7 Moat-y Dividend Growers in China

Companies with a lower yield at present, but a good record of growing their dividends, and whose prospects for continued growth in the business are good, may well be the high-dividend companies of the future.

In contrast, companies with a high dividend yield currently, but no signs of growth, may be in a stage of development where future dividends don't keep up with inflation or, in the worst-case scenarios, could be in jeopardy.

In the case of a dividend yield, investors should assess the potential for growth in the dividend over time, and the sustainability of the dividend, which means having a view of the prospects for the continued success of the underlying business. Companies that have the potential for dividend growth are known as dividend growers. In other words, earnings and business outlook are some of the important variables on a company’s dividend. Dividend growers would typically be stocks that possess solid and ever-improving operational performance.

What are the dividend growers in Hong Kong and China markets?

Agricultural Bank of China 01288

Agricultural Bank of China is one of Morningstar’s two top picks among the country’s state-owned banks. Growth in loans and fee income continues to be robust. According to Iris Tan, senior equity analyst at Morningstar, ABC benefits from lending to emerging strategic sectors including manufacturing, green industry and microfinance.

“We believe this reflects ABC’s inherent advantage in rural financing and policy tailwinds on the government's rural revitalization initiative—retail loans grew nearly 5% from end-2022, compared with the zero to 4% growths of peers,” Tan adds.

Its Hong Kong listing gives out the highest dividend yield among the growers. The stock is currently paying a 8.1% yield; it is expected to grow 4.3% annually.

Tencent Holdings 00700

A tech company isn’t a typical candidate for investors to look for income, but Tencent has been rewarding investors with a yearly dividend and share buybacks. Its payout ratio has averaged 8% over the past three years. Investors earn a 0.7% dividend yield from its shares, and the company is expected to grow its dividend by 50% in the coming year.

Wide-moat Alibaba owns some of the world's most popular brands, including Honor of Kings and PUBG Mobile. The gaming business has been the firm’s cash cow. As gaming license approval resumed, the company’s cash flow has recovered, according to our senior equity analyst Ivan Su. Over the years, Tencent has also returned capital to shareholders via share buybacks. In 2022, Tencent repurchased a total of 107 million Shares for an aggregate consideration of HK$33.8 billion before expenses.

Yum China YUMC

Another wide-moat name that grows dividend is Yum China. The company generates revenue from almost 13,000 KFC, Pizza Hut and other fast-food stores on the mainland. Already paying a 0.8% dividend, the restaurant operator is expected to grow its dividend yield by 6.1% projected for the next 12 months.

“The COVID-19 pandemic provided Yum China the opportunity to accelerate store openings at more favorable lease terms. Now that China’s zero-COVID-19 policy is in the rearview mirror, we expect these new restaurants to not only deliver significant incremental revenue but also be accretive to the overall margins,” says Su. This will be supportive of the sustainable payout and growth of dividend.

Methodology

With the list of stocks in the Morningstar China Index, we look for companies that:

• Grow their dividends for 5 years in a row and have announced they will be increasing divdiends in the upocoming quarter.
• Have a payout ratio on less than 80% of earnings per share, and payout ratio ratio of less than 60% on operating cashflow per share (or a dividend cover greater than 1.25x and 1.7x, respectively).
• Have a positive trailing return on equity and a five-year average being positive, to ensure companies are profitable
• Generate positive free cash flow per share, wich signifies they have the cash to pay a divdiend.