As Chinese stocks struggle, owning boring ones has paid dividends
Summary
Stocks with high dividend yields are a bright spot in the sluggish Chinese market.
It has been hard to make money in Chinese stocks. Unlike the U.S. market, even the country’s tech giants have disappointed investors in the past few years. But investors focusing on something more boring—dividends from some of China’s least-loved companies—did far better.
Cash returns to shareholders from listed Chinese companies over the past three years amounted to more than two trillion yuan, the equivalent of $275 billion, according to Goldman Sachs. Most of that came through dividends, though they also have stepped up stock buybacks. The total return on an MSCI gauge tracking Chinese stocks with high dividend yields has outperformed the broader MSCI China index by around 28 percentage points over the past three years.
State-owned enterprises with some stock-market presence have been especially rewarding. By contrast, an imploding housing bubble and regulatory crackdown have sunk shares of many private-sector Chinese companies. The Hang Seng China Enterprises Index, which tracks Hong Kong-listed Chinese stocks such as tech behemoths Tencent and Alibaba, has lost around 40% of its value in the past three years.
A separate index tracking state-owned enterprises with listings in Hong Kong, on the other hand, has risen 2% over the same period. Even this year, which has seen Chinese equity markets rebound, the SOE gauge has done better than the broader market. Some standouts: Oil company Cnooc has tripled in value since the end of 2021, while carrier China Mobile has surged by 59%.
These state companies are usually in what are considered old economy sectors such as banking and energy. While they don’t offer exciting growth opportunities, what they have instead is stable cash flows and lower regulatory risk. The Hong Kong-listed SOEs have a dividend yield of 5.7% versus 3.8% for all of the Chinese stocks listed there.
Significantly, dividend payout ratios—the share of profits returned to shareholders in that way—are still lower for Chinese SOEs than for private companies, according to analysts at Bernstein Research.
The broker also noted that their payout level is already close to the highest ever, but it could keep rising. Chinese policymakers are eager to boost the valuations of SOEs and increasing shareholders’ returns is one possible way to do so. It could also help to foster a stock ownership culture in a country where real estate has been the preferred store of wealth.
And Goldman points out that boosting dividends could also provide fiscal relief to the government, especially at a time when land sales revenue has plummeted. The bank estimated that every one-percentage-point increase in the payout ratio of the listed SOEs could increase fiscal revenue by 23 billion yuan.
Chinese equities are among the cheapest in the world, and perhaps for good reason with its once-hot economy sagging. Brave investors might want to bet on them narrowing a gap that still puts them at less than half of the earnings multiple and less than a third of the price-to-book value of U.S. stocks.
Or they could focus on dividends. Profit is an opinion—cash is a fact.
Write to Jacky Wong at jacky.wong@wsj.com
