, 67.9) Ireland
55
Clear demarcation between developed and emerging markets in terms of buyback preference
Singapore
50
45
Japan
France
Philippines S. Africa
Europe
Poland
UK
Malaysia 40
Peru
35
China Indonesia
30
India (8.5, 23) 3
6
APxJ
AsiaxJ
Canada
Mexico
EM
9
12
15
USA (58.1,33.6)
Egypt Russia (20.9, 14.3)
Korea (12, 16.6)
18
Germany (31.4,41.7)
DM (43.2,40.1)
LatAm
Brazil
HK
ME&A
Spain
Buyback payout (07-11A 21
24
27
Note: Intersection (15.8, 41.0) highlights the median of 07-11A average buyback payout and 07-11A average dividend payout of the MSCI regions and countries. Source: Factset, CLSA Asia-Pacific Markets.
124
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Microstrategy
Section 2: Case studies
Has there been a shift in buyback preference? It took buybacks several years to gain the importance and displace dividends in the developed markets. With the start of 21st Century, buybacks were already the name of the game in developed markets, while emerging markets were still coming in terms with dividends. Our analysis in Figure 233, highlights that the developed markets, predominantly the USA, has not changed much since then in terms of preference towards buybacks, while the emerging markets’ preference has dwindled. The USA with average buybackpayout of 45% during 2000-05 recorded a small increase during 2010-11, while Asia ex-Japan, which used to have buyback payouts north of 30% during 2000-05 witnessed a fall to a meagre 6% in 2010-11.
DM preference has not changed much, while EM buyback activity has pared
Figure 233
Buyback payouts: Average 2000-05 versus last two-year average (ex-fin)
AxJ buyback payouts have fallen from north of 30% during 2000-05 to meagre 6% in 2010-11
Buyback payout (10-11A avg, %)
40
USA (45,51) Switzer'nd
DM World
USA and Switzerland have increased the buyback levels, while majority of the EM markets have reduced compared to history
30
Switzer'nd (52.8, 79.4) Australia
Canada
20 LatAm India
10
HK
0
Japan
APxJ EM Korea (57.9, 8.7)
France
Malaysia
China
Brazil
UK
Taiwan
S. Africa Singapore
0
Russia
Europe
AsiaxJ
Germany
Buyback payout (00-05A avg, %)
Philippines
10
20
30
40
Note: Aggregates are bottom-up free-float adjusted Source: Factset, CLSA Asia-Pacific Markets
Embedded global payout (buyback + dividend) Historical analysis of the global dividends and buybacks clearly highlights that the flexibility associated with buybacks has been the key reason behind their popularity over dividends. Starting and stopping the buybacks as per the prevailing macroeconomic conditions is an invaluable tool for companies. During the crisis periods, buybacks have taken the biggest hit compared with dividends and on the other side during the risk-on bull periods, buybacks surged past dividends. In Figure 234, we highlight that the USA accounts for the highest embedded payouts above Australia and Taiwan.
Flexibility associated with buybacks strengthen the hands of corporates
USA accounts for highest embedded payouts above Australia and Taiwan Figure 234
Figure 235
MSCI AC world - Buyback1 and dividend payout trend
MSCI regions/markets - Buyback1 and dividend payout
44
51
42
50 20
31
1
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
India
35
HK
28
China
37
Korea
41
Singapore
32
AsiaxJ
38
Philippines
43
Dividend payout
LatAm
35
40 61
33
EM
27
34
32
Malaysia
34
35 29
35
44
Japan
39
France
51
50
Germany
51
33
Buyback payout
UK
20
52
56
60 40
35
60
USA
80
(L10Y avg, %)
Europe
100
100 90 80 70 60 50 40 30 20 10 0
Taiwan
Dividend payout
DM
Buyback payout
World
(%)
Australia
120
Buyback payouts are ex-finance. Aggregates are bottom-up free-float adjusted. Source: Factset, CLSA Asia-Pacific Markets
1 March 2013
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Microstrategy
Section 2: Case studies
Historical buyback and dividend payouts for the major global regions, markets and sectors
Global average buyback and dividend payout since 1999 In Figure 236, we highlight the historical buyback and dividend payout averages for the major global regions, markets and also for each of world sector. We have removed financials while calculating the buyback payouts for regions and markets, as the large buybacks by the banks and diversified institutions especially from Europe are distorting the overall picture, as these institutions also re-issue bulk of these bought-back shares causing the net impact to be minimal.
Figure 236
MSCI AC world regions and markets - Buyback payout versus dividend payout during different time period Region (exfinancials) 99-021 World 36.9 DM 37.0 EM 33.9 USA 44.5 Europe 22.4 APxJ 39.1 Japan 26.0 AsiaxJ 38.7 Latam 15.0 ME&A 12.2 Markets (ex-financials) Korea 88.8 UK 23.2 C anada 20.9 Russia 30.0 Switzerland 19.9 Australia 38.5 Spain 1.3 Germany 15.1 France 38.4 Brazil 6.5 Japan 26.0 Mexico 23.5 Taiwan 16.7 Indonesia 26.8 Malaysia 11.2 S. Africa 12.3 Philippines 4.9 C hina 7.2 HK 11.0 India 5.6 Singapore 10.3 MSCI AC World sectors Div fin 120.9 Software 75.0 Semis 86.0 Tech Hw 50.7 Healthcare 50.5 Retail 52.6 Media 33.3 HPC 46.6 C ons svc 53.5 C omm svc 43.6 C ons dur na Banks 66.8 Pharma 39.1 FBT 38.2 C ap gds 39.5 Transport 42.1 Fd stp ret 27.4 Insurance 35.2 Energy 20.8 Materials 22.6 Utilities 31.5 Telecom 24.4 Property 33.1 Auto 23.3 1
Dot com burst period
126
2
Buyback payout (avg, %) 10-114 08-093 03-072 43.8 35.0 36.2 45.7 37.3 38.7 21.3 12.3 11.8 61.3 47.5 51.7 32.4 20.2 19.3 17.4 11.2 12.1 18.7 30.3 10.2 16.5 11.9 6.1 18.7 13.8 12.5 13.7 12.0 7.6 20.7 36.1 32.8 29.5 29.1 19.2 31.1 19.3 16.6 24.9 18.7 10.6 15.9 4.6 14.4 13.5 12.0 5.6 3.5 3.3 1.4 108.8 86.2 72.7 66.3 77.4 75.7 90.7 75.7 59.7 61.1 29.3 33.0 45.6 31.9 32.8 31.6 38.1 27.6 35.1 21.9 27.6 34.2 19.1 22.1
95-11 37.7 39.0 20.6 48.7 23.4 19.3 18.7 18.2 16.0 9.2
99-021 46.7 47.7 31.0 33.9 67.0 50.0 29.9 36.4 33.8 39.4
Dividend payout (avg, %) 10-114 08-093 03-072 33.9 45.1 33.5 34.4 48.0 34.5 30.3 33.5 15.2 43.8 41.5 26.3 39.6 48.3 18.8 39.1 45.8 10.0 48.2 70.6 31.9 32.2 37.8 8.4 34.6 34.7 16.2 38.8 38.0 0.0
95-11 42.1 43.1 30.8 32.7 57.7 47.1 33.6 39.6 31.2 36.4
13.0 13.1 20.7 8.9 32.2 10.0 19.8 56.8 15.6 5.6 30.3 22.3 14.1 9.5 15.0 12.1 12.7 19.4 5.8 7.7 5.7
8.1 17.6 22.8 22.9 39.9 23.5 27.1 2.9 8.9 11.2 10.2 14.9 11.9 5.8 2.6 7.7 0.9 2.0 0.8 8.0 5.8
36.1 33.6 28.5 23.3 22.6 22.5 20.6 20.0 19.8 19.7 18.7 16.7 13.0 12.5 10.9 9.2 7.3 6.6 5.5 5.4 5.1
35.6 42.7 30.4 10.0 256.5 78.3 29.2 36.7 55.4 37.1 29.9 21.8 37.1 19.2 28.6 37.9 34.7 25.2 49.8 26.1 43.4
80.6 22.5 19.4 na 40.9 29.2 na 267.4 41.8 7.4 48.2 23.1 68.9 na 9.4 12.5 4.4 7.0 28.2 5.7 8.8
21.0 47.8 47.3 14.1 102.8 74.2 52.8 49.7 54.6 32.6 70.6 42.1 62.8 33.9 41.5 42.2 51.6 37.3 40.6 24.4 50.1
12.1 39.1 38.6 14.4 49.3 62.5 54.6 35.6 46.1 38.7 31.9 38.4 54.3 33.7 43.2 44.1 38.9 32.0 27.9 22.9 48.4
21.9 47.6 34.1 11.7 122.5 70.7 38.8 41.5 91.5 33.1 33.6 27.4 41.1 29.5 36.2 38.6 32.8 25.3 42.5 23.2 43.1
na 66.6 73.8 72.7 46.3 33.8 48.9 51.6 52.2 34.8 100.8 44.7 21.0 36.3 33.7 39.0 29.0 66.6 30.1 15.3 16.5 18.8 na na
65.7 60.8 45.7 51.7 58.0 76.6 73.4 53.3 41.6 60.7 58.9 28.3 35.2 40.8 27.0 40.5 45.0 32.1 26.4 18.2 20.9 14.4 12.7 5.8
93.0 70.8 66.0 58.8 56.6 56.2 54.9 53.3 52.0 51.6 42.3 41.6 38.0 36.3 35.4 33.9 33.1 32.6 28.2 26.6 24.7 22.0 18.8 14.3
29.7 9.2 15.7 na 21.1 18.5 139.8 36.8 28.9 21.4 48.6 51.2 37.0 42.3 39.7 28.6 25.9 155.9 42.0 41.0 52.7 126.1 62.1 29.0
36.0 32.1 23.4 19.1 14.0 20.2 32.9 39.3 40.7 35.5 25.3 40.2 41.6 43.7 34.2 30.4 29.6 24.5 26.5 31.9 53.4 52.0 51.5 24.7
na 20.2 55.4 26.0 16.5 30.3 55.8 43.0 45.1 43.4 60.9 54.0 38.9 49.5 39.4 87.4 37.8 na 31.3 30.5 56.0 57.6 658.4 na
18.4 19.6 25.2 16.3 22.2 29.7 28.7 46.5 41.2 44.3 51.0 35.2 40.5 48.0 32.9 31.6 39.4 31.8 28.2 28.3 62.8 57.8 41.8 16.7
29.8 18.4 21.1 21.0 32.4 24.0 61.1 39.3 35.3 34.7 37.7 45.3 38.9 69.5 36.3 36.0 30.1 81.9 36.8 33.8 57.1 69.5 130.3 26.5
Pre-global financial crisis (GFC)
3
GFC 4European sovereign debt crisis. Source: Factset, CLSA Asia-Pacific Markets
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Microstrategy
Section 2: Case studies
Buybacks doesn’t change the intrinsic value in the absence of change in capital structure
Undervaluation is a primary driver of buybacks
Identifying key drivers of buybacks and success rate There could be various plausible reasons for a company to engage into buybacks. However, for investors, apart from the reasons, it is also important to know whether the buyback strategy will turn out to be successful or not. From a fundamental perspective, buyback action doesn’t bring about any change in the intrinsic value of the company unless it borrows to fund the buyback programme in order to take advantage of the tax shield associated with interest payments on the borrowed funds. In all other cases, any rise or fall in the stock price after the buyback announcement depends on the signal being conveyed by the company. In Figure 237 and 238, we highlight that the bulk of companies engage in buyback action when they are trading cheaply, both relative to the markets and to their own history. On a more important note, buyback announcements by companies that appears lucrative based on valuation sends a strong signal to the markets, resulting in the best relative performance.
Figure 237
Figure 238
Global buybacks: Distribution based on relative PE 25,000
Number of buybacks (LHS)
(No.)
(%)
Next 1-month OPF
14
25,000
Number of buybacks (LHS)
(No.)
Next 12-month OPF
10 8
15,000
(%)
Next 1-month OPF
12
Next 3-month OPF
20,000
Global buybacks: Distribution based on PE Reilly 8
Next 3-month OPF
20,000
7
Next 12-month OPF
6 15,000
5
6 10,000
4 2
5,000
4 10,000
3 2
5,000
1
0 0
1.6
(2)
9
0 0
80
(1)
Note: Relative PE is calculated against the local MSCI market, PE Reilly is calculated based on last five-year monthly data. Source: Factset, Bloomberg, Datastream, CLSA Asia-Pacific Markets
Company can engage in buybacks, both at peak-cycle and trough-cycle ROE . . .
The analysis of the company’s ROE also presents a stark contrasting picture. Buyback are generally announced by those companies that are either at their peak-cycle ROE or trough-cycle, with best performance delivered by the ones that are at the bottom-cycle and poised for a rebound. Figure 239
. . . with companies at the trough-cycle performing better in the anticipation of rebound
Global buybacks: Distribution based on 12-month forward ROE Reilly score
18,000
(No.)
16,000 14,000
(%)
Number of buybacks (LHS) Next 1-month OPF
8
Next 3-month OPF
7
Next 12-month OPF
12,000
9
6 5
10,000
4
8,000
3
6,000
2
4,000
1
2,000
0
0
80
(1)
Note: ROE Reilly is calculated based on last 5-year monthly data, Source: Factset, Bloomberg, Datastream, CLSA Asia-Pacific Markets
1 March 2013
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127
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Section 2: Case studies
Buyback at the peak-cycle ROE forewarns investors of the end of the heady growth phase
Buybacks are mostly done by companies with high earnings-growth volatility
Buybacks of the companies with low gearing performs the best
As noted earlier, companies doing buybacks at the peak-cycle ROE sends a negative signal and forewarns investors regarding the end of the heady growth enjoyed by the company driving ROEs to the peak-cycle. However, on the plus side, it’s also a signal of the prudent management that is not engaging in reckless acquisitions or any other value-destructive corporate action. Thus, the company’s decision to invest the funds in its own high-ROE business is also taken positively by the market with decent outperformance by such companies over the next three to 12 months. Our analysis also highlights the majority of buybacks are done by the companies with high earnings-growth volatility and low gearing. From a performance perspective, earnings growth volatility is a poor factor. However, the companies with low gearing have delivered the best performance across the periods. This outperformance could also be attributed to the use of borrowed funds by the company to reach an optimal capital structure and benefit from future tax savings.
Figure 240
Figure 241
World buybacks: Distribution based on EPS growth CoV 40,000
(No.)
(%)
Number of buybacks (LHS)
12
Next 1-month OPF
35,000
10
Next 3-month OPF Next 12-month OPF
30,000
8
25,000
10,000
Number of buybacks (LHS) (%) Next 1-month OPF
(No.)
9,000
Next 3-month OPF
8,000
6
15,000
4
10,000 2
5,000 1.3
0
10 8
Next 12-month OPF
7,000
6
6,000
20,000
0
World buybacks: Distribution based on gearing (FY0)
5,000
4
4,000
2
3,000 2,000
0
1,000 0
90
(2)
Note: EPS growth volatility (CoV) is a ratio of average and standard deviation of last 6-years EPS growth. Source: Factset, Bloomberg, Datastream, CLSA Asia-Pacific Markets
High free-float companies do the most buyback
It is also interesting to note that freefloat is an important factor in the buyback analysis. Companies with high promoter holdings invariably do not do buybacks, while companies with high freefloat with professional management, whose compensation levels are tied to price or EPS do resort to buybacks options. In Figure 243, we highlight that buyback shares as a percentage of those outstanding are also important for performance.
Figure 242
Figure 243
World buybacks: Distribution based on freefloat Number of buybacks (LHS) Next 1-month OPF Next 3-month OPF Next 12-month OPF
World buybacks: Distribution based on BB shares % 12
60,000
10
50,000
8
40,000
6
30,000
4
20,000
5,000
2
10,000
0
0
0
35,000
(No.)
30,000 25,000
(%)
20,000 15,000 10,000
80
(No.)
Number of buybacks (LHS) Next 1-month OPF Next 3-month OPF Next 12-month OPF
(%)
9 8 7 6 5 4 3 2 1 0
0.2
(1)
Note: Free-float is based Lion’s share database. BB shares % is the percentage of buyback shares bought as a % of total share outstanding. Source: Factset, Bloomberg, Datastream, CLSA Asia-Pacific Markets
128
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Identifying the key characteristics of successful buybacks
Deconstructing DNA of successful buybacks Based on the earlier analysis of identifying the key reasons underpinning buybacks and the factors that matter most for them to be successful, we have identified key ranges for the buyback to deliver the best performance. In Figure 244, we highlight the incremental contribution of each factor to the average outperformance over the next 12 months. While the undervaluation, both relative to its own history and to the market, is an important factor with the highest contribution, picking the companies that are closer to the troughcycle ROE and are doing significant buybacks is also crucial to generate total 22% outperformance over the next 12 months. Figure 244
Buybacks that are cheap, close to trough-cycle ROE outperforms by 22% over next 12 months
Next 12M average performance of Microstrategy global buyback strategy
25
(%)
3.4
20
22.0
4.3 5.8
15 8.4
10
Identifying the characteristics of successfull buybacks
5 0
Low PE Reilly
Below mid-cycle ROE
Large buyback
Low relative PE
Avg next 12M OPF
Note: PE Reilly < 20%, ROE Reilly < 40%, BB shares as a % outstanding shares> 0.1% and Relative PE 0.1% and Relative PE < 1x. Source: Factset, CLSA Asia-Pacific Markets
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Embedded strategy versus standalone strategies The buyback strategy is typically played to benefit out of the bump in prices over the short to medium term. However, our backtest analysis highlights that the strategy of picking stocks based on their FY0 buyback yield results in significant outperformance over the long term for most regions. The level of outperformance does vary for each region with the USA delivering the best outperformance, while Asia ex-Japan delivered the worst. We have also compared the performance of high dividend-yield strategies with the high buyback-yield strategy to identify the investors’ preference towards either buyback or dividends in each region. Globally high buyback yields have underperformed the high dividend-yield stocks, but the high embedded yield ie, the combination of high dividend and high buyback yields have delivered similar performance as high dividend yield. In the USA, embedded yield has delivered the best performance.
High buyback-yield stocks have also outperformed over the long term
In USA, high buyback yield stocks have outperformed stocks with high dividend yield Figure 246
Figure 247
MSCI World: Cumulative performance of Q1 and Q2
MSCI USA: Cumulative performance of Q1 and Q2
300
Dividend yield DY+BB yield
(Index)
Buyback yield Benchmark
250
Dividend yield DY+BB yield
(Index)
230
250
Buyback yield Benchmark
210 190
200
170 150
150
130 110
100
90 70
50
Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
Dec 02
Dec 01
Dec 00
Dec 99
Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
Dec 02
Dec 01
Dec 00
Dec 99
50
Note: Backtest based on MSCI universe. Performance is US-dollar MSCI weighted total returns. Factor quintiles are rebalanced on monthly basis. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Similar to the USA, investors have a slightly higher preference towards stocks that have high buyback yield instead of high dividend yield. However, in Asia ex-Japan, the preference is clearly towards stocks with high dividend yield. Moreover the level of buyback activity in Asia in low compared with its western counterparts.
In Asia, preference is clearly towards high dividend yield stocks
Figure 248
Figure 249
MSCI Europe: Cumulative performance of Q1 and Q2
MSCI AxJ: Cumulative performance of Q1 and Q2
300
Dividend yield DY+BB yield
(Index)
Buyback yield Benchmark
700
Dividend yield DY+BB yield
(Index)
Buyback yield Benchmark
600
250
500 200
400
150
300 200
100
100 Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
Dec 02
Dec 01
Dec 00
Dec 99
Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
Dec 02
Dec 01
Dec 00
0 Dec 99
50
Note: Backtest based on MSCI universe. Performance is US-dollar MSCI weighted total returns. Factor quintiles are rebalanced on monthly basis. Source: Factset alpha tester, CLSA Asia-Pacific Markets
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Key factors for each region
Regional buyback characteristics In Figure 250, we highlight the key factors from a buyback perspective for each of the global regions. The table also highlights the three-month forward performance for each of the factor ranges broken down by region.
Figure 250
MSCI AC world regions and markets - Factors and next three-month outperformance Region / markets
Number of buyback transactions PE reilly range (%)
Global United States Europe Asia ex-Japan Japan Latin America
80 3.2 3.9 0.6 3.4 5.9 1.1
European sovereign debt crisis. Source: Factset, CLSA Asia-Pacific Markets
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Buybacks have become integral part of US corporate actions
This paradigm shift in the corporate action has significant bearing on dividend investors
Will Asia walk the US path? Buybacks have become integral part of the corporate actions within the US economy. In 2011, US corporations spent a total of US$375bn on buybacks, close to 140% of total dividends paid during the same year. The total buyback amount in 2011 was still 20% lower than the peak achieved during 2007, when companies bought back shares worth US$466bn. The roots of this paradigm shift in the corporates actions dates back to early 1990s. Since then, buybacks have gradually gained importance, while dividends are on a losing track. This transformation in the corporate actions has significant impact on the dividend investors and hence needs closer scrutiny to identify the factors that stimulated this change and if they can evolve for Asia as well. Figure 251
Companies doing buybacks grew from 38% in 1995 to current 17%
MSCI USA versus Asia ex-JP: Number of companies doing buybacks
80 70 60
Percentage of companies doing buyback (%)
Asia ex-JP
USA 70% for US
Gap between Asia ad USA is diverging since 2002
50 40 30
38%
20
4%
10
17% for Asia
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
Source: Factset, CLSA Asia-Pacific Markets
Difference between dividend and capital gains tax is not deciding factor
Preference of buyback over dividends can be directly linked to the taxes associated with both. However, our analysis in Figure 252 highlights that taxes have not been the deciding factors, as both capital gains and dividend taxes were converged in 2003 and still buybacks continued to surge ahead of the dividends to hit the 2007 peak. Figure 252
Dividend and capital gains tax were converged in 2003 and yet buybacks continued to surge
MSCI USA - Buybacks, dividends and tax
45
Buyback (RHS) Capital-gains tax
(%)
Dividends (RHS) Dividend tax
(US$bn)
600
40
500
35
400
30
300
25
200
20
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
1990
10
1989
100
1988
15
Source: Factset, CLSA Asia-Pacific Markets
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Valuations cannot be the reasons as buybacks peaked during the bull market of 2003-07
Earnings growth volatility has a strong correlation with propensity to do buybacks
Valuations also have to be ruled out as the buyback activity peaked during the risk-on bull cycle between 2003 and 2007. In Figure 253, we highlight earnings-growth volatility, which has been the driving force behind the surge in buyback activity. Rising globalisation and a shift away from secure domestic markets have led to volatile earnings, translating into low future earnings visibility. Under such circumstances, companies decide against dividends, which tend to be sticky and prefer buybacks to return cash to shareholders. There is a strong 56% inverse correlation between earnings-growth certainty and the percentage of companies doing buybacks in each market. Figure 253
High earnings-growth certainty in Asia implies greater preference for dividends than buybacks
MSCI markets: Buybacks preference versus growth uncertainty Earnings growth certainty (Mean/SD, since 1995) 0.45 India (3.9, 0.6) China (8.2,0.5) Russia Indonesia
0.42
Brazil
R² = 0.31 Correl: -0.56 T stat: -3.2
EM AsiaxJ
APxJ
0.39
LatAm
0.36
Taiwan Singapore
0.30
Germany Europe
Malaysia
Canada
Australia
France
HK
0.33
UK
World
USA DM
Korea
% of companies doing buyback 10
20
30
40
50
Japan
60
Note: Intersection (18.8, 0.4) highlights the median of % of companies doing buyback and earnings growth volatility (CoV, mean/SD) of the MSCI regions/countries. Source: Factset, CLSA Asia-Pac Markets
Corporate structure does affect corporate actions
Another interesting characteristic that differentiates Asia from the USA is corporate structure, which has a high bearing on the company’s decision to engage into buybacks. US companies have close to 100% freefloat and professional management overseeing the company. Typically management’s compensation is linked to share prices or EPS, causing buybacks to become the most likely action compared with dividends, which could result in shortterm price fall. Asia still has a long way to reach that stage. Figure 254
Professionally managed companies with low promoter holdings prefer buybacks
MSCI markets: Buybacks preference versus free float 100
Free float (%) Australia
95 90
Singapore
85
High promoter holdings in Asia will continue to be to the detriment of buybacks
Europe
80
Germany
75
France
70
UK
World
DM
R² = 0.61 Correl: 0.78 T stat: 5.95
USA Japan
Korea Taiwan
65
APxJ
60
Brazil
55 50
India
45 40 35
Canada
EM
LatAm
China
AsiaxJ
Russia Malaysia
HK
% of companies doing buyback
Indonesia
0
10
20
30
40
50
60
Note: Intersection (18.8, 72.4) highlights the median of % of companies doing buyback and the current free-float of the MSCI regions and countries. Source: Factset, CLSA Asia-Pacific Markets
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Stocks that have highest probability of doing successful buybacks
Global value-accretive buyback picks Based on our analysis highlighting the characteristics of successful buybacks, we have identified global stocks that have highest likelihood of doing successful buybacks. Most of these companies have already engaged in buybacks. These companies have high free float (>60%), low PE Reilly (Div
(US$m)
Cert (x)
(%)
(L5Y avg, %)
(FY0, %)
ROE Payout Div yld (avg, %) (%)
DPS Track
Track Record record (Increase/ total)
941 HK
China Mobile
CN
Telecom
222,259
33.0
10.0
79.5
(46.9)
16.2
44.6
4.0
16/16
8/9
1088 HK
Shenhua
CN
Energy
79,002
18.6
11.6
41.9
(2.2)
17.6
38.8
3.8
5/8
5/6
ONGC IN
ONGC
IN
Energy
50,824
9.3
12.5
34.7
(5.6)
18.1
31.1
3.3
13/14
9/14
WOW AU
Woolworths
AU
Food & drug
41,765
45.1
8.0
45.1
47.8
27.5
71.1
4.2
5/17
15/16
COAL IN
Coal India
IN
Energy
40,770
13.6
21.5
108.4 (143.1)
30.9
35.3
2.9
3/3
3/3
PTT TB
PTT
TH
Energy
34,144
19.3
11.8
29.4
50.5
16.7
33.1
3.9
7/12
8/10
TLKM IJ
Telkom
ID
Telecom
19,709
22.8
8.8
102.0
880 HK
SJM
HK
Cons svcs
14,798
24.6
9.8
1044 HK
Hengan
CN
HPC
12,727
26.9
THBEV SP
ThaiBev
TH
FBT
11,362
12.7
SMGR IJ
Semen Indonesia
ID
Materials
10,030
22.7
144 HK
China Merchants
CN
Transport
8,840
2282 HK
MGM China
CN
Cons svcs
8,615
WOR AU
WorleyParsons
AU
Energy
INDF IJ
Indofood
ID
1212 HK
Lifestyle
HK
MNCN IJ
MNC
2313 HK
Shenzhou Intl
PTBA IJ
14.9
24.7
64.9
4.9
16/17
10/17
34.1 (100.3)
35.8
74.0
4.9
4/5
3/3
10.3
35.6
(8.4)
28.9
61.6
2.7
5/15
9/13
9.2
119.2
24.9
27.2
58.6
3.2
6/7
4/6
16.5
57.6
(12.0)
29.2
41.9
2.5
11/17
12/15
12.2
5.6
45.7
39.1
9.2
45.2
2.8
8/15
9/13
15.1
45.8
na
(32.9)
63.3
53.2
3.9
2/2
0/0
6,766
22.0
6.2
80.5
25.0
19.2
63.2
4.0
7/10
7/9
FBT
6,084
21.0
10.1
66.4
(10.8)
16.4
39.3
2.6
13/17
8/12
Retail
4,167
24.3
12.9
89.0
(19.2)
20.3
40.1
2.7
8/9
6/7
ID
Media
3,822
11.8
13.9
20.0
(24.0)
26.0
42.3
2.4
3/6
2/3
CN
Cons dur
3,713
19.7
18.8
22.0
(1.2)
23.7
27.1
2.6
4/8
4/6
Bukit Asam
ID
Energy
3,699
8.0
15.5
115.2
(83.3)
29.8
52.8
4.6
11/11
6/8
3983 HK
BlueChemical
CN
Materials
3,359
13.4
9.7
63.3
(19.9)
14.1
36.2
3.8
7/7
4/5
SEK AU
Seek
AU
Comm svc
3,022
19.2
16.3
89.5
56.5
25.9
48.9
2.7
8/8
5/7
1177 HK
Sino Biopharm
CN
Pharma
2,976
16.1
7.2
81.6
(56.2)
21.8
59.9
2.5
10/13
8/11
052690 KS
Kopec
KR
Cap gds
2,801
11.9
12.7
98.2 (100.5)
34.8
70.1
3.9
2/3
9/12
3998 HK
Bosideng
CN
Cons dur
2,499
16.9
5.0
65.9
(40.1)
19.5
74.2
7.1
3/6
3/4
2395 TT
Advantech
TW Tech HW
2,468
26.8
7.9
88.1
(15.8)
24.5
58.3
3.9
9/14
8/11
336 HK
Huabao
CN
Materials
1,759
18.6
17.7
85.9
(21.5)
22.7
30.7
4.2
10/12
5/5
829 HK
Shenguan
CN
FBT
1,663
25.3
17.2
51.9
(33.0)
32.0
48.3
4.1
2/4
2/2
425 HK
Minth
CN
Autos
1,622
11.9
9.5
41.9
(48.7)
13.6
29.0
2.8
4/8
5/6
6121 TT
Simplo
TW Tech HW
1,372
25.1
11.3
58.8
(29.2)
19.9
46.7
4.4
5/10
8/8
JBH AU
JB Hi-Fi
AU
Retail
1,264
21.9
21.3
75.9
59.7
49.7
61.3
5.5
5/10
5/8
MMS AU
McMillan Shakes
AU
Comm svc
1,121
36.1
14.1
81.3
60.3
35.2
62.6
3.8
8/9
7/8
OSIM SP
Osim
SG
Retail
1,095
47.9
24.6
142.8
(40.7)
38.7
41.3
3.0
10/12
7/9
3044 TT
Tripod
TW Tech HW
1,044
29.0
7.3
82.1
(24.6)
12.1
45.5
4.6
7/13
8/10
Source: Factset, CLSA Asia-Pacific Markets
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19. Shadow defensives
In our Shadow defensives report, we introduced an index of the Asian stocks that belong to cyclical sectors but display true defensive characteristics. We called them “shadow defensives”. These stocks have high earnings certainty, behave like defensives but are much cheaper. In Figure 293, we show that defensives are trading at 39% premium to cyclicals, compared with the historical average of 15% since 2000. Despite these peak relative valuations, we believe that the macro conditions are not conducive enough to warrant a mean reversion. Figure 293
MSCI Asia ex-Japan relative PE: Cyclicals, defensives and financials Defensives are trading at 39% premium to cyclicals
1.5
Cyclicals
12M-fwd PE (rel to region, x)
Defensives
Defensives are trading at 39% permium to cyclicals versus the historical average of just 15% since 2000
1.4 1.3
Financials
1.2 1.1 1.0 0.9
Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
Dec 02
Dec 01
Dec 00
Dec 99
0.8
Note: Defensives include GICS Level 1 consumer staples, telecom, utilities and healthcare sectors while cyclicals includes materials, energy, tech, consumer discretionary, industrials and property. Source: MSCI, Factset, CLSA Asia-Pacific Markets
Shadow defensives are cheaper than defensives in Asia
Our analysis highlights that SDs provide an ideal launchpad for a seamless transition from defensives into cyclicals and vice-versa. In Figure 294 we show that the shadow defensives have shown an 82% correlation since 2009 but are much cheaper than the defensives. This high correlation suggests that shadow defensives would protect investors if the recent optimism turns out to be another false dawn. Figure 294
Historical performance makes them a good basket to hold around turning points
MSCI Asia ex-Japan: Relative PE of defensives and shadow defensives
1.5
12M-fwd PE (rel to region, x) Correlation since May 2009: 82%
Shadow defensives Defensives
1.4 1.3 1.2 1.1 1.0 0.9 0.8
Dec 12
Jun 12
Dec 11
Jun 11
Dec 10
Jun 10
Dec 09
Jun 09
Dec 08
Jun 08
Dec 07
Jun 07
Dec 06
Jun 06
Dec 05
Jun 05
Dec 04
0.7
Note: Shadow defensives are cyclicals companies with 12MF dividend yield >2.5%, earnings certainty>10x and next 2Y-average ROE>10%, rebalanced on yearly basis within MSCI Asia ex-Japan (ex-finance) universe. Source: MSCI, Factset, CLSA Asia-Pacific Markets
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Shadow defensives are worth holding during turning points
Cross-cycle performance supports case for shadow defensives Shadow defensives’ performance highlights the inherent benefits of holding these stocks during inflexion points. We identified various short cycles since the onset of the GFC and analysed the performance of each of the three baskets, namely, shadow defensives, defensives and cyclicals, since then. The Asia shadow-defensive basket has not only outperformed the cyclicals during the downmarket, but also outperformed defensives during the upmarket. Thus, in a nutshell, these are the stocks to hold if an investor believes the recovery is on the horizon but is uncertain about its timing. So instead of getting an early exposure to cyclicals, which might result in significant underperformance should the crisis protract, exposure to shadow defensives will cushion the downside. Figure 295
Shadow defensives outperformed cyclicals during downmarkets . . .
AxJ shadow defensives - Cross-cycle returns relative to cyclicals and defensives
14
(%)
O-PF relative to defensives O-PF relative to cyclicals
9
25.3
Defensives < SD < Cyclicals
Defensives > SD > Cyclicals
4 (1) . . . but outperformed defensives during market upturns
(6) (11) (16) (21)
Upmarkets
Downmarkets
GFC EU-crisis EU-crisis Post-GFC 2012 2012 (Dec 07-Feb (Apr 11-Dec (Feb 12-Aug (Feb 09-May (Dec 11-Feb (Aug 12-Dec 09) 11) 12) 09) 12) 12)
Note: SD = Shadow defensives (rebalanced on monthly basis). GFC = Global financial crisis, 2012 = bear market rally in 2012. Source: MSCI, Factset, CLSA Asia-Pacific Markets
Shadow defensive stocks have outperformed defensive . . .
It is worth noting that our shadow-defensives basket has also delivered handsome performance since its launch on 27 July 2012. The basket has not only outperformed the region, but has also outperformed both cyclicals and defensives over the same period. Figure 296
. . . and cyclical stocks as well
Asia Pacific ex-Japan - Performance of shadow defensive stocks since launch
25
Performance (%)
Defensives
Cyclicals
MSCI APxJ
Shadow defensives
20
15
10
5
0
Defensives
Cyclicals
MSCI APxJ
Shadow defensives
Note: Performance is measured in US$ total return from 27-Jul-2012 to 19-Feb-2013. Weights are based on freefloat adjusted market cap. Source: Factset, CLSA Asia-Pacific Markets
154
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Section 2: Case studies
Top shadow-defensive picks for Asia In Figure 297 we highlight our shortlist of shadow defensives within Asia Pacific ex-Japan. These stocks form part of the original shadow defensive index, ie, cyclicals with high earnings certainty (>10x), dividend yield (2.5%) and ROEs (>10%). Additionally, our short list has stocks with:
Shadow defensives are worth holding during turning points
A good DPS track record (not more than three cuts every 10 years)
Cheap based on 12-month PE and PB Reilly less than 65%
Solid FCF conversion (based on the last five-year average) Figure 297
Asia Pacific ex -Japan - Shadow defensives stock screen (market cap >US$1bn) Code
Name
Cty Sector
Mkt cap 12MF 12M 12M (US$m) div yld fwd trl (%) PE (x) PB (x)
12MF PE
12MT PB
13-14F ROE (avg, %)
Reilly (%)
EPS cert (x)
Payout FCF conv DPS (FY1, (5Y, avg, cut rec %) %) (yrs)
2330 TT
TSMC
TW Semis
91,783
2.8
14.7
4.1
14.5
65.0
23.2
14.9
42.9
74.5
0/8
1088 HK
Shenhua
CN
Energy
79,002
3.8
10.1
1.9
10.6
2.7
17.6
18.6
38.4
41.9
1/6
ONGC IN
ONGC
IN
Energy
50,824
3.3
9.4
1.8
57.8
28.8
18.1
10.0
32.6
34.7
1/14
SIME MK
Sime Darby
MY
Cap gds
17,920
3.7
13.8
2.0
38.3
33.9
14.3
10.2
53.4
23.6
3/16
KEP SP
Keppel Corp
SG
Cap gds
17,023
3.9
13.3
2.3
56.0
38.5
16.2
11.3
51.5
8.7
4/17
880 HK
SJM
HK
Cons svcs
14,798
4.9
15.0
5.7
58.8
65.0
35.8
24.6
74.0
34.1
0/3
BXB AU
Brambles
AU
Comm svc
13,122
3.5
17.7
4.4
44.2
25.6
23.9
19.3
64.4
53.5
4/18
BJAUT IN
Bajaj Auto
IN
Autos
10,545
2.8
14.9
7.6
39.3
52.8
42.5
22.8
44.2
71.0
3/12
ORI AU
Orica
AU
Materials
10,188
3.8
13.2
3.0
56.7
48.2
21.5
29.7
50.3
37.7
4/15
2357 TT
Asustek
TW Tech HW
9,037
5.4
11.3
2.1
42.0
34.7
17.7
23.1
56.3
107.5
3/12
SCI SP
Sembcorp Ind
SG
Cap gds
7,869
3.2
11.9
2.1
36.9
44.5
16.6
18.7
39.3
88.0
4/14
551 HK
Yue Yuen
HK
Cons dur
5,795
4.2
9.9
1.4
55.2
17.2
13.6
12.3
41.1
33.9
2/13
3673 TT
TPK
TW Tech HW
5,383
3.4
11.1
3.8
28.8
13.1
31.9
10.0
38.3
0.1
0/0
1101 TT
Taiwan Cement
TW Materials
4,874
5.0
14.9
1.5
43.3
41.8
10.2
15.3
80.6
40.2
3/12
576 HK
Zhejiang Expway
CN
Transport
3,753
5.7
13.2
1.5
38.9
21.2
11.0
15.9
75.2
116.5
0/14
CD SP
ComfortDelGro
SG
Transport
3,210
3.5
15.4
2.0
53.3
35.7
12.2
25.0
53.3
74.1
3/9
3998 HK
Bosideng
CN
Cons dur
2,499
7.1
10.3
2.1
41.0
46.9
19.5
16.9
75.1
65.9
0/4
GAM MK
Gamuda
MY
Cap gds
2,483
3.6
12.1
1.8
28.7
36.8
14.7
19.1
44.2
16.6
5/16
3034 TT
Novatek
TW Semis
2,391
5.2
12.6
3.1
26.2
23.0
23.0
11.9
65.8
105.4
2/10
051600 KS Korea Plant Ser
KR
Comm svc
2,271
3.6
17.5
4.8
47.3
64.7
24.0
10.9
63.1
75.1
2/12
861 HK
Digital China
CN
Tech HW
1,657
4.1
8.3
1.6
36.3
32.3
18.4
13.5
34.0
43.3
3/11
TTCH IN
Tata Chemicals
IN
Materials
1,598
3.1
9.1
1.2
47.5
4.8
13.6
10.7
31.6
79.5
1/17
Note: PE/PB Reilly based on 10Y history (minimum three-year history needed). Source: Factset, CLSA Asia-Pacific Markets
1 March 2013
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155
Microstrategy
Section 2: Case studies
20. Dividend-wave calendar (ex-date strategy)
Short-term excess returns by holding stocks before their ex-dates
In a perfectly efficient market, dividends should be a non-event from a shortterm price-performance perspective, since they imply companies transferring part of their value back to shareholders. If anything, given the tax impact on dividends, it is a suboptimal transfer of value and hence should be a negative on a total-return basis. However, stocks in the real world have a tendency to run up before the ex-dates. This may be explained by some investors’ inclination to hold on until the ex-date and other investors with an income focus seeing an immediate return on buying stocks before the ex-date.
Study focuses on MSCI universe with data from 2004-11
Our study for the MSCI EM universe calculates the relative performance of stocks against the relevant country index during the two-month window around the ex-dates from 2004-12. The results highlight that stocks do run up before their ex-dates and investors would have averaged close to 2.2% outperformance over a month with a success rate of 58%. Figure 298
MSCI EM - Performance of ex-date strategy since 2004
Average 2.2% excess return for a 30-day holding period
Excess return relative to day 0 (%)
Average
Median
0.5 0.0 (0.5) (1.0) (1.5) (2.0) -30D
Ex date -24D
-18D
-12D
-6D
0D
+6D
+12D
+18D
+24D
+30D
Note: Excess total return calculated against the MSCI regional index in local currency. Source: CLSA Asia-Pacific Markets, Factset
We also find that most of this performance would have been generated during relative bull markets (>25% return) rather than mildly positive or bear markets, and the arbitrage opportunities have diminished over time.
Works best during bull markets; arbitrage opportunities have diminished Figure 299
Figure 300
EM: Performance during bull markets
Performance during mildly positive or bear markets
Excess return relative to day 0 (%) 4 2
Excess return relative to day 0 (%) 3
2006 2007
2
2009
0
2005
2008
2010
2011
2012
1
(2)
0
(4)
(1)
(6)
(2)
(8) (10) -30D -24D -18D -12D -6D
2004
Ex date 0D
+6D +12D +18D +24D +30D
(3) -30D -24D -18D -12D -6D
Ex date 0D
+6D +12D +18D +24D +30D
Note: Excess total return calculated against the MSCI country index. Source: CLSA Asia-Pacific Markets, Factset
156
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Microstrategy
Section 2: Case studies
Investors better off by disposing of the position immediately after the ex-date
We also highlight that investors holding stocks to benefit from the ex-date strategy would have been better off disposing of the positions immediately after the ex-date. In the past, some markets have seen post-ex-date drifts, but such a phenomenon has been absent except for 2006.
Works better for high-yield stocks
We also tested the strategy for different levels of dividend yields. As expected, we found that the ex-date strategy works better for stocks with higher dividend yields, as the attraction of holding on to a high-yield stock or getting into it just before the ex-date is highest when the returns are significant. The average outperformance would have been over 3% for stocks with dividend yields of more than 5%. For low-yield stocks, it is better to enter a bit later.
Figure 301
Figure 302
MSCI EM - Stocks with yield of 1-5%
MSCI EM - Stocks with yield >5%
Excess return relative to day 0 (%) 1.0
Average Median
Excess return relative to day 0 (%) 1.5
Average Median
1.0 0.5
0.5 0.0
0.0
(0.5) (1.0)
(0.5)
(1.5) (2.0)
(1.0)
(2.5)
Ex date
(1.5) -30D -24D -18D -12D -6D
0D
+6D +12D +18D +24D +30D
(3.0) -30D -24D -18D -12D -6D
Ex date 0D
+6D +12D +18D +24D +30D
Note: Total returns outperformance calculated against the MSCI regional index in local currency. Source: CLSA Asia-Pacific Markets, Factset
Has worked globally though outperformance is small compared to Asia
We also checked the performance of the ex-date strategy for the MSCI AC World index and the MSCI US index stocks. Our study shows that the strategy has worked globally with an average 1.4% excess return over a 30-day holding period. The performance has been muted for the US universe at only 0.4% excess return over a 12-day holding period. Just like Asia, for both the World and the USA, investors would have been better off by exiting immediately after the dividend ex-date.
Figure 303
Figure 304
World - Performance of ex-date strategy since 2004
MSCI US - Performance of ex-date strategy since 2004
Excess return relative to day 0 (%) 0.2
Average Median
Excess return relative to day 0 (%) 0.2
Average Median
0.0
0.1
(0.2)
0.0
(0.4)
(0.1)
(0.6)
(0.2)
(0.8)
(0.3)
(1.0)
(0.4)
(1.2)
(0.5)
Ex date (1.4) -30D -24D -18D -12D -6D 0D +6D +12D +18D +24D +30D
(0.6) -30D -24D -18D -12D -6D
Ex date 0D
+6D +12D +18D +24D +30D
Note: Excess total return calculated against the relevant MSCI index. Source: CLSA Asia-Pacific Markets, Factset
1 March 2013
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Microstrategy
Section 2: Case studies
Investors can benefit efficiently out of market inefficiency by trading around ex-date
Global dividend calendar We earlier highlighted that dividend ex-dates do have a significant bearing on the stock prices and that the magnitude of performance varies among regions. However, it is important to note that the ex-dates of different markets and regions are spread across the calendar. Therefore, there is always an opportunity to profit from the market’s inefficiency by playing this ex-date strategy throughout the year. Figure 305 highlights the month-wise breakdown of the number of companies by region, whose ex-dates would fall in that particular month, enabling investors to ride this cycle to the fullest.
Figure 305
MSCI World - Regions to play the dividend ex-date strategy over next 12 months (% of ex-date stocks/region) Month
Region 1
Region 2
Region 3
Region 4
Region 5
Region 6
Mar 13
Japan (41%)
USA (27%)
Others (12%)
Europe (8%)
Asia ex-JP (7%)
Australia (4%)
Apr 13
Europe (36%)
Others (24%)
USA (22%)
Asia ex-JP (17%)
May 13
Europe (32%)
USA (26%)
Asia ex-JP (22%)
Others (17%)
Australia (2%)
Jun 13
Asia ex-JP (48%)
Europe (24%)
Others (12%)
Japan (10%)
Australia (6%)
Jul 13
Asia ex-JP (73%)
Europe (17%)
Others (9%)
USA (1%)
Japan (1%)
Aug 13
Asia ex-JP (74%)
Others (9%)
Europe (8%)
Australia (6%)
Japan (2%)
Sep 13
Asia ex-JP (63%)
Others (30%)
Europe (7%)
Oct 13
Others (50%)
Europe (20%)
USA (10%)
Asia ex-JP (10%)
Japan (10%)
Nov 13
Others (38%)
Europe (25%)
Asia ex-JP (25%)
USA (38%)
Dec 13
Asia ex-JP (83%)
Japan (6%)
Others (6%)
USA (2%)
Jan 14
Europe (56%)
Asia ex-JP (22%)
USA (11%)
Others (11%)
Feb 14
Others (50%)
Asia ex-JP (25%)
USA (25%)
USA (1%)
Europe (2%)
Note: Next DPS is an estimate based on "BBG projected dividend" or "BBG DPS estimate (adjusted for the dividend frequency), Bloomberg dividend estimate used unless the dividend is already declared. Source: Bloomberg, CLSA Asia-Pacific Markets
Global markets also offer lucrative yields during most of the months
For global income-focused investors, the spread of ex-dates throughout the year allows them to capture dividends on a consistent basis. Figure 306 highlights the gross dividend yield on offer during the rest of the year by month. It is evident that beginning of the year is when most of the dividends are paid out for the previous fiscal year. Figure 306
Beginning of the year offers lucrative yields
MSCI World - Monthly gross dividend yield
3.5
(%)
3.3
3.0 2.5
2.2
2.0
1.7
1.5 1.0
2.8
2.7
2.7
2.1
1.5
1.6
1.5
1.0 0.7
0.5
Feb 14
Jan 14
Dec 13
Nov 13
Oct 13
Sep 13
Aug 13
Jul 13
Jun 13
May 13
Apr 13
Mar 13
0.0
Note: Next DPS is an estimate based on "BBG projected dividend" or "BBG DPS estimate (adjusted for the dividend frequency), Bloomberg dividend estimate used unless the dividend is already declared Source: Bloomberg, CLSA Asia-Pacific Markets
Detailed ex-date results
158
Figure 307 highlights the performance of the ex-date strategy over years. It also highlights the best entry and exit date for each market.
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Microstrategy
Section 2: Case studies
Performance of ex-date strategy Figure 307
MSCI markets - Performance of ex-date strategy over time CN
HK
IN
ID
KR
MY
SG
TW
TH
AU
APxJ
US
EU
-25D
-30D
-13D
-26D
-29D
-17D
-30D
-30D
-27D
-30D
-30D
+7D +16D +25D
-5D
-24D
+25D
EM World
2012 Entry Date Exit Date
+3D +15D +21D +16D
-30D
-30D
+3D +20D +25D +30D +25D +22D +29D
Avg Excess Return (%)
1.4
3.0
3.7
2.9
0.4
2.2
1.1
5.2
3.5
2.3
1.5
1.3
1.7
2.8
Median Excess Return (%)
0.4
3.0
2.6
0.5
(0.4)
2.4
2.1
4.7
2.8
2.1
1.3
1.0
1.5
2.4
2.4
59.2
56.8
82.7
54.5
64.3
72.5
61.3
86.0
83.0
76.8
60.8
67.9
64.0
50.8
64.1
Entry date
-30D
-16D
-18D
-13D
-1D
-25D
-3D
-29D
-21D
-30D
-26D
-24D
-30D
-22D
-27D
Exit date
+1D +19D
+9D
Success Rate (%)
3.0
2011 +27D +27D +19D
0D +14D +25D +16D
+2D +25D +27D
+2D +27D
Avg excess return (%)
1.9
2.9
3.4
2.4
2.6
3.2
0.3
6.5
3.7
3.3
2.4
1.1
2.3
2.0
Median excess return (%)
0.6
2.1
4.6
2.6
2.0
1.8
0.3
5.4
4.1
2.8
1.9
1.2
2.0
1.5
1.6
45.9
37.5
48.9
65.7
71.7
63.3
51.7
40.7
46.2
49.6
48.0
57.2
49.1
53.6
51.1
-4D
-30D
-28D
-18D
-6D
-25D
-10D
-30D
-8D
-23D
-8D
-30D
-30D
-8D
-27D
+4D +27D
+30D
0D +30D
+2D
Success rate (%)
1.8
2010 Entry date Exit date
0D
Avg excess return (%)
0.5
3.3
5.2
2.5
1.8
3.7
1.8
4.6
2.4
3.3
0.6
1.9
2.3
0.5
Median excess return (%)
0.5
2.9
6.0
2.1
1.3
3.4
2.1
2.1
0.2
2.0
0.2
1.6
1.8
0.3
0.4
50.2
75.0
80.5 100.0
77.1
79.1
57.6
76.9
83.8
73.7
57.0
66.8
58.9
57.0
60.8
-7D
-29D
-29D
-25D
-22D
-30D
-22D
-28D
-21D
-24D
-30D
-30D
-10D
-30D
Success rate (%)
+1D +30D
0D +26D
+8D +29D
0D +30D 0.9
2009 Entry date Exit date
+21D +11D +26D
-3D
0D +11D +25D +19D +23D
0D +27D +22D +30D +21D +22D +27D
Avg excess return (%)
2.9
7.3
5.4
1.6
7.9
3.6
10.4
2.4
8.8
10.4
3.0
5.4
6.3
2.7
3.4
Median excess return (%)
0.7
4.3
3.8
1.8
1.1
2.4
2.8
(1.8)
5.0
5.9
(0.4)
(0.1)
3.3
0.5
(0.3)
78.2
80.4
79.1
83.3
74.5
82.9
81.3
85.7
81.1
84.2
82.1
64.8
80.2
76.9
71.1
-5D
-12D
-16D
-30D
-1D
-18D
-7D
-5D
-20D
-20D
-5D
-10D
0D +12D
+1D
+7D
0D
+1D
+1D
0D
+3D 1.1
Success rate (%) 2008 Entry date
-9D
-14D
-11D
Exit date
0D +10D +13D
+2D
+1D +12D
Avg excess return (%)
0.9
7.7
3.4
1.9
8.4
2.8
5.3
2.6
4.2
3.8
1.1
1.6
1.7
0.9
Median excess return (%)
0.9
1.8
2.3
1.7
6.7
2.7
3.4
0.4
2.6
3.2
1.0
1.5
1.2
0.9
0.9
44.0
38.2
51.2
25.0
71.1
42.2
46.9
50.0
63.9
51.9
49.2
48.0
53.0
47.8
44.7
Entry date
-29D
-24D
-22D
-1D
-1D
-8D
-13D
-27D
-15D
-23D
-29D
-1D
-4D
-29D
-24D
Exit date
+2D
+5D +21D
+1D
+8D
+1D
0D
+8D
0D
+2D
+2D
+2D
+1D
+2D
+2D
Avg excess return (%)
12.3
1.1
5.5
0.0
4.7
1.5
2.5
11.8
0.2
1.7
6.8
0.1
0.6
6.8
1.5
3.5
1.1
2.7
(1.1)
2.7
(0.2)
2.3
5.1
(0.1)
0.2
0.5
(0.3)
0.4
(0.0)
(0.5)
72.5
65.5
73.1
71.4
47.6
70.8
52.9
80.0
45.9
66.7
64.7
53.3
61.8
65.2
55.7
-30D
-30D
-4D
-14D
-29D
-27D
-1D
-23D
-12D
-27D
-30D
-15D
-29D
-30D
-30D
0D +27D
+1D
+3D +25D +30D +27D +30D +29D +30D +15D
Success rate (%) 2007
Median excess return (%) Success rate (%) 2006 Entry date Exit date Avg excess return (%) Median excess return (%) Success rate (%)
+30D
+1D +30D +29D
19.2
2.5
1.8
3.0
5.8
4.4
1.5
5.3
6.3
3.3
13.1
0.7
1.6
13.7
4.4
8.1
2.2
(0.1)
1.1
3.3
1.1
(0.9)
(0.5)
5.0
(0.4)
3.3
0.4
0.8
4.4
(0.5)
80.4
76.4
70.9
60.0
72.1
70.7
63.6
79.5
75.7
84.9
76.5
62.4
58.6
74.5
64.7
-2D
-25D
-29D
-3D
-11D
-28D
-1D
-9D
-24D
-4D
-6D
-30D
-4D
-7D
+5D +12D
0D
+1D
+9D
+9D
0D
+1D +28D +30D
+1D
+1D
2005 Entry date Exit date
-4D +1D
+8D +15D
Avg excess return (%)
0.7
0.7
3.8
8.8
4.4
0.2
3.2
2.3
2.7
2.9
0.7
0.5
1.8
0.8
0.2
Median excess return (%)
0.2
0.8
1.0
13.3
2.2
0.4
2.9
1.1
2.1
0.7
0.1
(0.2)
0.5
0.4
(0.1)
54.0
51.7
84.3 100.0
73.0
68.3
81.3
68.4
61.1
75.0
56.4
57.3
70.3
57.9
57.0
Entry Date
-29D
-24D
-25D
-3D
-4D
-25D
-30D
-22D
-24D
-21D
-29D
-24D
-30D
-30D
-29D
Exit Date
+1D +21D +25D
+1D
0D +12D
+1D
+7D
+1D +30D
+1D
+1D
+1D 2.2
Success rate (%) 2004-2012
Avg Excess Return (%)
+2D +30D
2.5
2.6
3.1
0.6
2.2
1.7
1.6
4.0
2.2
2.4
2.1
0.8
1.4
1.7
Median Excess Return (%)
(1.6)
1.1
2.2
0.7
1.3
1.2
1.3
2.4
1.5
1.3
0.5
0.5
0.6
1.2
0.3
Success Rate (%)
54.5
57.4
66.9
66.7
67.9
61.4
67.4
60.9
63.9
64.5
57.5
58.7
58.2
59.3
57.9
Source: CLSA Asia-Pacific Markets, Factset
1 March 2013
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159
Microstrategy
Appendices
Appendix 1: Yield characteristics Sustainable growth a better proxy for growth Investors need a different strategy to invest in high-yield stocks in Asia and EM
MSCI World: Current sustainable growth versus LT avg for dividend-yield ranges
12
Sustainable growth (%)
Current
Median since 2003
10
Sustainable growth too low for stocks with yield more than 7%
8 6 4 2 0
0-2
2-3
3-4
4-5
>7
5-7
Dividend yield range (%) Note: Sustainable growth is bottom-up aggregated using median values.
Tech and telecom sectors’ relative weight increased but materials, autos and utilities have lost out
MSCI regions and markets: Sustainable growth for stocks with dividend yield >3%
14
Sustainable growth (%)
Current
Median since 2003
A number of stocks with dividend yield more than 3% have sustainable growth > 6%
12 10 8 6 4 2
Aust
Taiwan
DM
Europe
World
USA
HK
Latam
AxJ
ASEAN
EM
UK
Korea
SAf
China
0
Note: Sustainable growth is bottom-up aggregated using median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
MSCI World: Sustainable growth for dividend yield and payout ranges
Sust. growth (%, since 2003) 0-20 20-40 40-60 60-80 >80 All Sust. growth (%, current) 0-20 20-40 40-60 60-80 >80 All
Payouts
Payouts
However, 5-7% dividend yield stocks have had the lowest beta since 2003
7 na na na 4.6 0.8 1.8
>3 na 10.2 7.8 4.6 1.5 6.4
All 12.2 9.3 7.6 4.6 1.4 8.2
>3 na 10.8 7.6 5.0 1.3 6.4
All 11.8 9.3 7.7 5.0 1.4 8.1
Note: Dividend yield buckets have median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
160
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Microstrategy
Appendices
Median sustainable growth of stocks in different yield ranges Div yields MSCI regions World DM EM Asia ex-JP AP ex-JP Asean Europe Latam Japan USA MSCI markets Australia China HK India Indonesia Korea Malaysia Philippines Singapore South Africa Taiwan Thailand UK 1
7%
>3%
L10Y1 10.2 9.8 11.0 11.1 11.1 8.3 10.3 9.3 4.9 13.1
Now 9.6 9.5 10.2 10.5 10.5 9.1 10.2 7.3 4.8 13.0
L10Y1 8.5 7.7 10.4 9.2 9.1 9.3 9.3 10.5 4.5 10.5
Now 8.3 7.9 9.9 8.8 8.5 10.8 9.9 10.2 4.5 11.5
L10Y1 7.8 6.9 9.7 8.2 7.8 8.1 7.5 10.7 3.7 8.0
Now 7.9 7.2 9.2 8.2 8.1 8.3 7.6 9.1 4.2 9.0
L10Y1 6.5 5.4 9.1 7.2 6.3 6.9 6.5 10.8 2.9 4.5
Now 6.4 5.5 8.3 7.8 7.1 7.8 6.4 7.1 4.2 4.0
L10Y1 5.1 3.8 7.3 6.0 4.8 5.6 5.3 7.6 2.0 2.5
Now 3.9 3.7 6.2 3.6 2.5 2.6 4.9 6.8 na 5.5
L10Y1 3.2 2.0 5.2 4.9 3.1 4.1 3.5 4.4 2.4 1.3
Now 1.8 0.9 na 2.7 1.3 na 3.3 na na 0.1
L10Y1 6.3 5.4 8.2 7.2 6.1 6.7 6.3 8.7 3.4 5.8
Now 6.3 5.4 7.8 7.6 6.5 7.8 6.1 7.0 4.2 6.4
6.6 11.3 8.1 16.6 18.5 11.2 8.5 7.0 7.6 8.3 4.2 4.8 12.5
4.1 10.8 9.3 14.3 18.0 10.5 10.4 8.7 8.1 5.9 6.6 9.4 11.0
8.0 9.7 5.9 14.1 14.4 9.3 7.6 8.5 8.7 12.4 6.1 11.9 10.4
4.4 9.0 6.5 13.4 12.3 7.8 7.4 9.0 10.0 11.3 5.1 13.6 12.5
6.2 8.7 6.0 13.9 13.1 10.1 6.4 8.4 6.5 12.7 6.5 10.9 9.1
6.7 11.2 6.4 13.9 16.5 8.0 8.1 20.2 8.8 10.4 5.9 7.8 11.1
4.1 8.6 5.9 13.8 15.3 10.0 4.8 4.6 5.2 13.4 6.1 9.2 7.0
4.1 11.8 7.7 na 11.6 9.8 4.6 na 5.0 10.5 4.4 12.5 6.0
2.3 9.6 6.7 12.0 15.2 7.7 4.7 8.7 2.9 12.1 5.7 6.7 6.0
1.4 11.1 10.4 na 9.6 na 3.9 na 2.7 7.1 4.3 0.0 7.3
1.6 10.5 8.3 15.6 15.1 7.0 1.8 6.2 2.3 7.2 5.0 4.2 3.6
1.3 na na na na na na na na na na na 2.3
3.0 9.1 6.0 14.1 14.6 9.3 5.2 7.6 4.9 12.5 5.5 8.5 7.6
2.5 11.2 7.0 14.4 15.4 8.6 7.2 2.5 5.6 10.0 5.1 8.8 7.9
Median value over the past 10 years. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Yield and earnings certainty Tech and telecom sectors’ relative weight increased but materials, autos and utilities have lost out
MSCI regions and markets: Earnings certainty for stocks with dividend yield >3%
22
Earnings certainty (x)
Current
Median since 2003
36 37
20 18 16
EM's earnings certainty is low but improving
14 12 10 8
Latam
Korea
China
HK
EM
AsiaxJ
Europe
Taiwan
World
ASEAN
DM
UK
Aust
SAf
USA
6
Note: Earnings certainty is bottom-up aggregated using median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
MSCI World: Earnings certainty for dividend yield and payout ranges
EPS certainty (x, since 2003) 0-20 20-40 40-60 60-80 >80 All EPS certainty (x, current) 0-20 20-40 40-60 60-80 >80 All
Payouts
Payouts
However, 5-7% dividend yield stocks have had the lowest beta since 2003
7 na na 11.0 na 13.9 na 16.0 13.9 16.9 11.7 15.4 11.7
>3 na 10.1 14.1 14.4 12.0 12.6
All 12.7 12.8 13.6 13.6 10.8 12.7
>3 na 11.4 16.2 19.4 13.8 15.4
All 13.9 14.8 15.2 18.0 12.3 14.7
Note: Dividend yield buckets have median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
1 March 2013
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Appendices
Median earnings certainty of stocks in different yield ranges Div yields MSCI regions World DM EM Asia ex-JP AP ex-JP Asean Europe Latam Japan USA MSCI markets Australia China HK India Indonesia Korea Malaysia Philippines Singapore South Africa Taiwan Thailand UK 1
7%
>3%
L10Y1 12.8 16.0 7.6 7.9 7.9 7.1 9.1 6.5 12.1 33.3
Now 13.4 18.2 8.6 8.7 8.7 10.1 9.7 8.6 12.3 34.9
L10Y1 12.3 14.0 8.8 9.0 9.3 9.4 12.2 6.6 10.9 35.4
Now 14.7 16.4 11.1 11.1 11.1 11.9 15.1 9.0 11.1 32.8
L10Y1 12.7 14.7 9.9 10.1 10.7 10.4 11.7 8.1 8.6 38.9
Now 15.8 18.3 11.2 11.7 11.7 15.7 14.7 13.7 12.1 39.1
L10Y1 13.1 15.2 10.3 10.5 11.7 11.0 11.8 8.4 8.8 38.0
Now 16.5 19.6 12.6 12.5 14.2 12.4 14.1 7.2 7.1 36.9
L10Y1 12.8 14.4 10.5 11.2 13.2 12.5 11.6 7.7 5.6 29.7
Now 15.4 16.0 14.6 15.5 16.4 19.6 13.8 15.0 na 35.2
L10Y1 10.0 11.9 9.0 10.4 12.8 11.3 9.5 6.5 8.2 16.6
Now 11.7 11.7 na 17.4 17.4 na 9.7 na na 13.8
L10Y1 12.5 14.2 10.1 10.5 11.9 11.4 11.4 7.3 8.3 35.9
Now 15.1 17.2 12.4 12.6 14.1 15.4 13.7 10.4 11.4 36.9
8.9 7.5 6.7 10.1 7.6 7.4 6.7 10.2 6.4 5.1 4.5 4.5 10.2
4.6 8.3 9.1 10.9 22.4 8.4 7.2 18.9 7.4 4.6 3.6 12.4 9.6
12.5 9.4 7.8 11.1 9.8 7.5 9.3 11.9 7.4 11.1 7.8 10.2 16.6
11.4 11.0 12.5 12.5 15.8 9.8 9.3 12.8 6.3 14.0 10.7 15.7 21.0
15.8 9.2 10.3 11.7 10.3 8.9 9.5 15.3 11.8 14.6 10.1 9.9 17.0
10.8 10.6 13.9 10.3 17.6 14.6 16.7 14.6 13.5 19.3 14.7 13.7 20.9
18.0 9.9 13.0 9.4 11.1 8.1 10.8 13.7 12.8 18.6 10.3 9.5 15.7
30.0 14.2 12.4 na 10.0 8.4 12.4 na 17.2 22.6 13.7 9.5 17.3
19.9 9.3 12.8 7.6 8.9 7.3 14.0 13.0 16.4 15.9 11.2 10.3 14.3
19.9 10.6 8.4 na 15.4 na 22.2 na 14.3 12.8 16.3 33.7 18.8
20.2 8.1 7.8 9.3 8.1 6.5 13.8 14.8 13.1 14.4 11.5 9.4 9.6
18.1 na na na na na na na na na na na 7.0
19.3 9.5 11.5 10.7 10.1 8.2 11.4 13.9 13.4 16.4 10.6 9.7 15.5
20.1 10.9 12.4 9.5 16.5 10.4 16.7 14.6 16.4 21.1 15.0 13.7 18.8
Median value over the past 10 years. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Yield and quality (ROE) Tech and telecom sectors’ relative weight increased but materials, autos and utilities have lost out
MSCI regions and markets: ROE for stocks with dividend yield >3%
24
Next 2-year average ROE (%)
22
Current
Median since 2003
EM high-yield stocks offer much higher ROEs
20 18 16 14 12
Aust
Korea
DM
Europe
Taiwan
World
HK
USA
AxJ
China
EM
ASEAN
Latam
UK
SAf
10
Note: ROEs is bottom-up aggregated using median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
MSCI World: Next 2Y average ROE for dividend-yield and payout ranges ROE (2Y avg) (%, since 2003) 0-20 20-40 40-60 60-80 >80 All ROE (2Y avg) (%, current) 0-20 20-40 40-60 60-80 >80 All
Payouts
Payouts
However, 5-7% dividend yield stocks have had the lowest beta since 2003
7 na na 16.9 na 12.4 na 15.3 12.1 10.7 11.6 13.6 11.6
>3 na 15.8 15.6 14.5 12.3 14.9
All 14.4 14.0 15.0 13.7 11.1 14.2
>3 na 14.8 15.0 15.6 10.0 14.5
All 13.7 13.4 14.7 15.2 9.4 13.7
Note: Dividend-yield buckets have median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
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Appendices
Median ROEs of stocks in different yield ranges Div yields
7%
>3%
L10Y1 13.5 13.4 14.2 14.2 14.3 10.8 14.8 13.0 8.2 16.6
Now 12.0 11.9 12.1 12.1 12.0 12.0 14.2 9.3 7.7 16.3
L10Y1 13.4 12.4 15.1 13.9 13.8 13.7 15.5 15.9 7.8 17.2
Now 13.0 12.1 14.5 12.4 12.4 15.5 15.4 16.0 7.1 17.9
L10Y1 14.9 14.3 16.3 14.8 15.0 15.4 15.2 18.6 8.0 16.2
Now 15.7 15.2 16.5 15.4 15.4 16.6 14.7 19.0 8.1 18.8
L10Y1 14.8 13.5 17.4 15.6 15.2 16.0 14.2 21.8 8.8 13.6
Now 13.9 12.5 15.4 15.4 14.8 16.3 13.6 12.6 6.7 11.7
L10Y1 14.9 13.2 18.3 16.9 15.6 17.6 14.0 21.0 8.5 10.6
Now 13.6 11.5 18.4 18.2 13.6 28.2 12.6 17.6 na 10.9
L10Y1 17.1 12.1 20.4 20.4 16.2 23.0 15.5 20.2 5.2 10.6
Now 11.6 11.4 na 11.0 15.0 na 12.5 na na 8.9
L10Y1 14.8 13.3 17.7 16.0 15.4 16.7 14.0 20.5 8.1 14.1
Now 14.3 12.9 16.7 15.8 14.7 16.9 13.6 17.1 7.3 15.3
12.8 14.1 8.5 20.6 24.4 15.0 11.3 9.6 8.9 16.2 7.1 11.2 16.1
6.1 13.0 5.0 17.4 23.1 10.9 11.3 12.8 6.8 11.7 6.8 20.1 15.5
16.1 14.4 7.1 19.9 22.3 12.5 11.7 14.0 9.8 17.1 10.9 16.4 17.7
10.1 13.0 6.9 19.4 18.4 8.2 10.0 21.9 7.9 23.6 9.4 20.6 19.3
16.5 14.2 11.7 23.1 23.2 14.0 13.0 15.9 12.4 21.7 14.5 18.4 17.9
19.7 14.6 10.2 18.4 24.4 11.3 14.2 26.3 14.4 18.9 15.1 18.0 20.0
13.8 14.6 14.7 21.7 28.3 15.5 14.3 14.6 14.4 22.2 14.8 16.6 16.2
13.0 17.1 14.8 na 25.1 16.2 16.3 na 13.2 21.1 11.1 14.7 15.2
12.1 16.6 19.6 20.1 24.9 14.3 16.3 21.1 16.2 25.5 16.8 19.5 16.6
9.0 16.2 16.6 na 37.1 na 30.1 na 16.9 30.0 18.0 91.0 15.0
8.8 20.0 21.2 21.5 27.3 18.0 30.5 30.8 23.1 26.3 18.7 20.8 15.9
15.0 na na na na na na na na na na na 13.0
12.2 15.2 14.5 23.1 25.3 14.3 15.0 17.4 14.4 22.0 16.1 17.9 16.9
11.2 16.1 14.5 18.8 26.5 11.3 15.0 26.3 13.9 21.1 13.7 17.6 18.1
Median value over the past 10 years. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Yield and earnings value HK and Taiwan high-yield stocks are the most expensive . . .
MSCI regions and markets: Forward PE for stocks with dividend yield >3%
16
PE (x)
Current
Median since 2003
15 14
High dividend-yield stocks within EM are still the cheapest
13 12 11 10 9 8 7
China
Korea
EM
Latam
Europe
UK
AxJ
SAf
World
DM
USA
ASEAN
Aust
Taiwan
6
HK
. . . China is the cheapest market for high-yield stocks
Note: Aggregated PE is based on weighted average. Source: Factset alpha tester, CLSA Asia-Pacific Markets
MSCI World: 12M-forward PE for dividend-yield and payout ranges
12MF PE (x, since 2003) 0-20 20-40 40-60 60-80 >80 All 12MF PE (x, current) 0-20 20-40 40-60 60-80 >80 All
Payouts
Payouts
Stocks with more than 80% payout are the most expensive
7 na na 7.5 na 8.4 na 12.2 8.9 14.9 11.8 10.5 10.5
>3 na 9.1 11.5 13.2 15.7 11.5
All 13.9 13.2 12.9 13.6 17.0 13.5
>3 na 8.7 11.9 13.9 16.5 11.6
All 11.9 11.7 12.9 14.2 17.5 12.6
Note: Dividend-yield buckets have weighted average values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
1 March 2013
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Appendices
Weighted average PE of stocks in different yield ranges Div yields MSCI regions World DM EM Asia ex-JP AP ex-JP Asean Europe Latam Japan USA MSCI markets Australia China HK India Indonesia Korea Malaysia Philippines Singapore South Africa Taiwan Thailand UK 1
7%
>3%
L10Y1 16.1 16.1 13.6 14.3 14.3 16.2 16.4 17.6 17.4 15.5
Now 14.9 15.4 12.7 12.6 12.7 17.4 14.0 21.7 18.4 15.2
L10Y1 13.9 14.1 11.2 12.7 12.8 13.7 14.0 12.1 13.4 13.7
Now 12.4 12.4 12.1 13.4 13.5 14.3 13.3 13.3 12.5 11.9
L10Y1 12.3 12.5 10.3 11.8 12.5 12.8 12.2 10.1 13.5 12.5
Now 12.5 12.6 11.8 12.2 12.7 13.3 12.8 13.5 10.6 12.4
L10Y1 11.4 11.6 9.5 11.1 11.8 11.9 11.0 9.1 11.7 12.3
Now 11.4 12.1 8.5 9.8 10.8 12.4 10.5 7.7 12.2 14.3
L10Y1 10.5 10.5 9.2 10.9 11.9 12.7 9.8 8.4 11.1 12.4
Now 10.5 10.9 7.6 10.4 12.5 15.1 9.0 10.1 na 13.8
L10Y1 8.9 9.2 8.8 9.4 10.2 11.7 8.7 7.7 5.0 10.5
Now 10.5 10.6 na 19.1 14.9 na 9.5 na na 12.1
L10Y1 11.5 11.7 9.4 11.0 11.9 12.5 11.0 8.9 12.5 12.3
Now 11.6 12.0 9.3 10.8 12.0 13.2 10.6 10.4 10.9 12.9
15.2 17.1 17.9 15.9 13.8 11.0 14.9 17.7 19.2 14.6 15.5 15.6 15.0
16.6 16.3 17.1 14.7 13.7 8.8 16.2 23.2 19.4 13.7 19.9 32.1 15.1
15.5 12.4 17.2 13.1 13.4 8.4 13.6 13.9 13.9 13.4 13.8 12.5 14.1
15.0 12.0 15.9 16.5 16.0 9.0 12.7 14.7 13.4 15.8 14.1 14.7 13.2
16.5 10.8 16.7 11.4 12.0 7.3 14.3 12.7 13.2 10.8 13.4 10.5 12.6
14.0 9.3 16.7 7.8 13.4 7.5 13.8 13.4 13.0 11.1 15.4 13.4 12.3
14.6 9.8 13.9 8.9 11.3 7.8 14.0 13.3 12.7 9.9 12.8 9.3 10.9
15.1 7.9 13.6 na 12.9 9.5 14.5 na 13.1 10.7 12.8 9.3 10.8
12.7 8.1 12.4 7.2 8.4 8.0 13.7 10.7 14.9 9.4 11.5 9.7 9.9
13.3 6.6 16.9 na 12.5 na 13.8 na 17.6 13.2 13.6 16.0 9.7
11.6 5.9 8.0 4.9 6.7 8.3 14.4 10.6 13.1 9.2 9.3 9.7 9.5
12.3 na na na na na na na na na na na 10.6
13.4 9.9 14.6 10.2 11.3 7.6 14.1 11.7 13.2 10.0 11.7 9.8 11.2
13.7 8.1 15.4 7.6 13.2 8.8 14.1 14.4 13.4 11.4 14.1 11.3 10.7
Median value over the past 10 years. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Yield and growth Europe offers the lowest growth among the highyield stocks
MSCI regions and markets: EPS Cagr for stocks with dividend yield >3%
18
Next 2-year EPS cagr (%)
16
Median since 2003
Current
Long-term: Yield and growth
14 12 10 8 6 4 2
USA
DM
UK
Europe
Aust
HK
Korea
World
ASEAN
AsiaxJ
Taiwan
EM
China
Latam
SAf
0
Note: EPS growth is bottom-up aggregated using median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
MSCI World: Next 2Y-EPS Cagr for dividend yield and payout ranges
Fwd EPS cagr (%, since 2003) 0-20 20-40 40-60 60-80 >80 All Fwd EPS cagr (%, current) 0-20 20-40 40-60 60-80 >80 All
Payouts
Payouts
Stocks with over 80% payouts are mostly ex-growth
7 na na na na 6.0 2.9 (0.1) na 7.8 5.9 1.4 na 8.1 5.2 3.5 0.8 10.9 5.0 3.7 (4.1) 7.6 5.0 2.8 (4.0)
>3 na 8.8 8.8 8.0 5.8 8.5
All 15.4 12.5 10.1 8.7 6.4 12.1
>3 na 4.9 6.3 5.0 2.9 5.0
All 13.1 10.7 8.1 5.9 3.7 9.5
Note: Dividend-yield buckets have median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
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Appendices
Median EPS growth of stocks in different yield ranges Div yields
7%
>3%
L10Y1
Now
L10Y1
Now
L10Y1
Now
L10Y1
Now
L10Y1
Now
L10Y1
Now
L10Y1
Now
World
15.0
13.9
11.7
10.2
10.3
7.6
8.5
5.0
6.1
2.8
3.7
(4.0)
8.4
4.9
DM
14.0
13.0
10.7
10.0
9.1
6.8
7.1
4.6
4.7
2.7
1.5
(5.9)
6.9
4.6
EM
20.9
16.9
16.1
11.7
14.1
8.5
12.8
6.4
9.7
3.2
6.1
na
11.8
6.3
Asia ex-JP
20.0
15.8
14.6
11.7
11.9
7.6
10.2
6.7
7.5
2.9
5.0
1.6
9.7
6.6
AP ex-JP
20.2
16.2
14.7
11.8
12.4
8.4
10.3
6.6
6.8
4.5
3.3
(1.1)
9.0
6.4
Asean
16.8
13.5
14.7
12.8
12.2
9.7
9.9
6.0
6.3
2.2
3.8
na
8.9
7.9
Europe
16.5
10.6
12.2
11.4
9.6
6.1
7.6
3.3
4.0
0.9
1.2
(4.5)
7.3
3.3
Latam
25.0
20.9
20.4
8.9
16.4
10.5
15.6
2.9
10.3
2.8
7.9
na
13.5
5.3
Japan
13.7
14.4
11.1
15.2
5.2
8.9
5.6
0.0
1.7
na
51.0
na
6.1
7.5
USA
14.4
12.9
9.8
8.8
7.8
6.5
4.4
1.5
1.5
5.3
2.0
(8.1)
5.8
5.1
Australia
26.6
20.1
15.1
14.3
13.5
10.0
10.4
5.6
5.5
4.7
2.5
(1.8)
7.6
5.1
China
22.5
9.9
14.4
14.5
14.4
3.7
12.4
8.0
10.5
0.2
12.4
na
12.9
3.7
HK
15.7
19.3
9.0
4.1
10.4
4.1
7.5
7.4
6.5
8.3
(1.6)
na
7.9
7.4
India
20.2
19.7
12.9
11.8
11.0
12.9
8.9
na
3.0
na
(8.0)
na
10.3
13.6
Indonesia
20.4
14.0
18.6
13.7
16.0
10.7
14.4
0.3
13.2
(16.5)
1.9
na
14.5
5.5
Korea
20.2
19.4
14.4
(8.3)
12.4
9.5
7.8
0.4
4.6
na
(3.5)
na
8.2
2.4
Malaysia
16.2
9.4
14.7
7.0
10.3
8.8
9.2
13.4
5.8
(0.8)
3.8
na
8.2
9.2
Philippines
15.5
14.1
14.4
14.5
9.9
(1.8)
13.0
na
7.5
na
2.8
na
9.3
(1.8)
Singapore
15.7
(6.1)
10.7
12.6
8.4
8.7
8.1
4.4
6.2
7.6
0.0
na
7.5
6.7
South Africa
31.8
17.8
22.2
16.9
17.9
14.2
16.5
11.6
14.9
11.8
12.7
na
16.0
13.4
Taiwan
25.2
15.0
19.6
13.7
13.2
7.6
11.1
8.7
9.0
9.2
4.4
na
10.3
8.4
Thailand
29.1
44.0
13.2
18.1
15.7
20.6
12.2
(2.6)
8.9
31.8
5.5
na
9.9
18.1
UK
15.7
7.2
11.4
7.5
8.4
7.6
7.2
2.6
3.8
2.8
0.0
(10.1)
7.1
4.5
MSCI regions
MSCI markets
1
Median value over the past 10 years. Source: Factset alpha tester, CLSA Asia-Pacific Markets
1 March 2013
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165
Microstrategy
Appendices
Appendix 2: Yield and payout USA has lower dividend yield and payout relative than the rest of the world
MSCI regions and markets - Yield versus payout
4.5
12MF Dividend yield (%)
Australia (64.2, 4.7)
Italy
France
4.0
Europe
3.5 3.0
World
EM
2.5
Singapore
Canada
Malaysia
Colombia HK
Indonesia
DM
Peru
AsiaxJ
South Africa
Taiwan
Thailand Latin America
APxJ
China
UK
Brazil
Germany
Chile
USA Philippines
Japan
2.0
Mexico
India (22.7, 1.6)
Payout (N2Y avg, %)
Korea (10.3, 1.2)
1.5 28.0
30.0
32.0
34.0
36.0
38.0
40.0
42.0
44.0
46.0
48.0
50.0
Source: Factset, CLSA Asia-Pacific Markets
Telecom and utilities have high dividend yield and payout
MSCI World sectors - Yield versus payout
4.0
12MF Dividend yield (%)
Banks
3.5
Real estate (70.3, 3.5, 3)
Insurance
FBT
Food & drug
Pharma
Energy
Telecom (62.7, 5.1, 4.2) Utilities (61.0, 4.6, 3.3)
3.0 Cap gds
Materials Autos
2.5
Semis Software
Cons svcs HPC
Div fin Media
2.0 1.5
Tech HW
Comm svc
Transport
Cons dur
Retail
Healthcare
1.0
Payout (N2Y avg, %)
18
21
24
27
30
33
36
39
42
45
48
51
Source: Factset, CLSA Asia-Pacific Markets
166
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Microstrategy
Appendices
Appendix 3: EPS versus DPS growth EM and Asia ex-Japan have better EPS and DPS growth compared to other regions
MSCI regions and markets - EPS versus DPS growth
14.0
Mexico (14.3, 17.1)
DPS cagr (13-14F, %)
13.0
Thailand South Africa Indonesia
12.0 11.0 10.0
Philippines
9.0
AsiaxJ
World
Japan (26.4, 8.3) Taiwan (19.0, 7.8)
APxJ
Australia
6.0
Malaysia Canada
Germany (3.2, 4.9) Peru Singapore (4.9, 4.6)
5.0 4.0
DM
Latin America
Korea
HK
France
UK
7.0
EM
China
USA
Europe
8.0
Brazil
India
Italy
Chile (21.1, 2.8)
EPS cagr (13-14F, %)
Colombia (2.6, -3.3)
7.0
9.0
11.0
13.0
15.0
17.0
Source: Factset, CLSA Asia-Pacific Markets
Diversified finance and consumer durables have higher EPS and DPS growth
MSCI World sectors - EPS versus DPS growth
11
DPS cagr (13-14F, %) Autos (8.1. 15.5, 2.7)
Banks
10
Transport
Software
8 Pharma
7
Media
HPC
Materials
Cap gds Telecom Semis
Comm svc
6 Energy
5
Insurance
4 Real estate
3 2
Retail
FBT
9
Div fin (18.2, 23.3, 4.7) Cons dur (57.1, 12.5, 1.5)
Tech HW (11.2, 30.6, 4.3)
Food & drug
Utilities Healthcare (4.4, -1.8, 2.5)
5
7
EPS cagr (13-14F, %)
Cons svcs (12.0, 0.3, 1.5)
9
11
13
15
17
Source: Factset, CLSA Asia-Pacific Markets
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Appendix 4: Dividend tax Dividend and capital-gains tax in detail
In the following figure we show the implications of increase and decrease in corporate capital-gains tax on the economy as a whole. Implications of long-term capital-gains tax on corporates
Implications of increase/decrease in LT capital-gains tax rate on corporates
Increase in CGT rate
• • • •
Lock in effect Decrease in new investments Less capital re-allocation Less economic growth.
Decrease in CGT rate
• • • •
Attract foreign investments Promote entrepreneurship High savings rate High economic growth
Source: CLSA Asia-Pacific Markets
Dividend and capital gains tax for Australia in detail
Australia:
Corporate Tax: Capital gains: Capital gains that companies derive are taxed at 30% the corporate rate.
Tax losses may be utilised and carried forward indefinitely to offset future
assessable income. However, capital losses can only be offset against capital gains. The carryback of losses is not permitted.
Dividends: Dividend received from local to local and foreign are taxable but can be offset with the amount of franking credit on dividends paid by local companies.
Dividend received from non-resident companies are tax exempt if the recipient is a local company that has a 10% or greater interest in the foreign company.
Personal tax: Capital gains: Residents are liable for tax on capital gains (subject to double-tax relief). Capital gains are included in taxable income for calculation of tax liability. On assets held for more than one year, individuals are taxed on half the capital gains. Dividends:
Dividends received by residents from local companies are taxable but can
offset with the amount of franking credit on dividends paid by companies. A recipient of a fully-franked dividend on the top marginal rate will effectively pay about 15% tax on the cash amount of the dividend. The top marginal rate in Australia is 45%.
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Corporate and personal tax in detail for China
China:
Corporate tax: Capital gains: Capital gains and losses of companies are generally combined with other operating income and taxed at the applicable company tax rate. Dividends: An exemption applies for dividends paid by a resident enterprise to another resident enterprise (with certain limits).
Dividends received from a foreign entity are included in taxable income
and subject to income tax at a rate of 25%. A 10% withholding tax is levied on dividends paid to a non-resident company unless anything is mentioned under a tax treaty.
Personal tax: Capital gains: Individual’s capital gains are taxable in China at a 20% rate. Dividends: Resident and non-residents pay 20% withholding tax and its final. Dividend and capital gains not taxed for residents or corporates
Hong Kong:
Corporate tax: Capital gains: There is no capital-gains tax in Hong Kong and capital gains are not subject to corporate or personal income tax. Dividends: Dividend income, whether from Hong Kong or overseas, is not taxable. Dividends paid to either a resident or non-resident of Hong Kong is not subject to any withholding tax. Personal tax: Capital gains: Capital gains for residents are not taxable in Hong Kong. Dividends: Dividend income is not taxed but gains from the exercise of share options are taxable.
India’s long- and shortterm capital gains. Dividends are taxable for residents and corporates
India:
Corporate tax: Capital gains: Capital-gains tax in India depends on whether the gains are long or short term. Capital gains Short term
Long term
Shares are held for less than a year
Shares are held for more than a year
Gains are subject to STT and taxed at 16.22%
Tax is exempt, if transaction is subject to STT. When such transaction is not subject to STT, a 10% tax applies (without indexation)
Capital losses can be set off with any capital gain
Capital losses can be set off only with LTCG
No carry forward apply here
Capital loss can be carried forward for 8 years against gain of same type in subsequent years
Source: CLSA Asia-Pacific Markets, Income tax department
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Dividend distribution tax is charged as a withholding tax in India
Dividend distributed tax: Companies have to pay 15% dividend distribution tax (DDT), 5% surcharge and 3% education cess on DDT and surcharge. So total tax incidence is 16.22%. Personal tax: Capital gains: Similar set of rules applicable in India for residents as applicable for corporations. Dividend distributed tax: Dividends from India companies are not subject to tax in the hands of shareholders and dividends can be repatriated, if dividend tax is paid by the company. However, the company paying the dividends is subject to DDT at an effective rate of 16.22%.
Details on capital and dividend tax in Indonesia
Indonesia:
Corporate tax: Capital gains: Capital gains are taxable as ordinary income and capital losses are taxdeductible. Losses may be carried forward for five years following the year the loss was incurred. Dividends: Dividends paid by a domestic corporate to a resident company are subject to a 15% withholding tax and non-resident are subject to 20% withholding tax unless the rate is reduced under a tax treaty. Personal tax: Capital gains: Gains on shares listed in Indonesia are taxed at 0.1% of the transaction value. An additional tax of 0.5% applies to the share value of founder shares at the time of an IPO. Dividends: A 10% withholding tax is imposed on dividends paid to resident individual.
Capital and dividend tax in Philippines
Philippines:
Corporate tax: Capital gains: Capital gains from the sale of shares not traded through the Philippine Stock Exchange are taxed at the rate of 5% on the first P100,000 and 10% thereafter.
Sales of stocks in a domestic corporation through the Philippine Stock
Exchange or through IPO are subject to a tax on the transaction at a rate of 50% of 1% of the selling price.
Losses can be carried forward for three years. A 10% surtax is levied on improperly accumulated earnings. Dividends received by residents taxed at 10%
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Dividends: Dividends received by local or foreign companies from a Philippines corporation are not subject to income tax.
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Microstrategy
Dividends received by non-resident foreign corporation from domestic
corporations are subject to a 30% final tax. However, the tax is withheld at a reduced rate of 15% in certain circumstances, provided the country of the non-resident allows a tax credit of 15%.
Personal tax: Capital gains: An individual is subject to capital-gains tax on the sale of shares not traded on the exchange at a rate of 5% of the net gain not exceeding P100,000 and 10% on the excess.
Gains derived from the sale of shares listed and traded on the stock exchange are taxed at 50% of 1% of the gross sales price.
Dividends: Dividends received by residents are subject to tax at 10%. Like Hong Kong, Singapore does not levy tax on dividends and capital gains
Singapore:
Corporate tax: Capital gains: Singapore does not tax capital gains. Dividends: Singapore operates a tier-1 corporate tax system, under which corporate tax paid on a company’s profit is final. Any dividends paid are tax exempt in the hands of the recipient. No withholding tax is levied on dividends paid by company residents in Singapore. Personal tax: Capital gains and dividend tax: Singapore does not tax capital gains for residents. Any dividends paid are tax exempt in the hands of recipient.
Capital gains for sale of shares are subject to income tax on residents up to 40%
Taiwan:
Corporate tax: Capital gains: Capital gains are treated as ordinary income and taxed at a standard rate of 17%. Dividends: For local corporates, the dividends received are not considered as taxable income. Imputed tax credits do not apply to non-resident shareholders. Non-resident corporates face a 20% withholding tax.
An additional 10% tax will be imposed on any current earnings that remain undistributed by the end of following year. Non-resident shareholders may use 10% surtax as on offset against dividend withholding tax.
Personal tax: Capital gains: Capital gains from the sale of shares in a domestic company are subject to individual income tax. Tax rates for residents are progressive up to 40%. Dividends: Taiwan residents do not pay any withholding tax but they get the dividend imputation credit attached to their dividend. Non-residents individuals have to pay 20% withholding tax.
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Dividends paid to local and foreign companies are subject to 10% withholding tax
Thailand:
Corporate tax: Capital gain: Capital gains are treated as normal corporate income tax with no restrictions on the use of capital losses to offset taxable profit. The normal corporate tax rate is 20%. Dividends: Dividends paid to local and foreign companies are subject to a 10% withholding tax (exempt, if certain requirements are met). Personal tax: Capital gains: Capital gains are exempt from personal income tax if the shares sold were of a public company registered on the stock exchange of Thailand. Dividends: A resident individual taxpayer who gets dividends has a choice of including the dividend in assessable income or paying a final withholding tax at 10% and excludes such dividend from their income.
Dividends from any board of an investment-supported company are taxexempt.
Carry forward of corporate operating losses under capital gains applicable for nine years
Japan:
Corporate tax: Capital gains: Capital gains are taxable as ordinary income; capital losses are generally deductible. The national standard corporation tax rate for FY13 of 25.5% applies to ordinary corporations with share capital exceeding ¥100m. However, a 10% surtax will be imposed therefore the national corporate tax rate will be 28.05%.
Carry forward of net operating losses is applicable for nine years. Dividends: Dividends received by a local corporation from another local corporation are excluded from taxable income for corporate income-tax purposes if the recipient holds 25% or more of the shares in the dividend-paying corporation for at least six months before the dividend determination. If a corporation holds less than 25% of the shares or for less than six months before the dividend determination, 50% of the dividends received may be excluded.
Foreign dividend exemption system exempts 95% of dividends received by
a local company from its qualifying shareholdings of 25% or more in foreign companies (held for at least six months before the dividend determination).
20.42% withholding tax is normally levied on dividend distribution to nonresidents unless the rate is reduced under a tax treaty.
Residents taxed at 20% on gains from share sales
Personal tax: Capital gains: Individuals are taxed on the gains from sale of shares at 20% and 10% for listed shares Dividends: 20.4% withholding tax is normally levied on dividend distributions to nonresidents and residents unless the rate is reduced under a tax treaty.
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Malaysia does not levy capital gains tax on corporates and residents
Malaysia:
Corporate tax: Capital gains: Capital gains are not taxed in Malaysia. Dividends: Single-tier system (STS): Dividends paid by companies using the STS are not taxable. Companies in Malaysia have until 31 December 2013 to adopt the STS. Personal tax: Capital gains: Capital gains are not taxed in Malaysia. Dividends: Imputation tax system: Resident individual get IRB rebates (the difference between corporate tax and individual progressive tax rate) for annual taxable income.
No tax will be levied on STS. Capital gains or losses taxed under normal income and subject to corporate-income tax
Korea:
Corporate tax: Capital gains: Capital gains or losses are usually reflected in normal taxable income subject to corporate income tax. Tax Tax rate
Tax slabs
10%
First 200m won
20%
Above 200m won - 20bn won
22%
Above 20bn won
Source: CLSA Asia-Pacific Markets, National tax service
A local surtax of 10% of the corporate income tax due applies. Dividends: Withholding taxes to resident companies are not applicable. Dividend received reduction is available for Korean resident company
The dividend received reduction (DRD) is available for dividend income received by a Korean resident company from another Korean company.
Dividend received deduction (DRD) of 30% to 100% is granted based on shareholding tax ratio.
Korea: Dividend received deduction (%) Listed company
Non Listed company
Equity ratio
Deduction ratio
100
100
>30
50
50
50
