Since our previous compilation of Hong Kong blue chips with high dividends back in 2021, the markets have changed drastically.
At the point of writing, the US indices have recorded eight straight weeks of declines and the Hang Seng Index has been lingering at 5 year lows. This is due to issues around the world such as the Russia-Ukraine conflict, inflationary pressures, China’s zero-covid policy and the tense China-US relations which has impacted economic growth. Amidst this backdrop, central banks such as the US Federal reserve and European central banks are looking at monetary tightening policies to try and reduce the deficit that was allowed to balloon during the worst of the COVID-19 pandemic.
There has also been an increased number of mentions of the dreaded “recession” word by market watchers as the longer these issues linger, the higher the likelihood of an economic contraction.
With the US 10 year treasury yield hovering at 2.85% at the point of writing, investors have also demanded higher returns to compensate for any investments.
With this, we look for strong blue chip stocks on the Hong Kong exchange that provide reasonably high dividends, yielding above 7%:
12 Hong Kong Blue chips with more than 7% dividend yield
Are their yields sustainable?
High dividend yields are great, but are they sustainable, or just a factor of a downtrending market?
Next, we explore if the stocks on our list can provide sustainable yields:
Bank of China, CCB, ICBC – sustainable
Bank of China (BOC), China Construction Bank (CCB) and Industrial & Commercial Bank of China (ICBC) make up three out of four of China’s Big four banks. They tend to be viewed as an attractive value proposition as they are undervalued by most metrics and when compared to global peers. We covered the best China banks to buy here.
China recently lowered the five-year loan prime rate (LPR) by 0.15% to 4.45% while maintaining the one-year LPR at 3.7%. This cut is forecasted to have a slightly positive impact on Chinese banks as while the net interest margins for banks will decline, it will be offset by the stimulation of long term investments and property sales, fuelling economic growth and thus expanding the bank’s loan books.
These three banks all have dividend payout ratios of below 40% and have a strong consistent track record of growing their earnings per share over time, hence it is very likely that their dividends are sustainable.
These three banks also have a good track record of increasing dividends over time.
Sinopec Corp, CNOOC, PetroChina – not sustainable
With oil prices maintaining above $100 on a per barrel basis for prolonged periods this year due to the Russia-Ukraine crisis, stocks related to the are one of the outperformers for this year. On this backdrop, All three companies have increased dividends significantly for 2021 and are the dividends being distributed are all at its highest level in the recent five years.
Sinopec Corp and CNOOC are distributing about 75% of its profits while PetroChina distributed about 45%. With a payout ratio of 75% and a significantly higher amount due to the higher oil prices, this may not be sustainable should oil prices come back down.
On the other hand, while PetroChina has only distributed 45% of its profits, as the company operates in a highly capital intensive industry, PetroChina may seek to maintain this level of distribution so as to conserve profits for capital expenditure and other expansion plans. This means that if profits drop, the company will naturally adjust dividends lower.
Country Garden, New World Dev – not sustainable
With the residential property sector in a downturn since the debt issues surrounding the sector surfaced with China Evergrande defaulting and many other property developers facing similar issues, there is no doubt one would have concerns over whether the dividend yields by Country Garden and New World Dev are sustainable.
Country garden, one of the big 3 property developers of China, along with Evergrande and Vanke is a stock that has traded below COVID lows due to the stressed situation. While dividends in 2021 were reduced by 30% as compared to 2020, the payout ratio has remained low at 25%.
With the Chinese government implementing policies to reduce the downside risk and at the same time attempt to revitalise the residential property sector, the worst could be over. While there may be a further dividend reduction for 2022 as Country Garden continues to conserve cash, there maybe a turnaround in future years.
New World Dev, which has the Chow Tai Fook Group as its significant shareholder has distributed dividends that is more than four times its earnings per share for the past two years. This is part of its dividend policy to distribute shareholders funds that are surplus to the operating needs of the company. There is no indication as to when this policy will end, as such, investors will have to take this into consideration before entering into New World Dev as a dividend play.
China Mobile, China Unicom – sustainable
The telecom industry in China, being structurally stable has seen its dividends grow over the years. Dividend payout ratio for China Mobile and China Unicom are 58% and 46% respectively which reflects a range that is typical of a slightly more mature industry that still requires to retain some reserves for capital expenditure and technological expansion plans
China Unicom has seen its earnings grow consistently over the past five years while China Mobile saw its profits dip during the pandemic but caught up and 2021 profits are higher than the previous years which would broadly attest to its stability and consequently its ability to maintain dividends.
Xinyi Glass – sustainable
Xinyi Glass is one of the world’s largest integrated glass manufacturers, producing auto mobile glass, energy saving architectural glass and float glass which is the most widely used form of glass, with applications such as Mirrors, insulated glass, windows and doors. The company has maintained its dividend payout ratio of 25% while growing profits over the years.
Xinyi Glass, who is a key supplier to the automotive and property industry will likely see its profits fluctuate in line with the fortunes of its key customers in these two segments.
Xinyi Glass is also the parent company of spin offs with strong profit contribution, namely Xinyi Solar (00968:HK) and Xinyi Energy (03868:HK) which are focused on solar glasses and solar farms respectively.
CITIC Ltd – sustainable
CITIC, which has also seen its dividends increase over the years in line with its earnings has a dividend payout ratio of approximately 50%. It is a diversified conglomerate with business in financial services, intelligent manufacturing and commodities.
It also has stakes in modern consumption and urbanisation sectors. As a conglomerate with its finger in many industries, it has seen different sectors outperform at different times to mitigate against the weaker ones. Hence it should be able to maintain its dividend baring any events with systemic risks across the entire economy.
7% dividend yield is only one of many considerations
While the best place to be during a storm is the harbour, fishing for returns at the harbour also does not bring adequate returns. If we are able to secure structurally strong and stable boats, heading out to sea may be a worthwhile risk.
With this, we identified 12 Hong Kong blue chips with 7% or higher dividend yield which would reward investors who board these boats while waiting for stock price appreciation in these uncertain times.
We also looked at the strength of the company and the dividend payout ratio as it determines whether the current dividend yields are sustainable. Some of these companies have consistent growth and seem likely to be able to maintain not only its payout ratio but also its total payout amounts. Others may even have a track record of increasing payout amounts and seem to be on track to continue this trend. There are also companies that have a little more uncertainty due to the fluctuations in the industry it operates in or are in industries facing structural challenges.
I am an experienced financial analyst with a deep understanding of the global markets, particularly focusing on Asian economies and stock markets. Over the years, I've closely monitored market trends, economic indicators, and corporate performance to provide insightful analysis and recommendations to investors. My expertise extends to evaluating dividend-paying stocks, assessing their sustainability, and understanding the broader economic and geopolitical factors influencing market dynamics.
In the context of the article discussing Hong Kong blue chips with high dividend yields, it delves into several key concepts:
Market Conditions and Geopolitical Factors: The article discusses how market conditions have shifted since 2021, citing factors such as the Russia-Ukraine conflict, inflationary pressures, China's zero-COVID policy, and tense China-US relations. These factors have contributed to economic uncertainties and impacted investor sentiment, driving changes in market indices like the Hang Seng Index and US indices.
Monetary Policy and Economic Growth: Central banks, including the US Federal Reserve and European Central Banks, are considering monetary tightening policies to address deficits that arose during the COVID-19 pandemic. The article highlights concerns about a possible recession, with investors demanding higher returns, as evidenced by the US 10-year treasury yield.
Dividend Sustainability: The article evaluates the sustainability of dividend yields, a critical consideration for investors seeking income from their investments. It examines various Hong Kong blue-chip stocks and assesses their dividend payout ratios, earnings growth trends, and industry dynamics to determine sustainability.
Sector-specific Analysis: Different sectors face distinct challenges and opportunities. The article categorizes blue-chip stocks based on sector performance and prospects. For instance, it discusses the sustainability of dividends in sectors like banking, oil and gas, real estate development, telecommunications, and manufacturing.
Company-specific Factors: Each company's financial health, dividend payout policies, earnings growth trajectory, and industry positioning influence its dividend sustainability. Companies like Bank of China, China Construction Bank, and Industrial & Commercial Bank of China demonstrate strong track records and conservative dividend payout ratios, suggesting sustainable dividends. In contrast, companies in industries facing challenges, such as real estate development, may struggle to maintain high dividend yields.
Investment Strategy: The article emphasizes the importance of considering various factors beyond dividend yield alone when making investment decisions. Factors such as company strength, dividend payout ratio, growth prospects, and industry dynamics play crucial roles in assessing investment opportunities.
Overall, the article provides valuable insights into navigating volatile markets, identifying high-yield dividend stocks, and evaluating their sustainability in the face of economic uncertainties and geopolitical tensions.