Asian Companies to Cut Dividends by Further 25%, UBS Estimates

By Chen Shiyin

Feb. 26 (Bloomberg) -- Asian companies may cut their dividends by a further 25 percent amid slowing earnings growth, even as yields climb to the highest in more than two decades, UBS AG said.

An index tracking dividend yields in Asia, excluding Japan, has dropped 8 percent since its peak, with weaker earnings likely to lead to further reductions, Hong Kong-based strategist Niall MacLeod and Aakash Rawat wrote in a report today. Banks in South Korea, Taiwan and Hong Kong may lead the cuts, the report said.

The MSCI Asia excluding Japan index has dropped 12 percent this year, extending last year’s record 53 percent slump. The decline means regional equities now offer a yield of 4.3 percent, the highest since 1985, UBS estimated.

“In absolute terms, those high yields look attractive,” the strategists wrote. “However there is still, we believe, a very substantial risk from dividend cuts.”

The 4.3 percent yield offered by Asian stocks is higher than both 1998 and 2003, the last time share prices fell to so-called bear-market lows, UBS said. The yield is also about 2 percent higher than that of 10-year U.S. Treasuries, the brokerage added.

In the U.S., a total of 288 companies cut or suspended dividends last quarter, the most since Standard & Poor’s records began 54 years ago. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.

Asian Banks

U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data.

In Asia, lower payouts by financial companies will hurt the region’s overall yield because banks account for about 25 percent of the dividend index, UBS said.

South Korean banks plan to cut dividends or pay no dividends for 2008 after their profits declined, Financial Services Commission Chairman Chin Dong Soo said on Feb. 23. These companies will probably cut their payout by 50 percent, UBS estimated, without naming any stocks.

“We remain very bearish on the earnings outlook -- the devastating impact of the credit crunch is starting to show up in earnings numbers for 2008 and will likely continue to do so,” the strategists wrote. “The greater risk surrounds dividends from the financials, especially the banks, as they increasingly look to rebuild balance sheets.”

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net.