New guidelines should promote cash dividends and buybacks
The Shanghai Stock Exchange published “Guidelines for Cash Dividend
Distribution of SSE-listed Companies” in August. The guidelines advocate
significantly higher cash dividend payout ratios and incentivize share
buybacks. We expect the guidelines to have a positive impact on cash
dividends and share buybacks in the A-share market.
Firms with sustained, high dividends may generate alpha
Firms paying a high dividend generally outperform the market around the
announcement of a dividend, though the effect is not sustained and is
related to the market risk appetite. The key is sustaining high dividends.
We found that an equal-weighted/market cap-weighted portfolio of stocks
with stable and high dividends outperformed the SHCOMP Index by
60%/20% since 2008. Our probabilistic choice model indicates that 8
areas—FCF/earnings, ownership concentration, market cap, ROE, status as
a state-owned enterprise (SOE), profitability, demand for refinancing, and a
tradition of sustained cash dividend payments—can influence whether a
firm maintains stable and high cash dividends. Based on those indicators,
we have developed a basket of stocks <GSSZCDIV> that could potentially
pay steady and significant dividends and may generate alpha.
Stocks typically outperform after a repurchase, but the effect fades
The number of listcos doing share buybacks has increased since the
publication of the new guidelines in August. A stock often outperforms
following a buyback, but this momentum tends to subside after 2-3
months. We have also put together a basket of firms that we think are likely
to undertake share buybacks based on P/B, surplus cash, short-term debt
pressure, etc.