Income investors need no introduction to dividend yield as a valuation metric. For the uninitiated, dividend yield is a measure of how much returned cash investors are getting for every dollar that they have invested. A company that has a high dividend yield relative to its historical average may indicate undervaluation as the dividends paid out by the company are high relative to its current market price. Unlike capital gains, which are not realised until investors sell off their investment holdings, dividends provide investors with a steady stream of realised income that can be reinvested to harness the power of compounding in growing their investment portfolios. In this article, we take a closer look at three blue chips with the highest forward dividend yields on the Hang Seng Index.
Table 1: Highest Yielding Dividend Stocks On The Hang Seng Index
Company |
Share Price |
Dividend Yield * |
|---|---|---|
MTR Corporation (HKEX.66) |
HKD 38.9 |
8.44% |
Li & Fung (HKEX.494) |
HKD 3.43 |
7.12% |
Belle International (HKEX.1880) |
HKD 4.65 |
6.22% |
| Source: Bloomberg, data as of 9 December 2016
* Estimated dividend yield for 2017 |
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1. Operator Of The World's Most Envied Subway System
If you have been a frequent traveller to Hong Kong, you will probably realise that getting around in Hong Kong is made easy by the availability of affordable and efficient public transport. At the centre of this highly developed and sophisticated transport system, is an extensive train network that is operated by MTR Corporation (HKEX.66). Besides operating the mass transit railway, which constitutes about 40% of its total revenues, the company also develops and manages residential and commercial properties. Its influence spans several geographical markets, with the company already having its footprints in overseas markets, such as the UK, Australia, Sweden and China.
With an estimated dividend yield of 8.44% in 2017, MTR Corporation is currently the highest yielding dividend stock on the Hang Seng Index, thanks to a special dividend of HKD 4.40 per share that will be paid out to shareholders in two equal tranches in 2016 and 2017. The railway operator has been contracted to build the Hong Kong section of an express rail link to Guangzhou. To help cover the additional project costs, shareholders have accepted funding from the Hong Kong government, which has a 75% stake in the company, and will be repaid through the special dividends. Excluding the special dividend, its estimated dividend yield for 2017 still stands at a decent 2.79%. While the company reported a sharp -37.5% year-on-year plunge in its 1H 2016 net income, MTR Corporation has a strong track record of paying out consistent dividends. Moreover, rising passenger revenue from new rail routes and the firm's continued expansion into overseas markets could help to support earnings growth in the years ahead.
Table 2: Selected Per-Share Statistics For MTR Corporation
MTR Corporation |
2011 |
2012 |
2013 |
2014 |
2015 |
|---|---|---|---|---|---|
Diluted Earnings Per Share |
2.69 |
2.31 |
2.24 |
2.68 |
2.22 |
Dividend Per Share |
0.76 |
0.79 |
0.92 |
1.05 |
1.06 |
Pay-out Ratio (%) |
28.3 |
34.2 |
41.0 |
39.1 |
47.8 |
Free Cash Flow Per Share |
0.09 |
0.42 |
0.10 |
0.50 |
-1.27 |
| Source: Bloomberg, data in HKD terms | |||||
2. Supply Chain Manager With A Global Footprint
Founded in 1906 and headquartered in Hong Kong, Li & Fung (HKEX.494) is a global supply chain manager that specialises in the sourcing and logistics of consumer goods for major retailers and brands around the world. The company operates one of the world's largest global supply chain network, with more than 300 offices and distribution centres in over 40 geographical markets.
Despite its global footprint, Li & Fung derives its revenues primarily from the US and Europe. Based on its closing price of HKD 3.43 on 9 December 2016, Li & Fung fetched an estimated dividend yield of 7.12% for 2017. The company reported a -13.9% year-on-year decline in its 1H 2016 operating income, and its full-year bottom line is likely to be negatively impacted in view of the challenging global macroeconomic conditions. On a brighter note, the company strives to pay a dividend every year, and its pay-outs have historically been covered adequately by its free cash flows. It is expected to distribute a dividend of USD 0.031 per share for 2017, based on consensus estimates, and that works out to be an estimated 7.12% dividend yield based on its closing price of HKD 3.43 on 9 December 2016. Dividends may increase next year if operating profits improve in line with a pick-up in global growth.
Table 3: Selected Per-Share Statistics For Li & Fung
Li & Fung |
2011 |
2012 |
2013 |
2014 |
2015 |
|---|---|---|---|---|---|
Diluted Earnings Per Share |
0.08 |
0.07 |
0.09 |
0.05 |
0.05 |
Dividend Per Share |
0.07 |
0.04 |
0.06 |
0.04 |
0.04 |
Pay-out Ratio (%) |
83.0 |
53.7 |
69.1 |
75.7 |
79.4 |
Free Cash Flow Per Share |
0.09 |
0.04 |
0.08 |
0.06 |
0.05 |
| Source: Bloomberg, data in USD terms | |||||
3. China's Top Retailer For Fashion Footwear
Belle International (HKEX.1880) is engaged in the manufacturing, distribution and retail sales of footwear and apparel products. It is China's top retailer for fashion footwear, operating more than 20,000 retail outlets in China, Hong Kong, Macau, and the US. The company's business is divided into two main segments – the footwear segment and the sportswear and apparel segment.
While the sportswear and apparel segment has been doing well, growth in Belle's footwear business has been decelerating, with sales declining by -12.7% year-on-year in its latest semi-annual earnings. The company, whose brick-and-mortar retail outlets are its bread and butter, is also grappling with an increasing e-commerce threat, as shoppers are lured online by cheaper alternatives and the convenience that comes along with online shopping. At its closing price of HKD 4.65 (as of 9 December 2016), Belle offered investors a tasty estimated dividend yield of 6.22% for 2017. It is worth noting that the company has a strong balance sheet, with an amassed CNY 7.6 billion of cash, and its free cash flows have historically been able to cover dividend pay-outs comfortably.
Table 4: Selected Per-Share Statistics For Belle International
Belle International |
2011 |
2012 |
2014 * |
2015 |
2016 |
|---|---|---|---|---|---|
Diluted Earnings Per Share |
0.50 |
0.52 |
0.52 |
0.56 |
0.35 |
Dividend Per Share |
0.15 |
0.16 |
0.20 |
0.34 |
0.22 |
Pay-out Ratio (%) |
29.7 |
31.0 |
38.3 |
60.3 |
63.2 |
Free Cash Flow Per Share |
0.16 |
0.34 |
0.55 |
0.52 |
0.52 |
| Source: Bloomberg, data in CNY terms
* Change of financial year end date |
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Caveat Emptor!
Companies that have high dividend yields can potentially be diamonds in the rough, offering investors a juicy yield on their investments. While dividend yield is certainly a criteria that investors should look at when assessing a stock, it is also important for investors to perform their due diligence to ensure that such dividend payments are sustainable in the future, lest they end up with a portfolio of fool's gold – distressed companies whose high dividend yields are a result of deteriorating fundamentals, in which case future dividend payments by the company may be reduced or suspended. If you have done your research and are ready to make your next dividend stock investment, do remember to check out our promotion for HKEX stocks and ETFs.
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