Scouting for Dividends in Asia

This fund offers an all-in-one package for growth-and-income investors.

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Sometimes it seems as though Asia's highflying technology stocks get all the attention. But investors—especially retirees focused on receiving current income—may be surprised to learn that Asia also boasts some of the highest-yielding stocks in the world. Matthews Asia Pacific Equity Income fund proposes a safer way to play this booming region by investing in companies that offer both growth and income. Over the past year (through March 10), the fund (symbol MAPIX) has returned 9 percent, ranking it among the top 5 percent of diversified funds that invest in the Asia-Pacific region, according to Morningstar. U.S. News recently caught up with comanager Jesper Madsen before a trip to Asia, where he'll be visiting about 50 companies in two weeks. Excerpts:

What is the case for investing in Asian dividend-paying stocks?


This is an area that's somewhat underinvested; it's a space people don't really know what to do with. When people think of Asia, they think of growth. But as soon as some of these companies come off their high-growth phase, it's difficult for the analyst community to get excited about the stocks, and they drop off the radar screen to some extent. These are midcap and large-cap companies that would be considered solid growth profiles in the United States, but they might not be as exciting as other stories in Asia. We ran analysis internally on dividend growth. Over the past five years, if you equally weighted the MSCI All Country Asia Pacific Index and the S&P 500, you'd find that dividends in the S&P would have generated about 6 percent dividend growth. With the Asia Pacific index, it comes out to about 18 percent.

Why is that?


There are a couple of reasons: While U.S. corporations have increasingly tapped share buybacks as a way to return capital to shareholders, in Asia, buybacks are somewhat unheard of outside of Japan. Instead, companies have generally returned cash to shareholders via dividends. Additionally, many of Asia's mid- and large-capitalization companies that have grown to a size where they can afford to pay dividends have initiated regular dividend payments. This is, in effect, giving shareholders access to a greater portion of company earnings. Why do you allocate nearly 20 percent of the portfolio to Japan, where dividends are the lowest in the region?


Japanese corporations are buying back their own shares, but some are starting to change their dividend policies. Some industry-leading companies have come out in a very precise manner and have released three- and five-year plans. If you have companies going from paying next to nothing to all of a sudden indicating they'd like to pay out 20 percent, 30 percent, or even 40 percent over the next five years, you start seeing actual dividends growing at a faster rate than earnings. That is enticing for us. We're not only looking at the yield we get today for our holdings but also at the yield we see three to five years from now. Corporate Japan still has a ways to go, but once the large blue-chips proceed, it will have a trickle-down effect throughout the economy. Other corporations will see this and follow their lead. Where are you finding some of the higher dividends in Asia?


Since the Asian crisis, a market that has been somewhat overlooked is Taiwan. This is a market that did not partake as fully as others in the rebound. Therefore, you'll find yields at the higher end in Asia. You also have these technology companies that previously didn't pay dividends that have now matured to the point that they can. One example is Taiwan Semiconductor Manufacturing, or TSMC. This company is the manufacturing arm of many design houses. In the dedicated foundry space, it has about 50 percent market share. It's a $55 billion company that's currently yielding about 4.5 percent (which obviously varies with market conditions). Here you have a company that's in a cyclical industry on paper, but it has market dominance and is able to invest heavily in capital expenditures. For the last couple of years, it has been upgrading and moving to advanced technology. That alone is a hurdle for competitors. For some time, TSMC has been growing cash flows to $5.5 billion or $6 billion a year, which leaves room for paying dividends. I'd call this company a "wedge" because of its potential for paying dividends. Now, just having billions to pay doesn't mean it'll take place. You also need willingness. TSMC started paying in 2003, but they have since increased that dividend at a rapid clip and have indicated they will take it very higher in the future. The balance sheet is also undergeared, so there's no stress to repay debt.