CLSA Microstrategy Dividend 2013-3-01

Microstrategy
evalu@tor in action

Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com
Desh Peramunetilleke
desh.peramunetilleke@clsa.com
(852) 26008293
Mahesh Kedia
(852) 26008291
Shrikant Kale
(852) 26008489

1 March 2013
Global
Microstrategy

Asian dividend-wave picks
Asustek (2357 TT)
Bank of China (HK) (2388 HK)
China Mobile (941 HK)
IAG (IAG AU)
PTT (PTT TB)

Global dividend-wave picks
Itau Unibanc (ITUB4 BZ)
Japan Tobacco (2914 JP)
McDonalds (MCD US)
Microsoft (MSFT US)
P&G (PG US)
PepsiCo (PEP US)
Reckitt Benckiser (RB/ LN)
Roche (ROG VX)
Siemens AG (SIE GR)
Toyota Motor (7203 JP)

www.clsa.com

Dividend wave 2013
A global theme for all seasons

Prepared for - W: klee@copelandcapital.com

Microstrategy

2 desh.peramunetilleke@clsa.com 1 March 2013
Contents
Executive summary ............................................................................ 3
Investment highlights ........................................................................ 6
Summary of case studies and screens ................................................ 8
Global dividend overview ................................................................. 12
Case studies ..................................................................................... 29
Appendices
1: Yield characteristics ........................................................................ 160
2: Yield and payout ............................................................................ 166
3: EPS versus DPS growth ................................................................... 167
4: Dividend tax .................................................................................. 168
5: Performance table .......................................................................... 178
6: Rating of high-yield stocks .............................................................. 180
7: Dividend-wave stocks ..................................................................... 186
8: Basel-3 guidelines ......................................................................... 188
All prices quoted herein are as at close of business 18 February 2013, unless otherwise stated
Catch the latest wave

Executive summary Microstrategy

1 March 2013 desh.peramunetilleke@clsa.com 3

Dividend wave 2013
We have been longstanding advocates of dividends with a singular focus on
capturing total returns over the long term. We believe our persistence has
paid dividends with most investors now focusing on yield as a way of
enhancing returns beyond the widely held view as a barometer of safety.
However, if you are yet to be convinced, we hope the case studies presented
in this report will inspire you to take comfort in the concept of an asset that
can appreciate while still providing distributions that exceed cash rates.
This report revisits our proven approach to dividend investing through our
Microstrategy dividend-wave total-return portfolio, combining dividend yields
with sustainable growth to capture the best of both worlds. Our main picks,
based on our dividend-wave strategy, have strong balance sheets, solid
cashflow, high consensus-forecast yield and the ability to deliver the expected
payout, and yet retain sufficient earnings for reinvestment to fund future
dividend payments. This strategy outperformed the MSCI Asia Pacific ex-Japan
index by 5.1% in 2012 and by 35% since its launch in May 2010. Our tactical
call to switch out of expensive defensives into dividend-paying high-quality
cyclicals ie, Shadow defensives from mid-to-end 2012 also outperformed.
Further, companies with a strong track record of consistently growing dividends,
our Dividend champions, have delivered 18.5% total returns since May 2012.
Furthermore, emerging markets continue to be in a dividend sweetspot with
depressed capex, growing cashflows and historically low gearing. Our analysis
shows that last year, 88% of the MSCI Emerging Market (MSCI EM) universe
paid dividends (totalling US$250bn) compared to less than half at the start of
the decade. Given the slower growth environment, emerging-market high-
yield stocks are developing into a new asset class poised for further rerating.
China itself has come a long way from being considered as an oasis of growth
to the biggest pool of cash dividends (US$77bn) in emerging markets. Indeed
dividends from state-owned enterprises (SOE) have become an important
topic in Chinas policy agenda enhancing its sustainability. For investors, this
further enhances the attractiveness of yield stocks in China, which have
outperformed by 21% per annum since 2000 and 8% per annum since 2008.
However, with receding global macroeconomic risks and rising interest rates
on the horizon, income investors are likely to face headwinds compared with
the past couple of years. But, we highlight that investors need to also take
into consideration the severely depressed yields of the higher-quality fixed-
income securities, which could continue to drive fund flows towards high-yield
stocks. Income and absolute-return investors should also take into account
the fact that top-quintile stocks within MSCI World have an average dividend
yield of more than 5% and have delivered an average 1.4% return per month
during periods of rising bond yields, ie, falling bond prices.
Finally, a word of caution. Like many prudent investors, we are concerned by
the wider interest in dividends turning from a passion into an obsession.
While the structural story in support of dividends remains intact, some
investors might feel that we are already in bubble territory, given the
significant rerating of high-dividend stocks over the past couple of years. Our
analysis dispels this notion and suggests that only certain pockets of the high-
yield universe such as defensives remain expensive, while the wider universe
offers sustainable yields at attractive valuations. We encourage investors to
use our seven-factor DPS revision star-rating framework to identify such
inexpensive sustainable-yield stocks globally, while avoiding the value traps.
Dividends are now a way
to enhance returns, not
just a barometer of safety

EM dividend statistics
Total dividend-distribution of
US$250bn last year
52 companies paid more
than US$1bn each
56 companies paid more
than US$500m each
300 stocks with >3%
dividend yield

High-yield stocks
underperform during
rising interest rates . . .

. . . but are attractive to
income investors. . .

. . . as they yield over 5%
and deliver positive
capital gains
Dividend-wave strategy
combines yield with
sustainable growth

Our Asian portfolio based
on this strategy has
outperformed consistently
Dividend-yield stocks are
not in bubble territory

DPS revision star-rating
framework to identify
sustainable yields

Dividends illustrated
Global overview Dividend wave

EM, Asia high-yield stocks have done best Since 2008, high-yield best in Asia worst in Europe EM and Asian dividends have grown fastest MSCI Asia Pac ex-JP: Dividend growth will catch up

EM dividend return - Highest since 2000 Asia ex-JP: Dividend key to total returns Asian stocks do not have a debt burden Capital intensity has been falling for Asia

More companies paying dividends in EM Flows to dividend funds remain strong Asian defensives at 39% premium to cyclicals Relative PE of high-yield stocks for Asia ex-JP sectors

Source: Factset, Datastream, CLSA Asia-Pacific Markets

Source: Factset, Datastream, CLSA Asia-Pacific Markets Source: Factset Alpha Tester, CLSA Asia-Pacific Markets Source: Factset Alpha Tester, CLSA Asia-Pacific Markets

0
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Europe Asia ex JP
EM DM
USA
(Q1 index)
High-dividend-yield stocks in
EM and Asia ex-JP have delivered
far superior performance
relative to regional peers
1.5
2.0
2.5
3.0
3.5
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4.5
5.0
(8)
(6)
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Annl OPF (since 2008) Annl OPF (since 2012)
Div yld (Now, RHS) Div yld (L5Y avg, RHS)
(%) (%)
50
100
150
200
250
300
350
400
450
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AxJ Europe EM
DM USA Japan
DPS index rebased to 100
EM have seen highest
growth among regions
followed by Asia ex-JP
100
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300
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EPS
DPS
Indexed FY0 value
Mind the gap,
reversal is imminent
(50)
(20)
10
40
70
100
130
160
190
220
EM Aust AsiaxJP USA World DM Europe Japan
Price return Dividend return
(%)
EM and Australia have highest dividend
contribution to ther total return since 2000
(50)
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PE
EPS
Dividend
Currency
Contribution to US$ total return since Dec-00 (ppt)
0
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120
140
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F
AsiaxJ Europe
USA Japan
World
(%)
Net gearing ratios
are at trough levels
2
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6
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F
AsiaxJ Europe
USA Japan
World
(%)
Capital intensity has been stable
for USA and Europe but has been
falling for Asia ex-Japan
28.0, 21.3, 26.8, 20.7
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MSCI EM
MSCI DM
(% of stocks paying dividends)
Increase in number of companies paying
dividend in EM augurs well for future
dividend contribution to total returns
(900)
(600)
(300)
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(US$m)
Flows in January have been strong
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Cyclicals Defensives Financials
12M-fwd PE (rel to region, x)
Defensives are trading at 39% permium
to cyclicals versus the historical average
of just 15% since 2000
0.2
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1.0
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Current
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Peak
Trough

Investment highlights Microstrategy


Investment highlights
Economic cycles have a significant impact on the performance of dividend-
yield strategies. In the graphic below we show a normal economic cycle based
on the OECD definition. Our studies show that high-yield stocks usually
underperform only during the expansion phase of the cycle. However,
dividend investors can take comfort that when combined with other factors,
dividend-yield strategies can outperform in every economic cycle.
Microstrategy global dividend-yield-cycle strategy

Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
However, for investors that have a longer-term view, we recommend our
through-the-cycle dividend-wave strategy that aims to capture the best total
returns by mixing sustainable yields with growth. The stocks in our dividend-
wave portfolio have high consensus 12-month-forward yield (average yield
of 4%), high sustainable growth, strong balance sheets, solid cashflow,
strong DPS revision star-rating and the ability to deliver the expected payout
and yet retain sufficient earnings for reinvestment to fund future dividend
payments. On the next page we present the top-25 stocks by market cap
from our Asian and global dividend-wave portfolio, which we plan to rebalance
quarterly.
Microstrategy - Dividend-wave strategy

Source: CLSA Asia-Pacific Markets
OECD cycle (above 100)
OECD cycle (below 100)
OECD definitions:
Slowdown: Below 100 and downward sloping
Recovery: Below 100 and upward sloping
OECD definitions:
Expansion: Above 100 and upward sloping
Downturn: Above 100 and downward sloping
Dividend wave criteria

Wave 1
Market cap >US$4bn
(US$1bn for Asia)
3M ADTO >US$5m
(US$1m for Asia)

Wave 2
Dividend yield >3%
(>2% for US/Japan)
Sustainable growth >5%
(>3% for Japan)

Wave 3
DPS star rating >=4
Net gearing <60%
(only for EM)
Payout <60%
(only for EM)

Note that a few
exceptions apply to these
stock selection criteria

Dividend-yield strategies
can outperform across
economic cycles

PE and earnings certainty
are two key factors for a
cycle-switching strategy

Investment highlights Microstrategy


Asia and global dividend-wave stock picks (large cap picks, sorted by dividend yield)
Code Name Cty Sector Mkt cap
(US$m)
Div yld
(12MF,
%)
Star
rating
1

12MF
PE (x)
13-14F
EPS
Cagr
(%)
Sustg
(%)
13-14F
ROE
(avg,
%)
Payout
(FY1,
%)
Gearing
(FY0,
%)
Years of
DPS cuts
out of
total
Asian dividend-wave stock picks
177 HK Jiangsu Expway CN Transport 5,275 5.6 4/7 12.8 9.2 4.0 13.4 76.2 25.9 0/14
ANZ AU ANZ Bank AU Banks 77,759 5.5 4/6 12.1 4.5 5.0 14.9 66.2 nm 1/18
2357 TT Asustek TW Tech HW 9,037 5.4 5/7 11.3 7.5 6.6 17.7 56.3 (43.3) 3/12
939 HK CCB CN Banks 211,181 5.1 4/6 6.7 5.9 13.5 19.0 34.3 nm 1/6
IAG AU IAG AU Insurance 11,054 5.0 4/6 12.5 21.2 5.1 18.3 60.2 nm 3/11
880 HK SJM HK Cons svcs 14,798 4.9 6/7 15.0 12.0 9.8 35.8 74.0 (100.3) 0/3
TLKM IJ Telkom ID Telecom 19,709 4.9 5/7 13.2 9.7 8.8 24.7 61.3 14.9 5/17
2388 HK BOC (HK) HK Banks 36,745 4.8 5/6 13.1 7.0 5.7 14.8 62.8 nm 1/9
LEI AU Leighton AU Cap gds 7,880 4.7 4/7 13.0 20.0 4.0 19.5 53.8 32.1 3/14
033780 KS KT&G KR FBT 9,097 4.4 4/7 12.3 0.1 8.3 15.6 54.3 (14.5) 0/14
5 HK HSBC HK Banks 206,771 4.3 4/6 11.0 10.3 5.6 10.7 47.0 nm 2/17
RECL IN Rural Electrification IN Div fin 4,303 4.3 4/6 6.0 12.8 14.9 20.0 28.1 nm 2/9
WOW AU Woolworths AU Food&drug 41,765 4.2 5/7 16.8 5.7 8.0 27.5 71.0 47.8 0/16
UMWH MK UMW MY Autos 4,569 4.2 5/7 12.8 10.8 9.4 21.1 54.5 (0.3) 6/15
941 HK China Mobile CN Telecom 222,259 4.0 6/7 11.0 1.2 10.0 16.2 43.7 (46.9) 0/9
PGAS IJ Perusahaan Gas ID Utilities 11,907 3.9 5/7 13.9 10.6 16.7 35.2 55.8 (4.4) 3/9
PTT TB PTT TH Energy 34,144 3.9 5/7 8.5 7.7 11.8 16.7 34.4 50.5 2/10
1088 HK Shenhua CN Energy 79,002 3.8 4/7 10.1 4.2 11.6 17.6 38.4 (2.2) 1/6
BBL TB Bangkok Bank TH Banks 13,422 3.7 4/6 10.5 12.7 7.7 13.5 39.1 nm 2/10
UOB SP UOB SG Banks 24,568 3.6 4/6 11.3 4.0 6.8 11.5 39.3 nm 4/17
ONGC IN ONGC IN Energy 50,824 3.3 5/7 9.4 13.7 12.5 18.1 32.6 (5.6) 1/14
SCI SP Sembcorp Ind SG Cap gds 7,869 3.2 4/7 11.9 10.7 11.0 16.6 39.3 (23.2) 4/14
ASII IJ Astra Intl ID Autos 32,447 3.1 5/7 14.0 14.2 15.9 27.1 44.8 52.6 2/10
MER PM Meralco PH Utilities 8,400 3.1 4/7 18.7 4.1 9.1 23.0 56.5 (30.9) 4/8
270 HK Guangdong Inv CN Utilities 5,402 3.0 4/7 13.2 4.4 8.0 12.3 38.5 1.3 3/10
Global dividend wave stocks (ex-Asia)
ALV GR Allianz DE Insurance 64,717 4.8 4/6 8.4 5.7 4.7 10.8 40.4 nm 2/16
BMO CN Bank of Montreal CA Banks 41,037 4.7 4/6 10.3 2.9 7.5 14.1 48.7 nm 0/17
BATS LN British American GB FBT 102,487 4.5 7/7 14.6 9.5 17.3 52.3 64.9 98.3 2/17
LKOH RM Lukoil RU Energy 50,804 4.3 4/7 4.6 2.4 12.0 13.5 19.4 9.1 1/13
NDA SS Nordea Bank SE Banks 44,353 4.2 4/6 10.5 8.5 6.7 11.5 43.9 nm 2/13
SIE GR Siemens DE Cap gds 92,477 4.2 5/7 11.7 15.1 9.6 17.0 51.6 19.8 2/18
RY CN RBC CA Banks 89,852 4.0 5/6 11.6 6.7 9.6 18.4 46.3 nm 0/18
ROG VX Roche CH Pharma 190,796 3.9 7/7 13.6 8.2 34.8 58.4 52.8 70.0 0/16
BAS GR BASF DE Materials 93,082 3.9 5/7 11.8 9.9 11.9 19.4 48.3 45.5 2/17
SU FP Schneider Elec FR Cap gds 41,159 3.5 4/7 13.0 9.7 7.2 12.9 45.8 29.2 4/17
NESN VX Nestle CH FBT 226,320 3.5 6/7 17.3 8.3 6.8 18.3 61.0 nm 0/17
UNA NA Unilever NL FBT 114,548 3.5 5/7 17.0 8.3 11.6 29.4 59.3 31.0 4/17
MCD US McDonald's US Cons svcs 95,671 3.4 6/7 16.0 8.8 19.0 41.7 54.8 nm 0/17
MSFT US Microsoft US Software 229,866 3.4 5/7 9.2 7.5 25.2 29.8 31.9 (77.0) 0/9
ITUB4 BZ Itau Unibanc BR Banks 78,025 3.3 4/6 9.9 12.2 13.9 18.7 32.3 nm 2/14
JNJ US JNJ US Pharma 204,208 3.3 5/7 13.9 6.3 12.2 21.6 45.8 nm 0/17
PG US P&G US HPC 205,311 3.1 6/7 17.9 6.7 8.2 17.7 55.8 39.9 0/18
PRU LN Prudential GB Insurance 38,826 3.1 5/6 12.1 10.1 10.9 17.7 37.8 nm 1/17
PEP US PepsiCo US FBT 112,480 3.1 6/7 16.5 7.9 15.6 30.9 51.3 108.5 0/17
RB/ LN Reckitt Benckiser GB HPC 48,913 3.0 6/7 17.2 1.6 14.4 28.1 52.2 40.2 0/17
UPS US UPS US Transport 75,484 2.9 5/7 16.3 12.4 38.0 95.5 48.3 nm 0/11
EMR US Emerson US Cap gds 41,371 2.9 6/7 15.5 8.7 13.1 23.9 45.6 28.4 0/18
2914 JP Japan Tobacco JP FBT 59,407 2.8 7/7 14.3 13.1 12.8 20.8 36.6 3.6 0/17
CSCO US Cisco System US Tech HW 109,247 2.7 5/7 10.2 6.6 15.3 18.0 28.3 (63.2) 0/1
7203 JP Toyota Motor JP Autos 151,472 2.1 4/7 12.3 25.7 5.4 10.7 26.1 85.9 2/17
1
For details of star rating factors, please refer to appendix 7. Source: Factset, CLSA Asia-Pacific Markets

Summary of case studies and screens Microstrategy


Summary of case studies and screens
In this report we discuss some of the key issues faced by dividend-focused
investors in the current low-growth and low-interest-rate environment.
Below we present a summary of the 15 most relevant questions addressed
in this report.
Q1. What will be the impact of rising interest rates?
Conventional wisdom suggests that dividend-yield strategies underperform
during a rising interest-rate environment. But investors need to realise that
interest rates are at an all-time low, while dividend yields are still much
higher than the sovereign-bond yields. Also, our backtests show that the
return of the highest-yield quintile averages 1.4% per month during rising
bond-yield periods while bond prices are falling, making them very attractive
for income and absolute return funds. The corporate-bond market does offer
higher yields but the yield compression post GFC has ensured that for a 5%
yield, investors need to invest in lower-quality B or C rated bonds.
Q2. Are high-yield stocks still low risk (beta)?
There is a growing perception that the quality aspect of high-yield stocks has
taken a hit and a number of high-yield stocks are high-beta cyclicals that
have corrected and have unsustainable dividends. Our study suggests that
dividend-yield stocks still tend to be low beta and well suited to the current
uncertain and low-growth economic environment. We also highlight that
stocks with 4-5% yield have the lowest beta rather than dividend-yield stocks
with more than 7% .
Q3. Can dividend strategies work for Chinese stocks?
While China has been a key growth market in the region, investors have
underestimated its importance from a dividend perspective. China is the
largest dividend paying market in Asia ex-Japan and high-yield stocks have
outperformed by almost 21% pa since 2000 and 8.1% pa since 2008. With
the Chinese government taking steps to institutionalise dividends, we believe
that dividends are a structural story in China.
Q4. Why focus on dividends in emerging markets?
Dividend-yield strategies have worked across most regions and markets over
the past decade, though the performance in emerging markets has been
significantly better. Highest-yield stocks have underperformed in Europe since
the GFC but have worked well in developed markets such as the USA and
Australia over the last couple of years. Among major equity markets, China
has witnessed the best outperformance since 2000, while Asia ex-Japan has
witnessed the best performance among regions.
Q5. Are dividends only for crisis periods?
Our analysis of the high-yield stocks during the different economic cycles
suggests that dividend yields underperform only during the expansion
phase of the cycle. This is along expected lines as investors are looking for
growth and value ideas during the market run-up. However, when combined
with low PE, dividend-yield strategies can outperform even during the
expansionary phase. With Asia in the recovery phase as per the OECD leading
indicator, we expect dividends yields to outperform on its own.
Pages 30-38
Dividend-yield stocks
have strong positive
absolute returns while
bond prices fall
Pages 39-46

Pages 47-50

Pages 51-58

Pages 59-64

Stocks with 4-5% yield
have the lowest beta as
opposed to those with
more than 7% yield
China has witnessed one
the best performances by
a high-yield strategy
EM-dividend-yield
performance has been
much better than DM
Dividend yields only
underperform during the
expansion phase
Key issues



Q6. Arent high-yield stocks overvalued?
Rerating of dividend-yield stocks has been a structural trend underpinned by
the low-growth environment and sustained yield compression in the
developed-world bonds. The impact of rerating hasnt been universal to all
high-yield stocks with quintile-1 stocks rerating the most in the USA while
quintile-2 stocks have rerated the most in Asia. Also, we highlight that the
highest quality, defensive dividend-yield stocks have rerated the most but the
cyclical and financial stocks still have value, such as the global energy sector
and Asian banking sector.
Q7. Does higher payout translate into higher PE?
In a perfect world the only way companies can create value for shareholders
is by investing in positive NPV projects. Corporate actions such as increasing
payouts should not have an impact on valuations. However, we find that
companies who can still maintain their growth curve can rerate by increasing
payouts. We also show that for every 10ppt increase in payout ratios, implied
growth is lower by about 1ppt but the beta also reduces, thus countering the
effect of slower growth. Based on this analysis, we highlight a list of stocks
that can rerate by increasing their payouts by an extra 10ppts. Also see our
Apple case study (pages 74-75).
Q8. Will the fund flows continue to be strong into dividend strategies?
We highlight that fund flows into dividend funds remain strong, even this
year, with markets having started on a more positive note. We also note that
the equity inflows have outpaced bond inflows so far. Our analysis of the
pension-fund data further highlights that the shift to equities is a structural
trend. We find that pension funds have significantly higher returns
assumptions than actual returns and given the low-bond yields, equities stand
to gain increased allocation from the lower allocation levels since the GFC.
Q9. How to identify sustainable dividends?
In our Dividend wave 2012 report we highlighted the dividend life-cycle and
the characteristics of stocks that increase or cut dividends over the longer
term. But investors primarily focus on the consensus estimate of future
dividends when analysing a stock. Hence, we developed a seven-factor DPS
revision star-rating (DRSR) scale to identify stocks most likely to witness
negative DPS revisions over the next three months. Our backtests show that
DRSR system can help in identifying stocks that are likely to see DPS
downgrades. The stocks rated lowest on our scale had a hit rate of almost
70% over the past two years. Using this system, we provide the rating for
global and Asian sectors and stocks.
Q10. Will Basel 3 weaken banks dividend sustainability?
The new Basel-3 guidelines aim to improve the ability of banks to absorb
financial and economic shocks. It now requires banks to increase the tier-1
capital from 4% to 6% but more importantly it requires banks to hold
additional buffers ranging from 2.5-5.0%. It has also made the definition of
equity tighter than Basel 2. And while we understand that national regulators
will have significant say in setting these limits, interpretation of the guidelines
and the implementation dates, banks will be increasing equity. While Asia
seems to be well placed, these tighter norms could drive payout cuts to allow
capital build-up in regions such as Europe. We highlight stocks and markets
with lower capital ratios, based on current definitions used by banks.
Pages 65-69

Pages 70-73

Pages 76-78

Pages 79-89

Pages 104-107

Rerating is a structural
trend as bond yields are
low and high-yield stocks
are still cheaper
Companies can provide
support to their PEs by
increasing payouts; also
see the Apple case study
Fund flows remain strong
and are now sharing the
inflows meant for
fixed income
A 7-factor DPS revision
star-rating system to
identify forecast DPS
sustainability
Some banks likely to
cut payouts to
shore up capital



Q11. What is the impact of tax on dividends?
We analysed the US tax environment and dividends in detail to understand
the linkages between the two. Dividend tax in the USA has come down to just
20% from 90% in the 1950s. More importantly, the gap between capital gain
and dividend tax used to be 65% in the 1950s but dividends have been taxed
at the same rate since 2003. This suggests that companies have no tax
related motivation when deciding between buybacks and dividends. But our
analysis shows a significant increase in the number of companies paying
dividends and number of equity-income funds launched since 2003. This
suggests that lowering of dividend taxes did have an impact.
Q12. Will companies return the cash back to shareholders?
Globally, companies are sitting on US$4tn cash pile. Notwithstanding the fact
that companies cannot run with zero cash and that some of the cash is spread
across geographies with little chance of a recall, we still believe companies
have a lot more cash than they need to run their operations. We analyse the
cashflow, gearing and capex trends to understand the probability of this cash
being returned. Our analysis suggests that Asia and the USA will increase the
return of cash through dividends (Asia) and buybacks (USA). However, we
believe that Europe will focus on conserving cash while Japan could plough
the cash into capex and acquisitions.
Q13. Will buybacks dominate the global landscape?
Current MSCI World constituents bought-back shares worth US$490bn in
2011, of which 95% came out of developed markets such as the USA. We
analyse 82,744 buyback transactions since 2007 to highlight the reasons for
companies doing buybacks and to identify the characteristics of a successful
buyback transaction beyond the immediate support to the share price. Finally,
we note that for Asia to walk the US path, the key difference of a professional
versus promoter-management team needs to be addressed.
Q14. What are the key dividend strategies to focus on?
Dividend wave is our key across-the-cycle strategy that involves mixing yield
and growth to produce the best total returns over the medium term. We do
some minor tweaks to the process to tightly align the global and Asian
process and have added our DRSR system to improve dividend sustainability.
The backtest results show solid performance with the changed strategies. Our
other key strategies include Shadow defensives, the switching strategy
focusing on the higher quality dividend-paying cyclical stocks, and the ex-
date strategy to capture the short-term impact of dividends around ex-dates.
Q15. Will dividend champions continue to outperform?
Dividend growth is a key factor in dividend-yield strategies since dividend
growers provide the ability to deliver sustainable capital gains besides
delivering the dividend yield. Our study highlights that dividend champions,
ie, companies with growing dividends, have outperformed those with merely
consistent dividends both globally and in Asia. Through our characteristics
study we highlight the factors that define the dividend champions and
highlight a list of stocks that meet those criteria.
Some of the other themes that we have highlighted include dividend life-cycle
(pages 90-100) and impact of dividend cuts and increases (pages 101-103).
Pages 108-112

Pages 113-123

Pages 124-134

Pages 135-144

Pages 145-152

Dividends made an impact
in the USA after dividend
taxes were brought
down in 2003
US$4T of cash, CF/BS
analysis suggests
increased payout in Asia
and the USA
We highlight the
characteristics of
buybacks that drive stock
outperformance
Dividend wave is the key
strategy along with
shadow defensives and
ex-dates
Dividend growth is a long
term theme and dividend
champions have done well
Other key themes



Key diagnostics screens and other portfolios in the report
Below is the list of other diagnostics screens and portfolios presented in this
report based on the key issues mentioned earlier.
Description and criteria used for other screens and portfolios
Topic Page Screen name and description
1. Interest rates and yield 38 Stocks with dividend yield higher than bond yields
Universe MSCI World stocks with publicly traded A-rated corporate bonds of maturity more
than five years
Criteria 12-month forward dividend yield > bond yield of the companys A-rate bond
2. Yield and beta 46 Defensive stocks as highlighted by their low risk (beta) and high yield
Universe MSCI World stocks with market cap greater than US$5bn
Criteria a) Observed beta (three-year weekly) < 0.5; b) Dividend yield > 3.5%
3. Payout and PEs 73 Stocks with highest rerating potential if payout increases by 10ppts
Criteria a) Next two-year average payout between 10-50%; b) Net gearing <60%;
c) Positive FCF conversion (last five-year average); and d) Implied growth and beta
change based on historical relationship with payout.
4. Dividend sustainability 88 Stocks with the least chance of a negative DPS revision
Criteria a) Dividend yield >2.5% for Japan and >3% for other regions; b) Seven-factor
DPS revision star rating > 5.
5. Dividend sustainability 89 Stocks with the highest chance of a negative DPS revision
Criteria a) Dividend yield >2.5% for Japan and >3% for other regions; b) Seven-factor
DPS revision star rating < 2.
6. Basel 3 107 Well capitalised dividend paying banks/financial companies
Universe MSCI World financial stocks
Criteria a) Company tier-1 CAR > 11%; b) Payout (average FY1-2) > 25%; and c) Equity-
to-assets ratio > 3%.
7. Basel 3 107 Poorly capitalised dividend paying banks/financial companies
Universe MSCI World financial stocks
Criteria a) Company tier-1 CAR < 11%; b) Payout (average FY1-2) > 25%; and c) Equity-
to-assets ratio > 3%.
8. Cash hoarders 122 Stocks with excess cash on balance sheet and strong cashflow
Criteria a) Cash to total assets > 10%; b) Solid track record of FCF > dividends; c) Robust
FCF conversion (last five-year average) > 50%; and d) Net gearing < 50%.
9. Buybacks 134 Value accretive buybacks
Criteria a) High free float >60%; b) Low PE Reilly <40%; c) Cheap relative to the local
MSCI index <1x; d) ROE estimate < mid-cycle ROE; e) Low net gearing <50%;
and f) Positive FCF conversion (last five-year average)
10. Dividend growers 152 Global dividend champions (ex-Asia)
Criteria a) Sustainable growth > 6%; b) High earnings certainty >8x; c) Strong quality
with ROEs >10%; d) Payout <60%; e) Net gearing <80%; f) Strong track record
of increasing dividends in the past; and g) Strong track record of FCF > dividends.
11. Dividend growers 151 Asian dividend champions
Universe Broader list of Asia Pacific ex-Japan stocks with market cap > US$1bn
Criteria a) Sustainable growth > 5%; b) High earnings certainty >8x; c) Strong quality
with ROEs >10%; d) Payout <75%; e) Net gearing <60%; f) Strong track record
of increasing dividends in the past (few stocks have less history); and g) Strong
track record of FCF > dividends (few stocks are now slowing capex).
12. Shadow defensives 155 Asian shadow defensives
Universe Broader Asia Pacific ex-Japan cyclical stocks with market cap > US$1bn
Criteria a) Dividend yield > 2.5%; b) High earnings certainty >10x; c) Strong quality with
ROEs >10%; d) Not cut dividends more than 3/10 years; e) Cheap based on 12M
PE and PB Reilly < 65%; and f) Positive FCF conversion (last five-year average)

Section 1: Global dividend overview Microstrategy


Global dividend overview
A year ago we were discussing how the record-low bond yields for high-
quality government debt have made the job of income-fund managers
challenging. We suggested that such fund managers should focus on high-
dividend-yielding equities, especially those from the emerging markets. That
trade has worked well but now the high-yield investors face a new set of
challenges, such as expensive valuations, rising bond yields, improving
economic prospects and chances of encountering value traps. However,
despite these concerns, we remain optimistic on high-yield strategies that
look beyond the traditional defensive characteristics and focus on capturing
long-term total returns.
From a macro perspective two issues matter most for any dividend-yield
strategy - impact of a turn in the business cycle and the direction of the bond
yields. In Figure 1 we show a normal business cycle based on the OECD
definition. Our studies show that high-yield stocks usually underperform
during the expansion phase of the cycle. However, we highlight in the chart
that when combined with the right styles/factors, dividend-yield strategies
can still outperform in every cycle. However, for those investors who have a
buy-and-hold approach, we recommend our low-turnover dividend-wave
strategy that delivers solid returns across the cycle.
Over the past few months, the US economy has shown some improvements
and consequently US bond yields have been rising along with those of some
of the other higher-quality developed markets. These rising bond yields are
also a concern for yield investors as they usually coincide with
underperformance of yield strategies. In a detailed analysis of the global bond
versus dividend-yield relationship we highlight that even though high-yield
stocks underperform, their absolute performance is still significantly positive,
while during the same period, bond prices fall.
The final issue of major concern is the expensive valuations of the high-yield
stocks. We find the relative rerating trend structural and that the absolute
valuations are still below the overall market. We also highlight that defensives
and quality yield stocks are expensive compared to cyclicals.
Figure 1
Microstrategy global dividend-yield cycle strategy

OECD cycle (above 100)
OECD cycle (below 100)
OECD definitions:
Slowdown: Below 100 and downward sloping
Recovery: Below 100 and upward sloping
OECD definitions:
Expansion: Above 100 and upward sloping
Downturn: Above 100 and downward sloping
New set of challenges for
dividend investors such
as rising bond yields and
expensive valuations
Dividend-yield strategies
can outperform across
economic cycles
Rerating trend structural
though defensives are
significantly overvalued
High-yield stocks much
more attractive than
bonds during rising yields
Yield and factor
combinations to perform
across cycles



High-dividend-yield stocks have outperformed globally
Investors should also recognise that the superior performance of high-yield
stocks is not restricted to a few markets within the regions. Figure 2 shows
that high-yield stocks have outperformed in most of the bigger markets since
2000. This outperformance has been most pronounced for emerging regions,
particularly Asia ex-Japan, and hence our preference for high-dividend-yield
stocks within emerging markets. Among the developed markets, Japan has
produced the best relative returns while the high-yield Australian stocks have
barely outperformed. The biggest surprise has been the significant
underperformance of high-yield stocks in Europe since 2008. We believe that
yield unsustainability could be a key reason behind underperformance,
despite the tough market conditions.
Figure 2
MSCI regions and markets - Dividend-yield performance

Note: Backtest based on MSCI universe. Factor quintiles are rebalanced on monthly basis.
Source: Factset alpha tester, CLSA Asia-Pacific Markets
High-yields outperformance has been supported by the relative rerating.
There are concerns that high-yield stocks, especially those with the higher
quality, are not cheap anymore. In Figure 3 and 4 we show the peak-to-
trough of the relative PE of stocks with yield more than 3%. We find that
expensive defensives are a key driver of these higher relative valuations.
Figure 3 Figure 4
High-yield
1
: Relative PE peak-to-trough (past 10 years) High-yield
1
defensives: Relative PE peak-to-trough

1
Based on yield more than 3%. MSCI universe with monthly rebalancing. Defensive based on MSCI GICS Level 1 sectors.
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
(8)
(6)
(4)
(2)
0
2
4
6
8
10
12
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Annualised OPF (since 2000) Annualised OPF (since 2008)
Div yield (Now, RHS, %) Div yield (L5Y avg, RHS)
(%)
(%)
21.3
14.9
0.6
0.8
1.0
1.2
U
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A
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Current
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Peak
Trough
Sorted by current versus the LT average
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
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Trough
Sorted by current versus the LT average
1.8
0.4
Expensive valuations
largely due to the
defensives
Asia ex-Japan has
delivered the best
performance
High-yield stocks have
outperformed globally



Dividends are important from a total-return perspective
Even for non-dividend focused investors, dividends play an important role in
generating total returns. While the dividend returns look small year-on-year,
their impact is significantly higher on a cumulative basis over longer periods.
Figure 5 highlights the break-up of regional total returns since 2000. It
highlights that emerging markets have not only delivered the best total-
return performance relative to other regions, but have also witnessed the
best dividend contribution. It is also important to note that the price returns
in most developed markets have been negative since 2000, with only
dividends contributing positively to total returns.
Figure 5
Total returns with dividends reinvested - Highest since 2000 for MSCI EM

Source: Bloomberg, CLSA Asia-Pacific Markets
Figures 6 and 7 show the breakdown of cumulative US-dollar total-return for
the MSCI EM and MSCI Asia ex-Japan indices since end-2000. In these charts,
the total return is disintegrated into four components: currency appreciation,
reinvested dividends, forward earnings and forward PE. It is evident that
reinvested dividends are the second-biggest contributor to total returns after
earnings, for both the MSCI EM and Asia ex-Japan. On the other hand, forward
PE is a negative contributor to returns as markets are cheap compared with
end-2000 valuations. It is also interesting to note that earnings contribution hit
a peak in 2007, but dividend contribution continued to grow.
Figure 6

Figure 7
MSCI EM - Disintegrating total return index

MSCI Asia ex-JP - Disintegrating total return index

Note: MSCI universe. Source: CLSA Asia-Pacific Markets
(50)
(20)
10
40
70
100
130
160
190
220
EM Australia AsiaxJP USA AC World DM Europe Japan
Price return Dividend return
(%)
EM and Australia have highest dividend
contribution to ther total return since 2000
(50)
0
50
100
150
200
250
300
350
400
450
D
e
c

0
0
J
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0
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1
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PE
EPS
Dividend
Currency
(50)
0
50
100
150
200
250
300
350
D
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0
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1
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D
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1
2
PE
EPS
Dividend
Currency
Reinvested dividends
have been 40% of total
returns of MSCI EM
Most developed
markets have negative
price returns

Dividends are
second-largest
contributors to total
returns after earnings



Dividend-yield performance
In Figure 8 we summarise the outperformance of different yield and payout
ranges for the MSCI World. It shows that the performance has been best for
the 5-7% dividend-yield stocks, while stocks with less than 2% yield have
underperformed. The same is true for performance over the past one year
with 5-7% yield stocks performing the best.
Figure 8
MSCI World: Outperformance for dividend yield and payout ranges

Note: MSCI-weighted total return.
Figure 9
Annualised outperformance
1
of stocks in different-yield ranges
Div yields <2% 2-3% 3-4% 4-5% 5-7% >7% >3%
MSCI
regions
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
World (1.1) (1.5) 0.7 (2.3) 0.9 0.7 1.2 0.9 4.1 7.4 0.6 (5.3) 1.1 2.1
DM (0.7) (1.9) 1.0 (3.4) 1.3 2.3 0.9 0.2 3.3 8.0 (2.1) (5.3) 0.9 2.7
EM (3.0) 0.9 (2.0) 3.0 (1.9) (7.0) 4.0 4.1 8.0 5.9 na na 3.2 (0.8)
Asia ex-JP (2.2) (4.2) (0.5) 1.5 1.4 (1.0) 4.9 7.7 5.5 8.2 na na 3.4 3.0
AP ex-JP (1.7) (7.2) (1.0) (1.9) 0.7 (3.7) 2.6 4.7 2.8 10.2 6.2 12.3 2.2 4.4
Asean (4.6) (8.9) (3.9) (2.4) (0.7) (4.1) 2.4 2.7 5.5 13.8 na na 2.9 2.0
Europe (1.1) (3.5) 1.9 0.4 0.4 4.3 1.3 0.3 0.6 (1.7) (5.9) (11.8) (0.3) (0.0)
Latam (5.0) 17.0 (13.0) 0.6 (3.1) (3.9) 6.5 10.1 15.1 0.2 na na 5.3 (3.9)
Japan (1.3) (0.2) 2.1 0.1 8.7 0.4 na na na na na na 4.0 0.8
USA (0.1) 1.3 1.1 (4.8) (0.3) 1.8 (1.0) 2.3 3.0 8.0 (0.7) (7.4) (0.1) 2.8
MSCI markets
Australia na na (1.6) (11.5) 2.6 (9.4) (2.3) (6.7) (1.8) 12.5 1.2 9.9 0.0 4.0
China (2.1) (0.0) (4.1) 3.5 (2.3) (17.4) 12.1 16.8 0.5 2.1 na na 3.7 (0.7)
HK (1.2) 2.6 (1.0) (0.5) 4.8 0.5 5.8 5.0 (1.3) 9.3 na na 2.8 1.6
India (4.0) (4.3) 7.6 13.1 (3.3) 1.3 na na na na na na 1.8 7.7
Indonesia na na (6.9) 2.4 (12.7) (6.8) (10.8) (7.6) na na na na (1.8) 0.5
Korea (1.2) 1.1 1.1 (5.6) (4.0) (0.4) (8.9) 1.9 na na na na (3.2) (0.0)
Malaysia (6.1) (11.7) (2.4) (1.8) (0.6) (5.2) 3.0 19.9 2.1 17.5 na na 1.7 3.8
Philippines (2.7) 6.9 5.6 (1.3) na na na na na na na na 0.4 (19.8)
Singapore 0.5 (15.2) (8.0) 3.2 1.5 1.1 1.4 (0.7) 6.8 11.5 na na 2.2 3.0
South Africa na na (3.3) 9.3 (7.2) (9.6) 1.5 4.4 2.5 (0.0) na na 0.7 1.2
Taiwan (10.5) (12.0) (3.7) (2.1) (0.9) 7.2 0.1 (1.2) 5.0 5.1 na na 4.4 2.8
Thailand na na na na 10.4 (9.7) (2.6) (5.6) 2.1 1.1 na na 4.1 (2.7)
UK 0.6 (16.3) 1.1 (4.4) (2.4) 7.6 1.2 2.3 6.8 3.2 na na (0.1) 3.0
1
Annual Cagr of total returns for yield bucket - Annual Cagr of the index. We have removed current data if the historical range is not available.
Highlights show the highest score since 2003 and last 12 months. Source: Factset alpha tester, CLSA Asia-Pacific Markets
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 (0.6) 10.0 na na na na na (0.3)
20-40 (2.1) 0.6 2.6 5.8 18.1 na 3.9 0.2
40-60 (0.6) 1.8 (0.0) 1.7 0.2 na 0.0 0.0
60-80 na (1.9) 0.6 2.2 6.0 0.1 1.9 1.5
>80 na na (0.2) (0.9) 3.6 2.3 0.9 0.5
All (1.1) 0.7 0.9 1.2 4.1 0.6 1.1 0.0
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 1.4 (7.0) na na na na na 1.3
20-40 (6.1) (3.9) (0.8) (3.1) 8.9 na 0.7 (3.2)
40-60 2.8 6.9 1.3 6.3 0.1 na 2.9 3.8
60-80 (14.0) (0.5) 0.9 2.0 8.9 1.7 4.0 3.4
>80 (19.9) (4.3) 0.5 (3.5) 11.4 (8.8) (0.9) (1.6)
All (1.5) (2.3) 0.7 0.9 7.4 (5.3) 2.1 0.0
Annualised OPF
since 03 (%)
Dividend-yield ranges (%)
P
a
y
o
u
t
s
Last 1-year
OPF (%)
P
a
y
o
u
t
s
Over the past 10 years,
5-7% yield stocks have
delivered the best returns
Stocks with yield less
than 2% have
underperformed



Dividend-payout performance
In Figure 10 we summarise the outperformance of different payout ranges
for the key region and markets. It shows that over the past one-year
performance has been best for the 40-60% payout stocks within the MSCI
World while stocks with more than 80% payouts have underperformed.
However, for the long term, stocks with >60% payout have outperformed.
Figure 10
Annualised outperformance of stocks in different payout ranges
Div yields <20% 20-40% 40-60% 60-80% >80% >40% >60%
MSCI
regions
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
Since
2003
Last
12M
World (0.3) 1.3 0.2 (3.2) 0.0 3.8 1.5 3.4 0.5 (1.6) 0.3 2.9 1.3 1.6
DM (0.0) 1.5 0.1 (3.1) 0.3 3.8 1.5 2.0 0.1 (2.0) 0.4 2.6 1.1 0.6
EM (1.3) 1.0 0.6 (2.4) (0.2) 0.7 0.6 13.9 1.2 0.8 0.1 3.4 0.5 7.2
Asia ex-JP 0.5 (2.9) 1.3 (0.1) 1.1 1.6 (0.5) 7.6 2.7 0.0 0.8 2.1 0.6 3.5
AP ex-JP (0.1) (5.1) 2.1 (4.8) 1.4 0.3 1.1 11.1 0.3 7.2 0.8 5.7 0.6 9.8
Asean 4.1 (10.1) 0.7 (2.5) (1.3) (2.1) 4.9 0.3 (1.0) 14.4 (0.2) 1.4 1.5 8.3
Europe 0.3 (5.5) 1.1 1.4 (0.1) 3.4 (2.1) (3.7) 2.3 (7.2) (0.4) 0.3 (0.9) (5.2)
Latam 1.3 17.9 (1.2) (6.3) (3.4) 2.7 0.8 21.9 4.6 13.8 (0.5) 9.8 2.8 17.0
Japan (1.6) (0.2) (0.9) 2.2 4.3 (2.5) 0.6 9.6 5.5 (6.2) 3.7 (1.1) 0.8 (0.6)
USA 0.8 4.9 0.7 (4.6) (0.5) 2.8 2.7 (1.5) (5.3) 1.8 (0.4) 1.8 0.4 (0.5)
MSCI markets
Australia (9.3) (38.4) 4.7 (26.8) (1.6) (6.6) 0.6 9.8 (2.3) 13.3 (0.5) 7.5 (0.4) 10.5
China 5.3 12.3 (0.8) (1.7) 3.5 (8.3) 7.1 4.2 na na 2.9 (6.5) 6.7 3.2
HK (6.7) 32.7 1.9 8.1 1.6 (6.5) (4.4) (1.4) 4.9 (3.9) 0.9 (4.9) (0.3) (3.4)
India (2.8) (1.5) 5.7 (3.4) 8.5 29.5 (9.5) na na na (2.2) 24.0 (19.3) 5.4
Indonesia (2.3) na 4.4 4.4 (8.1) (1.6) na (23.2) na na (7.0) (1.5) na (0.2)
Korea 0.9 0.3 (3.8) (6.0) 1.1 5.1 na na na na 1.4 7.0 na 0.1
Malaysia (2.9) (12.3) (4.0) (1.2) 2.9 (4.3) 6.4 7.5 (1.4) 16.5 1.8 2.8 2.3 11.9
Philippines na (0.0) (1.3) 15.4 (4.7) (1.7) na na na na (1.7) (13.2) na na
Singapore 0.3 0.6 (5.3) (13.7) 0.5 5.1 9.3 (0.9) 1.7 13.7 1.6 5.6 3.9 6.0
South Africa na na (1.7) (7.6) (0.7) 2.5 0.8 14.3 na na (1.0) 6.7 (2.4) 12.8
Taiwan (2.9) (7.4) (3.1) (3.7) 1.6 8.9 0.4 10.4 9.7 (9.7) 3.7 2.6 4.0 (2.3)
Thailand na na 3.9 (8.7) (2.7) (1.0) 18.1 na (7.3) 31.4 0.9 11.2 4.6 26.9
UK 5.2 (13.6) 2.7 (1.1) (0.4) 8.2 0.2 2.0 1.1 (2.8) (0.2) 5.0 0.9 (0.1)
Note: We have removed current data if the historical range is not available. Highlights show the highest score since 2003 and last 12 months.
Figure 11
MSCI World: Number of companies under dividend yield and payout ranges

Note: Median of monthly values since 2003. Source: Factset alpha tester, CLSA Asia-Pacific Markets
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 502 31 8 2 1 0 12 570
20-40 298 204 93 35 17 3 150 698
40-60 36 105 132 92 53 9 302 449
60-80 8 19 40 57 66 15 181 209
>80 9 12 19 28 54 42 151 172
All 851 400 299 221 192 67 774 2132
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 483 41 7 1 2 0 10 534
20-40 306 284 103 43 10 2 158 748
40-60 43 132 151 92 33 5 281 456
60-80 6 22 42 63 66 11 182 210
>80 13 29 41 42 65 41 189 231
All 851 508 344 241 176 59 820 2179
Count of stocks
(since 2003)
P
a
y
o
u
t
s
P
a
y
o
u
t
s
Count of stocks
(current)
Enough stocks available
in different payout and
yield ranges
Higher payouts
outperform for MSCI
World while for Asia
lower payouts outperform



Global dividend yield and payout trends
Dividend yield for MSCI EM stands at around 2.9%. While this may look small
compared with the 3.9% yield on offer from MSCI Europe, it is important to
note that the sustainability of dividends yields is higher, given the macro risks
in the Euro-region. Indeed, emerging-market dividend yields were at par with
Europe until 2005. However, a liquidity-driven rally in 2006-07 led to the
rerating of emerging-markets stocks and a related fall in yields. Since then,
the relative gap has persisted but became acute due to weak EU economy.
US dividend yields are the lowest but the payouts are masked by buybacks,
which have been higher than dividends on average over the past decade. So
from a total-yield perspective, US yields and payouts are significantly larger.
Figure 12
Dividend yields for USA, Europe and EM

Emerging markets have been paying out in the 35-40% range over the past
decade, although during severe crises nominal payout ratios move above
50%, led by fall in earnings. However, with falling capital intensity and lower
gearing levels, emerging markets are well placed to increase payouts and
deliver higher yields on a sustained basis.
Figure 13
Payout ratios for USA, Europe and EM

1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
MSCI EM MSCI Europe MSCI US (%)
EM yields have tracked well with Europe
until 2005, but are diverging since then
Current 0.9ppt-gap is largely price driven
with Europe falling behind on recovery
25
30
35
40
45
50
55
60
65
70
75
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
MSCI EM MSCI Europe MSCI US (%)
EM yields lower than
Europe but more
sustainable
US yields are masked by
significant buybacks

Falling capital intensity,
low gearing could lead to
higher payouts in EM

EM dividend payout has
been in the 35-40% range




Dividend-yield quintile trends
While the overall dividend-yield trend seems to range between 2-5% globally,
there are enough stocks available to investors across the wide spectrum. The
highest-dividend-yield quintile stocks have had an average dividend yield of
over 5.5% during the past 10 years. Even now the average yield of the
highest-quintile stocks is 5.3%. Indeed from a snapshot perspective, the
current average dividend yield of the different quintiles matches closely with
that of the past 10-year average for the MSCI World universe.
Figure 14
MSCI World: Weighted average dividend yield of different quintiles

Note: Bottom-up aggregated using MSCI weights. Source: Factset alpha tester, CLSA Asia-Pacific Markets
The changes to the highest-quintile dividend-yield trends are best witnessed
through the region-wise analysis. In Figure 15 we show the average dividend
yield of the highest quintile stocks within each of the major regions since
2003. The chart shows that the average yield of Japanese Q1 stocks
exceeded that of the USA in 2012 before starting to fall as Japanese equities
rallied. Similarly, it is interesting to note that Asian and European Q1 yields
have swapped ranks since GFC.
Figure 15
MSCI regions: Weighted-average dividend yield of Q1 stocks since 2003

Note: Bottom-up aggregated using MSCI weights. Source: Factset alpha tester, CLSA Asia-Pacific Markets
5.7
3.6
2.4
1.4
0.4
5.3
3.4
2.4
1.6
0.4
0
1
2
3
4
5
6
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5
Average (since 2003) Now
Average dividend yield (%)
1
2
3
4
5
6
7
8
9
10
D
e
c
-
0
2
M
a
y
-
0
3
O
c
t
-
0
3
M
a
r
-
0
4
A
u
g
-
0
4
J
a
n
-
0
5
J
u
n
-
0
5
N
o
v
-
0
5
A
p
r
-
0
6
S
e
p
-
0
6
F
e
b
-
0
7
J
u
l
-
0
7
D
e
c
-
0
7
M
a
y
-
0
8
O
c
t
-
0
8
M
a
r
-
0
9
A
u
g
-
0
9
J
a
n
-
1
0
J
u
n
-
1
0
N
o
v
-
1
0
A
p
r
-
1
1
S
e
p
-
1
1
F
e
b
-
1
2
J
u
l
-
1
2
D
e
c
-
1
2
APxJ Europe USA Japan
Average dividend yield (%)
Current average yield of
different quintiles is
comparable to the
long-term average
Highest quintile stocks
have an average yield of
well over 5%
Europe offers the
highest yield but also
underperformed the most
Japanese Q1 stocks had
higher yield than those in
the USA in 2012



Figure 16
Weighted-average dividend yield of stocks in different quintiles
Dividend yields Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5
MSCI regions L10Y
Average
Now L10Y
Average
Now L10Y
Average
Now L10Y
Average
Now L10Y
Average
Now
World 5.7 5.3 3.6 3.4 2.4 2.4 1.4 1.6 0.4 0.4
Developed markets 5.5 5.3 3.4 3.4 2.3 2.4 1.3 1.6 0.3 0.4
Emerging markets 6.8 5.3 4.1 3.6 2.9 2.5 1.8 1.7 0.8 0.7
Asia ex-Japan 5.8 4.8 3.9 3.4 2.8 2.4 1.8 1.7 0.8 0.7
Asia Pac ex-Japan 6.3 5.4 4.3 3.6 3.1 2.6 2.0 1.7 0.8 0.7
Asean 6.3 5.2 4.5 3.8 3.6 3.0 2.5 2.2 1.1 1.3
Europe 6.2 6.5 4.4 4.5 3.3 3.4 2.4 2.4 1.2 1.3
Latin America 8.4 5.3 4.7 3.5 3.4 2.5 2.0 1.6 0.9 0.9
Japan 2.8 3.4 1.9 2.3 1.6 1.9 1.2 1.4 0.7 0.9
USA 4.4 4.1 2.5 2.7 1.5 1.8 0.7 0.8 0.1 0.0
MSCI markets
Australia 7.5 6.5 5.9 5.5 4.8 4.5 3.5 3.3 2.0 2.1
China 4.9 4.5 3.5 3.0 2.7 2.1 2.0 1.6 1.0 0.7
Hong Kong 5.5 4.6 4.3 3.8 3.3 2.8 2.6 2.3 1.5 1.5
India 3.7 2.8 2.3 1.9 1.7 1.5 1.1 1.0 0.6 0.3
Indonesia 5.8 4.8 4.2 3.2 3.4 2.4 2.7 2.1 1.3 1.7
Korea 4.8 3.9 2.9 2.3 2.0 1.4 1.4 0.8 0.5 0.5
Malaysia 6.4 5.1 4.6 3.9 3.5 3.2 2.4 2.6 1.1 0.8
Philippines 6.4 5.6 3.3 2.3 2.1 1.6 1.4 1.2 0.7 0.9
Singapore 6.1 5.7 4.5 4.3 3.6 3.5 2.5 2.4 1.1 1.3
South Africa 7.1 6.1 5.2 4.5 4.5 3.8 3.5 2.7 1.9 1.3
Taiwan 7.0 5.4 5.1 4.4 3.9 3.2 2.7 2.4 1.2 1.5
Thailand 7.4 5.2 5.4 4.0 4.5 3.6 3.5 2.8 2.4 1.9
UK 6.2 5.6 4.6 4.3 3.6 3.3 2.8 2.6 1.4 1.5
Note: Aggregated using MSCI weights. Source: Factset alpha tester, CLSA Asia-Pacific Markets
In Figure 17 we also show the median size of stocks in the different yield and
payout ranges. The table highlights that lower yield stocks tend to be slightly
bigger companies, with 3-4% range having the peak market cap. On the
other hand, stocks with more than 7% yield are those that have probably
corrected a lot or do not have the ability to grow.
Figure 17
MSCI World: Median market cap of stocks under dividend yield and payout ranges

Note: Median of monthly values since 2003. Source: Factset alpha tester, CLSA Asia-Pacific Markets
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 6.2 5.4 na na na na na 6.1
20-40 6.0 6.3 6.1 4.0 3.5 na 5.6 6.1
40-60 5.3 8.0 8.0 7.6 5.2 na 7.0 7.2
60-80 na 4.7 5.8 6.0 5.2 5.0 5.6 5.5
>80 na na 5.4 4.8 4.7 3.9 4.6 4.7
All 6.1 6.3 6.8 5.9 4.9 3.8 5.7 5.9
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 8.0 10.8 na na na na na 8.2
20-40 8.2 9.0 7.8 12.8 9.6 na 8.6 8.6
40-60 7.5 8.5 10.2 11.9 10.7 na 10.7 9.7
60-80 11.6 5.1 8.2 10.6 10.2 11.4 9.6 9.0
>80 7.3 9.7 7.2 6.0 6.9 5.8 6.5 6.7
All 8.0 8.9 8.9 9.7 8.6 6.6 8.9 8.5
P
a
y
o
u
t
s
Mkt cap
(US$bn)
P
a
y
o
u
t
s
Mkt cap
(US$bn)
In market-cap terms,
2-5% yield stocks
tend to be bigger
Stocks with more than
7% dividend yield are
smaller due to limited
growth options



High yield = High payout
Earlier in this section we had highlighted that 40-60% payout range stocks
have outperformed most over the past one year. In Figure 18 we compare the
current average payout of different yield ranges to that over the past 10
years. It shows that the stocks with the ideal payout range for performance
fall in the 2-5% range.
Figure 18
MSCI World: Current payout versus average since 2003 for dividend yield ranges

Note: Payout is bottom-up aggregated using median values.
Figure 19
Weighted average payout of stocks in different yield ranges
Div yields <2% 2-3% 3-4% 4-5% 5-7% >7% >3%
MSCI
regions
L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now
World 19.1 19.2 38.4 38.9 47.8 50.8 57.5 59.0 67.1 72.3 78.8 85.3 57.9 60.3
DM 19.3 19.2 40.4 39.2 50.6 52.0 60.5 61.7 71.6 73.1 84.3 88.3 61.0 62.1
EM 18.0 19.3 32.9 38.1 41.8 48.4 50.1 53.7 60.3 70.1 75.3 na 53.4 56.7
Asia ex-JP 19.1 19.7 34.7 39.5 44.4 48.5 54.8 56.5 65.2 75.9 74.9 87.6 55.0 56.2
AP ex-JP 19.1 20.1 36.4 40.2 47.0 49.6 58.3 59.0 68.9 78.5 80.0 89.5 59.6 60.2
Asean 21.4 27.0 36.9 39.3 48.0 52.9 58.9 65.7 70.4 93.1 82.5 na 60.9 63.7
Europe 19.9 22.4 38.9 35.5 47.6 47.2 55.9 55.3 65.3 66.5 78.7 78.6 56.7 58.4
Latam 22.0 27.7 34.3 43.7 41.4 60.6 48.4 56.8 59.2 59.4 77.9 na 56.9 63.3
Japan 24.8 28.5 40.6 43.2 53.2 51.3 60.3 55.1 65.9 na 44.8 na 57.5 52.2
USA 12.6 12.5 38.5 35.8 50.9 54.2 63.7 67.8 76.2 74.4 90.7 99.4 60.2 62.5
MSCI markets
Australia 22.1 35.8 47.2 48.4 59.1 58.1 67.6 65.3 78.2 81.2 87.8 91.3 74.5 73.0
China 21.8 21.2 34.7 34.2 39.8 32.4 44.6 37.7 48.5 50.2 52.2 na 43.8 37.2
HK 25.0 28.8 42.7 43.5 55.3 61.6 62.9 57.9 67.1 83.6 68.9 na 61.9 62.6
India 18.0 17.7 32.3 41.1 44.9 25.2 45.0 na 40.4 na 41.7 na 46.1 25.5
Indonesia 17.6 29.5 36.8 41.5 43.3 44.3 48.1 58.9 47.0 85.7 50.9 na 47.5 55.0
Korea 13.0 12.9 25.0 26.1 28.8 24.9 35.9 39.7 45.9 na 66.6 na 35.5 36.4
Malaysia 18.3 17.6 35.9 39.0 54.7 48.5 66.3 78.2 78.2 86.4 93.0 na 69.0 65.0
Philippines 23.6 29.1 34.7 34.2 45.0 41.2 63.8 na 59.7 na 91.4 na 63.2 75.9
Singapore 23.0 30.2 37.1 33.0 49.4 51.5 67.8 71.2 88.3 100.0 100.0 na 68.5 67.1
South Africa 18.3 16.4 36.7 47.4 41.0 44.6 47.6 53.4 58.5 78.9 76.0 na 51.7 56.9
Taiwan 22.3 23.4 37.0 50.0 47.9 63.9 58.2 63.8 66.6 74.8 72.2 na 61.3 66.6
Thailand 10.6 38.0 34.4 44.4 39.7 65.1 48.4 40.8 59.8 100.0 74.4 na 53.1 59.3
UK 22.5 23.9 41.2 36.6 47.7 49.9 54.7 58.7 63.6 57.5 76.7 89.4 54.4 56.1
1
Median value over the past 10 years. Source: Factset alpha tester, CLSA Asia-Pacific Markets
0
10
20
30
40
50
60
70
80
90
0-2 2-3 3-4 4-5 5-7 >7
Dividend yield range (%)
Median since 2003 Current
FY1 payout (%)
Reasonable payout range 40-60%
More than 7% stocks are
ex-growth as payout
is over 80%
Stock with 2-5% yield
have the ideal payouts



Improving dividend statistics for emerging markets
It may be surprising, but a larger proportion of emerging-market companies
in the MSCI universe paid dividends last year than their developed-market
peers. Only 45% of emerging-market companies paid dividends back in 1998,
but that number has now increased to 88%. Also, 52 companies accounted
for US$147bn, with each paying over US$1bn, out of the US$250bn that
MSCI EM companies paid last year as dividends. Another 56 companies paid
US$39bn, with each paying more than U$500m. Figure 21 shows the
breakdown by market. MSCI EM stocks have managed a DPS Cagr of 13.7%
since December 2000. We believe that, given low payouts and sufficient
cashflows, this growth rate can be sustained and will result in the MSCI EM
companies paying more than US$5.4tn over the next decade.
Figure 20

Figure 21
More companies paying dividends in MSCI
1
EM

MSCI EM paid US$250bn of dividends in 2011
2

1
Using MSCI universe as it existed in the past.
2
Most companies have not reported 2012 results. Source: Factset, CLSA Asia-Pacific Markets
Our analysis shows that 39% of MSCI EM companies have a 12-month
forward dividend yield of more than 3%, while the same ratio for MSCI World
is 37%. This statistic highlights that emerging markets offer better high-yield
opportunities than developed markets. No doubt the high dividend-yield
opportunity is attractive in this low bond-yield environment. However,
investors must focus on dividend sustainability to capture the best total
returns, especially as the bond yields increase in developed markets.
Figure 22
MSCI World: Number of companies under dividend yield and payout ranges

40
50
60
70
80
90
100
9
8
A
9
9
A
0
0
A
0
1
A
0
2
A
0
3
A
0
4
A
0
5
A
0
6
A
0
7
A
0
8
A
0
9
A
1
0
A
1
1
A
1
2
F
MSCI EM MSCI DM
(% of stocks paying dividends)
Increase in number of companies paying
dividend within EM augurs well for future
dividend contribution to total returns 0
10
20
30
40
50
60
70
80
90
E
M
C
h
i
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(US$bn)
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China, Brazil and Taiwan contributes 58%
to total dividends paid by EM markets
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% of stocks with dividend yield >3%
Australia offers the most
stocks with yield more
than 3% followed
by Thailand
Some 39% of MSCI EM
stocks have a potential
dividend yield of over 3%
China and Brazil are
the largest paymasters
in dollar terms



Dividend growth - Emerging markets lead the way
Emerging markets are also attractive from a dividend-growth perspective.
Figure 23 shows the dividend growth through a DPS index rebased to 100 as of
FY00 for different regions. MSCI EM and Asia ex-Japan companies witnessed
the best DPS growth during the past decade while dividend growth has been
slowest in the USA. We believe that the difference in emerging- and developed-
market growth rates will persist, making a compelling case for the former.
Japans dividend growth was in line with the other developed markets until
2007, but since then dividend growth has been similar to that of emerging
markets. Perhaps this explains why a number of Japan stocks are also
offering substantial dividend yields.
Figure 23
MSCI regions and markets - Dividend index since 2000

Source: Factset, CLSA Asia-Pacific Markets
Further breakdown of DPS growth by markets suggests that Russia and China
have witnessed the highest growth during the past decade. On the other
hand, Hong Kong and Germany have had the slowest growth in dividends.
Among developed markets, Singapore stands out with a DPS Cagr that
exceeds the MSCI EM stocks, and is followed closely by Australia.
Figure 24
MSCI regions and markets - Dividend Cagr since 2000

50
100
150
200
250
300
350
400
450
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2
AxJ Europe EM
DM USA Japan
DPS index rebased to 100
EM have seen highest growth among
regions followed by Asia ex-JP and Japan
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DPS Cagr since 2000 (%)
Russia and China witnessed highest growth
among all bigger markets
Dividend growth has been
highest for EM
US has slowest dividend
growth, masked
by buybacks

Dividends in Russia and
China grew the fastest
Germany and Hong Kong
lag in dividend growth

Japans dividend has also
grown at a good pace



Yield and growth
A common misconception is that high dividends (or high-yield strategies)
preclude growth. It seems logical if one assumes that dividends are a signal
that a company does not have enough growth opportunities anymore and is
looking to return cash to investors instead of investing. Academic research
(Surprise! Higher Dividends = Higher Earnings Growth, Arnott and Asness,
Financial Analyst Journal January-February 2003) has shown such conventional
wisdom to be wrong for the USA, finding that over the long term, high payout
ratios have actually been precursors to periods of high growth. We continue to
believe that if investors want a cross-cycle strategy they need to focus on
opportunities that provide both yield and growth. In Figure 25 we show that a
number of emerging markets offer both higher-than-average yield and
higher-than-market growth. However, some of the highest-yielding developed
markets such as Australia and Europe offer lower growth.
Figure 25
MSCI regions and markets - Yield versus growth

In Figure 26 we present a similar analysis for the Asian sectors. It highlights
that tech hardware and consumer discretionary sectors offer both yield and
growth.
Figure 26
MSCI Asia ex-Japan sectors - Yield versus growth

World
EM
DM
APxJ
AsiaxJ
USA
Europe
Latin America
Australia
Brazil
Canada
China
France
HK
India
Indonesia
Italy
Malaysia
Mexico
Peru
Philippines
South Africa
Thailand
UK
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0 16.0
EPS Cagr
(13-14F, %)
12MF dividend yield (%)
Colombia (2.6, 3.0)
Germany (3.2, 3.5)
Singapore (4.9, 3.5)
Japan (26.4, 2.2)
Korea (15.1, 1.2)
Chile (21.1, 2.8)
Taiwan (19.0, 3.3)
Autos
Banks
Cap gds
Cons dur
Cons svcs
Div fin
Energy
Food & drug
FBT
Healthcare
HPC
Insurance
Materials
Media
Pharma
Real estate
Retail
Semis
Software
Tech HW
Utilities
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5 9 13 17 21 25 29
EPS Cagr (13-14F, %)
12MF dividend yield (%)
Transport (40.4, 2.6, 2)
Telecom
Higher yield does not
always mean
lower growth
South Africa, Brazil and
Thailand offer higher
growth and yield

USA returns most of the
cash through buybacks,
so the effective yield is
closer to 4%

Consumer discretionary
and tech hardware has
higher growth and yield

Asian sectors have yield
and growth



Trade-off between yield and growth
The other way of approaching yield and growth is at a stock-specific level. In
Figure 27 we show the median EPS growth (next two-year Cagr) of stocks
within different yield ranges. It highlights that the overall relationship
between yield and growth is negative. It also shows that in the current low-
growth environment it has become harder at the global level to find strong
yield and growth ideas without approaching stocks with lower yields. We find
that the 2-5% yield bucket still offers stocks with robust growth profiles.
Figure 27
MSCI World: Current EPS Cagr vs average since 2003 for dividend-yield ranges

Note: EPS growth is based on median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
At the market level, we find that emerging markets still offer the best
opportunity for yield and growth. In Figure 28 we show the median EPS
growth of stocks with dividend yield more than 3% for each of the key
markets and regions across the globe. It suggests that while the short-term
growth for emerging-market yield stocks is lower than the past 10 years, they
still offer much higher growth compared with developed markets. On the
other hand, European high-yield stocks offer the lowest growth.
Figure 28
MSCI regions and markets: EPS Cagr for stocks with dividend yield >3%

Note: EPS growth is bottom-up aggregated using median values.
(5)
0
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0-2 2-3 3-4 4-5 5-7 >7
Next 2Y EPS Cagr (%)
Trade-off between yield and growth
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Long-term: Yield and growth
Emerging markets still
offer the best yield and
growth opportunities
Europe offers the lowest
growth among the
high-yield stocks
For yield and growth
portfolio, 2-5% yield
range is ideal
At stock level, the
relationship between
yield and short-term
growth is negative



Yield and value
While growth may be lower than the historical average for high-yield stocks,
we find that they still offer reasonable value. In Figure 29 we plot the
weighted-average PE of different yield ranges for the MSCI World and
compare it with the past 10-year average. It shows that stocks within the 3-
7% range are still significantly cheaper, although now even the 2-3% yield
range has become relatively cheap. We find it surprising that the PE of stocks
with more than 7% yield has increased and is now similar to the 5-7% range.
We later highlight in Figure 31 and 32 that stocks with more than 7% yield
have the lowest earnings certainty and the lowest ROE, thus deserving to be
cheaper than the rest of the stocks.
Figure 29
MSCI World: Current PE versus average since 2003 for dividend-yield ranges

Note: Aggregated PE is based on weighted average.
Among markets, we find that emerging-market stocks with dividend yield
more than 3% are still significantly cheaper compared to the past and also
compared to developed markets. China is now the cheapest major market for
stocks with dividend yield of more than 3%.
Figure 30
MSCI regions and markets: Forward PE for stocks with dividend yield >3%

Note: Aggregated PE is based on weighted average.
8
9
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12
13
14
15
16
17
0-2 2-3 3-4 4-5 5-7 >7
Current Median since 2003
PE (x)
Stocks within 3-7% dividend yield
range are still cheaper than low-
dividend yield stocks
Expensive
compared
to history
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PE (x)
High dividend-yield
stocks within EM are
still the cheapest
Emerging-market high-
yield stocks are cheap
HK and Taiwan high-yield
stocks are the most
expensive . . .

. . . China is the
cheapest market for
high-yield stocks
7% dividend yield have a
high risk of being
value traps
High-yield stocks are
cheaper compared to the
overall market



Yield and earnings certainty
One of the key reasons we believe that stocks with yields more than 7% have
a high chance of being value traps is because they have low earnings
visibility. We define earnings certainty as the variation in a sell-side analysts
EPS forecasts for a particular stock and calculated as the inverse of the
coefficient of variation (CoV) of the EPS forecasts. A higher inverse CoV of
EPS usually highlights that the company will report results close to the mean
EPS. In Figure 31 we plot the median earnings certainty of the different
bucket of dividend yields for global stocks. It suggests that stocks with more
than 7% yield have the lowest earnings certainty while those with yield
between 3-7% have the highest earnings certainty.
Figure 31
MSCI World: EPS certainty for dividend-yield ranges

Note: EPS certainty is based on median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Yield and quality (ROE)
In a similar analysis involving ROE and yields we find that in the past, stocks
with yield more than 7% used to have higher ROEs. However, now those
stocks have the lowest ROEs. This further suggests that stocks with more
than 7% yield may seem attractive but they could also be lower quality.
Figure 32
MSCI World: Current ROEs versus average since 2003 for dividend-yield ranges

Note: ROEs is based on median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
9
10
11
12
13
14
15
16
17
0-2 2-3 3-4 4-5 5-7 >7
Earnings certainty (x)
Best earnings certainty for
3-7% dividend yield range
9
10
11
12
13
14
15
16
17
18
0-2 2-3 3-4 4-5 5-7 >7
Next 2-year average ROE (%)
Higher ROEs for 3-7%
dividend yield range
Stocks with yield between
3% and 7% have the
highest earnings certainty
Stocks with yield more
than 7% have the lowest
earnings certainty
Stocks with yield
between 3-7% also
have higher ROEs
Stocks with yield more
than 7% also have the
lowest ROEs



MSCI global regions and markets - Dividend snapshot
Dividend yields in the USA are artificially squeezed to lower levels due to high
level buybacks. The USAs current 12-month forward yield is 2.3%, however,
the embedded yield (including the buybacks) is higher than the world
average. Our analysis of performance of dividend-yield strategy during
upmarkets and downmarkets highlights that high-yield stocks have
outperformed during downmarkets for most regions and have
underperformed during the upmarkets for Asia and the USA.
Europe has the highest payout of 44% and 57% of companies have a
dividend yield of more than 3%, the highest relative to the other regions.
Figure 33
MSCI global regions and markets - EPS growth, DPS growth, yield, payout, performance
Div yield
(%)
EPS growth
(%)
DPS growth
(%)
Payout
(avg, %)
% of
stocks
Q1 - universe
annualised perf
(Q1-univ) monthly
average during
12MF L5Y avg 13F 14F 13F 14F N2Y L5Y >3% yld Since
2000
Since
2008
Up-
markets
Down-
markets
Region
World 2.9 3.0 9.7 11.6 8.2 7.9 36.0 42.2 36.8 6.3 (2.1) 0.5 0.6
DM 2.9 3.1 9.2 11.7 8.3 7.5 36.9 42.5 35.7 5.6 (2.8) 0.5 0.5
EM 2.9 3.2 13.1 10.7 7.8 10.6 31.0 36.0 38.9 7.9 8.0 0.1 1.3
Asia ex-JP 2.7 3.0 13.0 12.2 7.4 9.6 30.5 40.1 36.0 11.2 10.2 (0.8) 2.7
APxJP 3.2 3.5 10.2 11.8 6.8 8.5 38.2 47.9 40.7 8.1 7.1 (0.5) 2.0
Asean 3.3 3.8 8.5 10.6 7.4 9.0 45.9 49.7 50.4 10.8 7.8 (0.2) 2.3
Europe 3.9 4.3 6.0 10.9 6.6 8.9 43.8 45.4 56.5 1.9 (5.4) 0.4 (0.0)
Latam 3.2 3.7 21.0 9.8 7.4 12.8 40.1 38.8 42.2 2.0 1.5 0.5 0.0
Japan 2.2 2.3 41.1 13.2 8.7 7.9 29.1 42.7 11.6 10.0 2.3 0.1 1.5
USA 2.3 2.3 7.4 11.8 10.6 6.4 30.5 35.4 24.2 6.3 1.1 (0.3) 1.6
Market
Australia 4.7 5.0 10.2 8.1 6.5 7.0 64.2 64.8 75.4 0.4 (1.4) (0.1) 0.4
Austria 3.6 4.0 10.9 13.8 17.2 13.3 36.4 37.2 66.7 1.3 (5.5) (0.4) 1.4
Belgium 3.0 4.0 6.2 11.5 5.6 12.8 42.5 55.8 54.5 (8.8) (20.0) 0.5 (1.0)
Brazil 3.9 3.6 23.7 9.0 10.2 10.9 41.5 33.5 53.9 2.7 2.0 (0.5) 1.3
Canada 3.0 2.9 11.0 11.1 5.5 5.4 39.3 40.2 38.7 12.1 11.7 (0.3) 2.7
China 3.1 3.2 10.0 11.5 7.6 10.4 31.5 37.0 33.3 21.3 8.1 0.7 3.1
Denmark 2.1 1.8 21.7 17.1 17.6 19.2 35.6 26.9 20.0 (8.6) (22.8) (1.1) 0.3
Finland 4.4 4.8 29.0 18.0 6.7 6.4 63.5 58.0 85.7 29.0 23.6 (0.9) 5.7
France 4.1 4.5 7.5 11.4 6.9 8.2 44.7 45.5 55.6 6.4 (4.4) 0.6 0.7
Germany 3.5 3.9 (5.3) 12.6 0.7 9.2 37.6 44.5 44.7 (1.3) (4.9) 0.2 (0.3)
Hong Kong 2.9 3.4 10.3 10.4 7.5 8.1 44.8 50.9 46.3 4.2 (0.5) (1.4) 2.9
India 1.6 1.5 14.6 13.9 9.1 13.1 22.7 22.1 6.8 11.3 9.4 0.3 1.6
Indonesia 2.8 3.4 14.6 15.7 9.4 15.6 39.0 33.8 30.8 (12.3) (9.5) (0.4) (0.9)
Italy 4.3 5.3 6.3 15.7 8.1 12.4 41.9 49.9 52.2 1.9 0.7 (0.5) 0.9
Korea 1.2 1.6 16.5 13.7 9.9 8.8 10.3 18.5 11.4 (1.9) (5.7) (0.3) 0.4
Malaysia 3.6 3.7 7.4 9.7 5.1 6.5 49.5 55.3 54.8 na 5.1 (1.6) 2.7
Mexico 1.8 3.1 12.6 16.0 5.1 30.4 32.4 75.9 8.0 4.1 5.2 0.1 1.0
Netherlands 3.1 4.1 8.9 12.1 8.2 19.6 37.1 49.3 63.6 (6.2) (28.9) 1.2 (1.5)
New Zealand 5.0 5.9 14.3 11.0 7.8 6.4 75.6 83.8 100.0 12.3 9.4 0.7 1.6
Norway 4.9 4.7 5.3 11.0 4.4 7.8 50.3 49.9 70.0 5.8 5.8 (0.5) 1.9
Philippines 2.1 3.4 10.9 6.8 8.3 10.9 39.5 55.4 16.7 1.1 (4.5) 0.5 0.0
Poland 4.7 4.6 (15.2) 3.6 (7.7) 0.7 54.8 43.2 55.0 1.6 5.3 (0.5) 1.0
Portugal 4.8 5.3 4.6 21.6 (1.5) 8.7 63.9 65.3 40.0 6.0 7.1 0.6 0.7
Russia 4.0 3.0 1.5 1.1 7.5 6.4 21.2 12.1 42.3 na (6.2) (1.7) 1.2
Singapore 3.5 3.9 1.1 8.8 3.6 5.5 49.3 51.9 67.7 8.7 4.2 (0.8) 2.7
South Africa 3.8 4.0 15.8 13.1 12.5 14.3 46.3 44.4 68.0 3.3 (2.9) 0.9 (0.2)
Spain 6.3 6.6 29.0 16.3 13.3 6.7 63.3 58.9 69.6 6.7 2.1 0.5 0.8
Sweden 4.1 4.1 0.5 13.1 6.2 8.3 55.5 46.9 80.0 12.1 (2.6) 0.1 2.0
Switzerland 3.3 3.6 11.2 10.7 8.0 10.1 47.4 56.8 52.6 (4.4) (2.0) 1.0 (1.6)
Taiwan 3.3 4.3 24.9 13.4 5.8 9.8 47.3 74.5 58.4 9.5 2.4 (0.7) 2.1
Thailand 3.5 4.1 17.7 11.6 15.7 12.1 43.7 53.1 68.2 8.0 14.9 (1.4) 3.2
UK 4.0 4.4 6.7 9.5 6.7 8.1 45.1 45.0 59.4 4.6 (4.2) 0.6 0.2
Up-markets and down-markets are identified based on monthly performance of each region/market since 2000. Backtest are based on US-dollar
total returns with monthly rebalancing for MSCI universe. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
Dividend yield in USA is
supressed due to high
level of buybacks
Europe with highest
payout lags the
performance relative to
the rest of the regions



MSCI Global and Asia ex-Japan sectors - Dividends snapshot
Within MSCI world sectors, high-yield stocks have done well for consumer
durables sector since 2000 and 2008. Telecoms followed by utilities have the
highest 12-month forward dividend yield with more than 60% of stocks
having greater than a 3% yield. Within Asia ex-Japan, pharma has delivered
the worst performance since 2008. Telecoms leads the pack with dividend
yield of 4.4% with more than 70% of stocks paying more than a 3% yield.
Figure 34
MSCI world and Asia ex-Japan sectors - EPS growth, DPS growth, yield, payout, performance
Div yield
(%)
EPS growth
(%)
DPS growth
(%)
Payout
(avg, %)
% of
stocks
Q1 - universe
annualised perf
(Q1-univ) monthly
average during
12MF L5Y avg 13F 14F 13F 14F N2Y L5Y >3% yld Since
2000
Since
2008
Up-
markets
Down-
markets
World sectors
Autos 2.3 2.2 1.8 14.7 17.5 13.5 21.6 44.7 20.3 (3.8) (4.3) (0.5) 0.2
Banks 3.9 4.3 8.0 10.7 7.6 10.4 39.2 51.8 44.5 (1.0) (2.6) 0.0 (0.2)
Cap gds 2.8 2.8 9.3 12.0 7.5 7.5 34.9 36.8 33.2 3.9 1.4 (0.2) 1.0
Cons dur 1.9 2.1 nm 15.3 16.0 9.1 29.3 64.5 26.7 10.0 10.3 (0.3) 2.1
Cons svcs 2.6 2.7 9.7 14.3 (8.1) 9.6 45.1 44.2 39.6 2.4 (4.8) 0.4 0.1
Div fin 2.2 2.8 22.6 13.9 22.2 24.4 25.1 10.2 35.4 (1.2) 1.6 0.5 (0.3)
Energy 3.1 3.1 5.4 8.4 6.6 5.0 32.5 32.0 39.2 3.7 5.8 (0.4) 1.3
Food & drug 3.0 2.7 9.5 10.7 28.6 (5.3) 43.0 37.8 35.2 3.5 (2.3) 0.6 0.0
FBT 3.1 3.4 10.6 10.3 8.1 9.1 50.9 49.4 28.3 5.9 2.5 1.2 (0.6)
Healthcare 1.3 1.1 (1.8) 10.9 (10.4) 7.6 18.3 14.8 9.0 (4.3) 0.5 0.0 0.4
HPC 2.7 2.9 7.7 9.4 6.0 8.0 49.2 43.7 33.3 0.6 0.6 (0.8) 1.6
Insurance 3.2 3.8 9.2 8.3 5.8 5.0 33.9 50.8 52.1 (0.2) (2.9) 1.2 (0.9)
Materials 2.6 2.6 19.2 15.8 3.0 10.2 32.5 33.8 28.2 4.0 5.7 0.2 0.5
Media 1.9 2.5 0.5 14.7 5.2 9.5 28.1 43.7 36.0 (4.7) (18.6) (0.4) (0.2)
Pharma 3.1 3.5 3.6 7.7 6.5 6.2 41.9 41.0 26.8 4.3 0.8 0.4 0.4
Real estate 3.5 4.1 3.6 10.1 3.3 4.9 70.3 81.2 55.8 3.9 (3.3) (0.1) 1.1
Retail 1.7 2.0 14.7 16.1 7.5 13.5 28.8 32.5 25.9 7.1 6.3 0.0 1.3
Semis 2.1 2.3 13.5 18.2 7.7 3.7 25.1 50.8 32.6 5.4 (1.5) (3.5) 3.8
Software 1.3 1.3 10.0 12.9 10.8 8.5 18.0 19.9 11.8 (0.6) (2.5) (0.4) 0.9
Tech HW 2.2 1.4 10.2 12.2 56.7 8.8 24.3 22.5 32.6 8.4 4.2 (0.4) 2.0
Telecom 5.1 5.6 8.2 10.0 7.3 5.3 62.7 64.0 77.5 3.4 5.5 1.0 (0.3)
Transport 2.3 2.4 18.3 15.8 9.7 11.6 33.5 43.6 21.9 2.2 1.3 0.4 0.1
Utilities 4.6 4.6 8.9 12.0 0.1 4.6 61.0 65.1 66.4 4.1 7.6 (0.1) 1.0
Asia ex-Japan sectors
2

Autos 1.5 1.6 9.0 11.3 11.6 10.7 11.1 17.1 17.4 4.6 5.6 (0.8) 2.1
Banks 3.5 3.8 2.6 9.9 4.8 9.9 32.4 40.6 41.3 4.1 2.8 (0.4) 1.2
Cap gds 2.4 2.4 (1.1) 12.5 3.0 6.3 29.4 30.7 29.7 10.7 10.4 (0.5) 2.5
Cons dur 2.3 2.5 36.7 15.5 16.1 (3.6) 29.1 50.4 45.5 12.3 13.5 (1.0) 3.2
Cons svcs 2.3 2.0 17.0 15.5 12.6 10.0 40.0 44.4 53.8 7.1 1.8 (0.2) 1.7
Div fin 2.5 3.1 12.6 14.0 13.5 10.1 39.5 48.4 23.1 (5.3) 7.3 (0.6) 0.2
Energy 3.1 3.2 9.8 8.1 7.6 7.0 30.9 36.8 50.0 17.2 19.9 0.5 2.3
Food & drug 2.1 1.7 7.0 17.4 12.5 18.3 41.4 31.2 37.5 27.8 52.9 0.8 3.3
FBT 2.3 2.6 17.7 14.2 10.5 13.5 42.3 36.2 21.4 8.0 11.6 (4.7) 6.7
Healthcare 1.1 1.7 20.0 20.3 20.1 23.5 23.9 45.7 0.0 2.1 24.6 (5.9) 6.9
HPC 1.9 2.3 15.5 15.8 3.0 15.1 47.2 54.3 0.0 8.4 24.0 (2.9) 4.8
Insurance 1.6 1.6 20.6 13.1 21.8 10.7 24.7 31.7 21.4 (11.3) (6.3) (4.7) 3.6
Materials 2.5 3.1 26.6 13.3 12.7 14.9 30.8 35.1 33.9 3.3 6.5 (0.6) 1.5
Media 3.4 5.4 14.9 13.8 6.0 5.9 63.1 81.2 33.3 7.6 6.6 (0.1) 1.5
Pharma 1.0 1.0 14.5 24.6 12.1 15.0 20.4 24.8 0.0 (6.6) (10.9) (0.6) 0.4
Real estate 2.7 2.9 10.3 11.6 6.1 8.6 36.2 38.7 37.8 11.3 14.0 0.2 1.7
Retail 2.4 3.2 16.6 16.8 23.3 16.4 34.7 45.9 46.7 (3.1) (6.7) (0.6) 0.4
Semis 1.6 2.7 27.3 12.8 6.8 7.0 15.1 50.2 55.0 (2.5) (8.4) (3.8) 3.1
Software 1.1 1.1 18.7 17.7 12.7 14.8 19.2 21.3 0.0 (2.4) (4.5) 0.1 (0.1)
Tech HW 3.2 3.4 42.1 14.8 2.4 7.7 37.9 55.4 58.8 7.0 9.3 (0.4) 1.5
Telecom 4.4 4.4 7.6 8.7 5.0 7.9 58.9 56.8 74.1 13.3 21.9 (0.6) 3.5
Transport 2.6 3.0 50.8 30.7 12.5 16.9 44.9 47.5 18.8 3.8 9.7 (0.7) 1.6
Utilities 2.8 3.1 30.1 13.4 12.1 9.9 39.2 56.2 42.9 7.2 9.6 (0.9) 3.2
Up-markets and down-markets are identified based on monthly performance of each region/market since 2000.
2
For Asia ex-Japan sectors, the
backtest performance is based on (Tertile 1 - universe). Backtest are based on US-dollar total returns with monthly rebalancing for MSCI universe.
Telecoms and utilities
lead the global sectors
with high dividend yields

Section 2: Case studies Microstrategy


Case studies
1. What will be the impact of rising interest rates? ................................... 30
2. Are high yield stocks still low risk (beta)? ............................................ 39
3. Can dividend strategies work for Chinese stocks? ................................. 47
4. Why focus on dividends in emerging markets? ..................................... 51
5. Are dividends only for the crisis periods? ............................................. 59
6. Arent high-yield stocks overvalued? ................................................... 65
7. Does higher payout translate to higher PE? .......................................... 70
8. What should Apple do? ...................................................................... 74
9. Is it already too late to invest in yield strategies? ................................. 76
10. How to identify sustainable dividends? .............................................. 79
11. Dividend life cycle - Characteristics analysis ....................................... 90
12. Do dividend cuts or increases have a price impact? ........................... 101
13. Will Basel 3 weaken dividend sustainability of banks? ........................ 104
14. What is the impact of tax on dividends? ........................................... 108
15. Will companies return the cash back to shareholders? ....................... 113
16. Will buybacks dominate the global landscape? .................................. 124
17. Global dividend-wave .................................................................... 135
18. Are dividend growers better than consistent payers? ......................... 145
19. Shadow defensives ....................................................................... 153
20. Dividend-wave calendar (ex-date strategy) ...................................... 156




Case studies
1. What will be the impact of rising interest rates?
Dividend-yield strategies have conventionally underperformed during periods
of rising bond yields (or interest rates). In Figure 35 we show that the periods
of sustained increase in bond yields, a signal of improving growth prospects,
have coincided with rising equity markets. During such market upturns,
investor appetites turn towards riskier stocks over higher-yield and low-beta
plays. We believe it to be the key reason why high dividend-yield stocks
underperform during periods of consistently rising bond yields.
Figure 35
MSCI World - Price performance and change in sovereign bond yield
1

1
Average using MSCI weights. Source: CEIC, Datastream, Bloomberg, CLSA Asia-Pacific Markets
In Figure 36 we show that high-yield stocks indeed underperform in rising
bond-yield periods across most developed markets. However, the chart also
shows that high-yield stocks in emerging markets are on a structural uptrend
as quintile-1 (Q1) dividend-yield stocks have outperformed during both rising
and falling bond-yield periods. We believe that this could be driven by the fact
that mature-market bond yields have been on a structural decline, creating
the demand for undervalued high-yielding emerging-market stocks.
Nonetheless, high-yield stocks are an attractive total-return option globally.
Figure 36
MSCI - Dividend-yield outperformance during rising sovereign bond yields
1

1
(0.35)
(0.25)
(0.15)
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Price perf MoM (6mma) Bond yield MoM chg (6mma, RHS)
(%) (ppt)
Correl (since 02): 0.64
(1.0)
(0.5)
0.0
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1.0
1.5
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Bond yield rising Bond yield falling
Avg monthly US$ O-PF of Q1 div yield since 2002 (%)
High-yield stocks underperform during rising
sovereign bond yields across developed markets
Rising bond yields
coincide with upmarkets
when riskier stocks
are attractive
We expect bond yields to
rise from current troughs
Yet we argue that high-
yield stocks are attractive
on a total-return basis
High dividend-yield stocks
normally underperform
during rising bond yields




Higher income opportunity . . .
Despite the underperformance by high-yield strategies during periods of rising
bond yields we believe that the structural support for high-yielding equities
remains strong. With global bond yields close to trough levels dividend-
yielding stocks still offer a much higher yield opportunity to absolute-return
and income-focused investors. Up to 2008, sovereign bond yields were close
to the average dividend yield of Q1 stocks. However, now the average
dividend yield of Q1 and Q2 stocks is higher by 4ppts and 2ppts. These higher
dividend yields provide income investors with the ability to meet their regular
cash outflow requirements.
Figure 37
MSCI World - Diverging trend of dividend and sovereign bond yields
1

1
In Figure 38 we compare the differential of Q1 dividend yield and sovereign-
bond yields across markets since 2002 with current levels. We also highlight
the differential compared to the US treasury 10-year bond yield in Figure 39.
The analysis shows that the yield differential is higher for most developed
markets compared to the past. For global investors with US bond yields as the
benchmark, the differential is higher even in emerging markets, suggesting
that yield stocks remain attractive compared to bonds.
Figure 38

Figure 39
MSCI - Difference in dividend and sovereign bond yield
1

MSCI - Difference in dividend and US bond yield

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Q1 wtd avg DY Q2 wtd avg DY Sovereign BY (wtd avg) (%)
Both Q1 and Q2 of dividend yield provide higher
income return than the sovereign bonds
(1)
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Jan'13
Avg since 2002
Q1 wtd avg DY - sovereign BY (ppt)
(3.4), (4.9)
Difference in sovereign BY and Q1 DY
much higher for developed markets
(1)
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Jan'13
Avg since 2002
Q1 wtd avg DY - US treasury 10Y BY (ppt)
Q1 DY is higher than USA BY in all regions and markets
Yield differential is higher
in mature markets . . .

. . . and even in emerging
markets for those using
US bond-yield benchmark
Both Q1 and Q2 dividend
yields are higher
than bond yields
Mature market-bond
yields are significantly
lower and offer
little income



In Figure 40 we show that for 64% of the MSCI EM stocks, 12-month forward
dividend yield is higher than US 10-year treasury-bond yield. Furthermore,
for markets such as Hong Kong, Japan and Singapore, over 90% of stocks
offer higher dividend yields than the local 10-year government-bond.
Figure 40
Stocks with dividend yield higher than sovereign bond yield
1

Region/ Current 10Y No. of stocks with 12M-fwd div yield more than
Market Bond yield
1
10Y bond yield
1
US 10Y treasury BY
(%) Count (% of total) Count (% of total)
Hong Kong 1.3 39 95.1 37 90.2
Japan 0.8 287 90.5 190 59.9
Singapore 1.4 28 90.3 25 80.6
Europe 1.7 431 83.9 431 83.9
Taiwan 1.2 92 80.7 84 73.7
Australia 3.5 47 68.1 65 94.2
Developed markets 1.9 961 59.7 1,062 66.0
World 2.3 1,207 49.7 1,584 65.2
USA 2.0 270 44.7 302 50.0
Asean 3.2 63 44.4 112 78.9
Malaysia 3.5 17 40.5 34 81.0
Thailand 3.7 9 36.0 20 80.0
Asia Pacific ex-Japan 3.3 229 33.5 460 67.3
Asia ex-Japan 3.2 185 30.4 390 64.0
China 3.6 27 20.0 90 66.7
Emerging markets 4.8 97 11.8 522 63.6
Philippines 4.4 2 11.1 9 50.0
Korea 3.0 11 10.6 35 33.7
Latin America 7.8 8 5.5 87 60.0
Indonesia 5.2 1 3.8 24 92.3
India 7.9 0 0.0 32 43.8
1
Sovereign bonds are not the only safe options for income investors with deep
corporate bond markets in the USA and Europe. However, in Figure 41 we
highlight that the yield differential of the A rated stocks within MSCI World is
at historical trough and any reversal favours equities over bonds. Even
though bonds offer the less volatile source of income, the gap is close enough
to suggest that dividend yields can provide similar income levels.
Figure 41
MSCI World: Difference in bond and dividend yield
1
of A-rated listed companies

1
Simple average for bonds with maturity of at least five years.
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Bond yield Div yield Average value (%)
Yield compression could reverse driving
equities to outperform company bonds
Dividend yields of
corporates are almost as
high as their bond yields
Yield differential of A
rated stocks is at trough
Some 64% of EM
companies have dividend
yield above 10-year US
treasury bonds
HK, Japan and Singapore
have most companies
with dividend yield higher
than their 10Y bond



. . . and capital gains
The higher income opportunity, especially for the developed markets, is a
good case for dividend-yield stocks. However, the key attractiveness of
equities is the capital-gains opportunity when valuations are depressed, such
as in the emerging markets and most of Europe. In our Rethinking cost of
equity report published in December 2012, we highlighted that equities are
attractive compared to bonds. In Figure 42 we present the long-term
performance of equities and bonds using the US market as the proxy of global
equity returns and the change in 10-year US Treasury bond yields as a proxy
for bond returns. It shows that equities have had higher returns than bonds
over much longer periods but there has been a significant divergence over the
past five years as returns from bonds have far exceeded those of equities. If
history is any guide, we should expect the trend to reverse soon, suggesting
robust capital gains for equities.
Figure 42
US equities and bond performance
1
- Trend reversal favours equities

Change in bond yield is used as a proxy for the long-term bond performance.
Source: Factset, Robert J Schiller, CLSA Asia-Pacific Markets
In Figure 43 we highlight that for most markets, except China and India, bond
yields are close to trough levels and are rising compared to the six-month
average. This suggests that bond yields are in process of mean reversion.
Figure 43
Bond yields
1
are at a trough and moving up in developed markets

(15)
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10Y bond yield (%)
10.6
Current
Avg since'01
Peak
Trough
L6M avg
Bond returns could be
negative if bond yields
mean revert
Bond yields are close to
trough in most markets
except China and India

But more importantly
the yields are moving
up compared to
past six months



Earlier we highlighted that Q1 dividend-yield stocks underperform during
rising bond-yield periods in most developed markets, while they have
outperformed in emerging markets, irrespective of the bond-yield trends.
Nevertheless, Q1 dividend-yield stocks have delivered positive absolute
returns during rising bond yields across markets. This suggests that for
income and absolute return investors, Q1 dividend-yield stocks offer a good
capital-return opportunity even if bond yields were to continue rising. Indeed
the high-yield stocks should witness increased allocation within such
portfolios as the capital return from holding bonds would be negative, while
the yield opportunity would be similar or lower compared to high-yield stocks.
In Figure 44, we show that during rising bond-yield months, quintile-1
dividend-yield stocks have appreciated by an average 1.4% per month.
Figure 44
MSCI - Performance of high-yield (Q1) stocks during rising sovereign bond yields
1

The other statistic worth highlighting is the strong hit rate of Q1 dividend-
yield stocks during the rising bond-yield periods. In Figure 45 we show that
for MSCI world, high-yield stocks have delivered positive returns during more
than 70% of the rising bond-yield months.
Figure 45
MSCI - Hit rate of high-yield (Q1) stocks during rising sovereign bond yields
1

(2)
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Avg monthly US$ price perf of Q1 div yield since 2002 (%)
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Hit rate of Q1 div yield since 2002 during rising bond yields (%)
MSCI World high-yield
stocks have returned
1.4% pm on average
Q1 dividend-yield stocks
offer positive returns
even during rising bond-
yield periods
Hit rates are above
50% for all major
markets and regions
Hit rate is also strong at
70% for MSCI World



Asia ex-Japan: Dividend yields during rising bond yields
Dividend-yield stocks in Asia offer the best of both worlds in terms of yield
and growth, the key theme of our Dividend wave strategy. Thus, we believe it
is important to check the performance of high dividend-yield stocks in the
region during periods of rising bond yields. Our analysis highlights even in
Asia, high dividend-yield stocks underperform during bond-yield periods. In
Figure 46 we plot the rolling six-month average of the bond-yield change
(ppt) and the outperformance of quintile-1 dividend-yield stocks. It highlights
that during 2002-09, there have been six periods of rising bond yields and
high-yield stocks have underperformed in all the six periods. However, since
then, bond yields improved only once in 2H10, but dividend-yields stocks did
not underperform.
Figure 46
MSCI Asia ex-Japan - Q1 yield stocks outperformance during rising bond yields
1

In Figure 47, we repeated the analysis using the absolute return of high-yield
stocks. It suggests that during rising yields, returns for the quintile-1 yield
stocks are also positive. However, we believe that our dividend-wave strategy
is an all-weather strategy that outperforms irrespective of the yield trend.
Figure 47
MSCI Asia ex-Japan - Q1 yield stocks absolute return during rising bond yields
1

(0.25)
(0.20)
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(%) (ppt)
Falling correlation
Correl (since 02): (0.41)
Correl (since 11): (0.23)
Didn't
underperform
during 2H10
(0.25)
(0.20)
(0.15)
(0.10)
(0.05)
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Bond yield MoM chg (6mma, RHS) Q1 div yield perf (6mma)
(%) (ppt)
However, in 2H10 when
bond yields increased,
high-yield stocks
didnt underperform
Q1 dividend-yield stocks
underperform in Asia
during rising bond-yields
Positive returns by Q1
dividend-yield stocks
during rising yields
Our Dividend wave
strategy captures the best
total returns across
the bond cycle



Performance during different bond-yield ranges
In Figure 48 and 49 we provide further analysis of the probable upside for
dividend-yield stocks during different bond-yield ranges for MSCI World and
MSCI Asia Pacific ex-Japan. The charts show that for MSCI World, high-yield
stocks have delivered strong absolute returns over the next one-year when
bond yields have been less than 3.8%. With current weighted-bond yield for
MSCI world at around 2.3%, we expect a 13% return over the next year for
quintile-1 yield stocks with a 90% hit rate. Similarly for Asia, we expect
phenomenal returns of over 40% if history holds true as the hit rate is 100%.
Figure 48

Figure 49
MSCI World: Next one-year return of Q1 dividend yield

MSCI Asia Pac ex-JP: Next one-year return of Q1 div yld

Note: Aggregate bond yield calculated using country MSCI weights. Study period starts from 2001 and range is derived statistically at <(1)sd,
(0.5)-(1)sd, (0.5)-0sd, 0-0.5sd, 0.5-1sd and >1sd. Source: CEIC, Datastream, Bloomberg, CLSA Asia-Pacific Markets
In Figure 50 we present the detailed results of the similar analysis for
different markets and regions. Owing to different levels of bond yields, we
have created the ranges based on average yield and its standard deviation
(sd) since 2001. For most markets, current yields are more than 1sd below
the average. The analysis suggests positive returns for most markets except
Europe where the lower bond yields in the past have coincided with
significantly weaker equity markets during the EU-crisis.
Figure 50
Next 1-year return and hit rate of Q1 dividend-yield stocks for bond yield
1
ranges
(%)
Bond yield (%) <-1SD
2
-1SD to -0.5*SD -0.5SD to 0SD 0SD to 0.5SD 0.5SD to 1SD >1SD
Regions Since'01 Current Return Hit rate Return Hit rate Return Hit rate Return Hit rate Return Hit rate Return Hit rate
USA 3.8 2.0 17.5 100 19.7 100 4.3 81 (1.5) 70 (0.4) 66 (4.2) 36
Korea 5.1 3.0 19.3 70 6.9 47 28.0 85 10.0 73 4.5 50 44.4 74
Asia ex-JP 4.3 3.2 44.1 100 19.2 71 17.0 91 16.7 88 (2.9) 50 11.3 85
Asia Pac ex-JP 4.6 3.3 45.7 100 14.3 67 17.7 85 12.1 86 (0.3) 50 13.9 90
Australia 5.3 3.5 51.3 100 31.9 100 17.7 76 15.9 81 7.4 71 (39.6) 18
HK 3.5 1.3 20.3 94 (1.8) 54 (17.9) 45 9.7 84 15.9 90 5.8 84
DM 3.6 1.9 10.9 80 12.9 62 2.9 68 7.9 80 2.0 59 (6.3) 28
World 3.8 2.3 13.0 89 20.6 70 13.9 69 5.0 78 (2.9) 48 (3.2) 35
Japan 1.3 0.8 32.2 86 (5.7) 30 7.7 57 7.1 71 1.4 63 3.7 62
Europe 3.6 1.7 (0.7) 50 8.1 67 9.1 61 12.9 81 (2.2) 50 (7.7) 30
EM 6.2 4.8 28.7 100 44.2 100 26.4 91 8.7 62 10.8 67 2.8 33
Taiwan 2.2 1.2 na na 14.1 71 25.6 96 (6.5) 39 0.6 75 14.2 82
Asean 4.5 3.2 48.8 100 23.9 80 14.5 79 16.6 86 17.4 94 23.8 88
India 7.5 7.9 62.9 100 50.4 100 39.3 93 4.9 65 5.4 53 13.1 56
China 3.7 3.6 78.8 100 44.2 93 26.8 100 5.0 57 1.3 46 9.2 70
Average using MSCI weights.
2
SD = Standard deviation, ranges based on SD multiples around the average since 2001. Current bond yield range
upside and hit rate highlighted in blue. Source: CLSA Asia-Pacific Markets
30
40
50
60
70
80
90
100
(5)
0
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15
20
25
<3.1 3.1-3.5 3.5-3.8 3.8-4.2 4.2-4.5 >4.5
Next 1Y perf of Q1 div yield
Hit rate (RHS)
(%)
(%)
Current bond yield: 2.3%
40
50
60
70
80
90
100
(10)
0
10
20
30
40
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<3.9 3.9-4.3 4.3-4.6 4.6-5.0 5.0-5.3 >5.3
Next 1Y perf of Q1 div yield
Hit rate (RHS)
(%)
(%)
Current bond
yield: 3.3%
MSCI World high-yield
stocks could deliver 13%
return over the year . . .

. . . while Asia could
deliver more than 40%
returns if history repeats
For most markets bond
yields are below 1sd
compared to average



Higher fixed income yields are not risk-free either
The final argument that income investors could cite in favour of bonds is that
investments are almost risk-free compared with investing in equities. While
we agree that bonds as an asset class exhibit lower risk than equities, even
the sovereign bonds are not completely risk-free, like they used to be. The
advent of the GFC and EU-crisis has amply highlighted that even the top-
rated markets such as the USA has a default risk and it can be objectively
measured through the credit default spread (CDS) market. It also highlighted
that rating agencies themselves may not be the best judge of risk as most of
the peripheral markets in the EU were A rated before the EU-crisis. With
bond yields in most mature markets significantly lower, risk-free return after
removing the CDS spread is negligible.
Figure 51
CDS spreads - Sovereign bonds are no longer risk free

Note: CDS not available for India, Taiwan and Singapore so we use a proxy CDS spread as per Moodys
rating. Source: Bloomberg, CLSA Asia-Pacific Markets
The corporate bond market does offer higher yields but yield compression
post GFC has ensured that for a 5% yield, investors need to invest in B or
C rated bonds. These bonds carry sufficient risk of default, making higher-
quality dividend-yielding stocks a much safer option.
Figure 52
Higher-yield corporate debt also has default risk

Source: Federal Reserve Bank of St Louis, CLSA Asia-Pacific Markets
0
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3.3
4.6
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11
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
AAA AA A BBB BB (Average yield, %)
Till GFC, AAA rated debt yielded over 5%, now
only possible through BB or below
CDS spreads objectively
measure the default risk
Sovereign bonds,
including that of the USA,
arent default-free
Significant yield
compression in corporate
bond markets
For higher yields,
investors need to invest
in B or C rated bonds
that are also not risk free



Stocks with dividend yields much higher than bond yields
In Figure 53, we analysed the A-rated bond universe within the MSCI World
universe and highlight the stocks that have dividend yields higher than its A-
rated bond yields. Bonds have had a good run for the last four to five years,
but they have come off significantly while dividend yields have increased, it
makes sense to allocate more to the equities versus their bonds for these top-
rated companies.
Figure 53
MSCI World - Stocks with dividend yields much higher than bond yields
Code Name Cty Sector Mkt cap Bond ID Rating Maturity Coupon Bond yld 12MF div Difference
(US$m) date rate (%) yld (%) (DY-BY)
FTE FP France Telecom FR Telecom 29,858 35177PAL1 A3 01/03/2031 8.5 4.7 10.9 6.2
FP FP Total Fina FR Energy 122,361 89152UAF9 Aa1 28/01/2021 4.1 2.5 6.5 4.0
NAB AU NAB AU Banks 64,034 6325C1BJ7 Aa2 10/12/2020 4.4 2.7 6.4 3.6
WBC AU Westpac AU Banks 90,087 961214AH6 Aa2 01/06/2018 4.6 2.7 6.1 3.4
EDF FP EDF FR Utilities 35,499 268317AE4 Aa3 27/01/2040 5.6 4.7 7.8 3.1
BP/ LN BP PLC GB Energy 141,488 05565QBR8 A2 11/03/2021 4.7 2.6 5.2 2.6
VOD LN Vodafone GB Telecom 135,462 92857WAQ3 A3 27/02/2037 6.2 4.2 6.6 2.4
CME US CME US Div fin 19,185 12572XAA8 Aa3 15/03/2018 4.4 1.8 3.7 2.0
AZN LN AstraZeneca GB Pharma 60,360 046353AD0 A1 15/09/2037 6.5 4.4 6.3 1.9
NG/ LN National Grid GB Utilities 39,885 100743AJ2 A3 15/02/2042 4.5 4.3 6.1 1.8
UNA NA Unilever NL FBT 114,548 904764AK3 A1 15/02/2019 4.8 1.7 3.5 1.7
SAN FP Sanofi FR Pharma 129,176 80105NAG0 A2 29/03/2021 4.0 2.4 4.2 1.7
EOAN GR E. ON DE Utilities 33,120 268789AB0 A3 30/04/2038 6.7 4.4 6.0 1.6
NOVN VX Novartis CH Pharma 164,831 66989HAD0 Aa2 24/04/2020 4.4 2.1 3.7 1.5
WDC AU Westfield Group AU Property 26,292 92928QAB4 A2 10/05/2021 4.6 3.1 4.7 1.5
RDSB LN RDS GB Energy 229,347 822582AN2 Aa1 25/03/2040 5.5 4.0 5.5 1.5
NA CN National Bank of Canada CA Banks 12,810 63306ZCN9 Aa2 02/11/2020 4.7 3.0 4.4 1.4
017670 KS SK Telecom KR Telecom 12,420 78440PAC2 A3 20/07/2027 6.6 4.2 5.5 1.3
GSK LN GlaxoSmithKline GB Pharma 110,624 377372AE7 A1 15/05/2038 6.4 4.1 5.3 1.2
BBVA SM Banco Bilbao ES Banks 54,178 055295AB5 A2 17/05/2022 6.0 4.6 5.7 1.1
WOW AU Woolworths AU Food & drug 40,142 980888AF8 A3 12/04/2021 4.6 3.1 4.2 1.1
T MK TM MY Telecom 6,390 87942UAC5 A3 01/08/2025 7.9 3.8 4.8 1.0
ENI IM ENI IT Energy 100,528 26874RAC2 A3 01/10/2040 5.7 5.3 6.2 0.9
BMO CN Bank of Montreal CA Banks 41,037 06369ZAY0 Aa2 28/03/2023 6.2 3.9 4.7 0.8
STL NO Statoil NO Energy 84,748 85771PAE2 Aa2 23/11/2041 4.3 4.0 4.8 0.8
SIE GR Siemens DE Cap gds 92,477 826200AD9 A1 17/08/2026 6.1 3.4 4.2 0.8
ST SP SingTel SG Telecom 45,082 82929RAC0 Aa3 01/12/2031 7.4 4.1 4.8 0.8
EXC US Exelon US Utilities 26,850 693304AJ6 A3 15/03/2037 5.7 4.2 5.0 0.7
BVMF3 BZ BM&F Bov BR Div fin 13,532 09657QAA7 A3 16/07/2020 5.5 3.3 4.1 0.7
GD US General Dynamics US Cap gds 23,449 369550AR9 A2 15/07/2021 3.9 2.5 3.2 0.7
PEG US Public Sv Enterprise US Utilities 15,774 74456QAU0 A3 01/11/2039 5.4 4.0 4.7 0.7
TEG US Integrys Engy US Utilities 4,261 976843BE1 A2 01/12/2036 5.6 4.2 4.8 0.7
RSA LN RSA Insurance GB Insurance 7,402 78004VAB9 A3 15/10/2029 9.0 6.6 7.2 0.6
DO US Diamond US Energy 10,440 25271CAL6 A3 15/10/2039 5.7 4.1 4.7 0.6
DAI GR Daimler DE Autos 62,110 233835AQ0 A3 18/01/2031 8.5 4.2 4.8 0.6
BNS CN Bank of Nova Scotia CA Banks 69,543 064149AW7 Aa1 20/06/2025 8.9 3.5 4.1 0.6
APD US Air Products US Materials 18,153 009158AR7 A2 03/11/2021 3.0 2.6 3.1 0.5
CPB US Campbell Soup US FBT 11,490 134429AW9 A2 15/04/2021 4.3 2.7 3.1 0.5
DBS SP DBS SG Banks 29,450 233048AC1 Aa1 15/07/2021 1.0 3.5 3.9 0.4
MQG AU Macquarie AU Div fin 13,614 55608YAA3 A2 07/04/2021 6.6 4.8 5.2 0.4
SREN VX Swiss Re AG CH Insurance 27,584 36158FAD2 A3 15/06/2030 7.8 5.0 5.3 0.3
VZ US Verizon Comm US Telecom 124,681 92343VAW4 A3 01/04/2041 6.0 4.4 4.8 0.3
UPS US UPS US Transport 75,484 911312AF3 Aa3 28/02/2053 0.0 2.6 2.9 0.3
BBT US BB&T US Banks 21,188 054937AF4 A2 01/11/2019 5.3 2.8 3.1 0.3
PFG US Principal financial US Insurance 9,111 74251VAD4 A3 15/05/2019 8.9 2.7 3.0 0.3
Note: Universe is MSCI world stocks with A or above rating by Moody's. We only consider the stocks that have a bond yield history and select the
bond that has the longest maturity and with a minimum of five-year rolling maturity date. Data based on last seven years (monthly).
Source: MSCI, Factset, CLSA Asia-Pacific Markets
Stocks with higher
dividend yields than
bond yields



2. Are high yield stocks still low risk (beta)?
In our Rethinking cost of equity report published in December 2012, we
highlighted the drivers of the beta puzzle, that is the outperformance of low-
beta stocks over the past 15 years, despite overall positive market returns. In
Figure 54, we highlight that low (quintile 5) beta stocks have comfortably
outperformed high (Q1) beta stocks since 1995. We found that the beta
puzzle exists because high-beta stocks underperform more than expected
during a down market. One of our studies showed that an average 50% of
stocks that were classified as high (Q1) beta, did not qualify as high beta
after three years. The changes to beta and the difference in up- versus down-
market beta could be a key reason why high-beta strategies have had
seemingly poor returns over the longer investment horizons.
Figure 54
MSCI AC World index - Cumulative performance of high and low-beta stocks

Note: Beta is the three-year weekly beta against the local listing index. We rebalance monthly and track
the MSCI weighted US-dollar price returns. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
Our backtest also suggests that a low-beta strategy would have outperformed
across different regions. In Figure 55, we plot the quintile-1 (high) beta index
minus quintile-5 (low) beta index result for different regions since 2000.
Figure 55
Cumulative performance of high (Q1) - low (Q5) beta stocks (MSCI universe)

Note: Beta is the three-year weekly beta against the local listing index. We rebalance monthly and track
the MSCI weighted US-dollar price returns. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
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High beta Low beta MSCI World (index)
(175)
(150)
(125)
(100)
(75)
(50)
(25)
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APxJ Europe USA Japan (Q1index - Q5 index)
Low-beta strategies have
outperformed over the
longer term but not
across all cycles
High-beta stocks tend to
underperform a lot more
during market downturns
Europe witnessed the
worst performance by
high-beta strategies while
Asia was the best
Low-beta strategies have
outperformed across
regions since 2000



Strong case for low-beta strategy on risk-adjusted returns
A sustained stream of macro-risk events has ensured that the overall market
volatility has remained high since 1995. The resultant volatility in global high-
beta stocks has been astounding with annualised standard deviation in
monthly returns of 25%, while that of low-beta stocks have been 11%. In
Figure 56 we plot similar data across the regions. It shows that the USA has
witnessed the biggest risk differential between high- and low-beta stocks
while Latin America the smallest. This data makes a strong case for low-beta
strategies for a long-term investor.
Figure 56
Standard deviation of high and low-beta stocks since 1995 (MSCI universe)

Adjusting the annualised return for this risk highlights that high-beta
strategies would have been even poorer investments. In Figure 57 we plot the
risk-adjusted annualised returns for different regions since 1995. It suggests
that after adjusting for risk, low-beta returns have been almost 10 times
better than the high-beta returns for global equities. These results do suggest
that given the global risks, a low-beta strategy should be an easy choice for
investors with longer investment horizons.
Figure 57
Annualised returns since 1995 adjusted for risk: High- versus low-beta stocks

Note: Annualized returns by high-beta stocks divided by annualized standard deviation in monthly
returns. Universe: MSCI. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
0
5
10
15
20
25
30
35
40
World APxJ Europe LatAm Japan USA
High beta (Q1)
Low beta (Q5)
Annualised standard deviation in monthly returns since 1995 (%)
(0.30)
(0.20)
(0.10)
0.00
0.10
0.20
0.30
0.40
0.50
0.60
World APxJ Europe LatAm Japan USA
High beta (Q1)
Low beta (Q5)
Annualised returns divided by standard deviation in monthly returns (x)
High-beta strategies are
almost 2.5x more volatile
than low-beta strategies
Overall market volatility
has been high since 1995
Given the macro shocks,
high-beta strategy has
even lower returns on a
risk-adjusted basis

Risk-adjusted returns for
low-beta strategy has
been almost 10x better



Dividend strategies have the lowest beta stocks
Up to now, our debate has focused only on a high versus low-beta strategy in
isolation. However, bottom-up stock pickers usually focus on a stocks
underlying fundamentals or valuations, and beta is a secondary consideration.
To replicate the impact of a high- versus low-beta stocks within the usual
investment strategies we analysed the Q1 universe of four sets of investors:
value investors (using PE as a proxy); yield investors (using dividend yield as
a proxy); momentum investors (using earnings revision and price momentum
as a proxy); and GARP investors (using PE/G as a proxy). In Figure 58, we
highlight that the average beta of these strategies for MSCI Asia Pacific ex-
Japan universe. It shows why value and GARP investors do best in upmarkets
while a simple yield strategy works in downmarkets.
Figure 58
MSCI Asia Pacific ex-Japan: Strategy betas since 2000

We then split the performance of these strategies between higher (H1) and
lower (H2) beta stocks based on the median beta of the strategy each month.
In Figure 59 we plot the performance of the various baskets. It shows that
low beta does not work consistently across strategies and in certain cases,
such as yield and momentum, beta does not matter much.
Figure 59
MSCI Asia Pacific ex-Japan: Annualised returns of strategies since 2000

Note: Performance was calculated using MSCI weighted US-dollar returns with monthly rebalancing. H1 =
Above median beta, H2 = Below median beta. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
1.10
0.81
1.06
1.23
1.10
0.81
1.02
1.14
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
PE (Value) DY (Yield) Momentum GARP
Wtd average beta Median beta
Average of monthly data since 2000
0
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4
6
8
10
12
14
16
18
20
H1
Beta
All H2
Beta
H1
Beta
All H2
Beta
H1
Beta
All H2
Beta
H1
Beta
All H2
Beta
Q1 PE (Value) Q1 DY (Yield) Q1 Momentum Q1 GARP
Annualised return since 2000 (%)
High beta works Low beta works Beta matters less Beta matters less
High beta has been rewarded within certain strategies
while low beta in others; and yet in some strategies
beta does not matter much
Within Asia, GARP has the
highest beta while yield
strategy has the lowest
We now focus on effect of
beta on alpha strategies
We split the stocks into
higher and lower beta
based on the median
values within each basket
Within alpha strategies,
it is hard to argue that
low beta works



Volatility of dividend-yield strategies is also low
One of the key advantages of a high dividend-yield strategy is also its lower
volatility, as measured through the tracking error against the regional
benchmark. A key measure of a factors effectiveness is its information ratio
(IR), which is the annualised excess return (ER) dividend by the annualised
tracking error (TE). It measures the excess return per unit of risk. In Figure
60 we show that for Asia ex-Japan, even though value strategies have done
the best, dividend yield has a much higher IR over the past five years.
Figure 60
MSCI Asia ex-Japan: Annualised risk-adjusted outperformance over past five years

Note: Information ratio = Annualized excess return divided by annualized tracking error in monthly
returns. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
A similar study for rest of the global regions also highlights that the dividend-
yield factor has sufficiently high IR over the past two years, if not over the
past five. Europe seems to be the key market, where simple dividend strategy
has underperformed significantly over the last two-five years and that has
also impacted the performance of high-yield stocks within MSCI World. Even
for the USA, the lower bond yields have driven the outperformance and IR of
high-yield stocks significantly positive over the past two years.
Figure 61
Q1 dividend yield
1
: Annualised risk-adjusted outperformance over past five years

1
Universe = MSCI. Information ratio = Annualized excess return divided by annualized tracking error in
monthly returns. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
(10)
(8)
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(x)
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(1.05)
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1.5
Australia ASEAN AsiaxJ USA EM World Japan Europe
Information ratio (IR, L2Y) Information ratio (IR, L5Y)
Excess return (L2Y, RHS)
(x)
(%)
Lower bond yields have
fuelled performance of
high-yield stocks over
past two years in the USA
Dividend yield IR has
been positive over the
past two years except for
Japan and Europe
Information ratio
measures the excess
return per unit of risk

High dividend yield stocks
have had the best
information ratio over
past five years



Beta of dividend-yield strategy increased since 2000
Due to the low beta characteristics, investing in the high-yield stocks has
been even more rewarding on a risk-adjusted basis. We base this on our beta
analysis of the MSCI World and Asia ex-Japan high-yield stock baskets against
the overall index. Figure 62 highlights an inverse relationship between beta
and dividend yield. The beta of the high-yield stock basket (Q1) has been
significantly lower compared with the rest of the quintiles. This defensive
characteristic of the high-yield stock basket is also a key reason why it
consistently outperforms during downturns. A further investigation into the
composition of the high-yield basket shows an overweight in defensive
sectors such as telecom and utilities, and a presence of fundamentally strong
companies with solid balance sheets and consistently high cash conversion.
Figure 62
MSCI - Long-term beta dividend-yield quintiles (1995-2012)

Note: Factor quintiles are rebalanced monthly and beta is bottom-up aggregated using MSCI weights.
On a trend basis, the beta of highest-dividend-yield stock has been increasing
since bottoming in 2003. However, for Asia, the convergence of the beta for
the different dividend-yield quintiles is similar to the Asian financial crisis
(AFC) of 1998, and we expect it diverge from here.
Figure 63
MSCI Asia Pacific ex-Japan: Beta trend of dividend-yield quintiles

0.6
0.7
0.8
0.9
1.0
1.1
1.2
Q1 Q2 Q3 Q4 Q5
World APxJ
Weighted average beta (avg since 1995, x)
High-yield stocks are lower beta and
low-yield are higher beta
0.4
0.6
0.8
1.0
1.2
1.4
1.6
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1
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Q1 Q2 Q3 Q4 Q5
Weighted average
beta (6mma, x)
Beta convergence
similar to AFC
Beta increased for high-
yield basket in Asia since
bottoming in 2003
But the increase has been
is set to reverse as beta
convergence is now
similar to AFC
High-yield basket has
lowest beta
Beta and dividend
yield share an
inverse relationship



Change in trend most noticeable for EM and Asia
In Figure 64 we summarise the trend of the beta for the highest dividend-
yield stocks across the region by comparing the current beta with the average
beta over the past 10 years (since 2003). It shows that Asia has witnessed
the most significant increase in beta within the highest-quintile stocks by
dividend yield. On the other hand, the beta of high dividend-yield stocks
across the developed markets has actually reduced. This suggests that
investors need to have different view of investing in high dividend-yield stocks
in Asia and emerging markets as compared to the rest of the world.
Figure 64
MSCI Q1 dividend-yield stocks - Current beta versus average since 2003

To understand the fundamental driver of the change in beta in Asia, we
compared the current relative weight of different sectors for a high-yield
strategy with the average relative weight since 2003. Our analysis suggests
that a key driver of the rise in beta has been the increased allocation to the
tech-hardware sector, while also acknowledging that high-yield basket in Asia
now has relatively less weight of utilities and materials.
Figure 65
MSCI Asia ex-Japan quintile-1 dividend stocks: Change in relative sector weights

0.70
0.75
0.80
0.85
0.90
0.95
1.00
World DM EM APxJ AxJ
Avg (since 2003) Current
Q1 div yield - weighted average beta (x)
EM high-yield stocks are now much more riskier
as focus shifts from utilties and telecom
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
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Change in relative weight (Current vs avg since 2003)
(ppt)
14.0
Relative weight of banks. telecom and tech hardware has increased
while that of semis, materials and utilities has reduced
12.1
(5.4) (6.2) (7.2)
Banks, telecom and tech
sectors have the biggest
weight in Asia ex-Japan
high-yield portfolio
Since 2003, banks,
telecom and tech hw
sectors relative weight
has increased . . .

. . . but that of semis,
materials and utilities
has reduced
Investors need a different
strategy to invest in high-
yields stocks in
Asia and EM
Asian high-yield quintile
has witnessed the largest
increase in beta



Dividend-yield ranges and their beta
In Figure 66 we show the weighted average beta of the stocks within the
particular dividend-yield range and compare them with average value since
2003. It shows that 4-5% range has the lowest beta in MSCI World. In Figure
67 we show similar data for all other key regions and markets.
Figure 66
MSCI World: Current beta versus average since 2003 for dividend-yield ranges

Note: Beta is aggregated using MSCI weights. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Figure 67
Weighted average beta of stocks in different yield ranges
Dividend yields <2% 2-3% 3-4% 4-5% 5-7% >7%
MSCI regions L10Y
Average
Now L10Y
Average
Now L10Y
Average
Now L10Y
Average
Now L10Y
Average
Now L10Y
Average
Now
World 1.12 1.13 0.97 1.06 0.94 0.95 0.91 0.82 0.88 0.86 0.89 0.89
Developed markets 1.12 1.14 0.96 1.06 0.93 0.96 0.91 0.80 0.88 0.85 0.91 0.91
Emerging markets 1.11 1.06 1.11 1.02 1.06 0.91 0.97 0.98 0.89 0.91 0.80 na
Asia ex-Japan 1.14 1.11 1.14 1.04 1.05 0.96 0.93 1.00 0.78 0.93 0.74 0.98
Asia Pac ex-Japan 1.19 1.10 1.17 1.07 1.06 1.00 0.91 0.89 0.87 0.96 0.71 1.12
Asean 1.26 1.21 1.17 1.14 1.07 1.08 0.98 1.09 0.80 0.62 0.77 na
Europe 1.14 1.05 1.04 1.11 0.99 1.04 0.98 0.91 0.93 0.90 0.98 0.90
Latin America 0.98 0.85 0.93 0.79 0.91 0.83 0.87 1.01 0.86 0.71 0.81 na
Japan 1.06 1.06 0.80 1.08 0.79 1.00 0.81 0.69 0.91 0.51 1.32 na
USA 1.13 1.16 0.91 1.03 0.87 0.91 0.82 0.70 0.78 0.58 0.86 0.62
MSCI markets
Australia 1.40 0.95 1.23 1.27 1.05 1.15 0.84 0.71 0.89 0.97 0.68 1.13
China 1.21 1.21 1.26 1.09 1.15 0.89 1.03 1.34 1.14 1.19 0.97 na
Hong Kong 0.94 0.83 1.05 0.96 0.93 0.92 0.63 0.51 0.59 0.95 0.85 na
India 1.09 1.05 0.84 0.76 0.84 0.85 0.97 na 0.94 na 0.90 na
Indonesia 1.17 1.18 1.19 1.17 1.20 1.24 1.10 1.28 1.20 0.57 1.32 na
Korea 1.09 1.11 1.13 1.07 1.01 0.82 0.81 0.53 0.63 na 0.66 na
Malaysia 1.30 1.48 1.19 1.08 1.09 1.05 0.88 0.78 0.80 0.78 0.52 na
Philippines 1.14 1.14 1.00 1.19 1.02 0.92 1.04 na 1.03 na 0.97 na
Singapore 1.31 1.21 1.23 1.15 1.05 1.07 0.91 1.07 0.64 0.55 0.73 na
South Africa 1.23 0.93 1.14 0.77 1.07 0.79 1.00 0.88 0.80 0.83 0.71 na
Taiwan 1.38 1.04 1.12 1.17 1.13 0.93 1.03 1.10 0.89 0.70 0.86 na
Thailand 1.33 0.65 1.16 1.15 0.99 0.98 0.94 1.27 0.87 0.61 1.03 na
UK 1.12 1.26 0.97 1.38 0.94 1.06 0.91 0.89 0.88 0.81 0.89 0.64
Note: Beta is aggregated using MSCI weights. Blue shade highlights the lowest beta range. Source: Factset alpha tester, CLSA Asia-Pacific Markets
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
<2 2-3 3-4 4-5 5-7 >7
Average (since 2003) Current
Weighted average beta (x)
Lowest beta range
However, 5-7% dividend-
yield stocks have had the
lowest beta since 2003
Within MSCI World, 4-5%
dividend-yield stocks now
have the lowest beta



Stocks with low risk (beta) and high yield
In Figure 68, we compared the past three-year weekly observed beta and the
12-month forward dividend yield within the MSCI World universe and
highlight the stocks that have low risk and high yield. The screen is based on
following criteria,
Market cap greater than US$5bn
Last three-year weekly observed beta < 0.5
12-month forward dividend yield > 3.5%
Figure 68
MSCI World - Stocks with low risk (beta) and high yield
Code Name Cty Sector Mkt cap Beta
12-month forward
FCF Conv 13-14F 13-14F Earns
(US$m) (x) Div yld PE (x) PB (x) (L5Y avg, ROE EPS Cagr Cert
(%) (%) (avg, %) (%) (x)
Asia Pacific ex-Japan
941 HK China Mobile CN Telecom 220,930 0.5 4.0 11.0 1.7 79.5 16.2 1.2 33.0
TLS AU Telstra AU Telecom 59,702 0.4 6.2 15.2 4.8 130.0 32.3 6.0 29.4
WOW AU Woolworths AU Food & drug 40,142 0.4 4.2 16.8 4.5 45.1 27.5 5.7 45.1
2412 TT Chunghwa Telecom TW Telecom 24,696 0.2 5.1 18.0 2.0 121.9 11.3 1.9 16.2
2 HK CLP HK Utilities 20,461 0.2 4.0 14.4 1.7 70.2 12.2 10.4 13.3
TLKM IJ Telkom ID Telecom 19,075 0.5 4.9 13.2 3.2 102.0 24.7 9.7 22.8
MAXIS MK Maxis MY Telecom 15,377 0.3 6.2 21.1 7.3 96.2 34.8 5.5 16.7
902 HK Huaneng Power CN Utilities 14,498 0.4 4.8 10.6 1.4 (14.2) 13.6 20.5 9.0
017670 KS SK Telecom KR Telecom 12,420 0.2 5.5 9.0 1.0 95.2 11.6 (1.6) 6.5
CCL AU Coca-Cola Amatil AU FBT 10,990 0.3 4.5 16.9 4.3 56.0 26.5 8.1 31.3
Japan
9437 JP NTT Docomo JP Telecom 63,115 0.4 4.4 10.9 1.0 108.1 9.3 3.4 25.2
9432 JP NTT JP Telecom 50,242 0.5 4.1 8.8 0.6 158.7 6.6 3.9 21.0
4502 JP Takeda Pharma JP Pharma 40,658 0.5 3.9 24.6 1.7 113.0 7.1 (3.2) 11.7
4523 JP Eisai JP Pharma 12,492 0.4 3.9 19.9 2.5 118.9 12.7 3.7 9.5
4528 JP Ono Pharma JP Pharma 5,594 0.3 3.8 19.8 1.2 88.0 6.4 3.1 16.4
USA
VZ US Verizon Comm US Telecom 124,681 0.5 4.8 15.7 3.2 178.0 20.9 16.5 30.4
MO US Altria US FBT 68,206 0.4 5.5 14.2 16.4 117.3 126.2 7.7 67.4
ABBV US AbbVie US Pharma 57,995 0.0 4.3 12.1 11.5 112.6 88.0 nm 82.2
DUK US Duke Energy US Utilities 48,393 0.4 4.6 15.5 1.1 (35.7) 8.2 3.3 60.9
SO US Southern US Utilities 38,392 0.3 4.6 15.9 1.9 (11.4) 12.4 3.8 65.9
KRFT US Kraft Foods US FBT 27,381 0.0 4.3 17.3 4.6 101.6 27.6 6.6 25.3
RAI US RAI US FBT 24,318 0.4 5.9 13.6 4.9 82.4 35.9 6.7 39.4
PCG US Pg&E US Utilities 18,308 0.4 4.3 15.0 1.3 (52.7) 9.5 (0.3) 40.9
PPL US Ppl US Utilities 17,598 0.4 4.8 12.8 1.5 24.4 11.4 (5.2) 53.4
ED US Consolidated Edison US Utilities 16,659 0.4 4.3 14.8 1.3 (12.3) 9.0 1.4 69.9
Europe, Middle East and Africa
NG/ LN National Grid GB Utilities 39,885 0.3 6.1 12.5 2.4 56.1 18.4 2.6 30.3
IMT LN Imperial Tobacco GB FBT 39,705 0.4 5.2 10.5 3.6 153.7 33.5 7.2 106.8
CNA LN Centrica GB Utilities 28,839 0.5 5.0 12.4 2.7 124.9 22.4 5.6 56.3
SCMN VX Swisscom CH Telecom 22,957 0.5 5.4 12.7 4.0 109.9 32.5 (1.9) 17.5
SSE LN SSE GB Utilities 21,550 0.4 6.2 12.0 2.7 8.4 22.8 5.8 20.3
SRG IM SNAM IT Utilities 17,079 0.5 7.0 12.8 2.1 9.1 16.6 5.2 25.0
MFON LI MegaFon OJSC RU Telecom 17,067 0.0 6.6 10.4 3.7 na 35.4 15.4 11.2
SESG FP SES FR Media 15,385 0.3 4.8 14.9 3.1 75.6 21.8 6.0 20.1
TTKOM TI Turk Telekom TR Telecom 14,684 0.4 9.5 9.7 3.5 71.2 39.6 (0.5) 13.4
MRW LN Morrison Supermkts GB Food & drug 10,077 0.4 4.9 9.8 1.1 19.4 11.5 2.2 32.7
Latin America
AMBV4 BZ Ambev BR FBT 147,416 0.2 3.5 24.7 10.1 109.4 41.0 11.0 35.7
VIVT4 BZ Telefonica Brasil BR Telecom 28,398 0.3 7.9 11.2 1.2 104.8 11.1 7.3 9.1
CRUZ3 BZ Souza Cruz BR FBT 25,318 0.2 4.0 24.1 19.3 107.5 108.9 13.6 20.5
CIEL3 BZ Cielo BR Software 18,527 0.4 5.0 14.4 11.9 61.1 95.6 9.2 12.8
CCRO3 BZ CCR BR Transport 18,240 0.3 3.9 23.1 9.5 48.6 45.1 23.4 9.9
Stocks with low risk
and high yield



3. Can dividend strategies work for Chinese stocks?
Asia has always been looked upon as the region with bountiful structural
growth opportunities. Among other markets, China has been at the forefront
in driving this secular regional-growth environment. However, along with
being the fastest-growing market, the Chinese government has also ensured
in taking some constructive steps towards nurturing sustainable dividend-
paying culture within corporates. The foundation of this process was laid way
back in 2001, when China Securities Regulatory Commission (CSRC) formally
announced it would keep a close watch on the companies that did not pay
dividends without providing reasonable justification.
Since then, over the course of next 13 years, CSRC has been regularly
stepping in to announce progressive steps in this regard. In Figure 69, we
highlight each announcement on a yearly basis.
Figure 69
Governments initiatives towards boosting secular and sustainable dividend culture
2001: For the first time in China, CSRC formally attempted to regulate dividends by paying close attention to companies that do
not pay dividends without providing reasonable justification.
2004: If the listed companies did not distribute cash dividends for the last three years, they should not issue new shares to the
public, issue convertible bonds or place shares to existing shareholders.
2005: Any company that makes a profit during the reporting period with no scheme of cash profit distribution, should give
specific reasons and justify the usage of the undistributed profit. Withholding tax on cash dividends decreased from 20% to
10%.
2006: Accumulatively distributed profit in cash or stocks in the past three years shall not be less than 20% of the average
annual distributable profit realised in the past three years.
2008: A company shall specify its dividend policy in the Articles of Association, and keep a consistent and stable profit-
distribution policy. The rule emphasised the stability of cash dividend payments.
2012: Shanghai Stock Exchange (SSE) mandated for companies that distribute less than 30% of their distributable profit will be
required to explain their use of cash, as well as the rationale behind the decision to pay a dividend below the recommended
threshold.
2013: Withholding tax on dividends structuring depending on the length of time that the investor has held the shares. For
holding period of more than one year, investors will be taxed at merely 5%.
Source: CLSA Asia-Pacific Markets, CSRC
Figure 70
Evolution of pro-dividend environment in China

Source: CLSA Asia-Pacific Markets, Factset
0
10
20
30
40
50
60
70
80
90
30
40
50
60
70
80
90
100
97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A
% of stocks paying dividends Total dividend paid (RHS)
(%) (US$bn)
CSRC asking justifications for
non dividend paying
companies, mandate to non
div paying companies not to
issue new shares.
Need to justify use of
undistributed profits.WH
taxes decreased to 10%. 3
years cum. distributed profit
shall not be less than 20% of
avg. distributable profit.
Companies to follow stable
div policy, SSE mandated
justification from companies
with payout<30%,WH tax
based on holding period.
2. Development 3. Progression 1. Formulation
China is taking
constructive steps to
develop sustainable
dividend environment
Progressive efforts by
Chinas government have
led to the development of
pro-dividend environment
We highlight each
government action below



These reforms have brought about a profound shift in terms of dividend
paying culture in China. The impact is measurable, as the number of
companies paying dividends has increased from 37% in 1997 to 87% in 2011.
This significant shift in quantum augurs well from the future total-returns
perspective. This newly joined dividend-force will further increase the
contribution of dividends to the future total returns. Furthermore, these
policies have also resulted in the shift in corporates payout policy structure.
As a response to the policy of paying at minimum 20% in 2006, the
companies with payout ratios between 20% and 40% increased from 33% in
2002 to 48% in 2006. The Shanghai exchange in 2012 further raised this
threshold to 30%, causing this ratio to swell to 60% in 2011. Figure 71 also
shows that the increment in the 20-40% bracket is coming at the expense of
higher payout brackets.
Figure 71 Figure 72
China: Distribution based on payout brackets Asia ex-JP: Distribution based on payout brackets

While dividend culture is finding its roots in China in terms of more companies
paying out, there has not been sufficient effort to boost the payout ratios.
From sub-30% before 2002, Chinese corporates in aggregate have
consistently maintained average 34% payout ratios. The step-up in payout
during the GFC to more than 40% is primarily due to contraction in earnings,
rather than an increase in dividends.
Figure 73
MSCI China - Dividend yield and payout trend

0
10
20
30
40
50
60
70
2002 2006 2011
0-20 20-40 40-60 >60
(% of
companies)
Stocks with payout between 20 to
40% have increased from 33% in
2002 to current 62%
10
15
20
25
30
35
40
2002 2006 2011
0-20 20-40 40-60 >60 (% of
companies)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
25
30
35
40
45
D
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1
2
Payout Dividend yield (RHS)
(%) (%)
The number of companies
paying dividend have
increased from 37% in
1997 to the current 87%

The policies have resulted
in companies gravitating
to 20-40% payout bracket
Chinese corporates have
maintained average 34%
payout since 2002 . . .
. . . while the yields have
risen to 3%, higher than
the regional average



Stocks with high dividend yields have strong fundamentals
Apart from the pro-dividend environment, investors can also take comfort
from the fact that high dividend-yield stocks in China have high quality,
strong balance sheets and solid cashflows. In Figure 74, we highlight the
characteristics analysis of high dividend-yield stocks (Q1 and 2) versus the
broader China universe. The results are encouraging and favour high-
dividend-yielding stocks over the rest of the universe. The high-yield stocks
have strong free cashflow conversion, which is important for the future
sustainability of the dividends. Moreover, high return ratios of the high
dividend-yield stocks should ensure that the reinvested funds are utilised
efficiently for the future growth of the companies.
Figure 74
Characteristics analysis - High dividend yield (Q1&Q2) versus the universe

. . . and have high sustainability compared to the region
The impact of these strong fundamentals can also be seen through the better
track record of the Chinese companies compared with the region. In Figure
75, we highlight that the number of companies increasing dividends has
consistently outpaced Asia ex-JP since 2006.
Figure 75
Companies in China increasing dividends as compared to companies in AxJ

Note: Dividend growth of more than 10% is considered as increase.
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
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China high dividend yield (Q1&Q2) / Universe
3.0 3.0
(x)
High dividend-yield companies in China are high-
quality companies with strong cashflows and solid
balance sheets
20
25
30
35
40
45
50
55
60
65
70
2006 2007 2008 2009 2010 2011
China Asia ex-JP Companies increasing
dividends (%)
More companies in China increase
dividends compared to the region
Average 53% companies
in China increase
dividends each year
versus 47% for region

High-yield stocks have
strong free cashflows
essential for future
dividend sustainability

Number of companies
increasing dividends in
China have consistently
outpaced region
Chinese high-yield stocks
have high-quality,
strong balance sheets and
solid cashflows



Stocks with high dividend yields have outperformed the market
The governments enthusiasm towards dividends is also reflected in the
performance of the high-yield stocks. The highest dividend-yield quintile (Q1)
has outperformed the benchmark MSCI China by massive 2,613ppts since
December 1999. Furthermore, the performance of each quintile highlights
specific preferences for the high-yield quintiles as all the top quintiles (Q1, Q2
and Q3) have outperformed the benchmark and the bottom quintiles have
underperformed. From a consistency perspective, the high-yield stocks have
demonstrated impressive track records by underperforming only three times
over the past 13 years. On the other side, low-yield stocks have
underperformed in eight years over the same period.
Figure 76
MSCI China Dividend-yield cumulative performance since 2000

Note: MSCI-weighted US-dollar total return with monthly rebalancing.
. . . and have also outperformed the high-yielding regional peers
Compared to both, Asia and the world, high-yield stocks in China have
delivered an impressive performance since 2000. Quintile-1 stocks in China
have outperformed their equivalents in Asia ex-JP and AC world by 2,012ppts
and 2,552ppts.
Figure 77
Dividend-yield performance - MSCI China, Asia ex-JP and the world

0
500
1,000
1,500
2,000
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3,000
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Q1 (high) Q2 Q3
Q4 Q5 (low) MSCI China
(Index)
Quintile 1 of dividend yield has
outperformed MSCI China by 2613ppt
since Dec 1999
0
500
1,000
1,500
2,000
2,500
3,000
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China AxJ World
(Index)
China high dividend-yield stocks have
outperformed high yield stocks within
both Asia ex-JP and World
significantly since Dec 1999
China high yield stocks
have also outperformed
high yield stocks in Asia
by 2,012 ppts . . .

. . . and also
outperformed the high
yield stocks AC world by
2,552ppts
High-yield stocks in China
have outperformed
the market
All the top-three quintiles
have outperformed
the market . . .

. . . while the bottom-two
have underperformed



4. Why focus on dividends in emerging markets?
To say that high dividend-yielding emerging-market stocks ruled since 2000
would not be an exaggeration. Investing in such stocks has been an all-
weather theme that has delivered consistent outperformance driven by the
structural rerating. On the other hand, a similar strategy for developed
markets has resulted in less positive results due to the lack of consistency. As
we discussed earlier in the report, high-yield strategies now face headwinds
such as expensive valuations, rising bond yields and increased presence of
value traps in a low-growth environment. We also highlighted earlier how to
adjust the stock selection for these issues and continue to believe that
dividend-yielding stocks still offer significant alpha opportunities, especially
for total-return investors in a low-growth environment.
One of the key questions that investors continue to ask is whether the strong
performance of high yield stocks will repeat, especially if the global economy
continues on the path of slow but steady improvement. We believe that it can
certainly outperform in the future as well, though one has to make the
adjustments regarding valuations, quality and macro environment.
The other key question that investors ask is where the best opportunities for
high-yield stocks are. We believe that emerging-markets stocks still offer the
best total-return potential, along with the quality developed-markets stocks.
In a low growth world, emerging markets and global quality stocks that have
exposure to the high growth areas will continue to remain in favour as they
offer the best chance of strong yield and capital return.
In this section we conduct a battery of backtests to understand the
performance drivers of high-dividend-yield stocks and try to differentiate the
secular trends in outperformance from the noise. And while a lot of analysis is
backward-looking we find some important clues for the future.
In Figure 78 we show that first quintile of the MSCI AC World universe based
on dividend yields outperformed the bottom quintile by 532% since 1995 on a
total-return basis. The outperformance against the overall index was a 394%
since 1995 and 166% since 2000. The results sound even better when
accounting for that fact that high-yield strategies are also low beta.
Figure 78
MSCI AC World index - Performance of dividend yields

0
100
200
300
400
500
600
700
800
900
1,000
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Q1
Q2
Q3
Q4
Q5
All stocks
(Index)
733
201
339
MSCI world first quintile
outperformed last quintile
by 532% since 1995

have had stellar returns
since 2000, particularly in
emerging markets
We expect high-yield
strategy to continue to
work with some
adjustments
Emerging market still
offers the best option
Understand the
performance drivers
and patterns
Highest yielding stocks
delivered 394% excess
returns since 1995 and
166% since 2000



These backtests were done using the MSCI universe with at least three
analysts coverage. We rebalanced the quintiles on a monthly basis and
considered the US-dollar total returns without transaction or impact costs.
Developed versus EM performance
In Figures 79 and 80 we present the backtest results for developed and
emerging markets since 2000. It further illustrates the point that high-
yielding emerging-market stocks have been on a secular uptrend. It shows
that while the outperformance of the highest-quintile dividend-yield stocks for
the developed markets has been only 135% since 2000 for the developed
markets, in the emerging markets it has been a staggering 461%. The
difference is even more stark when comparing the top and bottom quintiles.
Figure 79

Figure 80
DM - Dividend-yield performance (cumulative)

EM - Dividend-yield performance (cumulative)

Note: MSCI-weighted US-dollar total return with monthly rebalancing for MSCI universe. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
One the key differentiating factor was that the high-dividend-yield stocks
have performed significantly better in emerging markets since the GFC while
they underperformed consistently in the developed markets during 2007-10.
One of the key reasons for the underperformance of high-yield stocks was
that they were lower-quality stocks, particularly from Europe, with
unsustainable dividends such as the financials. But emerging-market stocks
have outperformed even during the significant 2009 upmarket.
Figure 81
MSCI AC World index - Performance of dividend yields

0
50
100
150
200
250
300
350
400
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Q1
Q5
All stocks
(Index)
269
75
134
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100
200
300
400
500
600
700
800
900
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Q1
Q5
All stocks
(Index)
768
139
307
(20)
(15)
(10)
(5)
0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
DM EM
(%)
Golden period for
Emerging-market stocks continue to
outperform except for 2007
Emerging market stocks
offer yield and growth
MSCI universe for all
backtests
High-yield stocks in
emerging markets are on
a secular uptrend
Developed market high-
yield stocks have
underperformed
throughout 2007-10




Performance without country and sector biases
One of drawbacks of a simple quantitative backtest is that it may build
undesired risks such as over/underweighting certain regions, markets or
sectors. Such country/sector allocation issues could undermine the credibility
of the results since it would have significantly increased the tracking error. In
Figure 82 we show the annualised tracking error of the high dividend-yield
strategy since 2000 when run on normal, region-neutral, country-neutral and
sector-neutral basis. In a country-neutral strategy, the proportion of stocks
from any country would be the same in the Q1 basket and the overall index.
The chart shows that a normal dividend-yield strategy would have a tracking
error of over 7.5% per annum. A sector-neutral strategy has the lowest
tracking error and the second-highest information ratio.
Figure 82
MSCI World dividend yield (since 2000): Tracking error
1
and information ratio (IR)

1
Tracking error is annualized data.
OPF= annualized outperformance. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
Even though the best outperformance was generated using a normal strategy,
after adjusting for risk, a sector-neutral strategy would have also been
deemed a solid performer.
Figure 83
MSCI World - Dividend-yield strategy performance since 2000

Note: MSCI-weighted US-dollar total return with monthly rebalancing for MSCI universe.
0.70
0.72
0.74
0.76
0.78
0.80
0.82
0.84
0
1
2
3
4
5
6
7
8
Normal Region neutral Country neutral Sector neutral
Tracking error (TE) IR(OPF/TE, RHS) (%) (x)
(50)
0
50
100
150
200
250
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Region neutral
Country neutral
Sector neutral
Normal
(Q1-universe index)
The strategy works without
taking country/sector risks
Sector neutral the best
performer since 2003

A sector-neutral high-
yield strategy has the
lowest tracking error

A simple high-yield
strategy could have
country and sector biases
Information ratio
adjusts for risk



Regional performance comparison
As highlighted earlier, dividend-yield strategies have worked the best for Asia
ex-Japan but results are not very encouraging for some of the high-yield
markets such as Europe and Australia. In Figure 84 we show the cumulative
outperformance of the highest quintile dividend-yield stocks across regions.
These findings tie in with our earlier analysis, which showed that cumulative
dividend contribution to total returns is the highest for the Asia. Indeed, Asia
is in a sweetspot, with low payout ratios, yet high levels of sustainable
dividend yields.
Figure 84
MSCI regions: Cumulative dividend-yield outperformance

The recent performance of dividend-yield stocks across up and down markets
in Asia ex-Japan underscores its structural attractiveness. Asian high-yield
stocks still offer relatively better growth opportunities while the Europeans
are mostly lower growth. Even the Australian high-yield stocks, which have
been underperforming since 2007, turned positive in 2011 when the global
search for yield started driving up the US high-yield stocks.
Figure 85
MSCI regions: Yearly outperformance since 2010

(100)
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400
500
600
700
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1
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World USA
Europe AsiaxJ
Australia Japan
(Q1-universe)
630
Asian dividend yield performance
has been the best across regions
(10)
(5)
0
5
10
15
20
Australia AsiaxJ Europe Japan USA
2010 2011 2012
Outperformance (%)
Consistent performance by Asia
while Australia turned positive
European dividend yield
stocks have underperformed
US yield stocks worked
the best in 2011
Asia ex-JP performed
best; Australia has picked
up since 2011

High-yield strategies have
not worked in Europe sine
GFC as dividends were
unsustainable

Asian performance has
been consistent over the
past three years

US high-yield stocks
started to perform again
but Europe high-yields
are underperforming




Asian markets performance comparison
In Figure 86 we show that among the Asian markets, high-yield stocks within
China have recorded the best performance since 2000. And even though the
performance since GFC (2008) has not been as spectacular, high-yield stocks
have still delivered an annualised excess return of 8.1% with a maximum
rolling 12-month underperformance of 13.1%. Among the low-yield markets,
India has delivered strong outperformance but Korea has underperformed.
Taiwan, the highest payout market in Asia, has outperformed since 2000 but
the performance has been dismal recently. Aseans performance has also
been robust over the long and medium term.
Figure 86
MSCI Asia ex-Japan markets: Dividend-yield outperformance

Note: MSCI-weighted US-dollar total return for MSCI universe.
In Figure 87 we create a peak-to-trough analysis of the Q1 dividend-yield
outperformance over the rolling 12-month period since 2008 to gauge the
mean-reversion potential. The analysis shows that Aseans dividend-yield
stocks are due for a correction but those of China and Taiwan could start to
outperform better, given the positive momentum.
Figure 87
MSCI Asia ex-Japan Q1 dividend yld: 12-month O-PF peak-to-trough (since 2008)

(10)
(5)
0
5
10
15
China India Asean Taiwan HK Korea
Since 2000 Since 2008
Q1-universe (annualised , %)
Within Asia, high-yield stocks have
delivered the best results in China
21.3
(30)
(20)
(10)
0
10
20
30
40
India Taiwan China HK Asean Korea
1Y outperformance (%)
(47.6)
Current
L5Y avg
Peak
Trough
3M ago
China the best performer
since 2000, India the
best since GFC

Asean high-yield stocks
could outperform less if
mean reversion works

Aseans high-yield
performance has also
been robust and
consistent

While China and Taiwan
could perform better




Region and market performance - key stats
In Figure 88 we highlight the performance of Q1 and Q2 of dividend yields
across markets. We also include some of the technical indicators for the Q1
based on data for the past 10 years, such as the consistency (hit rate),
information ratio (O-PF/tracking error), 12M outperformance Reilly and
maximum underperformance (drawdown) over any 12-month period.
Figure 88
MSCI global dividend-yield performance and technical indicators

Note: MSCI-weighted US-dollar total return for MSCI universe. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
Consistency Information OPF Reilly Max draw-
Region Q1 Q2 Q1 Q2 Q1 Q2 Q1 Q2 (Hit rate) ratio (12M) down (12M)
World 6.3 3.3 1.0 0.8 (2.1) 0.6 2.5 (1.9) 56.2 0.18 48.8 (12.4)
- region neutral 5.3 2.9 0.2 0.1 0.6 0.1 (1.0) (0.3) 47.1 0.04 54.1 (10.6)
- country neutral 5.1 3.0 0.3 0.8 0.2 0.9 (1.4) (0.8) 49.6 0.06 63.0 (13.0)
- sector neutral 4.8 1.9 1.9 0.6 1.0 1.1 1.4 (0.6) 53.7 0.39 47.0 (8.3)
Dev markets 5.6 3.9 0.3 1.4 (2.8) 1.2 0.7 (0.1) 56.2 0.05 48.1 (11.5)
Emg markets 7.9 6.6 6.3 3.3 8.0 3.6 2.5 (0.4) 61.2 0.95 40.8 (18.1)
AsiaPac ex-JP 8.1 5.3 2.8 0.7 7.1 1.0 6.9 1.9 53.7 0.35 66.9 (21.2)
Asia ex-JP 11.2 6.7 5.5 3.2 10.2 3.6 6.5 (1.2) 53.7 0.66 67.1 (33.2)
Europe 1.9 2.0 (2.4) (0.2) (5.4) (0.5) (7.0) 0.8 45.5 (0.38) 23.9 (16.2)
USA 6.3 2.1 (0.4) 0.0 1.1 (0.1) (0.5) (4.7) 48.8 (0.04) 64.5 (14.9)
Japan 10.0 6.2 5.3 1.1 2.3 (1.3) (1.9) 2.4 57.0 0.87 28.2 (13.7)
Latin America 2.0 9.6 5.1 15.9 1.5 10.6 (3.4) 12.3 54.5 0.40 19.0 (36.9)
ASEAN 10.8 5.4 8.0 3.5 7.8 3.3 13.1 1.6 61.2 1.00 57.1 (16.7)
Markets
Australia 0.4 5.3 (3.3) 3.2 (1.4) 7.0 6.1 9.8 53.7 (0.29) 72.4 (27.4)
Austria 1.3 9.9 (1.0) 12.5 (5.5) 14.1 (21.1) (10.6) 53.7 (0.04) 51.1 (48.5)
Belgium (8.8) (4.1) (13.7) (5.0) (20.0) (6.3) (48.8) 41.5 45.5 (0.54) 7.3 (52.9)
Brazil 2.7 16.0 3.1 17.5 2.0 17.7 (5.5) 35.3 52.1 0.18 41.5 (84.4)
Canada 12.1 3.7 4.7 (1.3) 11.7 (0.1) (1.3) 9.1 52.9 0.44 21.3 (15.4)
China 21.3 10.4 11.2 3.0 8.1 4.8 9.2 (3.6) 60.3 0.80 33.5 (32.0)
Denmark (8.6) (1.3) (15.9) (4.6) (22.8) (10.4) (22.8) (7.6) 46.3 (1.03) 30.7 (38.2)
Finland 29.0 13.0 19.9 1.5 23.6 4.3 4.5 13.6 59.5 0.98 29.7 (44.7)
France 6.4 5.1 1.2 (0.1) (4.4) (0.4) (9.8) (0.8) 52.1 0.13 9.5 (15.7)
Germany (1.3) 7.1 (2.7) 2.0 (4.9) 2.1 (9.9) (2.1) 44.6 (0.28) 22.0 (20.5)
Hong Kong 4.2 8.3 (3.0) 2.5 (0.5) 2.3 4.3 (2.2) 45.5 (0.26) 48.0 (28.9)
India 11.3 (0.5) 4.8 (1.7) 9.4 7.9 4.4 3.5 51.2 0.36 32.1 (37.1)
Indonesia (12.3) 7.3 (1.6) 5.1 (9.5) 7.3 (9.1) (0.7) 47.9 (0.07) 20.8 (45.1)
Italy 1.9 3.5 1.3 (0.7) 0.7 (3.1) (9.5) 2.4 55.4 0.17 18.4 (13.1)
Japan 10.0 6.2 5.3 1.1 2.3 (1.3) (1.9) 2.4 57.0 0.87 28.2 (13.7)
Korea (1.9) 4.3 (1.2) (0.7) (5.7) (2.5) (0.1) (12.6) 48.8 (0.08) 52.3 (47.6)
Malaysia na na 1.2 3.2 5.1 5.9 18.4 4.7 51.2 0.12 84.3 (33.2)
Mexico 4.1 (12.7) 10.0 (12.2) 5.2 (9.3) 8.0 (9.1) 52.1 0.56 21.4 (16.4)
Philippines 1.1 10.5 (2.1) 9.9 (4.5) 8.4 (22.6) 10.5 44.6 (0.12) 21.6 (35.2)
Russia na na (12.6) 15.8 (6.2) 16.4 (2.1) (2.8) 46.3 (0.48) 41.9 (103.2)
Singapore 8.7 6.6 3.4 3.4 4.2 1.0 (1.5) 2.8 51.2 0.29 54.0 (23.8)
South Africa 3.3 6.8 0.1 5.0 (2.9) 1.2 9.0 (1.4) 55.4 0.01 45.6 (27.7)
Spain 6.7 (0.4) 1.2 (3.4) 2.1 (2.0) 1.1 (3.6) 50.4 0.13 20.3 (12.9)
Sweden 12.1 7.4 2.8 2.6 (2.6) 2.7 (1.0) 18.3 53.7 0.22 34.1 (19.5)
Switzerland (4.4) (1.4) (2.8) 3.5 (2.0) 2.3 12.7 (2.7) 46.3 (0.23) 67.6 (31.7)
Taiwan 9.5 8.2 5.0 6.8 2.4 12.5 (4.7) 1.4 57.0 0.47 39.4 (28.8)
Thailand 8.0 6.3 (0.4) 2.8 14.9 10.0 19.4 2.0 52.1 (0.02) 69.8 (90.7)
UK 4.6 1.2 (0.0) (0.7) (4.2) 0.4 2.4 (0.2) 52.1 (0.00) 43.4 (33.0)
USA 6.3 2.1 (0.4) 0.0 1.1 (0.1) (0.5) (4.7) 48.8 (0.04) 64.5 (14.9)
Q1 - technical indicators since 2003 (%) Annualized outperformance (%)
Since 2000 Since 2003 Since 2008 2012
Highlighting the
outperformance and
technical indicators




Do dividend yields work better in high-yielding sectors?
During the past 10 years, high dividend-yield strategies have not worked for
all the global sectors. High-yield sectors where dividend yield has not worked
include financials such as banks, insurance and real estate, as dividends were
not sustainable post GFC. On the other side, the sectors that have high
dividend yield and have also witnessed strong yield performance are the
traditional defensive sectors such as telecom and utilities. Within the low-
yielding sectors, FBT has the best outperformance by high-yield stocks while
media has the worst. Overall, we find a small positive cross-sectional
correlation between the dividend yields and high-yield outperformance.
Figure 89
MSCI World sectors: Quintile 1 (Q1) OPF since 2003 and current dividend yield

Note: Bubble size represents payout. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
We highlight the results of a similar analysis for Asia ex-Japan sectors using
the tertiles in Figure 90. It shows that for Asia, high-yield stocks have
outperformed in most sectors except semis, retail and insurance. The best
outperformance over the past 10 years has been for the energy and
consumer staples (ex-FBT) sectors, both of which have also offered growth.
Telecoms, now ex-growth, still offers outperformance but a high-yield
strategy for banks and utilities has not worked in Asia over the past 10 years.
Figure 90
MSCI Asia ex-JP sectors: Tertile 1 (T1) OPF since 2003 and current dividend yield

Note: Bubble size represents payout. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
Autos
Banks
Cap gds
FBT
Cons dur
Transport
Div fin
Energy Food & drug
Semis
HPC
Tech HW
Materials
Media
Insurance
Retail
Pharma
Software
Cons svcs
(10)
(8)
(6)
(4)
(2)
0
2
4
6
8
3.4 3.9 4.4 4.9 5.4 5.9 6.4
Current Q1 div yield (%)
Q1-universe perf (annualized, %)
Healthcare
(2.6,-1.9,36.3)
Real estate
(7.5,-3.4,88.5)
Telecom
(9.6,3.7,89.9)
Utilties
(7.1,3.2,73.5)
Correl: 0.11
Autos
Banks
Cap gds
Insurance
Cons svcs
Transport
Div fin
Energy
Cons stapl (ex FBT)
FBT
Semis
Materials
Tech HW
Real estate
Retail
Cons dur
Media
Telecom
(20)
(15)
(10)
(5)
0
5
10
15
20
25
2.8 3.1 3.4 3.7 4.0 4.3 4.6 4.9 5.2 5.5 5.8 6.1
Current T1 div yield (%)
T1-universe perf (annualized, %)
Utilities
Software
(1.9,4.0,30.4)
Healthcare(L1)
(1.8,0.1,39.3)
Correl: 0.13
High-yielding sectors do
have a slight edge

Energy and consumer
staples (ex FBT) has
witnessed the best
performance in Asia

Globally, tech hardware
and FBT has witnessed
the best outperformance
by a high-yield strategy

Dividend-yield strategy
has not worked well for
banks and utilities



Sector performance - Key stats
In Figure 91 we highlight the performance of Q1 and Q2 of dividend yields
across global sectors and tertile 1 and 2 for Asian sectors. We also include the
technical indicators for the quintile/tertile 1 stocks (since 2003).
Figure 91
MSCI sector-level dividend-yield performance and technical indicators

Note: MSCI-weighted US-dollar total return for MSCI universe. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
Q1 Q2 Q1 Q2 Q1 Q2 Q1 Q2 (Hit rate) ratio (12M) down (12M)
Auto (3.8) 3.2 (6.0) 2.4 (4.3) (3.1) (1.6) 6.8 42.1 (0.68) 70.7 (24.0)
Banks (1.0) 2.3 (0.4) 1.6 (2.6) 2.6 3.3 0.1 55.4 (0.06) 62.5 (13.0)
Capital goods 3.9 4.4 0.8 1.8 1.4 2.4 1.2 2.1 50.4 0.10 41.0 (17.4)
Consumer durable 10.0 6.2 2.5 4.0 10.3 6.0 10.2 3.0 52.9 0.21 48.3 (23.1)
Consumer services 2.4 3.0 (1.1) 0.4 (4.8) 1.1 (3.1) 2.9 50.4 (0.10) 55.6 (31.6)
Diversified financials (1.2) 0.3 (2.8) 2.9 1.6 4.1 10.9 (15.0) 50.4 (0.18) 38.2 (31.0)
Energy 3.7 (1.4) 2.1 (1.3) 5.8 0.0 5.5 1.0 51.2 0.30 67.7 (20.9)
Food & drug retail 3.5 0.4 0.2 1.1 (2.3) 4.0 4.5 8.6 47.9 0.02 28.1 (17.8)
FBT 5.9 2.7 5.4 0.4 2.5 2.1 (1.8) 2.1 62.0 0.54 34.8 (21.4)
Healthcare (4.3) 1.6 (1.9) 1.5 0.5 5.8 3.1 (7.3) 52.1 (0.15) 62.5 (46.6)
HPC na na (0.5) 3.2 0.6 1.7 (11.7) 12.9 54.5 (0.04) 6.6 (21.3)
Insurance (0.2) (0.2) (1.6) 2.5 (2.9) 3.6 (2.7) 7.5 51.2 (0.13) 27.6 (18.0)
Materials 4.0 (2.4) 1.3 (4.0) 5.7 (2.5) 6.7 4.0 56.2 0.12 65.5 (27.7)
Media (4.7) 5.8 (7.5) 1.2 (18.6) 0.7 4.9 (7.3) 48.8 (0.70) 59.2 (43.2)
Pharma 4.3 0.1 (0.9) 0.8 0.8 (1.2) (6.2) 3.7 48.8 (0.14) 42.4 (16.9)
Real estate 3.9 6.6 (3.4) 4.4 (3.3) 7.8 (6.6) 2.4 48.8 (0.27) 30.8 (24.9)
Retail 7.1 2.1 3.5 (0.4) 6.3 (8.4) 14.8 (14.8) 55.4 0.35 50.9 (15.0)
Semis na na (1.0) (2.6) (1.5) (0.6) (25.4) 0.8 na na 8.9 (26.5)
Software (0.6) 0.5 2.2 (1.1) (2.5) 0.8 (9.6) 1.8 49.6 0.19 32.2 (46.8)
Tech hardware 8.4 (0.4) 5.0 (4.5) 4.2 (6.8) (15.8) (3.6) 51.2 0.43 41.6 (24.4)
Telecom 3.4 0.0 3.7 (1.6) 5.5 2.5 (3.2) (1.1) 57.0 0.36 42.9 (23.1)
Transport 2.2 3.3 2.3 1.2 1.3 (2.5) (4.9) 1.8 52.1 0.31 36.5 (21.6)
Utilities 4.1 0.5 3.2 0.1 7.6 1.0 (7.6) (5.1) 57.0 0.52 16.4 (12.9)
T1 T2 T1 T2 T1 T2 T1 T2 (Hit rate) ratio (12M) down (12M)
Auto 4.6 3.6 2.7 5.2 5.6 4.3 (1.3) 11.9 52.1 0.14 44.8 (54.6)
Banks 4.1 1.7 0.0 4.2 2.8 5.3 2.7 (7.0) 49.6 0.01 54.2 (19.2)
Capital goods 10.7 1.3 6.0 1.2 10.4 (2.9) 11.4 (1.9) 57.0 0.60 70.4 (41.5)
Consumer durable 12.3 (4.4) 10.2 (7.1) 13.5 (0.6) (26.1) 10.8 55.4 0.41 7.1 (27.3)
Consumer services 7.1 3.5 0.6 1.6 1.8 (2.5) 9.1 (7.0) 47.9 0.03 68.5 (46.2)
Diversified financials (5.3) 4.3 (3.9) 5.2 7.3 (1.1) 4.6 (17.2) 47.9 (0.25) 75.1 (128.6)
Energy 17.2 (2.1) 20.4 (1.6) 19.9 1.4 1.4 (10.7) 57.9 0.99 39.7 (74.7)
Cons stapl (ex FBT) 8.5 (0.4) 21.9 (4.7) 27.7 (5.2) 11.8 (13.2) 60.3 1.09 45.5 (22.8)
FBT 8.0 4.3 5.4 8.5 11.6 3.8 (2.1) 1.5 57.0 0.43 25.2 (29.8)
Insurance na na (17.6) (6.6) (6.3) (2.2) (7.1) 0.9 na na 84.1 (119.1)
Materials 3.3 3.6 2.9 0.0 6.5 (2.8) (1.4) 4.5 53.7 0.25 57.9 (31.6)
Media na na 1.8 8.0 6.6 11.9 (14.6) 31.4 48.8 0.15 11.8 (21.8)
Healthcare (Level 1) 3.7 4.2 0.1 6.2 (0.8) 7.9 4.8 8.1 55.4 0.01 43.9 (39.7)
Real estate 11.3 1.0 11.5 (1.2) 14.0 (0.6) 11.9 (8.6) 61.2 1.24 35.3 (7.6)
Retail (3.1) 3.3 (8.9) (0.7) (6.7) (1.2) (9.8) 7.9 45.5 (0.49) 32.0 (41.4)
Semis na na (8.8) 5.4 (8.4) 7.2 (4.3) (9.4) na na 22.4 (29.3)
Software (2.4) 10.4 4.0 4.2 (4.5) 9.5 (23.4) 34.7 47.9 0.18 20.1 (43.8)
Tech hardware 7.0 (0.7) 8.0 (3.1) 9.3 1.6 (15.2) 10.6 57.9 0.62 32.3 (22.5)
Telecom 13.3 1.7 11.4 (2.1) 21.9 1.3 15.4 4.6 58.7 0.81 60.2 (55.6)
Transport 3.8 0.3 5.5 (0.3) 9.7 (3.5) 9.2 (5.6) 58.7 0.54 67.6 (30.0)
Utilities 7.2 (0.9) 3.0 1.5 9.6 2.4 (4.1) 1.1 55.4 0.27 45.0 (29.2)
Asia ex-Japan sectors
Annualised outperformance (%) T1 - technical indicators since 2003 (%)
World sectors
Annualised outperformance (%) Q1 - technical indicators since 2003 (%)
Highlighting the
outperformance and
technical indicators




5. Are dividends only for the crisis periods?
Globally high dividend-yield strategy is credited as the theme that is most
insulated to the economic shocks. However, our analysis highlights that high
dividend-yield strategy is an all-weather theme. Indeed, the best returns are
generated out of it by holding it over the long term. However, there are
certain economic cycle phases when dividend yield as a factor does not work
as well since it is closely linked to stocks that are relatively lower growth.
Thus, with the previously stated question, we aim to analyse the performance
of high-yield stocks during each economic cycle, both for the World and Asia
ex-Japan separately. We also identify the factors that will assist to enhance
the performance of high dividend-yield stocks during each cycle. We use
OECD leading indicators to define the economic cycle (Figure 92 and 93).
Figure 92

Figure 93
Global economic cycles - OECD CLI

Asia
1
economic cycles - OECD CLI

1
For Asia, we use Asia major 5. Source: OECD, CLSA Asia-Pacific Markets
In line with the expectations, the stocks with high dividend yields outperform
during down-cycles, the periods with negative slope of the OECD CLI, both
above and below 100. However, it is interesting to see the high dividend-yield
stocks also outperform during the recovery cycle ie, the periods with positive
slope of CLI but below 100. Only during expansionary cycles do the high
dividend-yield stocks underperform, both in MSCI world and Asia ex-Japan.
Figure 94

Figure 95
MSCI AC world - High div-yield (Q1) perf since 1995

MSCI Asia ex-JP - High div-yield (Q1) perf since 1995

Note: MSCI-weighted US-dollar total return with monthly rebalancing. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
95
96
97
98
99
100
101
102
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Expansion Downturn
Slowdown Recovery
(Index)
D1
E1
D5
D4
D3
D2
S1
E5
E4
E3
E2
R3
R2
R1
S4
S3
S2
R4
Expansion
95
96
97
98
99
100
101
102
103
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1
2
Expansion Downturn
Slowdown Recovery
(Index)
E1
E5
E4
E3
E2
D1
D5
D4
D3
D2
S4
S3
S2
S1
R4
R3
R2
R1
Recovery
40
45
50
55
60
65
70
75
80
85
(2)
0
2
4
6
8
10
12
Expansion Downturn Slowdown Recovery
Hit rate (RHS)
(%) (%)
20
30
40
50
60
70
80
90
100
(15)
(10)
(5)
0
5
10
15
20
25
30
35
Hit rate (RHS)
(%) (%)
High dividend yield stocks
underperform only during
expansionary economic
cycles
Dividends are favoured
most during crisis periods
OECD economic cycles:

Above 100:
Positive slope: Expansion
Negative slope: Downturn

Below 100:
Positive slope: Recovery
Negative slope: Slowdown




Identifying factors to enhance performance
To improve the performance of high dividend-yield stocks, we combined them
with six different factors categorised as growth, quality, valuations and
earnings certainty for both MSCI world and Asia ex-Japan.
1. EPS growth: Adding the next two-year EPS growth estimates in
conjunction with high dividend-yield strategy helps both during expansion and
recovery with a good hit rate.
Figure 96
Performance of high dividend-yield stocks in conjunction with EPS growth during various economic cycles

2. Sustainable growth: High sustainable growth in conjunction with high-
dividend yield works best during a slowdown for the World, while for Asia ex-
Japan it performs the best during both expansion and recovery.
Figure 97
Performance of high dividend-yield stocks in conjunction with sustainable growth during various economic cycles

3. ROE: For World, high ROE works the best during downturns and
slowdowns, while for Asia, it works the best only during slowdown.
Figure 98
Performance of high dividend-yield stocks in conjunction with ROE during various economic cycles

Div yield Div yield
(Quintile 1) >0% >5% >10% (Quintile 1) >0% >5% >10%
Expansion (2.0) (3.2) (2.1) 0.9 50 67 83 83
Downturn 8.4 9.1 9.8 6.6 60 60 60 40
Slowdown 8.6 14.0 10.6 7.2 60 100 100 80
Recovery 11.6 2.6 8.6 14.8 80 60 80 80
Expansion (14.5) (16.5) (5.7) (4.9) 25 25 25 25
Downturn 14.7 14.9 13.5 12.5 100 100 100 80
Slowdown 26.0 26.7 27.1 22.2 100 100 100 100
Recovery 31.3 26.3 33.0 41.8 100 100 100 100
MSCI AC world
MSCI Asia ex-Japan
Economic
cycles
Annualised performance (%) Hit rate (%)
Yield (Q1) + EPS growth more than Yield (Q1) + EPS growth more than
Div yield Div yield
Expansion (2.0) (2.5) (0.6) (0.2) 50 67 67 67
Downturn 8.4 6.7 5.8 1.3 60 60 60 60
Slowdown 8.6 11.6 9.7 10.7 60 80 80 100
Recovery 11.6 7.0 8.7 7.3 80 80 80 80
Expansion (14.5) (12.7) (12.9) (2.3) 25 25 25 25
Downturn 14.7 13.0 13.4 11.4 100 100 100 80
Slowdown 26.0 25.9 23.1 20.8 100 75 75 75
Recovery 31.3 25.2 35.1 46.0 100 100 100 100
MSCI AC world
MSCI Asia ex-Japan
Economic
cycles
Yield (Q1) + Sust growth more than Yield (Q1) + Sust growth more than
Div yield Div yield
Expansion (2.0) (3.2) (3.6) (4.1) 50 50 50 50
Downturn 8.4 7.8 8.6 9.3 60 60 60 60
Slowdown 8.6 13.0 13.9 13.3 60 100 100 100
Recovery 11.6 4.5 4.1 1.5 80 80 80 60
Expansion (14.5) (13.9) (14.6) (16.2) 25 25 25 0
Downturn 14.7 14.2 13.8 13.6 100 100 100 100
Slowdown 26.0 25.2 24.7 30.3 100 100 100 75
Recovery 31.3 31.1 31.1 28.5 100 100 100 100
MSCI AC world
MSCI Asia ex-Japan
Economic
cycles
Yield (Q1) + ROE more than Yield (Q1) + ROE more than
We tested the high-yield
stocks in combination
with six factors



4. Payout: In the case of the MSCI World, high payouts enhance the
performance of high dividend-yield stocks only during slowdowns, while for
MSCI Asia ex-Japan, the embedded strategy works for three cycles ie,
recovery, downturn and expansion.
Figure 99
Performance of high dividend-yield stocks in conjunction with payout during various economic cycles

5. Price to earnings: The embedded strategy of combining high dividend-
yield stocks with low PE helps during three cycles for both MSCI World and
MSCI Asia ex-Japan.
Figure 100
Performance of high dividend-yield stocks in conjunction with PE during various economic cycles

6. Earnings certainty: The embedded strategy of combining high dividend-
yield stocks with high earnings certainty helps during slowdown and downturn
for the World, while for Asia ex-Japan it helps only during slowdowns.
Figure 101
Performance of high dividend-yield stocks in conjunction with earnings certainty during various economic cycles

Div yield Div yield
(Quintile 1) <80% <70% <60% (Quintile 1) <80% <70% <60%
Expansion (2.0) (3.2) (2.9) (2.3) 50 67 67 67
Downturn 8.4 9.1 9.1 8.1 60 60 60 60
Slowdown 8.6 14.3 14.0 15.1 60 100 100 100
Recovery 11.6 3.9 5.5 7.7 80 80 80 80
Expansion (14.5) (13.3) (11.8) (11.2) 25 25 25 25
Downturn 14.7 16.6 16.3 15.8 100 100 100 100
Slowdown 26.0 22.4 21.8 14.3 100 100 100 75
Recovery 31.3 35.3 31.1 44.3 100 100 100 100
MSCI AC world
MSCI Asia ex-Japan
Economic
cycles
Yield (Q1) + payout less than Yield (Q1) + payout less than
Div yield Div yield
(Quintile 1) <15x <12x <10x (Quintile 1) <15x <12x <10x
Expansion (2.0) (2.0) (0.6) 3.9 50 50 50 50
Downturn 8.4 8.4 8.1 9.6 60 60 60 60
Slowdown 8.6 12.4 11.3 8.5 60 80 60 60
Recovery 11.6 5.9 12.5 30.1 80 80 80 100
Expansion (14.5) (13.0) (9.5) 3.9 25 25 25 75
Downturn 14.7 15.3 14.6 10.4 100 100 100 80
Slowdown 26.0 23.6 18.9 14.7 100 75 75 50
Recovery 31.3 33.0 48.5 61.0 100 100 100 100
MSCI AC world
MSCI Asia ex-Japan
Economic
cycles
Yield (Q1) + PE less than Yield (Q1) + PE less than
Div yield Div yield
(Quintile 1) >10x >12x >14x (Quintile 1) >10x >12x >14x
Expansion (2.0) (3.9) (4.4) (4.8) 50 33 67 33
Downturn 8.4 10.2 10.6 11.9 60 60 60 60
Slowdown 8.6 15.2 15.7 15.2 60 100 100 100
Recovery 11.6 (2.7) (3.3) (4.5) 80 40 40 40
Div yield Div yield
(Quintile 1) >6x >8x >10x (Quintile 1) >6x >8x >10x
Expansion (14.5) (15.1) (18.4) (20.7) 25 25 25 0
Downturn 14.7 16.6 17.0 16.4 100 100 100 100
Slowdown 26.0 20.4 22.7 25.6 100 100 100 100
Recovery 31.3 20.8 (5.2) (12.4) 100 100 33 67
MSCI Asia ex-Japan
MSCI AC world
Economic
cycles
Yield (Q1) + Earn cert more than Yield (Q1) + Earn cert more than
Economic
cycles
Yield (Q1) + Earn cert more than Yield (Q1) + Earn cert more than



Global - Best and worst factors for each economic cycle
Based on the previous analysis, we highlight the increment or decrement to
the overall performance of the high dividend stocks, during each global
economic cycle, after embedding them with the six factors discussed earlier.
For simplicity, we have only selected factors with highest cut-offs such as PE
less than 10x, earnings certainty more than 14, and EPS growth of more than
10% and so on. We then renamed them high or low as per the criteria.
In Figure 102, we highlight the performance of high dividend-yield stocks in
combination with each of the six factors during expansionary global economic
cycles. Stocks with low PE and high EPS growth are best suited to play such
cycle in combination with high dividend-yield stocks. During downturns, high
earnings certainty is the best factor to play alongside dividend yield.
Figure 102

Figure 103
Expansion - MSCI World high yield and other factor

Downturn - MSCI World high yield and other factors

Note: Low PE refer to PE<10x, High EPSgr refers to EPS growth>10%, High Sustgr refers to sustainable growth>8%, Low payout refers to
payout<60%, High ROE refers to ROE>15% and High EarnCert refers to earnings certainty >14. MSCI-weighted US-dollar total return with
monthly rebalancing. Source: Factset Alpha Tester, CLSA Asia-Pacific Markets
During slowdowns, high dividend stocks in combination with low payout or
high earnings certainty will deliver the best performance. On the other hand,
during the recovery, high earnings certainty becomes the worst factor while
stocks with low PE and high EPS growth are most preferred.
Figure 104

Figure 105
Slowdown - MSCI World high yield and other factors

Recovery - MSCI World high yield and other factors

20
30
40
50
60
70
80
90
(5)
(4)
(3)
(2)
(1)
0
1
2
3
4
Low PE High
EPSgr
High
Sustgr
Yield
(Q1)
Low
payout
high
ROE
High
Earncert
Annualised OPF Hit rate (RHS)
(%) (%)
30
35
40
45
50
55
60
65
0
2
4
6
8
10
12
High
Earncert
Low PE high
ROE
Yield
(Q1)
Low
payout
High
EPSgr
High
Sustgr
(%) (%)
40
50
60
70
80
90
100
6
8
10
12
14
16
High
Earncert
Low
payout
High
ROE
High
Sustgr
Yield
(Q1)
Low PE High
EPSgr
(%) (%)
20
30
40
50
60
70
80
90
100
(10)
(5)
0
5
10
15
20
25
30
35
Low PE High
EPSgr
Yield
(Q1)
Low
payout
High
Sustgr
high
ROE
High
Earncert
(%) (%)
Performance of high
dividend yield in
combination with other
factors during each cycle
During expansion, low PE
in combination with high
yield delivers the best
performance
During slowdown, low
payout and high earnings
certainty are most
preferred



Asia ex-Japan - Best and worst factors for each economic cycle
In case of Asia ex-Japan, although there is a difference in the overall periods
of the economic cycle as compared to the world, the factors that matter in
combination with dividend yield are not very different. During expansion,
stocks having the combination of low PE and high dividend yield perform the
best. The second best factor is high sustainable growth but with a low hit
rate. Stocks with high earnings certainty and high dividend yield should be
avoided during expansions; however, during the downturns they are most
favoured. High earnings certainty and low payout in combination with high
yield have delivered better results than high yield alone, without sacrificing
the 100% hit rate.
Figure 106

Figure 107
Expansion - MSCI AxJ high yield and other factors

Downturn - MSCI AxJ high yield and other factors

During slowdowns only the stocks with high ROE and high dividend yields
managed to outperform high yield alone, that too with a slight loss of hit rate.
However, during a recovery, several factors can be used in conjunction with
high yield to improve the performance. Low PE the best among all.
Figure 108

Figure 109
Slowdown - MSCI AxJ high yield and other factors

Recovery - MSCI AxJ high yield and other factors

0
10
20
30
40
50
60
70
80
(25)
(20)
(15)
(10)
(5)
0
5
Low PE High
Sustgr
High
EPSgr
Low
payout
Yield
(Q1)
High
ROE
High
Earncert
(%) (%)
40
50
60
70
80
90
100
110
6
8
10
12
14
16
18
High
Earncert
Low
payout
Yield
(Q1)
High
ROE
High
EPSgr
High
Sustgr
Low PE
(%) (%)
40
50
60
70
80
90
100
0
5
10
15
20
25
30
35
High
ROE
Yield
(Q1)
High
Earncert
High
EPSgr
High
Sustgr
Low PE Low
payout
(%) (%)
40
50
60
70
80
90
100
(20)
(10)
0
10
20
30
40
50
60
70
Low PE High
Sustgr
Low
payout
High
EPSgr
Yield
(Q1)
High
ROE
High
Earncert
(%) (%)
During expansion,
combination of low PE
and high dividend yield
works the best
During slowdowns, high
ROE in conjunction with
high yield does the best



Asia - Best and worst factors for each economic cycle
We summarise our analysis to identify the best factors to enhance the
performance of high dividend-yield stocks during each economic cycle for
both World and Asia ex-Japan in Figure 110 and 111. In the case of MSCI
World, high dividend-yield strategy delivers negative returns during
expansionary economic cycle. However, in combination with low PE, the
embedded strategy outperforms the global benchmark. For the rest of the
cycles, dividend yield alone was sufficient to outperform. However with the
additional factors, the total outperformance can be improved further.
Figure 110
World high yield - Factors to enhance performance during each economic cycle

Similar to world, combination of low PE and high yield outperform during the
expansionary cycle in Asia ex-Japan as well. Low PE also assists during the
recovery periods to almost double the performance of high-yield stocks. On
the other side, high earnings certainty and ROE in combination with high yield
works best during downturn and slowdown.
Figure 111
Asia ex-JP high yield - Factors to enhance perf during each economic cycle

(2.0)
8.4 8.6
11.6
5.9
3.5
6.6
18.5
(5)
0
5
10
15
20
25
30
35
Dividend yield (Q1)
Enhancement factor
Low PE
High
EarnCert
High
EarnCert
Low PE
(Annualised O-PF, %)
(14.5)
14.7
26.0
31.3
18.4
1.6
4.3
29.6
(20)
(10)
0
10
20
30
40
50
60
70
Dividend yield (Q1)
Enhancement factor
Low PE
High
EarnCert
High ROE
Low PE (Annualised OPF, %)
Identifying the best
factors in combination
with high yield for each
economic cycle
Low PE boosts the
performance of high yield
during the expansionary
economic cycle
Low PE almost doubles
the performance of
high yield during
recovery cycle
High earnings certainty
and high ROE works best
during a downturn
and slowdown



6. Arent high-yield stocks overvalued?
The structural rerating story of high dividend-yielding stocks cannot be
ignored. The highest dividend-paying stocks (Q1) within MSCI World are
trading at 0.87x relative to the overall 12-month forward PE, much higher
than the 0.68x relative PE 10 years ago. The pace of rerating has been even
steeper for Q2 stocks that have rerated from 0.82x to 0.95x. However, with
Q2 stocks already trading close to market valuations, we cannot ignore the
possibility of a rotation back into the Q1 stocks.
Figure 112
MSCI World: Past 10 years relative PE of high dividend-yield stocks

Note: Aggregate PE for each quintile is MSCI-weighted. Factor quintiles are rebalanced on a monthly
basis. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Looking across regions, the USA dividend stocks have rerated the most over
the past 10 years. However, the pace of rerating of Asian high-yield stocks
has picked up recently, and they are on a secular trend since the Asian
market peak during 2007. High-yield stocks in Europe also rerated since the
trough post the GFC but the trend has fallen apart as European markets
recovered strongly last year in the hope of an easing EU-crisis.
Figure 113
MSCI regions: Relative PE of high-yield (Q1 and Q2 within each region) stocks

Note: Aggregate PE for each quintile is MSCI-weighted. Factor quintiles are rebalanced on a monthly
basis for each region separately. Source: Factset alpha tester, CLSA Asia-Pacific Markets
0.6
0.7
0.8
0.9
1.0
1.1
1.2
D
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0
2
M
a
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0
3
O
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3
M
a
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a
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p
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9
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9
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p
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1
1
S
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p

1
1
F
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b

1
2
J
u
l

1
2
D
e
c

1
2
Q1 (div yield) Q2 (div yield) Q3 (div yield)
12M-fwd PE
(rel to MSCI World, x)
Quintile 2 of dividend yield has
rerated better than Quintile 1
0.70
0.75
0.80
0.85
0.90
0.95
1.00
D
e
c

0
2
M
a
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0
3
O
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0
3
M
a
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0
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A
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J
a
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0
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J
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0
5
N
o
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0
5
A
p
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0
6
S
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p

0
6
F
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0
7
J
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0
7
D
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0
7
M
a
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0
8
O
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0
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M
a
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0
9
A
u
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0
9
J
a
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1
0
J
u
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1
0
N
o
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1
0
A
p
r

1
1
S
e
p

1
1
F
e
b

1
2
J
u
l

1
2
D
e
c

1
2
AsiaxJ Europe US
PE (Q1&2 div yield stocks
rel to MSCI index, 3mma, x)
Quintile 1 & 2 of dividend yield
stocks have rerated globally
Globally, second quintile
of high-yield stocks have
rerated the most
Rerating of high-yield
stocks is structural as
bond yields are supressed
Asian high-yield stocks
have also been rerating
post the liquidity driven
upturn in late 2007
US high-yield stocks have
rerated the most while
European high-yield
stocks are out of favour



Also of interest is that different kinds of dividend-yielding stocks have rerated
across regions. In Figure 114 we show that Q1 of high-yield stocks have
rerated better than Q2 in the USA, highlighting the interest for the highest-
yielding stocks. However, even within Q1, higher quality stocks with better
growth potential have rerated more. For Asia, the rerating has been the
steepest for Q2 stocks while for Europe quintile 3 (close to average yield) has
seen the best rerating, suggesting that high-yield stocks in Europe have been
out of favour in recent times.
Figure 114

Figure 115
MSCI USA: Past 10 years relative PE of high-yield stocks

MSCI Asia ex-Japan: Past 10 years relative PE

Note: Aggregate PE is MSCI-weighted. Factor quintiles are rebalanced on a monthly basis. Source: Factset alpha tester, CLSA Asia-Pacific Markets
We went a step further and looked within the quintiles to assess if a particular
kind of stock has rerated the most. We show in Figure 116 that the rerating
profile of high earnings certainty and high ROE stocks in the Asian Q2 of
dividend yields. It suggests that higher-quality stocks are at a relative
valuation peak and we believe that further rerating is unlikely in the near
term. Investors searching for rerating candidates in Asia should focus on Q2
yield stocks with low payouts. In Figure 117 we show that they have been
rerating but are still relatively inexpensive. On the other hand, Asian Q2
stocks with higher payouts are well above regional valuations and close to the
peak relative valuation of 1.4x.
Figure 116

Figure 117
Asia ex-JP: Within Q2, quality stocks are expensive

Asia ex-JP: Within Q2, low payout and PE could rerate

Note: MSCI Asia ex-Japan. High/low split based on median values within the quintile. Source: Factset alpha tester, CLSA Asia-Pacific Markets
0.6
0.7
0.8
0.9
1.0
1.1
1.2
D
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c

0
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J
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D
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9
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9
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1
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1
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1
1
D
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c

1
1
J
u
n

1
2
D
e
c

1
2
Q1 (div yield)
Q2 (div yield)
PE (rel to MSCI USA
index, 3mma, x)
Rerating in US yield stocks has happened
mostly for 1
st
quintile stocks
0.6
0.7
0.8
0.9
1.0
1.1
1.2
D
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c

0
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9
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1
1
D
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1
1
J
u
n

1
2
D
e
c

1
2
Q1 (div yield)
Q2 (div yield)
PE (rel to MSCI AxJ
index, 3mma, x)
Rerating in Asian yield stocks has happened
mostly for 2
nd
quintile stocks
0.6
0.7
0.8
0.9
1.0
1.1
1.2
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1
2
D
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c

1
2
High EPS cert within Q2 (DY)
High ROE within Q2 (DY)
PE (rel to MSCI AxJ
index, 3mma, x)
Within Q2, rerating has been steepest for high
quality stocks in Asia
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
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1
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1
1
J
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1
2
D
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c

1
2
High pyt within Q2 (DY)
Low pyt within Q2 (DY)
PE (rel to MSCI AxJ
index, 3mma, x)
Low payout stocks within Q2 offer the best
rerating potential for Asia
Quintile 1 has rerated
most in the USA but
quintile 2 has rerated
most for Asia
High-quality dividend
stocks are expensive in
Asia but low-payout
stocks are cheap



Factor impact on valuations
We had earlier established that Q2 dividend-yield stocks have rerated the
most within the MSCI World universe over the past 10 years. In Figure 118
we further examine the extent of rerating within Q2 for stocks with specific
characteristics. We find that stocks with high payouts have rerated most
within the Q2 dividend-yield universe, while stocks with higher growth and
ROEs have rerated much less. With high payout stocks already 1.25x MSCI
World PE, we recommend switching out from high payout stocks into those
offering higher growth and ROEs.
Figure 118
MSCI world Q2 yield stocks: Relative PE and slope since 2003

Note: MSCI AC World. High/low split based on median values within the quintile.
Within Asia, a similar study shows that high ROE stocks and those with low
payouts have rerated the most. In Figure 119 we also show that high EPS
growth and earnings certainty are most expensive on a relative basis. We
recommend investors focus on stocks with low payouts as they continue to
trade well below the overall Asian valuations.
Figure 119
MSCI Asia ex-Japan Q2 yield stocks: Relative PE and slope since 2003

Note: MSCI Asia ex-Japan. High/low split based on median values within the quintile.
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
0.10
0.15
0.20
0.25
0.30
High
payout
High EPS
cert
High EPS
revision
High DPS
revision
High
ROE
Quintile
2
High DPS
growth
High EPS
growth
Slope (since 03) Current rel PE (RHS)
(x) (%)
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
0.01
0.03
0.05
0.07
0.09
0.11
0.13
0.15
0.17
High ROE Low
payout
Quintile
2
High DPS
revision
High DPS
growth
High EPS
revision
High EPS
growth
High EPS
cert
Slope (since 2003) Current rel PE (RHS) (x) (x)
Looking within quintile 2
to see what kind of
stocks have rerated
Switch out of high-quality
to low-payout yield stocks
for further rerating
Avoid high payout stocks
as they are expensive,
focus on those with
higher ROE and growth
High ROE and low payout
stocks have the highest
slope within Q2 yield
universe for Asia



Sector valuations
In Figure 120 we show the peak-to-trough analysis for high-yield stocks
within each sector. The chart compares the current relative PE of high (Q1
and Q2) dividend-yield stocks with the peak, trough and average since 2003.
It shows that high-yield stocks within most consumer-sectors are trading
above market valuations. The sectors where high-yield stocks have always
been cheap include energy and financials. Also, high-yielding stocks are closer
to relative trough valuations for the tech and autos sectors.
Figure 120
MSCI World sectors: Relative PE of high dividend yield (Q1+Q2) stocks

Note: High dividend-yield stocks (Q1 and Q2) are selected within each sector. Relative PE is calculated
against the MSCI World. Source: Factset alpha tester, CLSA Asia-Pacific Markets
We also show the result of a similar peak-to-trough analysis for the Asia (ex-
Japan) universe in Figure 121. For most Asian sectors, except tech, banks
and retail, the high-yield (tertile 1) stocks within each sector seem to be
trading above their average relative PE over the past 10 years. The chart also
shows that high-yield stocks within most defensive sectors are at a significant
valuation premium compared to the market and high-yield stocks are most
expensive within the consumer staples (ex-FBT) and healthcare sectors.
Figure 121
MSCI Asia ex-Japan sectors: Relative PE of high dividend-yield (T1) stocks

Note: High dividend-yield stocks (tertile 1) are selected within each sector. Relative PE is calculated
against the MSCI Asia ex-Japan. Source: Factset alpha tester, CLSA Asia-Pacific Markets
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
P
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n
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r
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y
(x)
Current
LT avg
Peak
Trough
5.6 2.3
3.0
0.2
0.6
1.0
1.4
1.8
2.2
C
S

(
x

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)
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(x)
3.6
2.5
Current
LT avg
Peak
Trough
Consumer sector yield
stocks are expensive
globally
Staples (ex-FBT) and
healthcare yield stocks
are most expensive

Energy and financials
sector offer cheaper
high-yield stocks
High-yield stocks are
expensive within most
Asian sectors



Valuation details
Figure 122
Weighted average relative PE of stocks in different yield ranges
Dividend yields <2% 2-3% 3-4% 4-5% 5-7% >7%
MSCI regions L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now
World 1.17 1.17 1.01 0.97 0.93 0.98 0.85 0.89 0.80 0.82 0.68 0.82
Developed markets 1.15 1.17 1.01 0.95 0.94 0.96 0.84 0.93 0.81 0.83 0.70 0.81
Emerging markets 1.27 1.18 1.04 1.12 0.95 1.10 0.91 0.79 0.86 0.71 0.78 na
Asia ex-Japan 1.20 1.07 1.03 1.14 0.98 1.05 0.91 0.84 0.90 0.89 0.76 1.63
Asia Pac ex-Japan 1.15 1.04 1.05 1.11 1.01 1.04 0.96 0.88 0.94 1.03 0.82 1.22
Asean 1.40 1.49 1.15 1.22 1.06 1.13 1.00 1.06 1.04 1.29 0.91 na
Europe 1.31 1.21 1.14 1.15 1.01 1.10 0.91 0.91 0.84 0.77 0.76 0.82
Latin America 1.75 1.71 1.17 1.05 0.99 1.07 0.91 0.60 0.82 0.79 0.72 na
Japan 1.10 1.33 0.86 0.91 0.82 0.77 0.77 0.88 0.82 na 0.34 na
USA 1.07 1.12 0.94 0.88 0.91 0.91 0.84 1.05 0.88 1.02 0.77 0.89
MSCI markets
Australia 1.09 1.19 1.11 1.07 1.15 1.00 1.07 1.09 0.95 0.95 0.87 0.89
China 1.52 1.58 1.06 1.16 0.91 0.90 0.86 0.77 0.71 0.64 0.54 0.92
Hong Kong 1.16 1.07 1.13 1.00 1.05 1.05 0.89 0.85 0.81 1.06 0.57 na
India 1.10 1.03 0.91 1.15 0.78 0.54 0.62 na 0.58 na 0.38 na
Indonesia 1.15 0.97 1.10 1.14 1.02 0.96 0.99 0.92 0.84 0.89 0.70 na
Korea 1.15 1.05 0.89 1.07 0.83 0.89 0.82 1.13 0.82 na 0.86 na
Malaysia 1.08 1.15 0.97 0.90 1.02 0.98 1.00 1.03 0.98 0.98 1.04 na
Philippines 1.23 1.29 0.96 0.82 0.92 0.75 1.00 na 0.81 na 0.77 na
Singapore 1.36 1.38 1.03 0.95 0.95 0.92 0.93 0.93 1.05 1.25 0.98 na
South Africa 1.36 1.12 1.26 1.29 0.99 0.91 0.94 0.88 0.88 1.08 0.83 na
Taiwan 1.19 1.37 1.03 0.98 1.03 1.07 0.97 0.88 0.88 0.94 0.70 na
Thailand 1.53 2.59 1.20 1.19 1.01 1.08 0.93 0.75 0.95 1.29 0.98 na
UK 1.25 1.32 1.12 1.15 1.05 1.07 0.91 0.94 0.86 0.84 0.77 0.92
1
Figure 123
Relative PE slope of high yield stocks in combination with other factors

Note: High/low split based on median values within the relevant quintile.
MSCI
regions
High
ROE
High
EPS rev
High
DPS rev
High EPS
growth
High DPS
growth
High
payout
Low
payout
High
EPS cert
World 0.09 0.11 0.12 0.11 0.08 0.11 0.08 0.10
EM 0.14 0.19 0.13 0.17 0.13 0.19 0.10 0.05
DM 0.06 0.08 0.09 0.07 0.06 0.06 0.02 0.11
Asia ex-JP (0.10) (0.00) 0.13 (0.04) (0.04) 0.08 (0.01) (0.14)
Apac ex-JP (0.07) (0.03) 0.05 (0.09) (0.10) (0.05) (0.03) (0.12)
USA 0.21 0.24 0.17 0.28 0.22 0.32 0.19 0.28
Europe 0.04 0.03 0.05 (0.01) 0.01 (0.01) 0.02 0.07
Japan (0.08) (0.07) (0.04) 0.05 (0.08) 0.44 (0.15) (0.11)
Latam 0.18 0.36 0.19 0.24 0.32 0.16 0.29 0.31
Australia (0.08) (0.05) (0.04) (0.14) (0.11) (0.06) (0.08) (0.14)
World 0.16 0.18 0.16 0.12 0.14 0.29 0.08 0.22
EM 0.15 0.12 0.08 0.11 0.05 0.03 0.06 0.09
DM 0.14 0.17 0.13 0.12 0.13 0.28 0.08 0.19
Asia ex-JP 0.17 0.09 0.11 0.09 0.10 (0.03) 0.13 0.03
Apac ex-JP 0.05 0.04 0.08 0.01 (0.01) 0.07 0.14 (0.04)
USA 0.03 0.07 0.03 0.05 0.03 0.12 0.04 0.04
Europe 0.03 0.06 0.05 (0.01) 0.04 0.14 0.02 0.14
Japan 0.04 0.04 0.05 (0.03) 0.02 (0.07) 0.01 0.03
Latam 0.60 0.39 0.30 0.38 0.33 0.36 0.24 0.41
Australia 0.07 0.06 0.05 0.06 0.06 (0.02) 0.07 0.07
Dividend yield (Quintile 1)
Dividend yield (Quintile 2)
Q1 yield stocks within
MSCI world rerated the
most in combination with
high DPS revision
Australia have derated
with every factor
combination
MSCI world rerated the
most in combination with
high payouts



7. Does higher payout translate to higher PE?
Companies tend to ignore market valuations and focus on the fundamentals
believing that valuations are beyond their control. A few of those with a
strong view regarding market mispricing tend to use the buyback route to put
a floor on their share price. However, companies tend to forget that the
strongest signal they can give to the market to put a floor to their PE ratio is
by increasing their payout ratio. Theoretically, the link is established through
the Gordon-Growth model but we also find the practical link when we
compare the relative valuations of different payout ranges.
The value of any asset is the present value of its future cashflows discounted
at an appropriate cut-off rate. For companies with stable dividend growth
rates, the intrinsic value can be determined by using single-stage dividend
discount model ie, Gordon-Growth model, which can be represented as
follows:
Price = D
1
/ (r - g)
where,
D
1
= Expected dividends next year
r = cost of equity = risk-free rate + Beta * Market-risk premium
g = perpetual growth rate of dividends
Thus, it is essentially the present value of dividends growing at a stable rate.
If we assume a constant payout ratio, then this equation can also be
remodelled in terms of valuation and payout ratio as follows:
Price = Payout ratio * E
1
/ (r - g), where E
1
= next year EPS
or, PE
1
= Payout ratio / (r - g)
Thus, PE is directly proportional to payout ratio, irrespective of the growth
potential and the riskiness of the business represented by cost of equity. In
Figure 124 we demonstrate this theoretical link with an example. In the table
we use two sets of scenarios. In the first scenario, we assume that the growth
and beta changes due to the change in payout. Here we define growth as ROE
x (1 - payout ratio). Beta changes since a company with slower growth and
higher payout will usually have lower beta. In the second example, we
assume the long-term nominal GDP growth rate as the proxy for growth.
Either of the scenarios highlight that increasing (and maintaining) the payout
ratios generally has a positive effect on the stocks PE.
Figure 124
Theoretical exercise highlighting the impact of change in payout to stock PEs
Items

Payout scenarios, set 1: Beta falls with slower
growth and higher payout
Payout scenarios, set 2: Constant long-term
growth and beta
1 2 3 4 5 1 2 3 4 5
Payout (%) 10.0 20.0 30.0 50.0 65.0 25.0 35.0 50.0 65.0 80.0
ROE (%) 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0
Growth (%) 13.5 12.0 10.5 7.5 5.3 8.0 8.0 8.0 8.0 8.0
RFR (%) 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
ERP (%) 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0
Beta (x) 1.50 1.45 1.40 1.30 1.20 1.25 1.25 1.25 1.25 1.25
COE (%) 15.5 15.2 14.8 14.1 13.4 13.8 13.8 13.8 13.8 13.8

PE (x) 5.0 6.3 7.0 7.6 8.0 4.3 6.1 8.7 11.3 13.9
Explaining with a
theoretical example
A single-stage GGM links
payout and PE
Buybacks more commonly
used even though
increasing payout is a
more robust signal
PE is directly proportional
to the payout ratio



We find evidence regarding this theoretical explanation based on a study of
the MSCI universe of stocks over the past 10 years. In Figure 125 we show
the impact of payouts on stocks forward PE by plotting the PE of the stocks
within different payout ranges. The chart clearly shows that higher payout
buckets usually have higher PEs. It further highlights that this is true not just
for the present data but also on the average PE of different payout buckets
over the past 10 years. This supports our earlier argument that rerating
potential exists for stocks with lower payouts (45% or less) compared with
higher payout stocks, which are already trading close-to or above long-term
average valuations.
Figure 125
MSCI World: Valuation of stocks within different payout ranges

Note: Aggregate PE based on MSCI weights. Source: Factset, CLSA Asia-Pacific Markets
The conclusions from the above study are also applicable to emerging
markets as the overall payout is lower and thus they have a better scope to
increase payouts. In Figure 126 we show that for MSCI Asia ex-Japan as well,
higher payouts are linked to higher PEs. We also highlight that stocks with
higher payouts are trading a significant premium to the overall market PE.
Figure 126
MSCI Asia ex-Japan: Valuation of stocks within different payout ranges

Note: Aggregate PE based on MSCI weights. Source: Factset, CLSA Asia-Pacific Markets
12.3
12.4
12.9
12.6
12.8
13.3
17.6
10.2
10.3
11.3
11.6
12.6
13.9
17.3
10
11
12
13
14
15
16
17
18
>0-15 15-25 25-35 35-45 45-55 55-75 >75
Payout range (%)
Avg since 2003 Current
12M-fwd PE (x)
10.6
11.0
11.6
12.3
13.3
13.9
17.4
9.1
10.7
9.9
11.9
14.2
15.0
21.4
8
10
12
14
16
18
20
22
>0-15 15-25 25-35 35-45 45-60 60-80 >80
Payout range (%)
Avg since 2003 Current
12M-fwd PE (x)
Evidence also available in
the real world as high
payouts = higher PEs
The results apply to
emerging markets
including Asia
Globally, low payouts
stocks are much cheaper
compared to the past
Rerating potential higher
with low payout stocks as
high-payout ones are
already expensive



Stocks with the best rerating potential
Our analysis also highlights as the company moves up in the curve in terms
of higher payouts, investors starts discounting lower implied growth
expectations. For Asia, a rise of 10ppts in payouts results in an average drop
of 1.2ppts of implied growth. The quantum in drop increases as the payout
increases beyond 60%. Similarly, an increase in payout also results in
company becoming more defensive, as highlighted by the drop in beta.
Figure 127 Figure 128
Asia ex-JP: Implied growth for each payout basket Asia ex-JP: Fundamental beta for each payout basket

Our analysis for US highlights the similar relationship of increase in payouts
with implied growth expectations and risk characteristics of the company.
However surprisingly as the company increases payouts beyond 80%, both
implied growth expectations and beta increases.
MSCI USA: Implied growth for each payout basket MSCI USA: Observed beta for each payout basket

Based on this analysis we identify companies in Asia ex-Japan and the USA
with the best rerating potential, if management decides to increase the
payout by 10ppts. For the calculation of implied growth, we have used last
three-year weekly observed beta, equity-risk premium based on our
microstrategy ERP model, 12-month forward PE and 12-month forward
payout. To adjust for the 10ppt rise in payout, we have lowered the beta by
10% and implied growth by 25%. The screen is based on following criteria:
Next two-year average payout between 10-50%
(1)
0
1
2
3
4
5
6
7
8
9
10
11
12
<
=
1
0
1
0
-
2
0
2
0
-
3
0
3
0
-
4
0
4
0
-
5
0
5
0
-
6
0
6
0
-
7
0
7
0
-
8
0
8
0
-
9
0
9
0
-
1
0
0
>
1
0
0
Implied growth (%) For every 10ppt rise in
payouts between zero to 60%,
the future implied growth of
the stock comes off by
average 1.2ppt
Post 60%, implied growth
expectations witness a step-
chnage from 5% to 2.9%
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
<
=
1
0
1
0
-
2
0
2
0
-
3
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0
-
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0
7
0
-
8
0
8
0
-
9
0
9
0
-
1
0
0
>
1
0
0
Fundamental beta
(%)
For every 10ppt rise in payouts
the fundamental beta falls by
3.5%.
Increases sharply for payouts
more than 100%
(1)
0
1
2
3
4
5
6
7
<
=
1
0
1
0
-
2
0
2
0
-
3
0
3
0
-
4
0
4
0
-
5
0
5
0
-
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0
6
0
-
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0
7
0
-
8
0
8
0
-
9
0
9
0
-
1
0
0
>
1
0
0
Implied growth (%)
For every 10ppt rise in payouts
between zero to 70%, the future
implied growth of the stock comes off
by average 1.1ppt
Implied growth expectation rises as
the payout increases beyond 80%
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
<
=
1
0
1
0
-
2
0
2
0
-
3
0
3
0
-
4
0
4
0
-
5
0
5
0
-
6
0
6
0
-
7
0
7
0
-
8
0
8
0
-
9
0
9
0
-
1
0
0
>
1
0
0
Observed beta For every 10ppt rise in payouts between
zero to 80%, the observed beta of the stock
comes off by average 6%
In Asia, increase in
payout reduces future
implied growth
expectation. . .

. . . and also imparts more
defensives characteristics
by reducing the beta
Similar analysis for US
highlights the same
dynamic
We highlight the
companies with best
rerating potential . . .

. . . should management
decide to increase the
payout by 10ppt



Net debt to equity less than 60%
Positive FCF conversion, last five-year average
Adjusted implied growth and beta change based on historical
relationship with payout
Figure 131
Stocks with highest re-rating potential if payout increases by 10 ppt
Code Company Cty Sector Mkt cap Payout
12M fwd PE
Implied 12MF Beta Gearing FCF conv
(US$m) (
1
N2Y Current Potential Rerating growth Div yld (X) (FY0, (L5Y avg,
Avg,%) (%) (%) (%) %) %)
AMGN US Amgen US Pharma 64,608 26.3 11.4 15.2 33.1 1.4 2.3 0.5 12.9 108.8
2914 JP Japan Tobacco JP FBT 59,407 38.3 14.3 18.6 30.7 1.1 2.8 0.6 3.6 78.5
STX US Seagate US Tech HW 12,194 27.7 6.3 8.2 30.1 3.5 4.4 1.4 21.3 91.3
SAN FP Sanofi FR Pharma 129,176 48.6 11.7 15.2 30.1 0.2 4.2 0.6 14.2 111.7
MSFT US Microsoft US Software 229,866 31.2 9.2 11.8 29.2 2.0 3.4 0.9 (77.0) 115.4
SPLS US Staples US Retail 12,539 31.5 9.0 11.4 25.9 2.7 3.5 1.0 11.0 133.7
MRK GR Merck KGAA DE Pharma 30,231 20.6 12.3 15.4 25.4 2.7 1.7 0.6 33.4 124.0
3382 JP Seven & I JP Food & drug 26,934 36.6 14.4 18.0 25.1 1.9 2.5 0.7 (3.2) 110.3
1925 JP Daiwa House JP Property 10,647 27.1 12.7 15.8 24.5 2.7 2.1 0.8 24.1 10.6
INTC US Intel US Semis 104,821 45.5 10.7 13.3 23.8 1.7 4.3 1.0 (9.2) 100.6
NOVN VX Novartis CH Pharma 164,831 48.6 13.4 16.6 23.8 1.4 3.7 0.8 16.8 107.7
EI FP Essilor Intl FR Healthcare 21,212 35.1 23.0 28.1 22.1 1.0 1.5 0.3 15.1 87.9
3407 JP Asahi Kasei JP Materials 8,086 35.2 12.0 14.5 20.3 3.2 2.6 1.0 11.4 41.1
CSCO US Cisco System US Tech HW 109,247 27.9 10.2 12.3 19.9 3.5 2.7 1.1 (63.2) 125.9
AAPL US Apple US Tech HW 427,693 23.4 9.7 11.6 19.0 4.1 2.4 1.1 (24.6) 115.8
7751 JP Canon JP Tech HW 42,506 48.3 12.8 15.2 18.9 2.8 3.9 1.0 (26.6) 116.9
3 HK HK & China Gas HK Utilities 24,653 48.9 25.0 29.4 17.6 1.2 2.0 0.4 33.9 25.6
SIE GR Siemens AG DE Cap gds 92,477 48.4 11.7 13.7 17.2 3.1 4.2 1.0 19.8 140.8
941 HK China Mobile CN Telecom 220,930 43.6 11.0 12.9 17.1 2.4 4.0 0.5 (46.9) 79.5
2330 TT TSMC TW Semis 89,109 39.9 14.7 17.1 16.5 2.7 2.8 0.8 (15.9) 74.5
1605 JP Inpex JP Energy 21,203 14.4 11.0 12.8 16.2 4.8 1.4 1.0 (16.4) 126.9
66 HK MTRC HK Transport 23,876 49.9 19.6 22.7 16.0 1.9 2.5 0.6 16.5 16.4
CAP FP Cap Gemini Sa FR Software 7,507 36.9 12.3 14.2 15.6 3.5 3.0 1.0 (9.4) 81.2
GLW US Corning US Tech HW 17,640 30.6 10.7 12.3 14.8 4.1 2.9 1.2 (12.5) 48.1
TNB MK Tenaga MY Utilities 12,471 28.2 10.5 11.9 13.5 3.7 2.7 0.8 43.8 82.8
SGO FP Saint-Gobain FR Cap gds 21,673 48.5 11.2 12.7 13.4 4.2 4.1 1.4 45.4 91.4
SYNN VX Syngenta CH Materials 40,186 44.0 17.0 19.3 13.0 2.9 2.6 0.9 22.4 58.8
386 HK Sinopec CN Energy 105,342 33.4 8.2 9.3 12.9 5.2 4.0 0.8 44.3 8.6
BAYN GR Bayer DE Pharma 81,583 33.9 11.7 13.2 12.8 4.3 3.0 1.0 35.7 127.6
BAS GR BASF DE Materials 93,082 47.0 11.8 13.3 12.7 4.2 3.9 1.1 45.5 99.2
ADS GR Adidas DE Cons dur 19,439 31.8 15.0 16.8 12.2 3.4 2.2 0.7 (4.2) 97.4
MMM US 3M US Cap gds 69,087 36.6 14.9 16.5 11.1 3.3 2.5 1.0 8.1 96.1
SCHN SW Schindler CH Cap gds 16,716 39.5 20.5 22.6 10.4 2.7 1.9 0.8 (67.4) 146.6
BA US Boeing US Cap gds 55,818 29.0 11.5 12.6 10.2 4.7 2.5 1.3 (53.7) 76.7
2317 TT Hon Hai TW Tech HW 33,829 20.0 8.9 9.8 10.1 6.5 2.2 1.3 1.8 15.9
HEN3 GR Henkel Vorzug DE HPC 38,334 24.7 16.2 17.7 9.8 3.4 1.5 0.6 14.5 117.4
SU FP Schneider Elec FR Cap gds 41,159 45.7 13.0 14.1 9.1 4.6 3.5 1.3 29.2 102.2
13 HK Hutchison Whamp HK Cap gds 47,661 39.6 13.4 14.5 8.0 4.7 2.8 1.0 44.1 4.7
EMR US Emerson US Cap gds 41,371 44.7 15.5 16.6 7.1 3.9 2.9 1.2 28.4 121.5
GPS US Gap US Retail 15,686 21.0 12.6 13.5 7.1 4.6 1.6 1.1 (8.0) 119.9
LYB US Lyondell US Materials 36,478 28.9 9.8 10.4 5.6 6.6 3.0 1.7 15.0 74.2
6971 JP Kyocera JP Tech HW 16,623 28.9 16.3 17.1 5.4 4.4 1.5 1.0 (26.0) 124.9
TWX US Time Warner US Media 47,085 29.6 14.2 14.9 5.0 4.5 2.1 1.1 57.0 118.4
PTT TB PTT TH Energy 32,663 33.8 8.5 8.9 4.5 7.6 3.9 1.3 50.5 29.4
ACN US Accenture US Software 48,983 37.6 16.6 17.2 3.7 4.1 2.3 1.1 (160.2) 151.0
003550 KS LG Corp KR Cap gds 10,152 12.4 7.7 8.0 3.5 7.8 1.7 1.3 9.3 81.0
2474 TT Catcher Tech TW Tech HW 3,356 39.5 10.0 10.4 3.4 7.8 3.9 1.7 (28.8) 34.4
857 HK PetroChina CN Energy 261,004 44.9 10.8 11.0 2.1 6.6 4.1 1.0 25.6 6.5
BHP AU BHP Billiton AU Materials 208,084 43.0 13.4 13.7 2.1 5.1 3.1 1.3 35.3 50.2
1
N2Y avg = FY1 and FY2 average. 10% adjustment for beta and 25% adjustment for implied growth have been done for the 10ppt increase in
payout based on historical relationship. Source: Factset, CLSA Asia-Pacific Markets



8. What should Apple do?
Apples burgeoning cash chest has become a subject of intense debate over
the past few months. The company is sitting on a huge cash pile of US$137bn
in the form of cash and short- and long-term investments. Even in relative
terms, cash-to-assets ratio is quite high at 76%. Against this backdrop, its
inevitable for Apple to respond to growing investor demand for the return of
the excess cash, particularly in the absence of high-return investment
opportunities. Back in March 2012, similar investor activism resulted in
management announcing plans to spend US$45bn over the next three years
cumulatively on dividends and buybacks. However, for a company with more
than US$40bn annual free-cashflow, spending US$15-20bn per year on
dividends or buybacks is a pittance. The current dividend yield of 2.4% is also
significantly low compared with the free cashflow yield of 10%.
Figure 132

Figure 133
Apple - Cash and investments trend

Apple - Strong free cash flow conversion

Our CLSA analyst estimates Apples free cashflow to continue rising and surge
past US$54bn by September 2014. In light of this trend, Apples management
faces the challenge of identifying the optimal ways to dispense with its excess
cash. Our analysis of Apples tech-sector peers highlights a mixed trend.
Microsoft and Intel have payouts in excess of 30%, while Google still hasnt
started paying dividends. However, given that Apples best free-cashflow
conversion ability relative to peers, which is expected to enhance further due
to a lack of chunky capex plans, management should decide soon on how to
best utilise this excess cash reserve.
Figure 134

Figure 135
Cash
1
to assets and FCF conversion - US tech companies

Payout and yield - US tech companies

1
Cash includes cash and investments. Source: Factset, CLSA Asia-Pacific Markets
0
50
100
150
200
250
55
57
59
61
63
65
67
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71
73
75
0
2
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1
4
C
L
Cash & investments (RHS) Cash & investments to Asset
Apple holds around US$137 bn in cash and
investments based on Dec 2012 reporting
(%)
(US$bn)
0
10
20
30
40
50
60
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FCF (RHS) FCF conversion (LHS)
(US$ bn)
(%)
Sequential increase in total free
cashflow since 2003
0
40
80
120
160
200
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a
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u
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Cash to assets FCF conversion
(%)
Majority of tech stocks have FCF
conversion ratio of more than 100%.
0
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5
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15
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45
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G
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l
e
Payout (FY1) DVY (FY1, RHS)
(%) (%)
Microsoft has payout ratio of about
38% whereas google has not paid
dividend yet
Apple has US$137bn in
cash and short- and long-
term investments. . .

. . . and free cashflow of
more than US$40bn
CLSA analyst expects the
FCF to surge past
US$54bn by Sep 2014

Compared to peers, apple
has the strongest FCF
conversion ability



Apple could resort to a few traditional options such as: increasing the payout;
paying one-off special dividends; raising the run rate of buybacks; and exotic
options such as issuing preference shares. We analyse the valuation impact of
each aforementioned corporate actions:
1. Increase in payout ratio by 10ppts: In line with management
expectations, consensus expects Apple to pay US$10.6 in dividends in FY14
(September 2014). However, relative to the profit and free cashflows,
dividends form a meagre 22% and 23%. This suggests that there is plenty of
headroom to enhance payouts and thereby increase the expected dividend
yield from the current 2.3%. Even a 10ppts increase in payouts would help
the company to allay investors fears regarding the misuse of its burgeoning
cash pile. Our analysis highlights that companies that have similar
characteristics as Apples, namely a payout of 20-30%, beta of 0.95-1.05 and
implied growth of 3.5-4.5%, trade on an average PE multiple of 11.2x. This
implies rerating of more than 18% from the current multiple of 9.5x, if Apple
decides increase the payout by 10ppts.
2. Special dividends: It is difficult to quantify the long-term impact of
paying special dividends. However, analysis of similar corporate action
undertaken by the company of the comparable size highlights that special
dividends result in a slight rerating of stocks. Microsoft faced similar investors
activism back in July 2003, when it announced to pay US$32bn in special
dividend, the highest ever. Although the stock rerated by close to 7% post the
announcement, the reaction was short-lived.
3. Buyback: In our buyback analysis, we have highlighted that stocks that
are attractive based on relative and historical valuations, undergoing decent
size buyback, and having below mid-cycle ROE does have strong probability
to post solid performance over the next 12 months. Apple does fit into most
of these criteria and does stand a chance to post significant outperformance.
4. Issuance of preference shares: Issuance of preference shares should
have the same impact on valuations as it would if Apple decides to increase
its payout. The only difference being the extra commitment being guaranteed
by the preference shares compared to the common shares.
However, an increase in payout is the simplest option with commensurate
high rewards. The resulting rise in yield will also open the stock to the new
set of investors focusing on a steady stream of dividends.
Figure 136

Figure 137
Apple should rerate if it increases the payout by 10ppts

Microsoft rerated post the announcement of special div

Note: Beta range is 0.95 to 1.05 and Implied growth range is 3.5 to 4.5%. Source: Factset, CLSA Asia-Pacific Markets
11.2
9.5
8.5
9.0
9.5
10.0
10.5
11.0
11.5
Consistent 20-30% payout Current
12M-fwd PE (x)
Assuming consistent payout of
20-30% and the current implied
growth and beta, Apple should
trade at 11.2x compared to the
current multiple of 9.5x
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
J
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5
Microsoft relative PE (x)
Microsoft rerated on relative
basis since the announcement of
of special dividneds in Jul 2004
Apple can increase
payout, pay special
dividends, do buyback or
issue preference shares
Stocks could rerate post
the announcement of
special dividends . . . .

. . . but the effect is
short-lived

Increase in level
buybacks should result in
outperformance

Preference shares is same
as raising the common
yield to 4%, albeit with
more commitment
Raising payouts
will be the most
rewarding alternative
Apples expected payout
is 22%. . .

. . . 10ppt increase in
payout can result in 18%
rerating of apple



9. Is it already too late to invest in yield strategies?
Equities were out of favour in 2011 and for most of 2012 with both developed
and emerging markets witnessing net outflows. In stark contrast, dividend-
focused equity funds have witnessed consistent weekly net inflows since
2011, adding up to an impressive US$39bn in 2011 and another US$33bn in
2012. Figure 138 highlights that there were only eight weeks of net outflows
from the dividend-focused equity funds since 2011 but the inflows have
started to slowdown in 2H12. While this may suggest that high-yield stocks
could derate as investors switch to growth stocks, we believe that high-yield
stocks, especially in emerging markets, remain a multiyear theme. One of the
key data points is the significant pickup in dividend-focused equity inflows in
the first few weeks of 2013, despite the improving market sentiment.
Figure 138
Global dividend equity funds - Weekly flows (2011-YTD)

Source: EPFR global, CLSA Asia-Pacific Markets
We believe that inflows into dividend funds were previously being financed
more by a shift to high-yield stocks by equity focused funds but could now be
financed by flows from bond/income focused funds. In Figure 139, we show
that bond inflows have lagged equity inflows during the first few days of 2013.
Figure 139
Global bond and equity funds - Daily flows (First two weeks of January 2013)

Source: EPFR global, CLSA Asia-Pacific Markets
(900)
(400)
100
600
1,100
1,600
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1
1
0
7

D
e
c

1
1
2
8

D
e
c

1
1
1
8

J
a
n

1
2
0
8

F
e
b

1
2
2
9

F
e
b

1
2
2
1

M
a
r

1
2
1
1

A
p
r

1
2
0
2

M
a
y

1
2
2
3

M
a
y

1
2
1
3

J
u
n

1
2
0
4

J
u
l

1
2
2
5

J
u
l

1
2
1
5

A
u
g

1
2
0
5

S
e
p

1
2
2
6

S
e
p

1
2
1
7

O
c
t

1
2
0
7

N
o
v

1
2
2
8

N
o
v

1
2
1
9

D
e
c

1
2
0
9

J
a
n

1
3
(US$m)
Flows in January 2013 have been strong
0
2
4
6
8
10
12
14
1
/
3
/
1
3
1
/
4
/
1
3
1
/
7
/
1
3
1
/
8
/
1
3
1
/
9
/
1
3
1
/
1
0
/
1
3
1
/
1
1
/
1
3
1
/
1
4
/
1
3
All Bond-Bond-Flow (cumulative)
All Equity-Equity-Flow (cumulative)
(US$bn)
Dividends are a multiyear
theme and 2013
witnessed another strong
start for dividend funds
But now bond inflows
have slowed and could be
diverted to dividend funds
Pace of inflow into
dividend-focused funds
slowed in2H12
Earlier inflows were
funded by equity-focused
funds



Global pension funds: Allocation and returns
We analysed the pension-asset allocation and return data from OECD pension
stats to further understand the fund-flow drivers of the dividend-focused
equities. Our analysis highlights that most of the global private pension assets
are concentrated in the top-eight mature markets, with the USA being the
single most important market driving the global fund flows. In Figure 140 we
plot the breakdown of global private-pension assets (US$29.7tn in 2011) and
the average return over the past 10 years. It suggests that the real returns
have been quite poor in the USA and UK and hence assume significant
shortfalls in the plan assets compared with liabilities.
Figure 140
Global private pension funds - Asset allocation and returns

Source: OECD pension statistics, CLSA Asia-Pacific Markets
To make up the shortfalls, pension assets will have to generate much higher
returns in future and that could imply an increased allocation to equities as
bonds offer safety but much lower yields/returns. In Figure 141 we show the
allocation trend for the USA. It suggests that compared with 2007, the equity
allocations are low and need to be increased to generate better returns.
Figure 141
US overall pension allocation trend

Source: OECD pension statistics, CLSA Asia-Pacific Markets
(2)
(1)
0
1
2
3
4
5
6
0
1
2
3
4
5
6
7
8
9
10
USA Canada UK Japan Aust Nether
lands
Switzer
land
Denmark Others
By country (%)
Global private pension assets (US$29.7tn, 2011)
Real net investment return (avg 2002-11, RHS)
59.3
46 45
37
16
22
23
18
16
20
20
17
20
0
10
20
30
40
50
60
70
80
90
100
2001 2007 2011
US pension
allocations (%)
Equity MFs Bonds Others
Average real returns have
been negative for USA
and UK based on
OECD data
US equity allocations are
much lower than in 2007
Bonds now offer much
lower return and could
witness outflows
USA is the most important
source of funds with 59%
of the global private
pension assets



US state pension funds: Allocation and return assumptions
To further understand the funds flows out of the USA, we analysed the data
from Public Fund Survey (www.publicfundsurvey.org), November 2012. It
captures data for more than 85% of all US state and local government-
pension assets (worth US$2.6tn). The asset allocation trend suggests a move
to alternative assets in search for higher returns, with allocation to plain-
vanilla equity and bonds at a trough.
Figure 142
Asset-allocation trend for US state pension funds

Source: Public Fund Survey (NASRA), November 2012
This trend could be driven by the funding shortfall of US$842bn compared to
the liabilities, as actual returns have been much lower than the assumption of
8% per-annum return. In Figure 143, we reproduce a chart from the survey
findings that suggests pension plans are starting to lower their assumptions,
with some plans assuming just 6.75% returns. While this trend may continue,
those with higher return mandates may continue searching for higher yielding
equities as a robust source of superior total returns.
Figure 143
Return assumption trend for US state pension funds

Source: Public Fund Survey (NASRA), November 2012
56.0 54.7
56.7
60.7 60.0 60.0 59.3
53.3 52.0 51.1 51.3
34.0
34.6 31.4
28.6 29.3 28.0
26.6
28.7
28.7
27.9
25.3
0
10
20
30
40
50
60
70
80
90
100
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Equities Fixed inc Real estate Alternatives Cash/other
(%)
Unfunded liability of
US$842bn due to much
lower actual returns
Return assumptions being
adjusted down . . .

. . . but search for higher
yielding assets will focus
on high-dividend stocks
Separate data set on state
pension plans in the USA
Also suggests that
equities out of favour
with preference for
alternatives



10. How to identify sustainable dividends?
Dividend visibility is a key factor in dividend strategies. Investors holding a
particular stock generally have an expectation of the DPS amount, which is
most easily captured from the consensus estimate. While the risk of a
negative surprise on the announcement date is well understood, dividend
investors are also hurt when consensus downgrades the DPS estimates.
Indeed, given the tight correlation between DPS and EPS, stocks with
negative EPS revisions also hurt the dividend investors as they need to lower
dividend expectations. To shield investors from such stocks we have created a
seven-star rating, which assess the dividend forecast sustainability.
This star-rating is based on our backtests of the MSCI World universe where
we analysed a host of factors to ascertain the characteristics of stocks with
negative DPS revisions over the past 10 years. The seven key factors that
define stocks likely to witness negative DPS revisions include:
EPS revision over the past three months
FCF conversion ratio (not applicable for financials)
Earnings growth
ROE
Earnings certainty
Beta
Dividend cut track record (from a long-term perspective)
Backtests show that our star-rating helped in identifying stocks likely to
witness negative DPS revisions over the next three months. This is
particularly useful in todays environment as we have witnessed negative DPS
revisions for 2011-13F. In Figure 144 and 145 we show the index DPS
estimate trend for the MSCI World and Asia Pacific ex-Japan, and the
downgrade in estimates from the peak in 2011. The downgrades for Asia has
been particularly large with 2012 DPS estimate now down by 18%. Hence, an
investor who bought into Asian stocks in April 2011 expecting a 3% yield for
2012 would now have to settle for just 2.5%, without any adjustment for the
index price movements.
MSCI World - Index DPS estimate trend MSCI Asia Pacific ex-Japan - Index DPS estimate trend

Source: Datastream, CLSA Asia-Pacific Markets
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
2011F
2012F
2013F
Index DPS estimates
July 2011 to current
2011: -5.6%
2012: -10.6%
2013: -11.8%
13
14
15
16
17
18
19
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
2011F
2012F
2013F
Index DPS estimates
Peak-to-trough change
2011: -10.6%
2012: -17.9%
2013: -20.5%
Negative DPS revisions
are a key concern for
yield investors relying on
forward yield estimates
We present a DPS revision
star-rating system based
on seven factors
DPS revisions have
significantly negative
since mid-2011,
especially for Asia and EM
Later we show that lowly
rated stocks had a 70%
chance of negative
DPS revision



Negative DPS revision trend across markets and sectors
The negative DPS revisions are a bigger concern for emerging markets. In
Figure 146 we show the median of the monthly series since 2012 for the
proportion of high-yield stocks that witnessed negative DPS revision over the
past three months. We compare it with the median of the monthly series
since 2003. It shows that Asia and Latin America (Latam) have witnessed the
highest number of negative DPS revisions while the USA/Canada the least.
Historically, the proportion has been highest for Middle-East and Africa
(ME&A) with Latam and Asia are close behind. Also, Europes dividends have
been more prone to downgrades than other developed markets.
Figure 146
MSCI regions: High-yield (>2.5%) stocks with negative three-month DPS revisions

A similar analysis for the global sectors suggests that recently materials,
diversified financials and tech hardware stocks have witnessed the highest
proportion of downgrades in DPS estimates over the past year. On the other
hand, pharma and software sectors, which normally witness higher
downgrades, have been holding up well. This highlights that there are
significant changes in dividend sustainability of sectors over time and hence
investors need to be more dynamic in their dividend strategy.
Figure 147
MSCI World sectors: High-yield (>2.5%) stocks with negative 3M DPS rev

30
35
40
45
50
55
60
65
APxJ LatAm Europe ME&A World Japan N. America
Median since 2012 Median since 2003
% of stocks with negative 3M DPS rev
20
25
30
35
40
45
50
55
60
65
70
M
a
t
e
r
i
a
l
s
D
i
v

f
i
n
T
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c
h

H
w
H
P
C
F
d

s
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B
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d
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h
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r
m
a
% of stocks with negative DPS rev
Materials, div fin and tech
hardware witnessed
significant negative DPS
revisions in 2012
USA is most immune to
negative DPS revisions

DPS revision profile
changes over time . . .

. . . investors cannot
assume certain sectors to
be always safe
Asia and Latam have
witnessed higher negative
DPS revisions



Negative DPS revision linkages with EPS and payout revisions
Before analysing the factors that affect DPS revisions, we also wanted to
understand the relationship of DPS revisions with EPS and payout revisions.
This is important since DPS revisions are dominated by the changes in EPS
but the nature of relationship is different across regions. In Figure 148 we
show the proportion of stocks that witnessed negative EPS revisions out of all
those that registered a negative DPS revision since 2012 and 2003. It shows
that the in Asia, including Japan, DPS is highly linked to EPS with 75-80% of
stocks with negative DPS revisions also registering a negative EPS revision.
The relationship is the weakest in the USA/Canada, where companies focus
on DPS irrespective of the EPS. Hence, in the Asian, and to a large extent
European context, it is important to get the EPS trend right.
Figure 148
MSCI regions: High-yield (>2.5%) stocks with EPS rev
1
<0 when DPS rev
1
<0

1
Three-month revision in FY1 and FY2 estimates. Source: Factset, CLSA Asia-Pacific Markets
In Figure 149 we show a similar analysis for stocks with negative payout
revisions. It shows that negative DPS revisions are less likely to be a result of
negative payout revisions and more likely to coincide with a negative EPS
revisions. The linkage between EPS and DPS is strongest for Japan as payout
revisions hardly change when the DPS revision is negative.
Figure 149
MSCI regions: High-yield (>2.5%) stocks with payout rev
1
<0 when DPS rev
1
<0

1
Three-month revision in FY1 and FY2 estimates. Source: Factset, CLSA Asia-Pacific Markets
50
55
60
65
70
75
80
85
90
Japan APxJ Europe World LatAm N. America
% of stocks with negative EPS rev when DPS rev is negative
0
10
20
30
40
50
60
70
80
LatAm APxJ World N. America Europe Japan
% of stocks with negative payout rev when DPS rev is negative
Payout revisions are not
that strongly linked to
DPS revisions
USA has the
lowest linkage
Asia including Japan has
the closest link between
DPS and EPS estimates
Japan has the least
correlation of the two




Factor testing
Our previous studies on stocks that witnessed dividend cuts versus those that
did not provides us with clues regarding the factors that are relevant to
dividends. Using the broad list of such factors, we tested the characteristics of
stocks with negative DPS revisions through an incremental approach. In this
approach we group stocks with dividend yields greater than 2.5% into
different categories of DPS revision values and then compare the median
factor characteristics of each group. In Figure 150, we highlight the DPS
revision categories and factors that we tested. We wanted to select a
maximum of six factors from this list. Our previous studies have already
highlighted the DPS cut track record as an important factor that needs to be
considered from YoY change perspective. Thus, we could have a seven-factor
model to rate DPS estimate sustainability.
Figure 150
MSCI World: Groups and factor list of high-yield stocks
1

Stock groups Factor list (those included in the model are in bold)
1. All stocks 1. Dividend yield (forward) 8. DPS growth (next 2 years)
2. DPS revision < 0% 2. EPS revision (3M lag) 9. Cash to total assets (FY0)
3. DPS revision < -1% 3. Net gearing
2
(FY0) 10. Capex/sales (FY0)
4. DPS revision < -2% 4. Payout (FY1) 11. ROE (next 2 years)
5. DPS revision < -5% 5. PE (forward) 12. Earnings certainty
6. DPS revision < -10% 6. FCF conversion (FY0) 13. Beta (3-year weekly)
7. EPS growth (next 2 years) 14. Sustainable growth
1
Dividend yield more than 2.5%.
2
Asset-to-equity for financial stocks. Source: CLSA Asia-Pacific Markets
Factor 1: EPS revision (3M lag)
As we highlighted earlier, EPS revisions are a key determinant of DPS
revisions, especially in the emerging markets and Japan. Indeed, only for the
USA, do we find that DPS forecasts tend to be relatively delinked from EPS
forecasts. In our backtest, we picked stocks with negative DPS revisions and
checked their EPS revisions values as they existed three months ago. This
was done because EPS revisions can be relatively volatile compared with
other annual financial measures and so we decided not to use the data for the
same period as the DPS revision. In Figure 151, we show that stocks that had
higher negative revisions also exhibited higher negative EPS revisions three
months ago, suggesting significant linkages between them.
Figure 151
MSCI high-yield (>2.5%) stock characteristics: EPS revision (3M lag)

Note: DPS revision for FY1 and FY2 estimates. Source: Factset, CLSA Asia-Pacific Markets
0.0
(0.7)
(1.1)
(1.4)
(2.2)
(3.1)
(0.0)
(0.9)
(1.2)
(1.5)
(2.3)
(3.5)
(4.0)
(3.5)
(3.0)
(2.5)
(2.0)
(1.5)
(1.0)
(0.5)
0.0
All stocks < 0% < -1% < -2% < -5% < -10%
Last three-month DPS revision
World APxJ
EPS revision - 3M lag (median since 2003, %)
Stocks with the highest negative DPS revision
also had more negative EPS revision in the
quarter before the current quarter
Current EPS revisions are
highly correlation with
future DPS revisions
Previous studies highlight
DPS track record to be a
strong factor from a
longer-term view
Stocks with highest future
negative DPS revisions
also had higher negative
EPS revisions

We test 14 other factors
to highlight the six other
factors that matter most



Factor 2: FCF conversion (FY0)
Stocks with lower FCF conversion are most likely to find it hard to support
dividends, especially if earnings are being revised down. In Figure 152 we
show that stocks with negative DPS revisions of more than 10% over the past
three months had a median FCF conversion ratio of just 45-46%, while the
median for all stocks with negative DPS revisions was over 50%. This
suggests that FCF conversion does have an impact on negative DPS revisions,
especially together with negative EPS revisions.
Figure 152
MSCI high-yield (>2.5%) stock characteristics: FCF conversion (FY0, ex-finance)

Factor 3: EPS growth (next two-year Cagr)
Companies with higher EPS growth usually have more room to withstand the
negative EPS revisions and hence would be reluctant to cut DPS. We also
believe that high EPS-growth companies may also include a number of stocks
with lower payouts and such stocks can resist dividend cuts a bit more than
those with already higher payouts. In Figure 153 we show that stocks with
dividend yield more than 2.5% had a median EPS growth of 9-10%, while
those with a negative DPS revisions of more than 10% were set to grow at
closer to 7%.
Figure 153
MSCI high-yield (>2.5%) stock characteristics: EPS growth (next two-year Cagr)

50.5
51.5
50.3
49.8
47.9
45.2
53.3
54.1
51.7
50.5
49.2
46.3
40
42
44
46
48
50
52
54
56
All stocks < 0% < -1% < -2% < -5% < -10%
World APxJ FCF conversion (median since 2003, %)
Stocks with the highest negative DPS
revision also had lower FCF conversion
9.0
7.6
7.7
7.9 7.8
7.2
10.0
8.5
8.7
8.5
7.9
7.0
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
All stocks < 0% < -1% < -2% < -5% < -10%
World APxJ Next 2-year EPS cagr (median since 2003, %)
Stocks with the highest negative DPS revision also
had lower earnings growth estimates
DPS estimates more
prone to cut for stocks
with lower FCF conversion
FCF conversion for stocks
with more than 10% cut
in DPS estimate was
almost 5ppts lower

Higher EPS-growth
companies have lower
payouts and more room
to support dividends
EPS growth for stocks
with more than 10% cut
in DPS estimate was
almost 2-3ppts lower




Factor 4: ROE (next two-year average)
Higher-quality companies are most likely to also be in less cyclical industries
and witness relatively better financial conditions, such as access to credit and
stronger cashflows. In Figure 154 we show that stocks with higher negative
DPS revisions had significantly lower ROEs than the other high-yielding
stocks. It highlights that companies with yield more than 2.5% and negative
DPS revisions had a median ROE of 14% while those with more than 10%
negative DPS revisions had a ROE of less than 13%.
Figure 154
MSCI high-yield (>2.5%) stock characteristics: ROE (next two-year average)

Factor 5: Earning certainty
Earnings certainty is a key factor that determines the overall revision trend
for stocks. We define earnings certainty as the dispersion in analysts EPS
forecasts. Our previous backtests in Searching for surprises published in
March 2011, highlighted that high earnings-certainty stocks have a low
chance of negative EPS surprise. Similarly, in our studies on DPS revisions
that we highlight in Figure 155, we find that stocks with higher negative
revisions also had a much lower earnings certainty.
Figure 155
MSCI high-yield (>2.5%) stock characteristics: Earnings certainty

14.5
14.1
14.1
14.0
13.4
12.6
15.3
14.4 14.4
14.0
13.6
12.4
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
All stocks < 0% < -1% < -2% < -5% < -10%
World APxJ Next 2-year avg ROE (median since 2003, %)
revision also had lower ROEs
12.5
11.4
10.3
9.3
7.6
6.3
11.4
10.8
9.9
9.3
8.0
6.9
5
6
7
8
9
10
11
12
13
All stocks < 0% < -1% < -2% < -5% < -10%
World APxJ Earnings certainty (median since 2003, x)
Stocks with the highest negative DPS revision
also have much lower earnings certainty
ROE for stocks with more
than 10% cut in DPS
estimate was almost
2-3ppt lower

Stocks with lower
earnings certainty have
low visibility on
possible dividends
Earnings certainty for
stocks with more than
10% cut in DPS estimate
was almost 50% lower

Higher quality companies
have less cyclical
business and higher
DPS sustainability



Factor 6: Beta
The last factor that produced strong characteristics trends with DPS revisions
was beta. Intuitively, stocks most geared to the economic cycle have higher
beta. These stocks have historically also had the most volatility and least
visibility in terms of earnings forecasts. The same rationale applies to DPS
estimates. In Figure 156 we show that stocks with the highest negative DPS
revisions also had the highest median beta since 2003. It highlights the
strong negative correlation between negative DPS revision and beta.
Figure 156
MSCI high-yield (>2.5%) stock characteristics: Beta (three-year weekly)

Factors that were left out
As we highlighted earlier, we tested a host of other factors that have
traditionally been important from a YoY dividend-cut perspective such
gearing, payouts, capital intensity and cash to total assets. However, the
results of most of these factors were not strong enough to characterise
negative DPS revisions, even though they have a significant impact on a
companys dividend policy over the longer term. We also find that stocks with
higher negative DPS revisions tend to be cheaper but that is already captured
by the correlation of PE and EPS growth.
Figure 157
MSCI high-yield (>2.5%) stock characteristics: Factors that were left out
Median since
2003
Div yield
(%)
Asset
1
to
equity (%)
Gearing
(%)
Payout
(%)
PE (x) DPS grw
(%)
Cash to
TA (%)
Capex /
sales (%)
ROIC
(%)
Sust
grw (%)
World
All stocks 4.0 12.6 40.1 50.5 12.4 7.0 7.3 6.7 11.4 7.7
DPS rev (< 0) 4.1 12.7 40.5 51.5 12.2 5.8 7.6 6.5 11.5 6.6
DPS rev (<-1) 4.1 12.9 37.6 50.3 11.9 6.3 8.2 6.5 11.8 6.7
DPS rev (<-2) 4.1 12.7 36.4 49.8 11.6 6.3 8.6 6.8 12.1 6.8
DPS rev (<-5) 4.0 13.4 34.1 47.9 11.1 5.8 9.4 7.1 12.0 6.6
DPS rev (<-10) 4.0 13.7 33.6 45.2 10.7 3.7 9.6 7.6 11.5 6.3
Asia Pac ex-JP
All stocks 4.2 11.5 25.3 53.3 12.3 7.2 10.7 7.7 13.9 8.0
DPS rev (< 0) 4.3 11.4 26.2 54.1 12.0 5.9 10.3 7.1 13.6 6.3
DPS rev (<-1) 4.2 11.4 25.1 51.7 11.8 6.2 10.7 7.2 13.7 6.6
DPS rev (<-2) 4.2 11.3 23.3 50.5 11.5 6.0 11.3 7.1 13.8 6.6
DPS rev (<-5) 4.1 11.5 24.4 49.2 11.2 6.0 11.3 6.6 14.0 6.7
DPS rev (<-10) 4.0 11.0 25.0 46.3 10.8 5.0 11.5 6.8 13.7 6.4
1
Only for financials. Source: Factset, CLSA Asia-Pacific Markets
0.90 0.90
0.93
0.95
1.00
1.06
0.99
0.97
1.00
1.02
1.06
1.10
0.85
0.90
0.95
1.00
1.05
1.10
1.15
All stocks < 0% < -1% < -2% < -5% < -10%
World APxJ Beta (median since 2003, x)
revision also have much higher beta
Higher beta stocks have
higher volatility in EPS
and DPS results and
forecasts
Beta for stocks with more
than 10% cut in DPS
estimate was almost
10-20% higher

Some factors were not
included because of poor
correlation with DPS
revision . . .

. . . even though they are
relevant from a dividend
growth perspective



Backtesting result
As highlighted earlier at the start of this section we had seven factors in our
DPS revision star-rating model based on data since 2003. Star-rating is
determined by the stocks current factor value and the high-yield universes
median value for these factors. To assess the ability of this model in
predicting future DPS revisions for the high-yield stocks even in the current
situation, we conducted a simple backtest for the past two years. We grouped
the stocks by their star-rating and then calculated the proportion of stocks
with negative DPS revisions over the next three months. In Figure 158 we
show the backtest results, which highlights that for 0-1 stars, an astonishing
70% of the stocks had negative DPS revisions over the next three months.
On other hand, for stocks with 5-7 stars, only 42% stocks witnessed negative
DPS revisions as compared to the global average of 55% for all stocks.
Figure 158
MSCI World high-yield (>2.5%) stocks: Hit rate of DPS revision star-rating system

The results were even more convincing when trying to weed out stocks with
possibly large negative revisions. In Figure 159 we show that stocks with 5-7
stars only had a 6-7% chance of a negative DPS revision of more than 5%.
Figure 159
MSCI World high-yield (>2.5%) stocks: Hit rate of DPS revision star-rating system

40
45
50
55
60
65
70
75
All stocks 0-1 2 3 4 5-7
% of stocks with negative DPS rev over the next three months (avg since 2011)
70.9
64.7
58.7
46.0
30.5
54.0
42.1
33.5
21.3
12.3
42.8
27.2
17.6
7.4
6.5
0
10
20
30
40
50
60
70
80
< -0 < -1 < -2 < -5 < -10
% of stocks with DPS revisions
0-1 stars All stocks 5-7 stars (%)
Stocks with more than 5 stars had a very small
chance of significantly negative DPS revisions
Testing the effectiveness
of star-rating in
predicting future DPS
revisions
Stocks with 0-1 star have
a more than 70% chance
of negative DPS revisions
over next three months

Results are stronger when
predicting significant
negative revisions
Stocks with 5-7 stars only
had a 6-7% chance of
negative DPS revision of
more than 5%




Sector view of DPS revision
In Figure 160 we highlight the star-rating of the different global and Asian
sectors based on recent factor values. The analysis suggests that global
energy and materials are most at risk with 0-1 star rating, while within Asia,
negative DPS revisions are most likely for materials and transport sectors.
Figure 160
DPS revision star-rating of the global and Asian sectors

1
Proportion of times YoY DPS cut by more than 5%.
2
MSCI.
3
Broader universe with market cap > US$1bn.
Div
yield
(%) Payout
3M DPS
rev
3M EPS
rev (%)
FY0 FCF
Conv
(%)
EPSg
(N2Y, %)
EPS cert
(x)
ROE
(N2Y, %)
Beta (3-
yr wk)
DPS cut
track
record
1
World
2
2.3 51.4 (0.1) (0.3) 64.1 8.5 14.4 14.2 0.9 13.3
Auto 1.8 33.8 (0.3) (1.0) 42.7 12.0 12.7 18.7 1.16 20.0
Banks 2.7 38.5 (0.4) (0.0) na 7.0 16.7 13.5 1.13 18.8
Cap gds 2.2 45.0 (0.6) (0.5) 53.6 9.5 15.1 16.3 1.13 13.3
Comm svc 2.3 64.3 (0.3) (0.3) 109.5 8.8 21.5 21.1 0.87 6.3
Cons dur 2.0 49.9 (0.2) (1.2) 37.2 13.8 14.9 15.4 0.90 11.8
Cons svc 2.6 56.2 2.2 (0.1) 80.6 9.3 19.2 21.7 0.91 18.2
Div fin 2.3 51.6 0.4 0.2 na 13.6 14.7 14.3 1.14 16.0
Energy 2.4 44.3 (0.0) (0.9) 35.8 7.2 9.3 13.8 1.05 15.5
Fd stp ret 2.6 57.2 (0.9) (0.6) 85.1 9.6 20.0 16.1 0.66 5.9
FBT 2.1 54.3 (0.3) (0.2) 87.8 8.3 33.0 24.2 0.49 11.8
Healthcare 1.4 72.1 (0.0) (1.1) 93.0 16.6 20.1 33.7 0.70 3.3
HPC 2.2 59.3 0.2 0.2 92.4 10.4 26.9 40.9 0.62 0.0
Insurance 3.1 45.0 0.0 (0.0) na 8.7 14.0 12.3 0.92 11.1
Materials 2.1 46.8 (0.9) (1.5) 53.9 13.7 9.0 14.0 1.17 18.2
Media 2.0 52.4 0.3 0.1 110.0 6.9 21.1 18.7 0.71 5.9
Pharma 1.8 50.9 0.0 (0.3) 105.4 4.1 20.9 16.4 0.56 0.0
Property 3.3 86.5 0.0 0.0 (0.0) 7.2 13.6 7.5 0.94 12.5
Retail 1.6 50.4 (0.0) (0.3) 72.8 12.0 23.2 20.8 0.92 6.3
Semis 2.5 57.7 (0.5) (0.2) 95.7 12.8 13.1 17.7 1.18 12.5
Software 1.0 41.6 (1.0) (0.2) 112.6 7.7 20.5 19.3 0.87 8.8
Tech Hw 2.1 52.6 0.6 (0.2) 48.3 9.4 15.5 13.6 1.22 18.2
Telecom 5.2 85.3 (0.6) (0.5) 102.9 5.9 12.9 17.2 0.61 22.6
Transport 1.9 52.1 (0.6) (0.6) 51.5 9.2 12.2 10.4 0.77 13.3
Utilities 3.9 62.1 0.0 (0.2) 38.1 4.5 16.6 10.8 0.60 13.3
Star rating
Factor data Other data (%)
Stocks with dividend yield > 2.5%
2
2
4
7
5
6
4
0
6
6
6
All
stocks Sector
(Median
values)
7
4
1
6
5
2
7
5
6
3
3
3
4
12MF
div
yield Payout
3M DPS
rev
3M EPS
rev
FY0 FCF
Conv
EPSg
(N2Y) EPS cert
ROE
(N2Y)
Beta (3-
yr wk)
DPS cut
track
record
APxJ
3
2.5 52.6 (0.1) (0.2) 49.1 10.4 13.2 14.8 0.9 22.2
Auto 1.7 44.5 (0.8) (1.8) 46.0 15.6 13.3 19.3 0.94 17.1
Banks 3.1 37.7 (0.1) 0.2 na 7.1 16.1 14.2 1.14 23.5
Cap gds 2.0 44.2 (1.8) (0.8) 13.9 8.0 11.9 14.3 1.30 21.4
Comm svc 3.6 62.8 (1.7) (0.6) 1.3 11.4 18.3 22.8 1.07 13.9
Cons dur 3.3 51.2 (2.6) (0.9) 31.3 13.8 16.9 17.6 0.79 15.4
Cons svc 2.3 76.0 1.7 (0.1) 110.2 10.2 16.8 32.0 0.80 25.0
Div fin 2.5 57.1 2.3 0.9 na 11.7 13.7 17.5 1.08 23.5
Energy 2.7 43.2 (1.1) (1.1) 56.5 10.2 9.1 16.7 1.04 21.4
Fd stp ret 2.3 79.8 (1.6) (0.4) 65.0 10.6 22.0 22.3 0.79 22.6
FBT 2.3 54.7 (1.1) (2.2) 66.8 11.5 10.7 16.4 0.74 31.3
Healthcare 2.0 60.6 0.2 0.2 73.3 8.9 17.2 17.4 0.77 16.8
HPC 2.4 73.2 (1.3) (0.5) 63.7 14.3 25.6 68.5 0.57 7.7
Insurance 1.9 32.1 (3.8) (2.7) na 16.5 9.6 15.1 0.69 24.0
Materials 2.3 45.7 (2.0) (1.3) 42.9 13.1 10.6 14.4 1.19 23.1
Media 2.8 65.8 0.2 1.0 96.7 7.6 13.9 23.4 0.59 12.5
Pharma 1.0 50.0 (5.4) (1.0) 29.2 13.0 15.8 26.0 0.72 13.3
Property 3.3 62.6 0.1 0.0 2.9 7.8 12.5 7.6 0.85 22.2
Retail 2.9 49.5 0.3 0.1 71.3 12.7 17.0 15.7 1.00 20.0
Semis 2.8 57.0 (1.3) (0.3) 94.1 18.7 9.6 17.3 1.21 29.3
Software 1.1 48.9 0.3 0.2 106.2 9.6 21.3 28.2 0.75 16.7
Tech Hw 3.9 56.3 0.0 (0.5) 36.5 11.5 15.9 17.4 1.13 22.2
Telecom 4.9 91.2 (0.1) (0.0) 106.7 9.7 14.4 22.9 0.59 22.2
Transport 2.3 73.5 (0.9) (0.5) 47.7 6.9 11.6 9.1 0.71 25.8
Utilities 3.0 52.3 1.0 0.1 47.8 8.4 12.4 12.4 0.57 17.4
Star rating
Sector
(Median
values)
All
stocks
Stocks with dividend yield > 2.5%
Other data Factor data
3
1
6
4
6
3
6
3
5
6
1
3
6
6
4
5
3
2
5
4
5
5
4
1
Star-rating of sectors



Stocks with least chance of a negative DPS revision
We applied the star-rating system to identify the stocks with the least chance
of a negative DPS revision. In Figure 161, we focus on high yield (over 2.5%
for Japan and 3% for other regions) large-cap companies with at least a five
out of seven-star rating and thus unlikely to see significant negative DPS
revisions.
Figure 161
Stocks with least chance of a negative DPS revision (sorted by market cap)
Code Name Cty Sector Mkt cap 12MF 3M EPS FCF Conv 13-14F Earns 13-14F Beta DPS cut Rating
(US$m) Div yld Rev (FY0, EPS Cagr Cert ROE (x) track
(%) (%) %) (%) (x) (avg,%) record (%)
941 HK China Mobile CN Telecom 222,259 4.0 (0.3) 79.3 1.2 33.0 16.2 0.5 0.0 6/7
CBA AU CBA AU Banks 110,712 5.4 0.8 na 2.7 33.2 17.7 0.9 5.9 5/6
TLS AU Telstra AU Telecom 59,365 6.2 0.8 150.9 6.0 29.4 32.3 0.4 22.2 5/7
ST SP SingTel SG Telecom 44,832 4.8 (0.4) 84.0 7.8 31.7 15.5 0.6 14.3 5/7
2388 HK BOC (HK) HK Banks 36,745 4.8 0.1 na 7.0 19.8 14.8 0.9 11.1 5/6
PTT TB PTT TH Energy 34,144 3.9 (0.0) 68.8 7.7 19.3 16.7 1.3 20.0 5/7
TLKM IJ Telkom ID Telecom 19,709 4.9 0.8 152.8 9.7 22.8 24.7 0.5 29.4 5/7
TEL PM PLDT PH Telecom 15,112 6.4 (0.0) 125.4 6.2 32.3 29.3 0.8 7.1 6/7
880 HK SJM HK Cons svcs 14,798 4.9 1.4 150.1 12.0 24.6 35.8 1.3 0.0 6/7
AMC AU Amcor AU Materials 11,056 4.7 0.0 63.3 9.6 19.7 20.5 0.5 11.8 6/7
Japan
9437 JP NTT Docomo JP Telecom 63,115 4.4 (1.7) 84.3 3.4 25.2 9.3 0.4 7.1 5/7
2914 JP Japan Tobacco JP FBT 59,407 2.8 2.0 132.5 13.1 25.0 20.8 0.6 0.0 7/7
9433 JP KDDI JP Telecom 28,478 2.9 (0.2) 129.9 20.9 9.3 13.9 0.5 0.0 5/7
4503 JP Astellas Pharma JP Pharma 23,318 2.8 1.0 112.4 15.6 20.8 11.4 0.5 5.9 7/7
4578 JP Otsuka JP Pharma 17,775 2.7 2.1 110.1 16.0 23.7 10.8 0.3 0.0 7/7
USA
MSFT US Microsoft US Software 229,866 3.4 (0.9) 136.5 7.5 39.1 29.8 0.9 0.0 5/7
PG US P&G US HPC 205,311 3.1 1.2 86.1 6.7 76.1 17.7 0.4 0.0 6/7
JNJ US JNJ US Pharma 204,208 3.3 (0.9) 89.1 6.3 124.5 21.6 0.5 0.0 5/7
T US AT&T Inc US Telecom 198,549 5.1 (0.5) 246.2 8.3 64.3 15.6 0.6 5.9 5/7
PEP US PepsiCo US FBT 112,480 3.1 (0.2) 79.8 7.9 92.5 30.9 0.4 0.0 6/7
MCD US McDonald's US Cons svcs 95,671 3.4 (0.1) 80.9 8.8 61.1 41.7 0.5 0.0 6/7
COST US Costco US Food&drug 44,500 4.6 0.0 92.3 12.4 66.1 17.2 0.6 0.0 7/7
KMB US Kimberly-Clark US HPC 34,846 3.6 0.1 113.6 6.8 73.6 40.9 0.3 5.9 5/7
GIS US General Mills US FBT 27,089 3.1 0.1 100.5 8.5 98.4 24.5 0.3 0.0 7/7
PSA US Public Storage US Property 26,266 3.1 (0.1) 202.4 14.3 30.3 16.7 0.9 0.0 5/7
ROG VX Roche CH Pharma 190,796 3.9 (0.4) 107.3 8.2 33.2 58.4 0.9 0.0 7/7
BATS LN British American GB FBT 102,487 4.5 (0.0) 122.3 9.5 111.5 52.3 0.6 11.8 7/7
BAS GR BASF DE Materials 93,082 3.9 0.2 62.6 9.9 14.5 19.4 1.1 11.8 5/7
SIE GR Siemens DE Cap gds 92,477 4.2 0.1 82.1 15.1 13.0 17.0 1.0 11.1 5/7
HMB SS Hennes & Mauritz SE Retail 60,917 4.3 (1.0) 71.6 10.6 28.2 42.0 0.8 5.9 6/7
IMT LN Imperial Tobacco GB FBT 39,705 5.2 (0.3) 93.1 7.2 106.8 33.5 0.4 0.0 6/7
MTN SJ MTN Group ZA Telecom 36,510 5.8 (0.2) 63.4 10.2 11.7 25.5 0.9 9.1 6/7
MUV2 GR Muenchener R DE Insurance 32,949 5.2 0.6 na 8.9 14.3 10.3 0.9 0.0 5/6
CNA LN Centrica GB Utilities 28,839 5.0 (0.2) 101.7 5.6 56.3 22.4 0.5 15.4 5/7
DPW GR Deutsche Post DE Transport 28,383 4.7 0.2 49.4 8.9 14.1 15.8 0.9 7.1 6/7
Latin America
AMBV4 BZ Ambev BR FBT 147,416 3.5 0.3 109.3 11.0 35.7 41.0 0.2 20.0 6/7
GMODELOC MM Modelo MX FBT 27,549 3.0 0.8 137.9 9.4 11.4 17.6 0.5 21.4 6/7
CRUZ3 BZ Souza Cruz BR FBT 25,318 4.0 1.3 95.3 13.6 20.5 108.9 0.2 13.3 7/7
CIEL3 BZ Cielo BR Software 18,527 5.0 (0.1) 49.9 9.2 12.8 95.6 0.4 0.0 5/7
NATU3 BZ Natura Cosmetic BR HPC 11,589 3.9 (0.2) 105.0 16.0 22.6 76.8 0.5 11.1 7/7
Stocks with at least five
stars have a lower chance
of a negative DPS revision



Stocks with highest chance of a negative DPS revision
In Figure 162 we use the same DPS revision star rating system to identify
stocks with the highest chance of a negative DPS revision. These stocks are
most at risk with only 0-2 star rating. We focus on large-cap companies with
high dividend yields that are unsustainable and quite likely to disappoint.
Figure 162
Stocks with highest chance of a negative DPS revision (sorted by market cap)
Code Name Cty Sector Mkt cap 12MF 3M EPS FCF Conv 13-14F Earns 13-14F Beta DPS cut Rating
(US$m) Div yld Rev (FY0, EPS Cagr Cert ROE (x) track
(%) (%) %) (%) (x) (avg,%) record (%)
3328 HK Bocom CN Banks 60,143 3.6 0.0 na 1.4 11.5 14.1 1.3 33.3 1/6
WPL AU Woodside AU Energy 31,044 3.6 (1.5) (78.6) 5.6 8.6 13.7 1.1 33.3 0/7
2891 TT Chinatrust FHC TW Banks 7,558 3.3 (0.9) na 7.0 11.5 11.3 1.2 25.0 0/6
024110 KS IBK KR Banks 6,153 3.9 (6.3) na (13.4) 6.8 7.7 1.1 30.0 0/6
267 HK Citic Pacific CN Cap gds 5,713 3.3 (1.1) (164.4) (0.9) 4.3 6.1 1.3 40.0 0/7
2303 TT UMC TW Semis 4,837 3.6 (2.8) (94.8) 12.8 5.2 5.7 1.2 50.0 1/7
410 HK Soho China CN Property 4,103 5.2 (2.8) (121.0) (19.2) 5.9 11.1 1.0 33.3 1/7
2778 HK Champion Reit HK Property 2,642 4.8 0.3 18.5 (4.1) 11.9 2.7 0.7 75.0 2/7
GNC AU GrainCorp AU FBT 2,633 3.5 1.1 12.8 (17.6) 10.0 9.5 0.5 50.0 2/7
HVN AU Harvey Norman AU Retail 2,507 3.9 0.4 2.1 (1.1) 11.8 7.8 1.0 25.0 2/7
Japan
8411 JP Mizuho Financial JP Banks 48,285 3.1 3.4 na (5.5) 8.2 7.6 1.2 25.0 1/6
8795 JP T&D Holdings JP Insurance 8,342 2.0 2.4 na 8.4 12.8 6.0 1.6 14.3 2/6
5201 JP Asahi Glass JP Cap gds 7,673 3.9 (2.5) 24.5 9.8 4.3 6.2 1.3 23.5 1/7
4005 JP Sumitomo Chem JP Materials 4,782 2.8 (36.2) (81.0) na 2.6 8.1 1.6 11.8 1/6
5214 JP NEG JP Tech HW 2,398 3.5 (15.0) 16.3 (12.5) 2.4 2.0 1.4 17.6 0/7
USA
BBT US BB&T US Banks 21,188 3.1 0.1 na 8.0 30.9 10.1 1.3 12.5 2/6
CME US CME US Div fin 19,185 3.7 (2.9) na 9.3 19.2 5.2 0.9 11.1 1/6
ETR US Entergy Corp US Utilities 11,478 5.4 (2.5) (14.8) (12.1) 27.3 9.0 0.6 11.8 1/7
AMTD US TD Ameritrade US Div fin 10,606 3.3 2.2 na 8.3 28.5 14.0 1.2 50.0 2/6
MAC US Macerich US Property 8,138 3.9 0.2 (3.8) (38.7) 3.2 4.3 1.3 11.8 1/7
UDR US UDR Inc US Property 5,976 3.8 0.0 na na 0.8 (0.7) 1.1 17.6 1/5
LRY US Liberty Property US Property 4,641 4.8 7.0 (86.0) 7.0 4.9 7.8 1.0 5.9 1/7
HCBK US HCB US Banks 4,516 3.7 (1.8) na (11.2) 8.1 4.2 1.2 8.3 0/6
POM US Pepco US Utilities 4,479 5.4 (0.3) (128.6) 5.6 29.5 6.6 0.6 11.8 1/7
DRE US Duke Realty US Property 4,306 4.4 0.0 na na 2.7 (1.9) 1.3 17.6 1/5
BBVA SM Banco Bilbao ES Banks 54,178 5.7 0.3 na 6.5 5.7 10.7 1.4 23.5 1/6
EDF FP EDF FR Utilities 35,499 7.8 (3.7) (93.6) (7.6) 9.6 10.7 1.0 16.7 0/7
EOAN GR E. ON DE Utilities 33,120 6.0 (4.9) 14.5 (18.0) 5.4 7.3 1.1 12.5 1/7
SREN VX Swiss Re CH Insurance 27,584 5.3 1.4 na (7.6) 7.9 8.6 1.3 20.0 1/6
SWEDA SS Swedbank SE Banks 25,870 6.0 0.9 na 1.2 8.5 13.6 1.3 14.3 1/6
AV/ LN Aviva GB Insurance 16,965 7.0 (2.3) na 6.1 6.4 12.6 1.7 14.3 0/6
AGN NA Aegon NL Insurance 13,191 4.6 0.5 na (2.5) 7.5 5.4 1.7 26.7 1/6
PKN PW PKN Orlen PL Energy 6,768 3.4 (0.0) 0.6 (17.8) 5.1 5.9 1.5 25.0 1/7
MB IM Mediobanca Banca IT Div fin 6,205 3.4 (0.5) na 7.7 7.9 6.8 1.1 14.3 0/6
IIA AV IIA AT Property 4,514 6.1 (0.1) (62.9) 8.9 6.5 5.8 1.0 50.0 2/7
Latin America
VALE5 BZ CVRD BR Materials 100,259 5.1 (3.5) 36.4 8.8 4.1 13.6 1.0 44.4 0/7
BVMF3 BZ BM&F Bov BR Div fin 13,532 4.1 (0.6) na 10.4 10.3 8.5 1.1 33.3 2/6
CSNA3 BZ CSN BR Materials 7,879 3.9 (19.5) (5.3) na 1.7 18.6 1.5 41.7 1/6
BRAP4 BZ Bradespar BR Materials 5,428 4.0 (2.9) 31.5 10.2 3.3 11.6 1.2 42.9 0/7
PDGR3 BZ PDG Realty BR Cons dur 2,119 2.5 (29.2) (103.3) na 1.2 6.9 1.5 33.3 0/6
Stocks with only 0-2 star
rating have a higher
chance for a DPS cut



11. Dividend life cycle - Characteristics analysis
Dividends are discretionary, unlike interest payments, and provide
management with control over related policies. Just like a company goes
through various growth stages during its existence, its dividend policy may
also change depending on a number of factors such as current/future growth
prospects, cashflow situation and gearing levels. We analysed the various
stages, especially the turning points, in a companys dividend lifecycle to
highlight the defining characteristics of a particular stage.
In essence, a company can have six to seven key stages such as initiating
dividends, increasing dividends, maintaining dividends, announcing special
dividends or stock buybacks, cutting dividends and reinitiating dividends after
stopping completely. We analyse each of these cases for the MSCI AC World
universe of stocks and the MSCI EM to further highlight any differences within
emerging markets, compared with the rest of the world. Figure 164 provides
the details.
Factors driving dividend policies
Before we start to analyse the different stages it is important to have a good
understanding of the inherent differences in the factors among the broader
universe of emerging-market stocks compared to the World. Figure 163
highlights the relative factor exposure of MSCI EM stocks since 2000 relative
to the MSCI AC World stocks. Note that we focus only on those factors that
are relevant to the determination of dividend policies.
The dividend-related-factor-exposure analysis clearly highlights why emerging
markets are in a dividend sweetspot. DPS growth has been robust because
earnings growth has significantly exceeded the World while the payout-ratio
has risen from 20% in 2000 to 30% now, though it is still slightly below the
global median. While the lower FCF conversion might pose questions
regarding the sustainability of dividends, investors must realise that higher
capital intensity is required to generate the superior earnings growth, which is
the key driver of lower FCF. Furthermore, the higher cash-to-total assets and
lower net-gearing ratios underpin growth in emerging-market dividends.
Higher profitability, as measured by ROE, is another positive highlighting the
quality of dividends.
Figure 163
Dividend policy-related factor exposure of MSCI EM versus World (avg since 2000)

Note: Based on data as of 31-October in each year. Source: Factset, CLSA Asia-Pacific Markets
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
D
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S
g

(
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a
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c
e
r
t
(Relative exposure of MSCI EM vs World, x)
1.8
Dividend policy changes
over a companys lifecycle
Factor exposure
highlights why EM is in a
dividend sweetspot
We highlight six key
stages and their defining
characteristics
Higher DPS growth of EM
is underpinned by strong
EPS growth and
rising payouts
Calculating dividend-
related factor exposure
of EM stocks relative
to World

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9
1

Figure 164
Dividend lifecycle


Reinstating
dividends
High net gearing
but falling
Higher growth
forecast
High FCF
conversion
Starting
dividends
Highly profitable
High growth but
maturing
Higher cash to
total assets
Low net gearing
Lower capex
compared to past
Special
dividends
Track record of
special dividends
Significantly high
cash to total assets
High yield and
payouts
Lower growth
Low net gearing
Buybacks
Track record of
buybacks
High FCF
conversion
Highly profitable
Low yield
Low net gearing
Lower growth
Increasing
dividends
High sustainable
growth
High profitability
Low yield
Low net gearing
Lower capital
intensity
Low earnings
dispersion
Cutting
dividends
High yield - past
and expectations
High payout
High capital
intensity
Higher gearing
Lower growth
Low FCF conversion
High earnings
dispersion
Global stock characteristics during different dividend stages
Reinstating
dividends
Increasing
profitability in the
future
Higher growth
forecast
Starting
dividends
High growth
expectations
Higher cash to
total assets
High profitability
Low net gearing
Lower capex
compared to past
but still above
average
Special
dividends
Track record of
special dividends
Significantly high
cash to total assets
High profitability
High EPS growth
but low DPS
growth
Low net gearing
Buybacks
Track record of
buybacks
High cash to total
assets
Highly profitable
High growth yet
inexpensive
(GARP)
Low net gearing
Increasing
dividends
High earnings and
sustainable growth
Higher profitability
Higher cash to total
assets
Low net gearing
(Dividend increases
are tied to EPS growth)
Cutting
dividends
High yield - past
and expectations
High payout
High capital
intensity yet lower
EPS growth
Low FCF conversion
High earnings
dispersion
Falling profitability
Emerging markets stock characteristics during different dividend stages



Dividend sustainability record
While the probability of a dividend cut was higher for emerging-market stocks
than global peers last decade, a much larger proportion of emerging-market
companies also increased dividends compared with the World. Figure 165
shows that on-average, 52% of emerging-market companies increased
dividend by more than 10% every year, while only 19% cut dividends.
At the country level, Brazil and Taiwan have been the most risky while India
(low-payout country) and the Philippines are the safest. However, investors
focusing on increasing dividends would find the best opportunities in Russia,
South Africa, India and China. Korea is the least attractive market, followed
by Malaysia, when trying to pick companies likely to increase dividends.
Figure 165
EM markets - Distribution of stocks dividend sustainability record since 2000

A cut or rise is defined by a decrease or increase in DPS of 10% or more for the current MSCI universe.
Among sectors, export-driven tech and cyclicals such as transport, diversified
financials and materials have witnessed the highest dividend cuts since 2000.
On the other hand, sectors with the highest proportion of stocks that raised
dividends were healthcare, food & drug retail, software and energy.
Figure 166
EM sectors - Distribution of stocks dividend sustainability record

since 2000

A cut or rise is defined by a decrease or increase in DPS of 10% or more for the current MSCI universe.
29
25
23
20 19
17 17 16 15
12 12 11
9
52 53
54
61
52
43
56
60
43
50
41
48
58
0
10
20
30
40
50
60
70
80
90
100
BR TW ID Ru EM KR CN SA MY TH World PH IN
Cut Constant Increase
(% of companies)
23 22 22 22 22
20 20 19 19 18 18 18 18 17 17 17 16 15 14 13 12 11 10
44
51
56
53
50
64
45
47
52
55
44
49
58
55 54
50 49
56
54
64
60
53
57
0
10
20
30
40
50
60
70
80
90
100
T
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p
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D
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m
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P
P
Cut Constant Increase
(% of companies)
Cyclicals like transport,
tech and materials
cut dividends most
since 2000
In Russia, South Africa,
India and China, over
55% of companies raised
dividends since 2000

On the other hand,
consumer staples,
healthcare and energy
raised dividends

Brazil and Taiwan have
highest probability of a
dividend cut
EM stocks have a higher
probability of increasing
and cutting dividends
compared to World



Initiating dividend stage
During the last decade, emerging-market companies have increasingly
become accustomed to paying dividends. While this is partly an effect of
slowing growth potential and rising unused cash balances, there is also a
sense that dividend-paying companies are no longer viewed as ex-growth but
instead hailed as demonstrating strong cash-generating business models. Asia
ex-Japan contributed around 40% of the stocks out of those that initiated
regular dividends for the first time during the last decade.
Figure 167
Regional contribution to count of companies starting dividends since 2000

Note: Special dividends are not considered. Source: Factset, CLSA Asia-Pacific Markets
Analysis of the factor exposure prior to initiating dividends highlighted that
most companies initiate regular dividends once they have reached the high
earnings growth phase as opposed to when they are ex-growth. The other
key feature is that these companies have accumulated significant excess cash
on their balance sheets and have lower net gearing. However, there are some
differences between the global and emerging-market peers. For example,
capital intensity did not drop for emerging-market stocks even when they
initiated dividends, and consequently their FCF conversion was low. These
stocks may be unique in that they can continue to pay dividends while
maintaining growth for a lot longer.
MSCI World - Starting dividends since 2000 MSCI EM - Starting dividends since 2000

40
28
17
5 5 4
2
0
5
10
15
20
25
30
35
40
Asia ex-JP North
America
Europe Latam ME&A Japan Australia
(Breakdown of companies starting dividends by region, %)
Asia ex-Japan contributed most to count
of companies starting dividends since 2000
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
EPSg
(N2Y)
Cash
/TA
ROE
(N2Y)
Capital
int
FCF
conv
Gearing
(Exposure relative to universe, x)
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
EPSg
(N2Y)
Capital
int
Cash
/TA
ROE
(N2Y)
Gearing FCF
conv
Changing attitude of
companies towards
dividends in the
emerging markets
Dividends initiated while
in high growth phase . . .

. . . but EM stocks
continue to maintain
higher capital intensity
compared to global peers
Asia ex-Japan was the
biggest contributor,
followed by the USA



Increasing dividends stage
Strong earnings growth and rising payouts have driven robust growth in
emerging-market dividends over the past decade. Our analysis shows that
on-average, 52% of companies have increased dividends by 10% or more in
any given year over 2000-11. Asia ex-Japan has been the biggest contributor
to the count of companies that increased dividends with Europe following
closely. Despite the significant cash generation by US companies, dividend
growth has been slower because they have focused on maintaining dividends
while using the excess cash for stock buybacks.
Figure 170
Regional contribution to count of companies increasing dividends since 2000

Note: Only YoY increases of 10% or more considered. Source: Factset, CLSA Asia-Pacific Markets
Higher earnings growth and sustainable growth is a key driver of increased
dividends from companies globally and in emerging markets. Companies
increasing dividends also have higher profitability compared with the rest of
the market. On the balance-sheet side, they have higher cash-to-total assets
and lower net gearing. Perhaps the key difference between emerging-market
and global companies when it comes to increasing dividends is that capital
intensity is higher for emerging-market companies compared with the
emerging-market universe, while it is relatively lower for the global universe.
MSCI World - Increasing dividends since 2000 MSCI EM - Increasing dividends since 2000

27
23
22
13
6
5
3
0
5
10
15
20
25
30
35
40
Asia ex-JP Europe North
America
Japan Latam ME&A Australia
(Breakdown of companies starting dividends by region, %)
Asia ex-Japan contributed most to the count
of companies starting dividends since 2000
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
Sustg EPSg
(N2Y)
ROE
(N2Y)
Cash
/TA
Capital
int
Div yld
(trl)
Gearing
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
EPSg
(N2Y)
Sustg Cash
/TA
ROE
(N2Y)
Capital
int
Gearing
Dividend growth has been
quite strong globally
during last decade
High growth, excess cash
and lower net gearing the
key drivers

. . . but EM stocks
maintain higher capital
intensity even while
increasing dividends
Asia ex-Japan was
biggest contributor
followed by Europe



Special dividends stage
Nonfinancial companies have been hoarding cash throughout this decade with
emerging-market companies are leading the charge on account of their lower
payouts in the past. However, as growth opportunities have diminished,
companies are forced to offload these excess balances to help restore their
depressed ROEs. Asian companies, including in Japan, have used special
dividends as their primary tool and over 50% of special dividends announced
since 2000 were by Asia Pacific companies. European companies have been
the next biggest contributor, while the USA has chosen the buyback route.
Figure 173
Regional contribution to the count of special dividend cases since 2000

The most important characteristic of a special dividend is the companys track
record. Our analysis highlights that globally three out of every four companies
announcing special dividends would have already announced them at least
once before in their history. This ratio for emerging markets is two out of
three. The other major difference between global and emerging-market
special-dividend-paying companies is that the latter have better profitability,
while global names have average profitability. Lastly, earnings growth is lower
for global companies but average in emerging markets.
MSCI World - Special dividends since 2000 MSCI EM - Special dividends since 2000

26
21
20
13
10
7
3
0
5
10
15
20
25
30
Asia ex-JP Japan Europe Latam North
America
Australia ME&A
(Breakdown of companies that paid special dividends by region, %)
Asia ex-Japan contributed most to the count of
companies paying special dividends since 2000
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Cash
/TA
Div yld
(trl)
Payout ROE
(N2Y)
EPSg
(N2Y)
DPSg
(N2Y)
Gearing
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
Div yld
(trl)
Payout Cash
/TA
ROE
(L3Y)
ROE
(N2Y)
EPSg
(N2Y)
DPSg
(N2Y)
Gearing
1.9
Fewer opportunities to
employ excess cash has
forced companies towards
special dividends
Track record of special
dividends is the most
important characteristic
followed by excess cash
Asia ex-Japan was the
biggest contributor
followed by Japan



Buyback stage (special case of dividends)
The other side of special dividends is buybacks but while special dividends do
not alter the capital structure, buybacks are specifically designed to do so,
especially if treasury shares are cancelled post buybacks. Cancelling shares
allows companies to reduce their overall equity and share count, thus
boosting the EPS and ROEs, by forgoing cash that generates hardly any
returns, particularly in the current low-interest environment in the West.
There is also a difference in the tax treatment of the two. Looking through the
distribution of buybacks, it is clear that US and European companies are
largely involved in buybacks.
Figure 176
Regional contribution to the count of share buyback cases since 2000

Only buybacks that are 10% of profits or more considered. Source: Factset, CLSA Asia-Pacific Markets
Unlike special dividends, buybacks tend to be multiyear phenomenon because
companies sometimes announce open-ended buyback plans. Hence, the track
record is quite an important tool in identifying the potential candidate.
Comparing the global factor exposure for buybacks and special dividends, we
find that high FCF conversion is a key characteristic, since buybacks tend to
be multiyear programmes. For emerging-market stocks, it is still excess cash
but a standout factor is that stocks were cheaper on a forward PE basis while
offering higher earnings growth, that is, they had strong GARP traits.
MSCI World - Buybacks since 2000 MSCI EM - Buybacks since 2000

56
18
11
9
2
2 2
0
10
20
30
40
50
60
North America Europe Japan Asia ex-JP Latam Australia ME&A
(Breakdown of companies that did buybacks by region, %)
USA contributed most to the count of
companies doing buybacks since 2000
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
FCF
conv
ROE
(L3Y)
ROE
(N2Y)
Cash
/TA
EPSg
(N2Y)
Div yld
(fwd)
Gearing
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
Cash
/TA
ROE
(L3Y)
EPSg
(N2Y)
ROE
(N2Y)
PE
(fwd)
Gearing
Buybacks alters capital
structure if treasury
shares are cancelled
after buybacks
High FCF conversion is a
key factor globally

Cheap on PE-basis,
important for EM stocks
Buybacks are most
relevant for developed
markets such as
USA and Europe



Cutting dividends stage
A key concern for dividend investors is that companies might cut dividends
thus impacting the ability to deliver certain promised yields for their funds. It
is therefore imperative that income investors dedicate enough focus on
avoiding dividend cuts, which in turn could be a due to either a payout cut or
an earnings shortfall compared with the previous year. Our analysis shows
that while Asia offers the best chance for dividend increase and special
dividends, it is also the one most likely to spring a dividend cut, followed by
Europe. Among emerging-market sectors, materials and banks are the two
that contributed most towards the dividend cuts. Among developed-market
financials, dividend cuts have been even more prominent since the GFC.
MSCI World - Dividend cut breakdown by region MSCI EM - Dividend cut breakdown by sectors

Note: Only YoY cut of 10% or more considered. Source: Factset, CLSA Asia-Pacific Markets
The paradox facing the yield investors is that the single most important factor
signalling likely dividend cuts is that dividend yields are 30-40% higher than
the universe. This calls for a more detailed analysis of dividend sustainability
for high-yield stocks in the portfolio. Common criteria globally and for
emerging markets include high payouts, low FCF conversion, low earnings
certainty (high dispersion in forecasts) and slower EPS growth expectations,
despite higher capital intensity. While high gearing has mattered for
developed markets, it is not the case with emerging-market stocks. Also, for
EM stocks, falling profitability matters.
MSCI World - Cutting dividends since 2000 MSCI EM - Cutting dividends since 2000

32
23
13
12
10
6
4
0
5
10
15
20
25
30
35
AsiaxJ Europe North
America
Japan Latam ME&A Australia
(Breakdown of companies cutting dividends by region, %)
companies cutting dividends since 2000
18
13
9
7
5 5 5 5 5 5
3 3 3 3 2
0
2
4
6
8
10
12
14
16
18
M
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(Bbreakdown of companies cutting dividends by region, %)
Witihn EM, dividends were cut most by
materials and banks sectors
0.4
0.6
0.8
1.0
1.2
1.4
1.6
D
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(
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(
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t
A dividend cut impacts
the ability of funds to
manage their yield
expectations
Yield investors face a
paradox as high-yield
stocks are most likely to
witness dividend cuts

Other criteria include high
payouts, lower growth
and lower FCF conversion



Reinitiating dividends stage
The last stage of the dividend lifecycle involves companies restarting
dividends after stopping them for a period of time; say a minimum of two
consecutive years. Asia leads the charts here with almost 40% of companies
that reinitiated dividends since 2000 belonging to this region, followed by
Europe. Within emerging markets, materials, banks and capital goods are the
key sectors that account for more than 50% of the companies that stopped
paying dividends and then restarted paying them.
Figure 183
Regional contribution to the count of dividend reinitiation cases since 2000

Starting dividends after not paying for at least two consecutive years.
The primary reason that companies stop paying dividends is a significant drop
in profitability and an unmanageable net-gearing ratio (for ex-financial
companies). Therefore, when companies reinitiate dividends, we can still
notice the significantly higher net-gearing ratio compared with the universe.
Globally, we also noticed that a reduction in gearing was significantly higher
for these companies before they reinitiated dividends. However, for emerging
markets, what matted most was the return of profitability to the universe
average from the bottom quintile, even though gearing reduction may not
come through and FCF conversion continues to be below universe average.
MSCI World - Reinitiating dividends since 2000 MSCI EM - Reinitiating dividends since 2000

40
20
12
9 9
8
2
0
5
10
15
20
25
30
35
40
45
Asia ex-JP Europe North
America
ME&A Japan Latam Australia
(Breakdown of companies reinitiating dividends by region, %)
companies reinitiating dividends since 2000
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
G
e
a
r
i
n
g
c
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t
G
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a
r
i
n
g
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(
N
2
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(
N
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(
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3.0
2.4
0.1
0.6
0.8
1.0
1.2
1.4
1.6
1.8
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2.2
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Companies reinitiating
dividends after stopping
for two or more years
Globally, reduction in
gearing ratio is a key
characteristic . . .

. . . but for EM, return of
profitability matters
the most
Asia contributed most to
reinitiation of dividends



Estimated and actual yield gap
Apart from the dividend track record of a company and its previous dividend
payment, investors rely heavily on the analyst projections of DPS forecasts
for the future to gauge the possible yield from a stock. We analysed the
difference between forecasts (just before results) and the actual DPS to
ascertain the yield loss investors suffer due to analyst inaccuracy.
Figures 186 and 187 show that for stocks with an expected yield of 3% or
more, on-average yield expectations are met as dividends estimates
disappoint only in tough economic conditions. Most surprising was that
emerging-market stocks have done almost as well as the global peers over
the longer term. The worst years for dividend disappointments were 2007-08,
followed by 2011. We checked the results for estimates a day ahead of results
to six months ahead, and while this showed more disappointments, overall
these were still just 1% on average during 2000-11.
Global - Difference in estimated vs actual yield EM - Difference in estimated vs actual yield

Using current MSCI universe with an estimated annual yield of 3% or more a day before the FY result. Source: Factset, CLSA Asia-Pacific Markets
We also dissected the disappointment study by different estimated yield
buckets to ascertain if there is a limit beyond which the estimates are more
likely to disappoint. As highlighted in Figures 188 and 189, stocks with yields
beyond 8% are quite likely to disappoint on their dividend estimates. The
average disappointment is in the range of 5-15%. For investors looking to
garner high, yet safe yields, 4-8% is the best range.
Global difference since 2000 - Grouped by yield EM difference since 2000 - Grouped by yield

Using current MSCI universe with estimate yield a day before the FY result. Source: Factset, CLSA Asia-Pacific Markets
(2)
(1)
0
1
2
3
4
5
6
4.0
4.5
5.0
5.5
6.0
6.5
00 01 02 03 04 05 06 07 08 09 10 11 Avg
Estimated yield Actual yield
Diff (RHS)
(7.9)
(%)
(%)
(5.5)
(4)
(2)
0
2
4
6
8
10
4.0
4.5
5.0
5.5
6.0
6.5
7.0
00 01 02 03 04 05 06 07 08 09 10 11 Avg
Diff (RHS)
(%) (%)
(10.7)
(15)
(10)
(5)
0
5
10
15
20
0
2
4
6
8
10
12
14
0-2 2-4 4-6 6-8 8-10 >10
Diff (RHS)
(%) (%)
(15)
(10)
(5)
0
5
10
15
20
25
30
0
2
4
6
8
10
12
14
0-2 2-4 4-6 6-8 8-10 >10
Diff (RHS)
(%) (%)
However, stocks yielding
more than 8% are quite
prone to dividend
disappointments
Investors rely heavily on
analyst forecasts of
dividends, which
could disappoint
On average
disappointments for
stocks yielding more than
3% has been minimal



Market and sector gap
Based on the 2000-11 data, the markets that are quite likely to surprise
positively on their high-yielding stocks are South Africa, Malaysia and
Singapore. The average dividend-yield of more than 3% yield stocks in these
markets has averaged above 5.0% during 2000-11. On the other hand, the
markets most likely to disappoint on their high-yield stocks are Japan,
Germany and Brazil. While Germany and Japan are low-yielding markets,
Brazil has promised the highest average yield over the last decade.
Figure 190
Markets - Average difference in estimated versus actual yield (2000-11)

Current MSCI universe with an estimated annual yield of 3% or more a day before the FY result
included in the study. Source: Factset, CLSA Asia-Pacific Markets
Among emerging markets, consumer-driven sectors such as retail, food and
drug retailing, and consumer services have stood out in terms of their ability to
surprise on estimated yields. Some bigger cyclical sectors such as energy and
materials have also managed to surprise, highlighting that investing in cyclical
emerging-market sectors may be rewarding. However, some of other cyclicals
such as tech and transport, defensives such as telecoms and financials have
disappointed on their estimated yields during the last decade.
Figure 191
EM sectors - Average difference in estimated versus actual yield (2000-11)

Current MSCI EM universe with an estimated annual yield of 3% or more a day before the FY result
included in the study. Source: Factset, CLSA Asia-Pacific Markets
(6)
(4)
(2)
0
2
4
6
8
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
S
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Estimated yield Actual yield Diff (RHS) (%)
(%)
13.6 11.1
(3)
(2)
(1)
0
1
2
3
4
5
6
7
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
R
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Estimated yield Actual yield Diff (RHS) (%)
(%)
17.4
(9.3)
16.2 12.2
(8.7)
Consumer-driven EM
sectors have generally
surprised positively
Japan, Germany and
Brazil have disappointed
the most

South Africa, Malaysia
and Singapore have
surprised positively
on average
Financials and cyclicals
such as tech and
transport have
disappointed



12. Do dividend cuts or increases have a price impact?
Our analysis of the relationship between dividend changes and operating
characteristics of the firms suggest that dividends contain rich information
about the future performance of a company. Further, our results also support
the notion that dividend increases are indicative of future strong earnings
growth; and so while a dividend increase signals an improvement in a
companys performance, a decline suggests a worsening of its future
profitability, and hence dividend action has a direct bearing on stock prices.
Figure 192
Stock performance in two-week period around DPS increase date

Note: Current MSCI universe of stocks. An increase refers to dividend growth of more than 10%.
Our analysis shows that during the past decade, a 10% increase or cut in DPS
has resulted in notable out/underperformance for global and emerging-
market stocks. On average, the companies that have raised DPS have
delivered a 1ppt outperformance during the period from one week before the
dividend announcement to one week after. On the other hand, stocks that cut
dividends by more than 10% underperformed during the two-week period
around the announcement.
Figure 193
Stock performance in two-week period around DPS cut date

Note: Current MSCI universe of stocks. A cut refers to dividend de-growth of more than -10%.
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg
World EM
(% 2W outperformance)
Increase in DPS lead to consistent
outpeformance each year
0.8
1.1
(1.2)
(1.0)
(0.8)
(0.6)
(0.4)
(0.2)
0.0
0.2
2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg
World EM
DPS cut has lead to underperformance
in most years
(0.2)
(0.3)
Dividend increase signals
strong future
earnings growth

Best result achieved
during two-week period
around dividend
announcement date

Dividends have direct
bearing on stock price

Stocks with DPS cuts have
underperformed




Performance post DPS announcement
Our analysis on the dividend surprises post results highlights that the
dividend surprises do not just impact the estimate versus actual yield but
they also lead to price action. Figure 194 shows that when companies
surprise positively, not only do investors receive excess dividend yield but
also witness capital appreciation of their investments. While normally dividend
surprises are linked to EPS, a company can also surprise by increasing
payouts.
Figure 194
Stock performance in two-week period around DPS surprise date

Note: Current MSCI universe of stocks. Only 3% or more yielding stocks that surprised by more than
10% considered for this study. Source: Factset, CLSA Asia-Pacific Markets
Our analysis shows that during the past decade, a 10% surprise or
disappointment in DPS has resulted in notable out/underperformance for
global and emerging-market stocks. On average, the stocks that have
surprised on DPS have delivered a 1.4ppt outperformance during the period
from one week before the dividend announcement to one week after. On the
other hand, stocks that disappointed on dividends by more than 10%
underperformed during the two-week period around the announcement.
Figure 195
Stock performance in two-week period around DPS disappointment date

Note: Current MSCI universe of stocks. Only 3% or more yielding stocks that disappointed by more than
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg
World EM
DPS surprise lead to consistent
outpeformance each year
1.3
1.4
(2.0)
(1.6)
(1.2)
(0.8)
(0.4)
0.0
0.4
0.8
1.2
2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg
World EM
DPS disappointment has led to
underperformance in most years
(0.1)
(0.3)
Dividend surprises drive
stock outperformance

Best result achieved
during two-week period
around dividend
announcement date

Dividend announcements
have direct bearing on
the stock price

Stocks with DPS
disappointments have
underperformed




Identifying stocks like to disappoint
To identify factors that drive disappointment, we conducted an exposure
analysis similar to our earlier examination of dividend lifecycle stages. Figure
64 shows the factor exposure of high-yield stocks within emerging markets
that disappointed by more than 10% on their DPS during results, compared
with stocks that were either in line or surprised positively. The analysis shows
that stocks with negative earnings revision, relatively low earnings certainty
(higher estimate dispersion), lower growth expectations, relatively lower FCF
conversion, lower profitability, higher gearing and higher capital intensity are
more likely to disappoint on their estimated yields. These factors are similar
to those we found that are likely to drive earnings disappointment.
Figure 196
EM - Factor exposure of high-yield stocks that disappointed vs those that didnt

Note: Current MSCI universe of stocks. Only 3% or more yielding stocks considered for this study.
A similar analysis for the global high-yield universe also shows similar factors
that are likely to drive disappointments versus those that are likely to
surprise positively by 10% or more during a DPS results announcement.
Figure 197
Global - Exposure of high-yield stocks that disappointed vs those that surprised

Note: Current MSCI universe of stocks. Only 3% or more yielding stocks that disappointed by more than
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
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(Exposure - disappointments relative to others, x)
0.0
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0.70
0.80
0.90
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1.10
1.20
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(Exposure - disappointments relative to positive surprise, x)
0.0
Factor exposure study
similar to dividend
lifecycle stages

Some of factors are
identical to those that
signal EPS disappointment

Earnings revisions and
certainty stand out for
both EM and World

Global and EM factors
are quite similar




13. Will Basel 3 weaken dividend sustainability of banks?
The GFC highlighted the need for a robust financial framework that can deal
with risk-management aspects of the banking sector more effectively. Against
this backdrop, Basel-3 guidelines aim to improve the ability of banks to
absorb shocks arising from financial and economic stress and strengthen their
transparency and disclosures. The implementation of these measures will
start from 2013.
The upshot of these measures has been the various methods employed by
the banks to raise the capital to comply with the new guidelines. Cutting the
payout ratio is one of them. In that context, our question aims to analyse the
general financial health of global banks and differentiate the ones that will
witness smooth transition versus the ones that will face headwinds and could
resort to disruptive options such as payout cuts. Few banks have already
made use of that option. Public Bank from Malaysia has already cut its payout
ratios to meet regulatory requirements. Figure 198 highlights some of the
efforts (including payout cuts) undertaken by banks to comply with respective
country guidelines.
Figure 198
Various efforts undertaken by banks to meet Basel-3 requirements
Country News
Italy Weakest capitalised banks in Europe, UniCredit, Intesa Sanpaolo and Monte
dei Paschi commented that to beef up capital, halving the historical dividend
payout ratio is perfectly possible.
Philippines Monetary Board approved the implementation of guidelines for the 1 January
2014 adoption of the revised capital standards under the Basel-3 Accord and
mandated that banks not able to meet the new capital guidelines will not be
allowed to issue dividends.
Malaysia Public bank BHD lowered its dividend guidance for 2013 to comply with
stricter capital requirements.
USA United Bancorp slashed its quarterly dividends to half in order to reserve
capital for Basel 3
We have also analysed the historical published tier-1 CAR ratio in various
regions and countries and found Asian banks have maintained steady tier 1
CAR ratio since 2005. This is particularly credible as Asian banks have stricter
regulations on classification of capital as opposed to their European peers.
While the improvement can be seen with US and European banks since GFC,
it is hard to gauge the same under Basel 3-definitions.
Basel 3 - Implementation roadmap starting 2013 Published Tier-1 CAR for various regions

Note: Aggregate tier-1 CAR is calculated using bottom-up freefloat adjusted methodology for tier-1 CAR ratio of banks with market cap >US$1bn in
respective regions and market. Basel-3 guidelines will be in place starting 2013. Source: CLSA Asia-Pacific Markets
0
1
2
3
4
5
6
7
8
9
10
2012 2013 2014 2015 2016 2017 2018 2019
CET 1 Conservation buffer Countercyclical buffer
Basel 2
Sequential rise
in core tier-1 CAR
(%)
6
8
10
12
14
16
18
2005 2006 2007 2008 2009 2010 2011
World AxJ Latam Europe
USA Australia Japan
(%)
Asia ex-Jp banks have steady tier-1 CAR
GFC has necessitated a
need for having robust
financials framework
European banks tier-1
CAR are overstated under
Basel 3
Banks are implementing
measures to comply with
Basel 3 requirements



Under Basel 3, common-equity 1 capital (CET 1) is the predominant form of
total capital required for tier-1. Two new buffers: a capital conservation buffer
and a countercyclical buffer will be introduced, which will act as an extra
cushion to CET 1 capital, raising the ratio to 7-9.5%. The newly introduced
leverage ratio of 3% will also help banks to monitor the buildup of leverage.
Basel-3 regulations provide guidelines for minimum percentages for capital
and leverage ratios but central banks adopting Basel could have more
stringent requirements for their respective country banks. All the countries
have time until 2015 to fully implement tier-1 CAR requirements as per Basel
3. After 2015 two additional buffers namely capital conservation and counter-
cyclical will kick in. However, it is important to note that each national
regulator has significant flexibility to amend the level of ratios and the
implementation roadmap.
Figure 201
Differences between key ratios under Basel 2 and Basel 3
Existing Basel 2 Basel 3
Key ratios Common
equity
tier 1
Total
tier 1
Total
capital
(inc
tier 2)
Common
equity tier 1
Total tier 1 Total capital (inc
tier 2)

Minimum 2.0% 4.0% 8.0% 4.5% 6.0% 8.0%
Capital conservation buffer - - - 2.5% 2.5% 2.5%
Minimum plus Conservation buffer 2.0% 4.0% 8.0% 7.0% 8.5% 10.5%

Counter-cyclical buffer - - - 0 - 2.5% 0 - 2.5% 0 - 2.5%
Total range 2.0% 4.0% 8.0% 7.0% to 9.5% 8.5% to 11.0% 10.5% to 13.0%
Note: More details on Asian markets in Appendix 8. Source: CLSA Asia-Pacific Markets
Based on the last published tier-1 CAR, Taiwanese, Korean and Chinese banks
may have to tighten their balance sheets if they wish to comply with Basel-3
levels. Australian banks typically maintain a boundary CAR and prefer
dividend payout of approximately 75%. The Philippines and Singapore are
among the healthiest countries in Asia with published tier-1 CAR of 13.5%.
Figure 202
Published tier-1 CAR in various regions (FY0)

Note: Tier-1 CAR (max) is sum of total tier-1 CAR (6%) plus conservation buffer (2.5%) plus max
countercyclical buffer (2.5%). Tier-1 CAR (min) excludes counter cyclical buffer. These are minimum
guidelines by Basel, though countries do differ on their own guidelines during implementation. Source:
CLSA Asia-Pacific Markets, Bloomberg
6
7
8
9
10
11
12
13
14
S
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Published tier-1 CAR Total tier-1 (max)
Total tier-1 (min) Total CET 1
(%)
11%
8.5%
7%
Basel 3 requires CET 1
capital to be predominant
form of capital
Taiwanese, Korean and
Chinese banks may have
to tighten their
balance sheets



Banks will face significant new capital requirements, the bulk of which will
come from either raising common equity, or in worst case, cutting dividends.
Basel 3 also mandates that banks that do not meet the conservation buffer,
which is designed to give them an extra source of capital to draw on during a
crisis, will be subject to restrictions, such as limits on dividend payouts. The
introduced leverage-ratio requirement may also limit banks from swelling
balance sheets. In light of these mandates, Australian banks may feel the
pressure in maintaining such high cash payouts, however it is also important
to note that most of these cash dividends are reinvested back for the tax
benefit purpose.
Figure 203
Banks - Dividend payout versus Tier-1 CAR ratio

Note: MSCI Countries average Pay-outs for year 2012-14 is used and compared with 2011 tier CAR-1
ratio. Source: CLSA Asia-Pacific Markets, DataStream, Bloomberg
The global dividend payout forecast for 2013 has already been moderately cut
since May 2011. The global economic slowdown is also partly responsible for
this cut, but the stringent Basel-3 requirements could exacerbate the
problems for banks. This could lead to acceleration in the payouts cuts.
Within regions, US banks have been cut the least, while Latams payouts are
down the most, followed by Japan and Europe.
Figure 204
Dividend-payout forecast revisions for 2013 since May 2011 for major regions

Note: Dividend payout forecast revisions for period May 2011 to Jan 13 are calculated by bottom up
aggregation of 2013 payout forecasts for Banks in respective region. For Europe, we have excluded Bank
Santander SA from analysis as its payout is revised positively due high negative EPS rev caused by loans
restructuring in last 2 year. Source: CLSA Asia-Pacific Markets, Factset
Taiwan China
Thailand
Malaysia
Russia
France
India
HK
Japan
UK
Germany
Brazil
Indonesia
USA
Philippines
Singapore
15.0
19.0
23.0
27.0
31.0
35.0
39.0
43.0
47.0
51.0
55.0
59.0
9.0 10.0 11.0 12.0 13.0 14.0
Tier CAR I Ratio
Payout
Switzerland
(16.1,33.3)
Australia(10.1,74.6)
(%)
(5)
(4)
(3)
(2)
(1)
0
USA APxJ World Europe Japan Latam
(9.1)
2013 payout forecasts have been negatively revised for
all the regions since may 2011
(%)
Latam payouts have
been cut the most
Banks will face a
significant additional
capital requirement
USA and European tier-1
capital is overstated
compared to their Asian
peers
Payouts for all regions
have been negatively
revised since May 2011



Stocks with least and most risk from Basel 3
We have analysed MSCI World Banks and diversified financials tier-1 CAR
ratio and total CAR to gauge the effect on their dividend payout after Basel-3
implementation. Well capitalised banks have either higher tier-1 CAR ratio or
higher equity-to-asset ratios which make them unlikely to cut dividends post
Basel-3 implementation, whereas banks which have less tier-1 CAR as
compared to Basel-3 targets coupled with dividend payouts greater than 25%
might feel pressure in sustaining the same payout level.
Dividend payout (average FY1 and FY2)>25%
Equity to asset >3%
Figure 205
MSCI World - 15 well capitalised banks with payout more than 25% (sorted based on published tier-1 CAR)
Code Name Cty Sector Mkt cap Tier-1 CAR Total CAR Eq/assets Payout ROE 12MF
(US$m) (FY0, %) (FY0, %) (FY0, %) (N2Y avg (N2Y avg Div yld
%) %) (%)
UBSN VX UBS CH Div fin 63,379 21.3 25.2 3.6 36.4 8.0 1.7
CSGN VX Credit Suisse CH Div fin 38,939 19.5 22.3 3.9 32.9 10.9 2.9
STAN LN Standard Chartered UK Banks 64,917 13.7 17.6 6.8 38.6 12.5 3.1
UOB SP UOB SG Banks 24,850 13.5 16.7 8.8 39.9 11.8 3.4
RY CN RBC Canada CA Banks 91,809 13.1 15.1 4.8 46.1 18.4 3.8
ICICIBC IN ICICI IN Banks 23,817 12.7 18.5 10.1 27.7 13.0 1.8
JPM US JPMorgan Chase US Div fin 188,108 12.6 15.3 8.3 26.6 10.2 2.8
2388 HK Bank of China (HK) HK Banks 36,062 12.5 16.9 7.5 63.0 14.8 4.6
BBL TB Bangkok Bank TH Banks 14,212 12.2 15.4 11.3 39.1 13.5 3.5
MAY MK Maybank MY Banks 24,259 11.8 15.4 7.6 73.0 15.0 5.9
WFC US Wells Fargo US Banks 185,058 11.8 14.6 10.2 28.4 12.7 2.8
HDFC IN HDFC IN Banks 23,340 11.6 14.6 11.5 37.8 21.8 1.4
HSBA LN HSBC UK Banks 207,305 11.5 14.1 6.2 48.5 10.5 3.9
HLBK MK Hong Leong Bank MY Banks 8,365 11.3 15.5 7.2 33.9 15.5 2.5
SCB TB SCB TH Banks 19,975 11.1 14.5 9.6 36.0 24.8 2.9

Figure 206
MSCI World - 15 poorly capitalised banks with payout more than 25% (sorted based on published tier-1 CAR)
Code Name Cty Sector Mkt cap Tier 1 CAR Total CAR Eq/assets Payout ROE 12MF
(US$m) (FY0, %) (FY0, %) (FY0, %) (N2Y avg (N2Y avg Div yld
%) %) (%)
USB US US Bancorp US Banks 63,593 10.8 13.1 9.7 29.6 15.4 2.6
PBK MK Public bank MY Banks 18,240 10.8 14.1 6.5 45.0 21.7 3.6
FITB US Fifth Third US Banks 14,079 10.7 14.4 10.9 28.1 10.7 2.8
AMM MK AMMB MY Div fin 6,094 10.5 15.0 10.0 42.5 14.1 3.8
WBC AU Westpac AU Banks 97,175 10.3 11.7 6.6 81.0 14.9 5.7
BBVA SM Banco Bilbao Vizcaya ES Banks 55,738 10.3 12.9 6.4 51.6 10.7 5.6
CMA US Comerica US Banks 6,643 10.1 13.1 10.6 26.7 7.1 2.0
1398 HK ICBC CN Banks 242,108 10.1 13.2 6.2 34.2 21.1 5.0
UCG IM UniCredit IT Banks 33,129 9.3 12.4 5.6 27.9 2.5 1.4
UBI IM Unione di Banche IT Banks 4,379 9.1 13.5 6.9 29.0 2.2 1.4
024110 KS IBK KR Banks 6,553 8.9 11.7 7.1 25.5 7.7 3.6
2892 TT First Financial TW Banks 5,266 8.3 10.9 6.1 29.0 8.1 2.0
3968 HK CMB CN Banks 48,212 8.2 11.5 5.9 25.1 20.4 3.3
CHILE CI Banco de Chile CL Banks 15,798 6.9 12.9 8.0 60.6 22.7 4.4
5880 TT TCF TW Banks 4,672 6.1 10.3 4.1 27.3 5.9 1.7
Identifying global banks
with highest and lowest
payout sustainability



14. What is the impact of tax on dividends?
Countrys taxation policy plays a crucial role during decision-making process
of a corporations dividend policy. Management has to deliberate over various
viable options, being mindful of the tax implications on existing shareholders.
Management always has the option to either pay dividends (common or
special) or buy back the stock. However, the choice between the two can also
be a function of the countrys tax regime. The company can always opt for
dividends, if the dividend tax incidence on their shareholders is less than
capital-gains tax and vice versa.
In light of this relationship between the dividend tax and dividend policy, our
previously stated question aims to identify the historical evidence related to
the dynamics of the two variables. We have used the USA as a case study for
the analysis, as it offers the longest history of both dividends and capital-
gains tax and other pertinent dividend related statistics.
In Figure 207, we highlight the dividend and capital-gains tax in the USA
since 1954. It is interesting to note that during the early 1950s, the dividend
tax rate (highest marginal tax rate charged to individuals) was 90% versus
the 25% on capital gains. Against this stringent tax regime, following a high
dividend payout policy is unlikely for corporates. However, since then, the
dividend tax rate has witnessed secular contraction. Indeed in 1986, the gap
between the dividend tax and capital gains narrowed to zero, removing any
disadvantage associated with paying dividends. But, ironically, during the
same decade, a new corporate action, called buybacks, started gaining
traction with management and investors. Although the buybacks were a
pittance during the late 1980s, they gained critical mass during the 1990s
and surged past dividends after 2000.
Therefore, against the backdrop of surge of buybacks relative to dividends,
the impact of taxes seems negligible. However, a detailed analysis presents a
much clearer picture and highlights that a reduction in the dividend tax rate
has impacted the corporates dividend culture, although it has not come at the
expense of buybacks. We have also analysed the impact of dividend taxes on
the evolution of equity income funds as a separate asset class in the USA.
Figure 207
Dividend and capital-gains tax in USA since 1954

Source: CLSA Asia-Pacific Markets, US tax policy centre, OECD
10
20
30
40
50
60
70
80
90
100
1
9
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4
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6
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6
2
0
0
8
2
0
1
0
2
0
1
2
Dividend tax Capital-gains tax
(%)
Spread between dividend and
capital-gains tax
Capital-gains tax
Tax policy can have
impact on the dividend
payout policy
Dividend and capital-
gains tax in USA
since 1954

Analysing USAs tax
history to establish its
relationship with
dividends
Dividend tax in USA has
consistently fallen from
90% in 1954 to current
20%
Tax cuts have resulted in
improvement in dividend
statistics in USA



The impact of the change in dividend tax structure is evident in Figure 208.
Our analysis highlights that after the dividend tax cut of 2003, US corporates
have undergone a structural change in terms of dividend paying ability. The
number of companies paying dividends has witnessed almost a step-change
since 2003 and more importantly they have continued to make gain until the
outbreak of GFC. The change in tax regime has also brought about a change
in the number of companies witnessing positive revisions to future dividends,
highlighting consensuss optimism towards future dividend payouts. It is no
surprise that DPS index too grew in concurrence with the general optimism
around dividends.
Figure 208
MSCI USA - Tax impact on number of companies paying dividends

Note: No. of companies with positive DPS revisions is calculated based on average number of companies
with 3month positive DPS revisions for 1 year period.
Source: CLSA Asia-Pacific Markets, Factset alpha tester
Surge of new equity income funds post the 2003 dividend tax cut
The dividend tax cuts also led to the resurgence of new asset class, namely
global equity income funds. Our analysis highlights that during 1993 to 2002,
the average number of funds launched was six. However, post the dividend
tax cuts in 2003, the number has shot up to 17.
Figure 209
Launch of new equity income funds surged since 2003

Note: Active equity income open-end funds are taken into consideration.
Source: CLSA Asia-Pacific Markets, Bloomberg
0
50
100
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200
250
200
250
300
350
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500
D
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D
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1
1
No. of dividend paying companies
No. of companies with +ve DPS rev (RHS)
DPS Index (RHS)
High dividend tax of 39.6% Dividend tax cut to 15%
10
15
20
25
30
35
40
45
0
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Number of equity income funds launched
Dividend tax rate (RHS)
(No. of funds) (%)
Post 2003 the dividend
culture has undergone a
paradigm shift
Few companies paying
dividends during high tax
regime pre 2003
Number of new equity
income funds increased
post tax cut in 2003
Equity income funds
invest in stocks with good
history of sustainable
dividend payouts.




Effect of tax on dividend yield in USA
The dividend tax rate also has demonstrated strong relationship with dividend
yield in the USA. Our analysis on S&Ps dividend yield and dividend tax shows
an inverse correlation between the two. The USAs dividend yield consistently
fell between 1986 and 2000 in response to the high tax rate. However, after
2003, the dividend yield is making a structural shift upwards. Reduction in tax
rate during 2003 led to the expansion in yield from 1.6% to 2.3%. Although
recently dividend tax rate has marginally increased from 15% to 20%, it is
still significantly lower than its historical average and should not affect yield.
Figure 210
Relationship of dividend tax and dividend yield in USA

Source: CLSA Asia-Pacific Markets, US tax policy centre, Robert Shiller
Differences in dividend tax charged to local and foreign corporates
Taxes on dividends are always the main concern for investors. In Figure 211,
we highlight the difference in dividend taxes that are charged to local and
foreign corporates.
Figure 211
Summary of withholding/ dividend tax on corporates
Country
Local Foreign Comments
UK - -
Neither withholding tax nor dividends are included in annual taxable income.
Brazil - -
HK - -
Sing - -
Philippines - 30.0
Withholding tax on foreign corporate is applicable.
Taiwan - 20.0
Turkey - 15.0
Japan - 20.4
India 16.2 16.2
Withholding tax for both local and foreign corporate is applicable.
South Africa 15.0 15.0
Russia 9.0 15.0
Indonesia 15.0 20.0
Thailand 10.0 10.0 Partial dividends (50%) are included in annual taxable income and charged at 20%.
Malaysia - -
Dividends are included in taxable income and charged at 25%, no withholding tax.
Australia - -
USA - 30.0
Dividends are included in taxable income and charged at 35%.
China - 10.0
Korea - 22.0
France - 30.9
Germany - 15.8 Partial dividends (5%) are included in taxable income and charged at 30%.
Note: All the numbers includes surtax where applicable.
1
India: Long-term capital gains and DDT is 15% plus 5% surtax and 3% education cess
finally makes total tax incidence of 16.22%.
2
Malaysia: Assuming majority of companies have migrated in to STS.
3
Australia: Assuming fully
franked dividends. Source: CLSA Asia-Pacific Markets, Regional tax authorities.
0.0
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Increase in dividend
tax rate resulted in
compression of yield
Continuous
reduction in yield
due to higher tax
rate
Lower taxes reuslted in
expansion of yield
(%)
(%)
Effect of tax on
dividend yield

Inverse correlation
between dividend tax and
dividend yield for US
Key differences in
dividend tax for local and
foreign corporates



For local corporates there is no withholding tax for any country except India,
South Africa, Russia, Indonesia and Thailand whereas foreign corporations in
the UK and developed Asia fall under a tax-haven trajectory and developed
countries like the USA, France, Germany, Italy and Korea are highly tax
oriented nations.
The UK, Brazil, Hong Kong and Singapore are the most tax-efficient countries
in terms of corporate dividends. All four have eliminated double taxation as
they rely heavily on overseas investments and the subsequent distribution of
dividends back to parents by companies operating outside their jurisdictions.
The USA, China, Korea, France, Germany and Italy include dividends in net
assessable income. However, Malaysia and Australia do not levy withholding
tax but include dividends in net income. In Malaysia, we have assumed most
companies have migrated to a single-tier-system (STS), hence companies
paying dividends will no longer withhold anything from recipients. However,
corporations in Malaysia have until December 2013 to adopt STS.
To neutralise a companys dividend distribution decision, a non-distributed
earnings tax charge (NDET) is prevalent only in Taiwan and Philippines. NDET
encourages companies to increase payouts rather than hold back cash on
balance sheets. This may be another reason for the average payout ratio to
be about 80% in Taiwan. However, more companies in the Philippines tend to
retain more to funds as they are in growth phase.
Dividend and capital-gains tax rates on local residents
Every country has its own rules with regards to taxation. Some governments
prefer withholding tax on dividends by corporates before distributing them to
shareholders, as this prevents tax evasion, whereas some tax laws require
shareholders to include the dividends in their annual income and pay taxes
accordingly. In this section, we attempt to show dividend and capital-gains
tax applicability on residents.
Figure 212
Dividends and capital-gains-tax rate on local residents

Note: Higher tax rate plus surtax taken into account for all the countries. Indonesia levy 0.1% of
transaction value as capital-gains tax for residents. Capital gain related assumptions: - 1) In Korea, we
have assumed gains are from transfer of listed stocks. 2) In case of India, capital gain is not taxable if
transaction is subject to STT. 3) In China, only exception is ESOPs which are taxable.
Source: CLSA Asia-Pacific Markets, Regional tax authorities.
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Asia Pac free Europe America Middle
East
Dividend tax
Capital gains tax
(%)
NDET only applicable in
Taiwan and Philippines
forcing higher payouts

Malaysia has until
December to adopt STS
No withholding tax on
local corporates in
most countries
UK, Brazil, Hong Kong and
Singapore are the most
tax-efficient countries
Dividends are taxed either
by including individuals
income or by withholding
tax at company level
France has the highest
tax rate for dividends and
capital gains




In Figure 212, we have classified the dividend and capital-gains tax into four
regions; Asia Pacific (including Japan), Europe, America and the Middle-East.
Singapore and Hong Kong are the best in Asia for not levying tax on dividends
and capital-gains tax. In terms of long-term capital gains taxation, Asian
countries like China, India, Indonesia, Thailand and Malaysia are tax friendly
countries as they do not levy long-term capital gains taxes on resident
individuals subject to few tax-related assumptions mentioned in the note of
Figure 212.
Our study shows, capital-gains tax on corporates are always higher compared
to resident individuals in each country except Taiwan, the UK and France
where capital-gains tax on individuals is charged based on marginal income
tax rate. All European countries require individuals to include the dividends in
taxable income and subject to tax based on respective marginal rates. The
USA has recently increased dividend and capital-gains tax to 20% and
introduced additional medicare tax of 3.8% with immediate effect. Prior to
2003, the USA had a dividend-tax rate that was far above that of most other
developed nations. Lastly, in addition to issues related to the double tax, a
lower rate on capital gains can be justified on policy grounds because high
capital-gains tax rates lengthen investors holding period and the capital-gains
tax is a taxed on both real and inflationary gains.
Corporate capital-gains tax rates
Most capital gains is realised from the sale of securities. In this subsection,
we have discussed tax on the sale of securities. A capital-gains tax is levied
on the profit realised from the sale of a stock. Not all countries implement a
capital-gains tax and most have different rates of taxations for corporations.
Figure 213 shows that the regional capital-gains-tax average for developed
markets is higher than in Asia-Pacific markets. The likes of Hong Kong,
Singapore and Malaysia do not impose taxes on long-term capital gains.
Capital-gains tax for corporations in France and the USA is the highest among
all the developed nations. On the other hand, developing nations like
Philippines and India levy the least.
Figure 213
Capital-gains tax in various countries with regional average

Source: CLSA Asia-Pacific Markets, Regional tax authorities.
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Asia Pac Free Europe America Middle
East
Capital gains tax Regional average
(%)
Regional average of
capital-gains tax for
developed markets is
higher compare to Asia

Singapore and Hong Kong
does not levy tax on
capital gain and dividends
Capital-gains taxes on
corporates are always
higher compare to
individuals
High capital-gains tax
rate lengthen investors
holding period
Capital-gains tax in
various countries with
regional average

Corporate capital-
gains tax
No long term capital gain
levied in most of the
Asian countries.



15. Will companies return the cash back to shareholders?
There are two key questions that matter to a global dividend investor. Firstly,
who is carrying the cash balance in excess of the immediate operational and
strategic requirements? And secondly, how are they likely to dispense with
the excess cash? We look through the financial statements of the top 2,500
stocks globally (MSCI AC World constituents) to answer these questions.
Our analysis suggests that despite the significant absolute cash amounts with
US companies, its Asian companies that are carrying the most excess cash
compared to assets. We also find that Asian capital intensity is falling as
capacity utilisation remains low and margins at a multidecade trough. Finally,
given Asias total debt-to-equity ratio is the lowest, there is little chance that
companies will focus on deleveraging their balance sheets. Hence, despite the
volatile free-cashflow conversion rate, we are convinced that with excess cash
balances and reducing demands on cash, Asia presents a strong case for
structural dividend growth.
We also believe that given managements compensation structure, US
companies are likely to continue using the buyback route to distribute excess
cash. However, Europe will continue to focus on building the depleted cash
reserves as the EU-crisis continues to threaten a long period of below-normal-
growth, if not a recession. Japanese earnings, especially exporters, seem to
be turning the corner as the weaker yen drives increased revenue and
margins. Japan also has the lowest capital intensity but as margins improve,
we expect an increase in capex and acquisitions to capture improved growth
opportunities.
In Figure 214, we show the cash balances of the current MSCI AC world
constituents (ex-finance) without any adjustments. The data cannot be used
for a YoY comparison as the number of companies with data changes every
year but it does highlight the growth of cash on the balance sheets globally.
The chart shows that the top companies have close to US$4tn of cash. The
USA, which is close to 50% by weight for MSCI, leads the charge followed by
Europe. However, it is interesting to note that Asia has been catching up fast
with the rest of the world.
Figure 214
MSCI World (ex-finance): Breakdown of cash and cash equivalents by regions

1278
1048
774
584
317
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USA Europe AsiaxJ Japan Others (US$bn)
Significant cash build up since GFC -
US$4tn by end of 2011
Who has extra cash and
how would they pay it out
Asian companies carry the
most cash, and have less
need of it going forward
USA will favour buybacks,
Europe will conserve cash
and Japan will
increase capex
Top global companies are
sitting on US$4tn in cash
USA is the biggest
contributor but Asia has
been catching up



A similar analysis for Asia suggests that China is by far the largest cash
hoarder in Asia with US$286bn in 2011. In Figure 215 we show the cash
balances of the current MSCI Asia ex-Japan constituents (ex-finance). We
believe that Chinas cash reserves would rise further as capex slows. Asean
has also been increasing its cash balance at a rapid pace and its holdings are
much closer to those of Korea. Even Indian companies have been hoarding
cash and have close to US$77bn in 2011. We believe that these balances are
a signal that Asian dividends are sustainable.
Figure 215
MSCI Asia (ex-JP, finance): Breakdown of cash and cash equivalents by markets

The cash-to-total-assets ratio is a more useful measure to track the level of
excess cash on balance sheets. In Figure 216 we show that global cash
balances have risen since the GFC as companies have been hoarding cash and
capex growth has slowed. Asia has the highest cash-to-total-asset ratio but
the USA has witnessed a significant increase in its cash-to-total-assets ratio
since the GFC. If Asias ratio were to rise to the global level of 10%, Asia
would end up distributing US$180bn of extra cash, compared with the 2011
dividends and buybacks of US$129bn (ex-finance).
Figure 216
MSCI (ex-finance): Cash to total assets trend

286
136
117
102
77
56
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China Korea Asean Taiwan India HK (US$bn)
China has the most cash while Asean is
catching up fast with Korea
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AsiaxJ Europe USA Japan World
(%)
Despite the increase in buybacks in the USA, cash balances
are too high, Asia and Japan also have lots of cash
China is the largest cash
hoarder in Asia with
US$286bn in 2011
Cash to total assets has
increased universally
since GFC
Aseans cash hoard is
rising fast and already
close to Korea
Asia has the highest cash-
to-assets ratio and should
return some of the extra
cash to investors



We also examined the sectors to understand the drivers of the cash hoarding.
In Figure 217 we plot the cash-to-total-assets ratio in 2011 for different
sectors and compare it with the average over the past 10 years. Our analysis
suggests that shorter product-life-cycles and research-and-development
(R&D)-driven tech and pharma sectors have constantly hoarded higher cash
balances to facilitate the development of new products either through organic
or inorganic routes. Long durations and asset-heavy sectors such as property,
energy, telecom and utilities have the lowest cash-to-assets ratios. We also
find that cash-to-assets ratios are higher than in the past for the majority of
sectors with pharma witnessing the biggest drop followed by HPC.
Figure 217
MSCI world sector cash to total assets: Last reported versus past 10-year average

We believe that these cash reserves will continue increasing since the free-
cashflow conversion ratio in the immediate future is set to better the
historical average. In Figure 218 we compare the 2013-14F average free-
cashflow ratio with the historical average for different regions. The charts
suggests that while the USA has the highest cash-conversion ratio, Asia and
Japan are set to witness a significant increase in their free-cashflow
conversion ratios, further boosting cash reserves.
Figure 218
MSCI (ex-finance) FCF conversion: Comparing estimates with history

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2011 Avg (02-11) Diff (RHS)
(%)
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the cash levels compared to the assets
(ppt)
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USA Japan World Europe AsiaxJ
Avg (13-14) Avg (02-11)
(%)
Asia'a FCF conversion ratio is set to improve the most
Tech and pharma have
the highest cash build up
FCF conversion is set to
be robust in the future
Most sectors have
witnessed an increase in
cash balances
Asia is set to witness the
most improvement



Companies dont need to deleverage further
One of the key reasons we expect payouts to increase is because there arent
alternatives for the efficient use of the cash. The first potential use of cash is
paying off the debt but we find that after deleveraging through the 1990s to
2007, companies have reasonable debt levels and do not need to deleverage
further. In Figure 219 we show the trend in total-debt-to-equity ratios across
markets and Japan is the most geared while the rest of Asia is the least. It
highlights that Japanese companies have been deleveraging despite the
persistently low interest rates. Indeed if the new monetary policy in Japan
drives yields higher, we could witness further deleveraging for Japan. But for
the other regions, further deleveraging could result in inefficient capital
structures and hence they are unlikely to use cash to reduce debt.
Figure 219
MSCI (ex-finance): Total debt to equity trend

In Figure 220 we show the net debt to equity trend for various regions. The
charts highlight that net gearing ratios are much lower and that the forecasts
suggests that net debt-to-equity could reduce further to ridiculously low levels
if companies do not utilise the cash on their balance sheets.
Figure 220
MSCI (ex-finance): Net debt to equity trend

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global deleveraging has stopped
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Net gearing ratios are at trough levels
First use of cash is to
deleverage but companies
have already done that
Net gearing ratios are set
to be even lower
Total debt to equity has
been stable since 2006
except for GFC
Companies must payout
more to improve ROEs



In Figure 221 we compare the current total debt-to-equity of different global
sectors with the past 10-year average. It shows that most sectors have
witnessed a drop in the overall gearing ratio, with the previously highly
geared sectors such as autos, capital goods and transport driving the trend.
However, utilities stocks are now the most geared with total-debt-to-equity
ratio is only marginally lower than the 10-year average, suggesting that they
are most likely to drive any further deleveraging. Tech and energy have the
lowest gearing ratios, which have been stable over the past 10 years. Overall,
we find that most sectors do not have any urgent need to deleverage except
for utilities.
Figure 221
MSCI world sector total debt equity: Last reported versus past 10-year average

We highlight a similar analysis of the net-debt-to-equity ratio across global
sectors in Figure 222. Indeed for all sectors, current net-debt-to-equity ratios
are lower than the past 10-year average. We also find that most sectors have
witnessed a 20ppt or more drop in their net-debt-to-equity ratio. With tech in
a net-cash position, we believe they are likely to drive any global effort by
companies to return the cash back to investors.
Figure 222
MSCI world sector net debt to equity: Estimate versus past 10-year average

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o
f
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a
r
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S
e
m
i
s
2011 Avg (02-11) Diff (RHS)
(%)
The most geared sectors have also witnessed
the biggest drop in total debt-to-equity ratio
(ppt)
(60)
(50)
(40)
(30)
(20)
(10)
0
10
(60)
(40)
(20)
0
20
40
60
80
100
120
140
U
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d
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H
w
S
o
f
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w
a
r
e
Avg (13-14) Avg (02-11) Diff (RHS)
(%)
Most sectors have witnessed a
decrease in net gearing ratio
(ppt)
Most sectors, especially
the most geared ones,
have deleveraged over
the past 10 years
Net debt-to-equity ratios
have fallen even more
across sectors
Utilities has not
deleveraged and now
have the highest gearing
Utilities could deleverage
at expense of dividends



Unlikely to increase capex
The second-most important use of cash is to increase investments - either
through capex or mergers and acquisitions (M&A). We focus more on the
capex side as M&A is a much more stock/sector/market specific phenomenon.
For example, the USA remains the hotbed for M&As since insiders hold little of
the company while in emerging markets, companies rarely have low insider
holdings and those insiders such as promoters may not be willing to sell at
any reasonable price. However, if we assume capex to be a proxy for M&A, we
find that capital intensity (capex/sales) has dropped the most for Asia but has
been stable for the rest of world at around 6-7%. And with the world entering
a new slower growth phase, we doubt that companies will find increasing
capex or M&A an efficient use of cash.
Figure 223
MSCI (ex-finance): Capital intensity (capex/sales) trend

In Figure 224 we compare the 2012 forecast capital intensity with the 10-year
average across sectors. We avoid using 13-14F since capital intensity is
structurally underestimated by analysts to the tune of 1-2ppt at the start of the
year. Our analysis shows that capital intensity is stable for most sectors and
where it has increased, the rise is quite small (1-2ppt).
Figure 224
MSCI world sector capital intensity: 12F versus past 10-year average

2
4
6
8
10
12
14
16
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
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8
1
9
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9
2
0
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0
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2
2
0
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3
2
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4
2
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2
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6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
(%)
Capital intensity has been stable for US and
Europe but has been falling for Asia ex-Japan
28.0, 21.3, 26.8, 20.7
(5)
(4)
(3)
(2)
(1)
0
1
2
3
0
2
4
6
8
10
12
14
16
18
T
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H
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a
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t
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c
a
r
e
2012 Avg (02-11) Diff (RHS)
(%)
For most sectors capital intensity is lower than
the long-term average
(ppt)
23.9
(9.3)
In a low-growth world,
higher capex may not be
an attractive option
Among sectors, most
have similar capital
intensity as in the past
Global capital intensity is
stable but it has been
falling for Asia
Even for those with
increases, the extent of
increase is quite small



Robust operating cashflow growth
Up to now we have discussed how cash balances are unusually large and
there are hardly any opportunities for its efficient use other than paying it
back. One could argue that the uncertainty about future cashflows could be
the reason that they continue to hold on the cash, despite not having much
use of it. However, in Figure 225 we highlight that the operating cashflow
growth for 13-14F is set to be same or higher than the historical average for
all regions except Asia ex-Japan. Even for Asia, the actual cashflow-growth
level is only lower than Japan, which is high due to the low base in 2012.
Figure 225
MSCI (ex-finance) operating cashflow growth: Comparing estimates with history

We also checked the ability of companies to pay existing dividends out of the
current free cashflow, and thus not having to raise any debt. We found that
since the 2000-01 slowdown, only Asia has found it difficult to cover
dividends without raising debt. However, our data also shows that future
payout expectations are quite low, driving improvements in dividend cover for
all markets. With cash balances already higher, we expect the positive
surprise for the payout ratios in 2013-14.
Figure 226
MSCI (ex-finance): FCF cover (FCF/dividends) trend

0
2
4
6
8
10
12
14
Japan World AsiaxJ USA Europe
Avg (13-14) Avg (02-11)
(%)
Japan's operating growth is
set to be robust over the
next two years, followed by
rest of Asia
(2)
(1)
0
1
2
3
4
5
6
1
9
9
4
1
9
9
5
1
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9
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1
0
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0
1
1
2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
(x)
FCF cover for Asia is set to
improve but remains volatile
(5.5) (3.4)
FCF cover of dividends
has been comfortably
above one for most
regions except Asia
Asias growth to slow but
is still higher than
US and Europe
For Asia FCF cover is set
to improve as capex
growth slows
Operating cash flow
growth set to be robust



Dividends or buyback
Now that we have established that companies are mostly likely to increase
the return of cash to investors, the only question that remains is the route
that the companies will take. One of the easier ways would be to increase the
payout ratios, thus enhancing the distribution of future cashflows and prevent
cash from accumulating at a similar rate as in the past. In Figure 227 we
show that consensus expects payout ratios to fall in 2013-14 for most
markets except the USA. We believe it is unlikely that payout ratios will fall
further for Asia and the USA. For Japan, we see increased capex as a threat
to the payouts. Also for Europe the already high payouts and need to
conserve cash could drive payouts lower.
Figure 227
MSCI (ex-finance): Dividend payout trend

Note: Japans 2008 data is an outlier and hence not plotted. Source: Factset, CLSA Asia-Pacific Markets
From a buyback perspective, the USA remains the key market as it is
motivation and the capability to do buybacks while for Europe, cash
conservation will take the lead. For Japan, we believe that domestic
companies will continue with buybacks while exporters will focus on capex.
For Asia, we still believe the immediate focus will remain on dividends as
highlighted in our freefloat and tax study later in the report.
Figure 228
MSCI (ex-finance): Buyback payout trend

For Asia ex-Japan and Japan, we have smoothed the outliers (2001-2 and 2008).
15
20
25
30
35
40
45
50
55
2
0
0
1
2
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2
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1
1
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1
2
F
2
0
1
3
F
2
0
1
4
F
(%)
Europe's payout is the highest while Asian
payout set to increase to 36% in 2012
0
10
20
30
40
50
60
70
80
90
100
1
9
9
4
1
9
9
5
1
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9
6
1
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1
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3
2
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4
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2
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0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
(%)
Buybacks common in US and
Europe but hardly used in Asia
Increasing payout is a
straightforward way to
not allow cash to
accumulate in future
USA is key market from a
buyback perspective
Europe will continue to
focus on cash
conservation
Expect Asias payout to
increase while Europe and
Japans could fall



Balance-sheet and cashflow characteristics of yield stocks
In Figure 229, we show the balance sheet and cashflow characteristics of the
different yields and payout ranges for investors to ascertain the sustainability
of dividends. For example, the table shows that while stocks with more than
7% yield may seem attractive, they also have the highest gearing.
Figure 229
MSCI world - Current balance sheet and cashflow ratios (median values)

Note: Dividend yield is 12-month forward and payout is FY1 data.
<2 2-3 3-4 4-5 5-7 >7 All
0-20 9.7 9.6 na na na na 9.7
20-40 11.7 9.6 9.5 9.1 11.2 na 10.2
40-60 8.4 11.0 9.0 10.2 9.4 na 9.8
60-80 6.1 16.2 15.0 5.6 6.4 8.6 8.3
>80 19.5 11.9 8.3 7.1 6.7 4.4 7.4
All 10.5 10.0 9.5 8.3 7.6 6.8 9.6
<2 2-3 3-4 4-5 5-7 >7 All
0-20 45.5 53.6 na na na na 46.4
20-40 61.6 59.2 40.1 28.0 na na 54.9
40-60 52.8 70.3 68.0 68.8 19.1 na 64.0
60-80 37.7 62.3 56.0 71.9 65.4 48.0 62.1
>80 24.6 73.3 73.0 52.1 72.5 92.7 76.5
All 52.2 63.3 56.2 58.3 56.1 87.4 58.4
<2 2-3 3-4 4-5 5-7 >7 All
0-20 51.4 60.6 na na na na 51.6
20-40 46.2 49.2 66.7 65.4 62.7 na 49.6
40-60 59.5 48.5 59.1 45.1 70.1 na 54.4
60-80 69.0 58.5 39.3 84.7 69.5 115.5 67.0
>80 93.7 58.4 59.8 63.6 78.5 76.8 72.2
All 50.5 50.2 59.1 60.3 74.5 86.9 55.4
<2 2-3 3-4 4-5 5-7 >7 All
0-20 30.0 29.3 na na na na 29.7
20-40 20.2 25.2 44.3 37.6 35.3 na 27.1
40-60 38.9 25.4 35.0 19.9 32.0 na 27.9
60-80 41.8 4.7 16.6 61.1 54.7 73.9 43.8
>80 18.9 35.6 53.3 39.5 62.7 58.8 51.2
All 28.0 24.1 37.0 35.1 53.9 63.1 31.3
<2 2-3 3-4 4-5 5-7 >7 All
0-20 6.2 4.9 na na na na 6.1
20-40 4.8 5.6 6.4 5.7 20.0 na 5.4
40-60 6.6 6.2 5.2 5.2 5.1 na 5.6
60-80 10.7 7.2 6.8 8.3 8.2 10.7 7.8
>80 6.4 4.8 11.7 11.0 13.3 15.7 11.6
All 5.5 5.7 6.3 7.1 9.5 14.6 6.2
<2 2-3 3-4 4-5 5-7 >7 All
0-20 8.2 11.9 na na na na 8.7
20-40 17.5 20.5 21.0 18.9 35.7 na 18.9
40-60 25.6 28.0 33.8 30.3 25.5 na 29.8
60-80 14.0 44.2 47.4 40.2 41.0 39.8 41.1
>80 13.7 37.6 67.4 62.8 72.3 48.5 57.5
All 12.3 22.9 31.5 37.7 43.2 44.6 23.1
FY0 Capital
intensity (%)
Dividend yields (%)
P
a
y
o
u
t
s
2013F Cash
payout (%)
Dividend yields (%)
P
a
y
o
u
t
s
FY0 Tot debt
to equity (%)
Dividend yields (%)
P
a
y
o
u
t
s
FY0 Net debt
to equity (%)
Dividend yields (%)
P
a
y
o
u
t
s
FY0 Cash
/tot asset (%)
Dividend yields (%)
P
a
y
o
u
t
s
FY0 FCF
conversion
Dividend yields (%)
P
a
y
o
u
t
s
Highlighting cashflow
situation of different yield
and payout buckets
Higher yield companies
has less excess cash



Stocks with excess cash and strong cashflow
In Figure 230 and 231, we highlight the companies with excess cash and
strong cashflow within MSCI World universe. These stocks have positive free-
cashflow yield, high free-cashflow conversion and strong track record of free-
cashflow yield higher than dividend yield. Other factors such as gearing, cash-
to-total assets, capital intensity and payout were also considered.
Figure 230
Stocks with excess cash and strong cashflow (Asia Pacific ex-Japan, Japan and Europe region)
Code Name Cty Sector Mkt cap 12MF FCF yld FCF Conv FCF>Div Gearing Capital Payout Cash 12MF 12MT
(US$m) Div yld (FY0, (L5Y Track (FY0, Int (FY1, To TA PE PB
(%) %) avg,%) record %) (FY0, %) (FY0, (x) (x)
%) %)
941 HK China Mobile CN Telecom 220,930 4.0 7.5 79.5 16/16 (46.9) 23.4 43.7 35.0 11.0 1.9
700 HK Tencent CN Software 64,608 0.5 2.1 101.0 8/9 (44.7) 17.1 11.4 46.3 24.2 9.3
INFO IN Infosys IN Software 29,959 1.9 4.2 74.2 16/17 (61.9) 4.5 30.1 54.0 15.8 4.2
CSL AU CSL AU Pharma 28,549 1.9 2.9 74.4 14/16 3.3 7.0 40.9 19.9 21.2 7.9
2412 TT Chunghwa Telecom TW Telecom 24,696 5.1 6.6 121.9 10/12 (19.4) 12.6 92.7 16.5 18.0 2.0
TLKM IJ Telkom ID Telecom 19,075 4.9 8.6 102.0 16/17 14.9 19.4 61.3 10.5 13.2 3.5
035420 KS NHN KR Software 9,738 0.3 2.5 80.0 10/10 (56.2) 6.7 5.4 46.7 17.8 6.3
HCLT IN HCL Tech IN Software 8,995 1.7 3.7 68.0 8/9 (3.4) 4.3 21.2 13.4 12.6 4.0
4904 TT Far EasTone TW Telecom 8,288 5.4 5.8 153.8 10/12 (14.6) 11.6 98.6 14.5 17.9 3.3
270 HK Guangdong Inv CN Utilities 5,176 3.0 7.1 134.1 14/17 1.3 25.3 38.5 10.2 13.2 1.8
ITMG IJ ITM ID Energy 4,809 6.6 11.0 82.8 5/6 (56.7) 2.9 85.7 38.8 12.0 4.2
PTBA IJ Bukit Asam ID Energy 3,648 4.6 9.4 115.2 11/11 (83.3) 2.2 53.8 59.0 11.9 3.7
3008 TT Largan TW Tech HW 3,512 2.8 3.9 89.5 8/10 (54.8) 15.1 39.7 45.4 14.3 5.1
FLT AU Flight Centre AU Cons svcs 3,168 4.1 8.9 87.1 12/14 (114.9) 2.8 57.1 51.5 14.1 3.6
Japan
9437 JP NTT docomo JP Telecom 63,115 4.4 6.9 108.1 12/14 (12.6) 16.9 49.0 12.9 10.9 1.1
4502 JP Takeda Pharma JP Pharma 40,658 3.9 7.5 113.0 14/14 5.2 4.1 83.9 12.7 24.6 1.8
6954 JP Fanuc JP Cap gds 30,561 1.3 3.4 92.8 14/14 (64.9) 8.2 30.8 56.3 23.9 2.8
4503 JP Astellas Pharma JP Pharma 23,318 2.8 4.8 78.1 13/14 (29.4) 6.6 59.0 21.4 18.5 2.1
4689 JP Yahoo Japan JP Software 22,854 1.1 3.9 99.3 14/14 (55.2) 4.8 19.8 45.8 18.7 4.0
1605 JP Inpex JP Energy 21,203 1.4 13.8 126.9 6/7 (16.4) 5.9 13.4 22.0 11.0 0.8
6861 JP Keyence JP Tech HW 16,859 0.2 3.2 97.5 14/14 (58.2) 1.8 5.5 55.1 22.8 2.3
6971 JP Kyocera JP Tech HW 16,623 1.5 4.2 124.9 16/19 (26.0) 3.8 34.0 24.0 16.3 1.0
4452 JP Kao JP HPC 15,005 2.3 5.4 173.3 13/14 (5.6) 3.7 48.0 13.3 20.8 2.5
4523 JP Eisai JP Pharma 12,492 3.9 6.5 118.9 12/14 37.6 3.0 84.1 18.7 19.9 2.6
9735 JP Secom JP Comm svc 10,906 2.3 3.9 87.6 12/14 (29.4) 8.1 34.6 23.3 14.7 1.5
8113 JP Unicharm JP HPC 9,792 0.7 3.3 59.5 13/14 17.4 6.2 19.8 18.4 26.8 4.2
9613 JP NTT Data JP Software 8,585 2.1 7.3 143.3 13/14 35.9 10.8 39.7 11.1 16.7 1.2
4543 JP Terumo JP Healthcare 8,323 1.3 4.2 82.4 14/14 32.0 6.3 24.6 11.4 18.4 2.0
4817 JP Jupiter Telecom JP Media 8,237 2.6 9.2 184.5 8/8 14.6 17.4 45.2 13.7 17.5 1.6
1878 JP Daito Trust JP Property 7,879 4.2 11.5 99.3 13/14 (66.7) 0.3 49.9 39.7 11.8 3.7
2267 JP Yakult Honsha JP FBT 7,287 0.7 2.1 74.3 12/14 (7.8) 6.6 26.1 19.9 34.9 2.5
2651 JP Lawson JP Food & drug 7,257 3.1 7.3 91.2 11/13 (15.6) 7.6 57.2 15.8 18.0 3.0
7309 JP Shimano JP Cons dur 6,339 1.2 2.6 92.4 12/12 (40.8) 9.3 23.1 36.8 19.0 2.7
4506 JP Dainippon SP JP Pharma 5,607 1.5 8.1 124.3 13/14 5.0 2.5 46.0 20.0 25.8 1.5
Europe
EAD FP European Aeronautic FR Cap gds 38,360 2.6 7.4 187.7 12/14 (52.2) 4.5 32.6 11.0 12.6 2.8
HEN3 GR Henkel Vorzug DE HPC 38,334 1.5 4.1 117.4 16/17 14.5 2.5 24.6 14.3 16.2 2.9
SCHP VX Schindler-Hldg CH Cap gds 17,148 1.8 3.3 146.6 15/17 (67.4) 1.9 38.8 34.8 21.3 5.1
DSY FP Dassault Systemes FR Software 13,900 1.0 5.1 148.5 15/15 (53.1) 2.0 22.7 36.2 21.9 4.8
SW FP Sodexho Alliance FR Cons svcs 13,409 2.6 6.8 139.0 18/19 41.1 1.7 49.0 11.4 18.6 3.4
SOLB BB Solvay SA BE Materials 13,314 2.9 7.3 142.4 15/18 18.3 6.3 38.2 13.8 12.9 1.5
PUB FP Publicis Groupe FR Media 13,048 2.0 7.6 147.5 15/16 (8.9) 2.0 27.8 13.2 14.2 2.3
WOS LN Wolseley GB Cap gds 12,786 2.5 5.6 121.5 16/19 2.8 1.0 37.9 11.5 15.0 2.1
BRBY LN Burberry Group GB Cons dur 9,507 2.3 3.7 78.9 10/11 (39.0) 8.2 41.2 34.0 18.0 6.1
LISN SW Chocoladefabriken CH FBT 9,114 1.6 2.7 84.1 15/17 (30.0) 4.2 43.4 19.7 27.8 5.0
GEBN VX GEBERIT CH Cap gds 9,073 3.2 4.6 97.2 14/14 (32.9) 5.0 63.9 25.5 19.7 6.0
Stocks with high FCF
conversion and strong
FCF>dividends track
record



US cash hoarders
Figure 231
Stocks with excess cash and strong cashflow (USA)
Code Name Cty Sector Mkt cap 12MF FCF yld FCF Conv FCF>Div Gearing Capital Payout Cash 12MF 12MT
(US$m) Div yld (FY0, (L5Y Track (FY0, Int (FY1, To TA PE PB
(%) %) avg,%) record %) (FY0, %) (FY0, (x) (x)
%) %)
AAPL US Apple US Tech HW 427,693 2.4 9.6 115.8 16/19 (24.6) 6.0 23.7 16.5 9.7 3.3
GOOG US Google US Software 249,362 0.0 5.1 110.4 9/9 (59.3) 6.5 0.0 51.3 17.0 3.5
MSFT US Microsoft US Software 229,866 3.4 12.5 115.4 18/19 (77.0) 3.1 31.9 52.0 9.2 3.1
ORCL US Oracle US Software 168,601 0.7 7.5 126.9 19/19 (32.5) 1.7 9.8 39.2 12.0 3.6
KO US Coca-Cola US FBT 166,426 3.0 4.7 88.7 19/19 49.0 5.8 51.7 19.2 17.2 5.1
CSCO US Cisco System US Tech HW 109,247 2.7 9.2 125.9 19/19 (63.2) 2.4 28.3 53.1 10.2 2.0
INTC US Intel US Semis 104,821 4.3 9.2 100.6 18/18 (9.2) nm 46.7 21.5 10.7 2.2
EBAY US eBay US Software 72,425 0.0 3.5 131.1 13/15 (23.4) 8.9 0.0 25.4 20.2 3.5
MMM US 3M US Cap gds 69,087 2.5 5.3 96.1 18/19 8.1 5.0 37.0 13.4 14.9 3.9
NWSA US News Corp US Media 64,700 0.7 3.9 79.2 17/19 23.6 2.8 10.5 17.0 15.4 2.7
AMGN US Amgen US Pharma 64,608 2.3 6.0 108.8 18/18 12.9 nm 25.8 44.3 11.4 3.2
MON US Monsanto US Materials 54,159 1.5 4.2 88.7 13/13 (12.8) 5.4 32.3 17.7 21.2 4.4
HON US Honeywell Intl US Cap gds 53,457 2.4 4.8 142.1 18/18 17.1 2.3 33.1 12.6 13.9 4.7
EMC US EMC US Tech HW 51,852 0.0 10.0 174.4 17/18 (19.9) 5.7 0.0 16.2 12.7 2.2
ACN US Accenture US Software 48,983 2.3 8.1 151.0 12/12 (160.2) 1.2 38.0 39.9 16.6 10.1
NKE US Nike US Cons dur 48,429 1.8 2.6 83.3 16/19 (32.5) 2.5 31.8 24.3 18.9 4.5
TXN US Texas Ins US Semis 36,659 2.5 7.7 107.3 16/19 15.7 3.9 48.4 19.8 18.8 3.4
TJX US Tjx Cos US Retail 32,948 1.3 3.2 98.4 18/19 (25.4) 3.5 18.1 19.3 15.7 9.3
VMW US VMware US Software 32,786 0.0 5.2 195.7 5/5 (72.8) 5.1 0.0 43.7 23.0 5.4
AGN US Allergan US Pharma 31,543 0.2 2.9 82.6 17/19 (24.0) nm 3.9 32.3 22.1 5.9
ITW US Illinois Tool US Cap gds 29,119 2.4 5.2 114.0 18/18 21.5 nm 35.4 14.4 14.5 3.3
MOS US Mosaic US Materials 26,073 1.6 3.9 55.7 5/6 (23.0) 14.8 23.3 22.8 12.9 2.0
SYK US Stryker Corp US Healthcare 23,807 1.6 6.0 94.3 19/19 (29.5) 2.4 22.9 31.8 14.5 3.0
EL US Estee Lauder US HPC 23,575 1.4 2.9 96.8 17/17 (2.2) 4.3 36.4 20.4 22.2 8.1
DELL US Dell US Tech HW 22,985 2.1 19.1 120.0 19/19 (62.4) 1.1 8.2 33.3 8.3 2.3
ADBE US Adobe Systems US Software 18,693 0.0 6.4 148.6 19/19 (30.5) 6.2 0.0 35.5 26.2 2.8
SHW US Sherwin-Williams US Materials 16,718 1.0 3.4 137.5 19/19 45.8 nm 22.0 13.9 20.7 10.6
BDX US Becton Dickinson US Healthcare 16,300 2.3 6.6 96.7 18/19 48.0 7.2 34.1 19.2 14.9 3.9
GPS US Gap US Retail 15,686 1.6 4.7 119.9 18/19 (8.0) 3.8 21.8 25.4 12.6 4.8
NOC US Northrop Grumman US Cap gds 15,558 3.6 14.2 121.8 17/19 0.7 1.3 32.8 14.5 9.2 1.6
AMAT US Applied Materials US Semis 15,453 2.5 9.7 148.0 16/19 0.1 1.9 58.6 16.0 18.4 2.3
RL US Ralph Lauren US Cons dur 15,100 0.9 3.8 110.0 13/15 (23.9) 4.0 18.3 21.9 19.1 4.3
SYMC US Symantec US Software 15,004 0.3 9.7 177.1 18/19 (23.0) 4.2 0.0 24.7 11.8 3.0
CF US CF Industries US Materials 14,407 0.7 12.2 129.7 8/8 9.0 4.1 5.6 13.4 8.5 2.3
COH US Coach US Cons dur 14,312 2.5 7.4 102.2 13/13 (44.9) 3.9 30.2 29.5 12.1 6.5
ROST US Ross Stores US Retail 13,276 1.1 3.0 94.9 18/19 (33.5) 4.8 15.5 19.7 15.3 7.4
BBBY US Bed Bath US Retail 13,274 0.0 7.1 91.6 18/19 (44.9) 2.6 0.0 30.7 11.5 3.1
ADI US Analog Devices US Semis 13,153 2.6 4.9 108.2 17/19 (73.9) 4.9 56.9 69.4 20.0 3.3
ZMH US Zimmer Hldgs US Healthcare 12,943 1.0 6.7 94.9 12/12 4.5 5.9 13.1 17.3 13.0 2.4
MAT US Mattel US Cons dur 12,900 3.4 9.1 96.8 16/19 5.7 nm 49.9 20.5 14.4 5.1
NTAP US NetApp US Tech HW 12,892 0.0 7.9 187.5 15/17 (96.3) 6.5 0.0 56.6 14.7 2.9
STJ US St Jude Medical US Healthcare 12,843 2.4 7.2 85.8 16/18 46.1 nm 26.0 13.0 11.1 2.9
STX US Seagate US Tech HW 12,194 4.4 17.9 91.3 9/11 21.3 4.3 27.5 21.0 6.3 3.7
HUM US Humana Inc US Healthcare 11,774 1.2 12.0 129.7 17/19 (72.0) 1.1 13.5 46.6 9.7 1.4
JNPR US Junpier Networks US Tech HW 11,533 0.0 2.0 140.0 12/13 (26.4) 9.5 0.0 29.0 18.3 1.6
TDC US Teradata US Software 11,272 0.0 4.1 119.3 6/6 (25.6) 5.6 0.0 23.8 19.6 6.3
APH US Amphenol US Tech HW 10,834 0.6 4.8 100.1 19/19 31.4 3.0 10.5 18.1 18.2 5.0
ALTR US Altera US Semis 10,680 1.1 4.6 114.9 17/19 (77.3) 3.5 26.1 66.1 22.3 3.4
EW US Edwards Life US Healthcare 10,432 0.0 2.3 77.9 13/13 (22.4) nm 0.0 23.5 25.4 6.9



16. Will buybacks dominate the global landscape?
Over the past decade, buybacks have evolved as a secular theme across
developed markets. Globally companies bought-back shares worth US$490bn
in 2011, of which 95% came out of developed markets (DM), while the
emerging-market (EM) contribution was meagre. This growing significance of
buybacks in DM warrants a closer scrutiny of the dynamics at play, both in DM
and EM. With our previous question, we aim to identify the preconditions that
are essential for the evolution of buybacks and more importantly for them to
become successful. We also focus on identifying the underlying characteristics
that separates EM from DM and extend the analysis to highlight the
circumstances under which the current diverging gap between the two
regions could converge in the future.
It is not surprising that the proliferation of the buyback culture within the DM
markets has come at the expense of its concurrent theme, the dividends.
Although both buybacks and dividends have witnessed steady improvement
over the past decade, the former has clocked a faster growth rate. This
structural shift from dividends to buybacks is evident in the USA; the market
is worth examining simply owing to its size and the explosive buyback growth
it has witnessed since the early 1990s, when buybacks were still in nascent
stage while dividends dominated. However, from there onwards buybacks
started gaining significant traction with corporations and investors and were
favoured ahead of dividends. Indeed in 1998, buybacks superseded dividends
and the trend continued unabated until the GFC.
Against this backdrop, the key question is what has led to this profound shift
in the market dynamics causing buybacks to gain such significant popularity
over dividends. The answer lies in understanding the reasons why companies
prefer buybacks to dividends. Our analysis of 82,744 buyback transactions
across the globe since 2007 highlights that the bulk of the companies
engaged in buybacks primarily for four reasons: undervaluation, both relative
to their own history and to the market; excess cash or low gearing and lack of
investment opportunities commensurate with the current ROE generated by
the business; to avoid the commitment associated with the sticky dividends
due to volatile nature of the future cashflows; and high promoter holding
versus professional management. In Figure 232, we highlight the divergence
between the EM and DM buybacks.
Figure 232
MSCI regions and markets (ex-fin) - Buyback versus dividend payout (5Y avg)

Note: Intersection (15.8, 41.0) highlights the median of 07-11A average buyback payout and 07-11A
average dividend payout of the MSCI regions and countries. Source: Factset, CLSA Asia-Pacific Markets.
EM
LatAm
APxJ
AsiaxJ
Europe
ME&A
Brazil
Canada
China Egypt
France
HK
Indonesia
Ireland
Japan
Malaysia
Mexico
Peru
Philippines
Poland
Singapore
S. Africa
Spain
Taiwan
UK
30
35
40
45
50
55
60
3 6 9 12 15 18 21 24 27
Buyback payout (07-11A
Dividend payout
(07-11A avg, %)
Australia (14.9, 69.7)
Switzer'nd (37.2, 67.9)
India (8.5, 23) Korea (12, 16.6) Russia (20.9, 14.3)
Clear demarcation between developed and emerging
markets in terms of buyback preference
USA (58.1,33.6)
DM (43.2,40.1)
Germany
(31.4,41.7)
Globally companies
bought-back shares worth
US$490bn in 2011 . . .

. . . versus US$181bn in
2009 and US$335bn
in 2010
Buybacks have
proliferated at the
expense of dividends
Global analysis of 82,744
buyback transactions to
identify their key
underlying characteristics
Developed markets prefer
buybacks more than
emerging markets



Has there been a shift in buyback preference?
It took buybacks several years to gain the importance and displace dividends
in the developed markets. With the start of 21
st
Century, buybacks were
already the name of the game in developed markets, while emerging markets
were still coming in terms with dividends. Our analysis in Figure 233,
highlights that the developed markets, predominantly the USA, has not
changed much since then in terms of preference towards buybacks, while the
emerging markets preference has dwindled. The USA with average buyback-
payout of 45% during 2000-05 recorded a small increase during 2010-11,
while Asia ex-Japan, which used to have buyback payouts north of 30%
during 2000-05 witnessed a fall to a meagre 6% in 2010-11.
Figure 233
Buyback payouts: Average 2000-05 versus last two-year average (ex-fin)

Note: Aggregates are bottom-up free-float adjusted Source: Factset, CLSA Asia-Pacific Markets
Embedded global payout (buyback + dividend)
Historical analysis of the global dividends and buybacks clearly highlights that
the flexibility associated with buybacks has been the key reason behind their
popularity over dividends. Starting and stopping the buybacks as per the
prevailing macroeconomic conditions is an invaluable tool for companies.
During the crisis periods, buybacks have taken the biggest hit compared with
dividends and on the other side during the risk-on bull periods, buybacks
surged past dividends. In Figure 234, we highlight that the USA accounts for
the highest embedded payouts above Australia and Taiwan.
Figure 234

Figure 235
MSCI AC world - Buyback
1
and dividend payout trend

MSCI regions/markets - Buyback
1
and dividend payout

1
Buyback payouts are ex-finance. Aggregates are bottom-up free-float adjusted. Source: Factset, CLSA Asia-Pacific Markets
World
EM
DM
LatAm
APxJ
AsiaxJ
Europe
Australia
Brazil
Canada
China
France
HK
India
Japan
Malaysia
Philippines
Russia
Singapore
S. Africa
Switzer'nd
Taiwan
UK
Germany
0
10
20
30
40
0 10 20 30 40
Buyback payout (10-11A avg, %)
Buyback payout (00-05A avg, %)
Korea (57.9, 8.7)
Switzer'nd
(52.8, 79.4)
USA (45,51)
USA and Switzerland have increased the buyback levels,
while majority of the EM markets have reduced compared
to history
29
27
35
43
38
32
41
37
28
35
44
51
61
50
20
31
42
35
51
56
60
52
51
39
44
34
32
35
33
35
50
40
33
34
0
20
40
60
80
100
120
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
Buyback payout Dividend payout
(%)
0
10
20
30
40
50
60
70
80
90
100
U
S
A
A
u
s
t
r
a
l
i
a
D
M
W
o
r
l
d
T
a
i
w
a
n
U
K
E
u
r
o
p
e
F
r
a
n
c
e
G
e
r
m
a
n
y
J
a
p
a
n
E
M
M
a
l
a
y
s
i
a
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a
t
A
m
A
s
i
a
x
J
P
h
i
l
i
p
p
i
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s
S
i
n
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a
p
o
r
e
K
o
r
e
a
H
K
C
h
i
n
a
I
n
d
i
a
Buyback payout Dividend payout
(L10Y avg, %)
Flexibility associated with
buybacks strengthen the
hands of corporates

USA accounts for highest
embedded payouts above
Australia and Taiwan
DM preference has not
changed much, while EM
buyback activity
has pared
AxJ buyback payouts have
fallen from north of 30%
during 2000-05 to meagre
6% in 2010-11



Global average buyback and dividend payout since 1999
In Figure 236, we highlight the historical buyback and dividend payout
averages for the major global regions, markets and also for each of world
sector. We have removed financials while calculating the buyback payouts for
regions and markets, as the large buybacks by the banks and diversified
institutions especially from Europe are distorting the overall picture, as these
institutions also re-issue bulk of these bought-back shares causing the net
impact to be minimal.
Figure 236
MSCI AC world regions and markets - Buyback payout versus dividend payout during different time period

1
Dot com burst period
2
Pre-global financial crisis (GFC)
3
GFC
4
European sovereign debt crisis. Source: Factset, CLSA Asia-Pacific Markets
99-02
1
03-07
2
08-09
3
10-11
4
95-11 99-02
1
03-07
2
08-09
3
10-11
4
95-11
World 36.9 43.8 35.0 36.2 37.7 46.7 33.9 45.1 33.5 42.1
DM 37.0 45.7 37.3 38.7 39.0 47.7 34.4 48.0 34.5 43.1
EM 33.9 21.3 12.3 11.8 20.6 31.0 30.3 33.5 15.2 30.8
USA 44.5 61.3 47.5 51.7 48.7 33.9 43.8 41.5 26.3 32.7
Europe 22.4 32.4 20.2 19.3 23.4 67.0 39.6 48.3 18.8 57.7
APxJ 39.1 17.4 11.2 12.1 19.3 50.0 39.1 45.8 10.0 47.1
Japan 26.0 18.7 30.3 10.2 18.7 29.9 48.2 70.6 31.9 33.6
AsiaxJ 38.7 16.5 11.9 6.1 18.2 36.4 32.2 37.8 8.4 39.6
Latam 15.0 18.7 13.8 12.5 16.0 33.8 34.6 34.7 16.2 31.2
ME&A 12.2 13.7 12.0 7.6 9.2 39.4 38.8 38.0 0.0 36.4
Markets (ex-financials)
Korea 88.8 20.7 13.0 8.1 36.1 35.6 80.6 21.0 12.1 21.9
UK 23.2 36.1 13.1 17.6 33.6 42.7 22.5 47.8 39.1 47.6
Canada 20.9 32.8 20.7 22.8 28.5 30.4 19.4 47.3 38.6 34.1
Russia 30.0 29.5 8.9 22.9 23.3 10.0 na 14.1 14.4 11.7
Switzerland 19.9 29.1 32.2 39.9 22.6 256.5 40.9 102.8 49.3 122.5
Australia 38.5 19.2 10.0 23.5 22.5 78.3 29.2 74.2 62.5 70.7
Spain 1.3 31.1 19.8 27.1 20.6 29.2 na 52.8 54.6 38.8
Germany 15.1 19.3 56.8 2.9 20.0 36.7 267.4 49.7 35.6 41.5
France 38.4 16.6 15.6 8.9 19.8 55.4 41.8 54.6 46.1 91.5
Brazil 6.5 24.9 5.6 11.2 19.7 37.1 7.4 32.6 38.7 33.1
Japan 26.0 18.7 30.3 10.2 18.7 29.9 48.2 70.6 31.9 33.6
Mexico 23.5 10.6 22.3 14.9 16.7 21.8 23.1 42.1 38.4 27.4
Taiwan 16.7 15.9 14.1 11.9 13.0 37.1 68.9 62.8 54.3 41.1
Indonesia 26.8 4.6 9.5 5.8 12.5 19.2 na 33.9 33.7 29.5
Malaysia 11.2 14.4 15.0 2.6 10.9 28.6 9.4 41.5 43.2 36.2
S. Africa 12.3 13.5 12.1 7.7 9.2 37.9 12.5 42.2 44.1 38.6
Philippines 4.9 12.0 12.7 0.9 7.3 34.7 4.4 51.6 38.9 32.8
China 7.2 5.6 19.4 2.0 6.6 25.2 7.0 37.3 32.0 25.3
HK 11.0 3.5 5.8 0.8 5.5 49.8 28.2 40.6 27.9 42.5
India 5.6 3.3 7.7 8.0 5.4 26.1 5.7 24.4 22.9 23.2
Singapore 10.3 1.4 5.7 5.8 5.1 43.4 8.8 50.1 48.4 43.1
MSCI AC World sectors
Div fin 120.9 108.8 na 65.7 93.0 29.7 36.0 na 18.4 29.8
Software 75.0 86.2 66.6 60.8 70.8 9.2 32.1 20.2 19.6 18.4
Semis 86.0 72.7 73.8 45.7 66.0 15.7 23.4 55.4 25.2 21.1
Tech Hw 50.7 66.3 72.7 51.7 58.8 na 19.1 26.0 16.3 21.0
Healthcare 50.5 77.4 46.3 58.0 56.6 21.1 14.0 16.5 22.2 32.4
Retail 52.6 75.7 33.8 76.6 56.2 18.5 20.2 30.3 29.7 24.0
Media 33.3 90.7 48.9 73.4 54.9 139.8 32.9 55.8 28.7 61.1
HPC 46.6 75.7 51.6 53.3 53.3 36.8 39.3 43.0 46.5 39.3
Cons svc 53.5 59.7 52.2 41.6 52.0 28.9 40.7 45.1 41.2 35.3
Comm svc 43.6 61.1 34.8 60.7 51.6 21.4 35.5 43.4 44.3 34.7
Cons dur na 29.3 100.8 58.9 42.3 48.6 25.3 60.9 51.0 37.7
Banks 66.8 33.0 44.7 28.3 41.6 51.2 40.2 54.0 35.2 45.3
Pharma 39.1 45.6 21.0 35.2 38.0 37.0 41.6 38.9 40.5 38.9
FBT 38.2 31.9 36.3 40.8 36.3 42.3 43.7 49.5 48.0 69.5
Cap gds 39.5 32.8 33.7 27.0 35.4 39.7 34.2 39.4 32.9 36.3
Transport 42.1 31.6 39.0 40.5 33.9 28.6 30.4 87.4 31.6 36.0
Fd stp ret 27.4 38.1 29.0 45.0 33.1 25.9 29.6 37.8 39.4 30.1
Insurance 35.2 27.6 66.6 32.1 32.6 155.9 24.5 na 31.8 81.9
Energy 20.8 35.1 30.1 26.4 28.2 42.0 26.5 31.3 28.2 36.8
Materials 22.6 21.9 15.3 18.2 26.6 41.0 31.9 30.5 28.3 33.8
Utilities 31.5 27.6 16.5 20.9 24.7 52.7 53.4 56.0 62.8 57.1
Telecom 24.4 34.2 18.8 14.4 22.0 126.1 52.0 57.6 57.8 69.5
Property 33.1 19.1 na 12.7 18.8 62.1 51.5 658.4 41.8 130.3
Auto 23.3 22.1 na 5.8 14.3 29.0 24.7 na 16.7 26.5
Region (ex-
financials)
Buyback payout (avg, %) Dividend payout (avg, %)
Historical buyback and
dividend payouts for the
major global regions,
markets and sectors



Identifying key drivers of buybacks and success rate
There could be various plausible reasons for a company to engage into
buybacks. However, for investors, apart from the reasons, it is also important
to know whether the buyback strategy will turn out to be successful or not.
From a fundamental perspective, buyback action doesnt bring about any
change in the intrinsic value of the company unless it borrows to fund the
buyback programme in order to take advantage of the tax shield associated
with interest payments on the borrowed funds. In all other cases, any rise or
fall in the stock price after the buyback announcement depends on the signal
being conveyed by the company.
In Figure 237 and 238, we highlight that the bulk of companies engage in
buyback action when they are trading cheaply, both relative to the markets
and to their own history. On a more important note, buyback announcements
by companies that appears lucrative based on valuation sends a strong signal
to the markets, resulting in the best relative performance.
Figure 237

Figure 238
Global buybacks: Distribution based on relative PE

Global buybacks: Distribution based on PE Reilly

Note: Relative PE is calculated against the local MSCI market, PE Reilly is calculated based on last five-year monthly data.
Source: Factset, Bloomberg, Datastream, CLSA Asia-Pacific Markets
The analysis of the companys ROE also presents a stark contrasting picture.
Buyback are generally announced by those companies that are either at their
peak-cycle ROE or trough-cycle, with best performance delivered by the ones
that are at the bottom-cycle and poised for a rebound.
Figure 239
Global buybacks: Distribution based on 12-month forward ROE Reilly score

Note: ROE Reilly is calculated based on last 5-year monthly data,
(2)
0
2
4
6
8
10
12
14
0
5,000
10,000
15,000
20,000
25,000
<0.7 0.7-1 1-1.3 1.3-1.6 >1.6
Number of buybacks (LHS)
Next 1-month OPF
Next 3-month OPF
Next 12-month OPF
(No.) (%)
(1)
0
1
2
3
4
5
6
7
8
9
0
5,000
10,000
15,000
20,000
25,000
<20 20-40 40-60 60-80 >80
Next 1-month OPF
Next 3-month OPF
Next 12-month OPF
(No.) (%)
(1)
0
1
2
3
4
5
6
7
8
9
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
<20 20-40 40-60 60-80 >80
Next 1-month OPF
Next 3-month OPF
Next 12-month OPF
(No.) (%)
Buybacks doesnt change
the intrinsic value in the
absence of change in
capital structure
Company can engage in
buybacks, both at
peak-cycle and
trough-cycle ROE . . .
. . . with companies at the
trough-cycle performing
better in the anticipation
of rebound
Undervaluation is a
primary driver of
buybacks



As noted earlier, companies doing buybacks at the peak-cycle ROE sends a
negative signal and forewarns investors regarding the end of the heady
growth enjoyed by the company driving ROEs to the peak-cycle. However, on
the plus side, its also a signal of the prudent management that is not
engaging in reckless acquisitions or any other value-destructive corporate
action. Thus, the companys decision to invest the funds in its own high-ROE
business is also taken positively by the market with decent outperformance
by such companies over the next three to 12 months.
Our analysis also highlights the majority of buybacks are done by the
companies with high earnings-growth volatility and low gearing. From a
performance perspective, earnings growth volatility is a poor factor. However,
the companies with low gearing have delivered the best performance across
the periods. This outperformance could also be attributed to the use of
borrowed funds by the company to reach an optimal capital structure and
benefit from future tax savings.
Figure 240

Figure 241
World buybacks: Distribution based on EPS growth CoV

World buybacks: Distribution based on gearing (FY0)

Note: EPS growth volatility (CoV) is a ratio of average and standard deviation of last 6-years EPS growth.
It is also interesting to note that freefloat is an important factor in the
buyback analysis. Companies with high promoter holdings invariably do not
do buybacks, while companies with high freefloat with professional
management, whose compensation levels are tied to price or EPS do resort to
buybacks options. In Figure 243, we highlight that buyback shares as a
percentage of those outstanding are also important for performance.
Figure 242

Figure 243
World buybacks: Distribution based on freefloat

World buybacks: Distribution based on BB shares %

Note: Free-float is based Lions share database. BB shares % is the percentage of buyback shares bought as a % of total share outstanding.
0
2
4
6
8
10
12
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
<0.4 0.4-0.7 0.7-1 1-1.3 >1.3
Next 1-month OPF
Next 3-month OPF
Next 12-month OPF
(No.) (%)
(2)
0
2
4
6
8
10
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
<0 0-30 30-60 60-90 >90
Next 1-month OPF
Next 3-month OPF
Next 12-month OPF
(No.) (%)
0
2
4
6
8
10
12
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
<20 20-40 40-60 60-80 >80
Next 1-month OPF
Next 3-month OPF
Next 12-month OPF
(No.)
(%)
(1)
0
1
2
3
4
5
6
7
8
9
0
10,000
20,000
30,000
40,000
50,000
60,000
<0.05 0.05-0.1 0.1-0.15 0.15-0.2 >0.2
Next 1-month OPF
Next 3-month OPF
Next 12-month OPF
(No.) (%)
Buyback at the peak-cycle
ROE forewarns investors
of the end of the heady
growth phase

Buybacks are mostly done
by companies with high
earnings-growth volatility

Buybacks of the
companies with low
gearing performs the best
High free-float companies
do the most buyback



Deconstructing DNA of successful buybacks
Based on the earlier analysis of identifying the key reasons underpinning
buybacks and the factors that matter most for them to be successful, we
have identified key ranges for the buyback to deliver the best performance. In
Figure 244, we highlight the incremental contribution of each factor to the
average outperformance over the next 12 months. While the undervaluation,
both relative to its own history and to the market, is an important factor with
the highest contribution, picking the companies that are closer to the trough-
cycle ROE and are doing significant buybacks is also crucial to generate total
22% outperformance over the next 12 months.
Figure 244
Next 12M average performance of Microstrategy global buyback strategy

Note: PE Reilly < 20%, ROE Reilly < 40%, BB shares as a % outstanding shares> 0.1% and Relative PE
<1x. Source: Factset, CLSA Asia-Pacific Markets
Strategy works across the periods
Another important feature of the strategy is that, it not only works over the
long term, but has consistently delivered the best performance across
periods. In Figure 245, we highlight that for each of the periods, addition of
the extra factors has resulted into incremental performance.
Figure 245
Average next 1M, 3M, 6M and 12M performance

Note: PE Reilly < 20%, ROE Reilly < 40%, BB shares as a % outstanding shares> 0.1% and Relative PE
< 1x. Source: Factset, CLSA Asia-Pacific Markets
8.4
22.0
5.8
4.3
3.4
0
5
10
15
20
25
Low
PE Reilly
Below mid-cycle
ROE
Large
buyback
Low
relative PE
Avg next
12M OPF
(%)
Identifying the characteristics of
successfull buybacks
0
5
10
15
20
25
Next 1M Next 3M Next 6M Next 12M
PE Reilly
PE Reilly+ROE Reilly
PE Reilly+ROE Reilly+BB shares
PE Reilly+ROE Reilly+BB shares+Rel PE
(%)
Identifying the key
characteristics of
successful buybacks
Buybacks that are cheap,
close to trough-cycle ROE
outperforms by 22% over
next 12 months
Addition of each factor
enhances the overall
performance
Strategy delivers
consistent
outperformance
across periods



Embedded strategy versus standalone strategies
The buyback strategy is typically played to benefit out of the bump in prices
over the short to medium term. However, our backtest analysis highlights that
the strategy of picking stocks based on their FY0 buyback yield results in
significant outperformance over the long term for most regions. The level of
outperformance does vary for each region with the USA delivering the best
outperformance, while Asia ex-Japan delivered the worst. We have also
compared the performance of high dividend-yield strategies with the high
buyback-yield strategy to identify the investors preference towards either
buyback or dividends in each region. Globally high buyback yields have
underperformed the high dividend-yield stocks, but the high embedded yield
ie, the combination of high dividend and high buyback yields have delivered
similar performance as high dividend yield. In the USA, embedded yield has
delivered the best performance.
Figure 246

Figure 247
MSCI World: Cumulative performance of Q1 and Q2

MSCI USA: Cumulative performance of Q1 and Q2

Note: Backtest based on MSCI universe. Performance is US-dollar MSCI weighted total returns. Factor quintiles are rebalanced on monthly basis.
Similar to the USA, investors have a slightly higher preference towards stocks
that have high buyback yield instead of high dividend yield. However, in Asia
ex-Japan, the preference is clearly towards stocks with high dividend yield.
Moreover the level of buyback activity in Asia in low compared with its
western counterparts.
Figure 248

Figure 249
MSCI Europe: Cumulative performance of Q1 and Q2

MSCI AxJ: Cumulative performance of Q1 and Q2

Note: Backtest based on MSCI universe. Performance is US-dollar MSCI weighted total returns. Factor quintiles are rebalanced on monthly basis.
50
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(Index)
In Asia, preference is
clearly towards high
High buyback-yield stocks
have also outperformed
over the long term
In USA, high buyback
yield stocks have
outperformed stocks with
high dividend yield



Regional buyback characteristics
In Figure 250, we highlight the key factors from a buyback perspective for
each of the global regions. The table also highlights the three-month forward
performance for each of the factor ranges broken down by region.
Figure 250
MSCI AC world regions and markets - Factors and next three-month outperformance

1
Dot com burst period
2
Pre-global financial crisis (GFC)
3
GFC
4
European sovereign debt crisis. Source: Factset, CLSA Asia-Pacific Markets
<20 20-40 40-60 60-80 >80 <20 20-40 40-60 60-80 >80
Global 22,747 13,842 10,127 5,702 3,260 2.2 0.5 0.5 (0.1) (0.5)
United States 2,241 1,010 749 430 253 4.0 2.1 2.1 1.4 0.3
Europe 13,775 8,408 5,447 3,310 1,635 1.2 (0.1) 0.2 (0.7) 0.2
Asia ex-Japan 3,125 2,148 2,476 1,169 742 3.6 1.0 0.3 (0.4) (2.1)
Japan 451 126 50 57 18 4.0 5.6 4.8 3.1 4.6
Latin America 919 718 360 291 269 2.0 (2.1) (1.1) 4.8 0.9
<0.7 0.7-1.0 1.0-1.3 1.3-1.6 >1.6 <0.7 0.7-1.0 1.0-1.3 1.3-1.6 >1.6
Global 11,796 19,681 15,477 7,846 5,960 2.8 0.6 (0.3) 1.4 0.6
United States 737 1,506 1,415 734 696 5.1 2.7 2.2 3.6 1.8
Europe 4,424 10,790 10,353 5,400 3,653 2.3 (0.0) (0.6) 1.6 1.2
Asia ex-Japan 4,699 4,019 1,813 536 276 1.9 1.0 (2.1) (1.8) (0.8)
Japan 134 224 176 63 134 5.8 4.7 4.8 2.6 3.6
Latin America 308 1,157 594 364 465 2.8 (0.6) 1.8 1.0 0.3
<8 8-12 12-16 16-20 >20 <8 8-12 12-16 16-20 >20
Global 12,423 19,474 16,002 7,000 5,870 2.6 0.7 (0.3) 1.1 0.9
United States 442 1,218 1,549 916 963 7.2 4.3 1.7 0.9 2.9
Europe 6,411 12,043 9,165 4,025 2,982 1.8 (0.1) (0.6) 1.9 1.6
Asia ex-Japan 3,807 3,232 2,979 898 428 2.7 1.5 (1.3) (2.2) (2.4)
Japan 81 222 174 95 159 6.3 4.1 5.4 5.0 3.2
Latin America 293 1,117 593 397 488 1.2 (0.2) 0.0 3.0 0.7
<20 20-40 40-60 60-80 >80 <20 20-40 40-60 60-80 >80
Global 14,950 6,639 6,655 6,932 16,236 1.8 (0.3) 0.1 1.4 0.8
United States 933 499 794 542 800 4.4 (0.1) 2.3 1.2 2.9
Europe 8,090 4,050 3,640 3,978 10,930 1.6 (1.7) (1.3) 1.0 0.6
Asia ex-Japan 3,726 1,187 1,000 1,400 1,963 1.8 2.4 2.4 1.8 (1.2)
Japan 133 150 94 80 135 6.8 6.0 4.8 3.1 2.0
Latin America 768 201 508 297 763 1.4 (2.0) (0.2) (1.0) 2.1
<10 10-15 15-20 20-25 >25 <10 10-15 15-20 20-25 >25
Global 11,925 11,551 9,402 6,262 17,529 0.8 0.8 0.9 0.1 0.6
United States 818 1,308 920 373 563 4.3 2.8 1.8 1.9 2.2
Europe 5,778 5,549 4,775 3,902 12,721 0.1 (0.3) 0.4 0.1 0.6
Asia ex-Japan 3,002 3,163 2,448 1,101 1,361 0.7 1.3 0.6 0.5 (0.9)
Japan 391 158 45 10 18 5.0 3.9 2.9 3.7 11.6
Latin America 314 83 246 492 1,733 3.8 0.7 2.2 1.7 (0.4)
<0.4 0.4-0.7 0.7-1.0 1.0-1.3 >1.3 <0.4 0.4-0.7 0.7-1.0 1.0-1.3 >1.3
Global 35,119 26,879 6,687 3,222 5,103 0.7 1.3 1.2 0.9 1.3
United States 2,969 1,957 681 212 289 4.4 3.2 1.8 1.1 0.4
Europe 18,814 12,594 2,659 1,613 3,758 (0.2) 1.0 (0.2) 2.3 1.8
Asia ex-Japan 6,932 7,975 2,259 1,081 456 0.2 1.5 1.2 (1.0) (4.6)
Japan 1,024 378 55 29 31 5.2 5.7 8.7 12.3 3.1
Latin America 793 884 515 185 414 (0.4) 1.4 0.4 (3.4) 2.7
<20 20-40 40-60 60-80 >80 <20 20-40 40-60 60-80 >80
Global 1,662 11,785 16,187 11,828 30,360 2.2 0.9 2.0 1.7 0.2
United States 18 201 354 748 4,248 3.7 5.0 4.5 3.2 3.2
Europe 708 3,698 6,973 5,859 20,168 2.2 0.1 3.5 0.4 (0.3)
Asia ex-Japan 635 6,139 6,153 2,595 1,634 1.6 0.8 (0.0) 1.5 (1.7)
Japan 49 320 530 431 213 1.0 6.8 6.3 5.6 2.7
Latin America 11 641 1,050 505 403 (1.0) 2.3 (2.4) 3.9 (0.5)
<20 20-40 40-60 60-80 >80 <20 20-40 40-60 60-80 >80
Global 52,884 9,978 3,294 1,620 14,964 0.7 (0.3) (0.5) 0.1 3.2
United States 658 290 117 64 5,350 4.5 0.4 (1.2) 0.6 3.9
Europe 30,568 6,003 1,802 890 3,432 0.9 (1.3) (1.3) (1.5) 0.6
Asia ex-Japan 14,516 2,095 818 363 1,888 0.0 1.1 1.2 1.7 3.4
Japan 106 15 26 26 1,378 3.5 10.3 1.1 (1.1) 5.9
Latin America 2,337 353 76 38 339 (0.1) 4.8 4.1 9.5 1.1
ROE (%)
Number of buyback transactions Average forward 3-mth opf
Region /
markets
Freefloat range range (%) Freefloat range range (%)
Buyback shares as % of total range (%) Buyback shares as % of total range (%)
Relative PE range (x) Relative PE range (x)
ROE reilly (%) ROE reilly (%)
Earnings growth volatility Earnings growth volatility
PE reilly range (%) PE reilly range (%)
Absolute PE range (x) Absolute PE range (x)
ROE (%)
Key factors for
each region



Will Asia walk the US path?
Buybacks have become integral part of the corporate actions within the US
economy. In 2011, US corporations spent a total of US$375bn on buybacks,
close to 140% of total dividends paid during the same year. The total buyback
amount in 2011 was still 20% lower than the peak achieved during 2007,
when companies bought back shares worth US$466bn. The roots of this
paradigm shift in the corporates actions dates back to early 1990s. Since
then, buybacks have gradually gained importance, while dividends are on a
losing track. This transformation in the corporate actions has significant
impact on the dividend investors and hence needs closer scrutiny to identify
the factors that stimulated this change and if they can evolve for Asia as well.
Figure 251
MSCI USA versus Asia ex-JP: Number of companies doing buybacks

Preference of buyback over dividends can be directly linked to the taxes
associated with both. However, our analysis in Figure 252 highlights that
taxes have not been the deciding factors, as both capital gains and dividend
taxes were converged in 2003 and still buybacks continued to surge ahead of
the dividends to hit the 2007 peak.
Figure 252
MSCI USA - Buybacks, dividends and tax

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Asia ex-JP USA
Percentage of companies
doing buyback (%)
38%
4%
Gap between Asia ad USA is diverging since 2002
70% for US
17% for Asia
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Buyback (RHS) Dividends (RHS)
Capital-gains tax Dividend tax
(US$bn)
(%)
Buybacks have become
integral part of US
corporate actions
This paradigm shift in the
corporate action has
significant bearing on
dividend investors
Difference between
dividend and capital gains
tax is not deciding factor
Companies doing
buybacks grew from 38%
in 1995 to current 17%
Dividend and capital gains
tax were converged in
2003 and yet buybacks
continued to surge



Valuations also have to be ruled out as the buyback activity peaked during the
risk-on bull cycle between 2003 and 2007. In Figure 253, we highlight
earnings-growth volatility, which has been the driving force behind the surge in
buyback activity. Rising globalisation and a shift away from secure domestic
markets have led to volatile earnings, translating into low future earnings
visibility. Under such circumstances, companies decide against dividends, which
tend to be sticky and prefer buybacks to return cash to shareholders. There is a
strong 56% inverse correlation between earnings-growth certainty and the
percentage of companies doing buybacks in each market.
Figure 253
MSCI markets: Buybacks preference versus growth uncertainty

Note: Intersection (18.8, 0.4) highlights the median of % of companies doing buyback and earnings
growth volatility (CoV, mean/SD) of the MSCI regions/countries. Source: Factset, CLSA Asia-Pac Markets
Another interesting characteristic that differentiates Asia from the USA is
corporate structure, which has a high bearing on the companys decision to
engage into buybacks. US companies have close to 100% freefloat and
professional management overseeing the company. Typically managements
compensation is linked to share prices or EPS, causing buybacks to become
the most likely action compared with dividends, which could result in short-
term price fall. Asia still has a long way to reach that stage.
Figure 254
MSCI markets: Buybacks preference versus free float

Note: Intersection (18.8, 72.4) highlights the median of % of companies doing buyback and the current
free-float of the MSCI regions and countries. Source: Factset, CLSA Asia-Pacific Markets
World
EM
DM
LatAm
APxJ
AsiaxJ
Europe
Australia
Brazil
Canada
France
Germany
HK
Indonesia
Japan
Korea
Malaysia
Russia
Singapore
Taiwan
UK
USA
0.30
0.33
0.36
0.39
0.42
0.45
10 20 30 40 50 60
% of companies doing buyback
Earnings growth certainty (Mean/SD, since 1995)
R = 0.31
Correl: -0.56
T stat: -3.2
India (3.9, 0.6)
China (8.2,0.5)
World
EM
DM
LatAm
APxJ
AsiaxJ
Europe
Australia
Brazil
Canada
China
France
Germany
HK
India
Indonesia
Japan
Korea
Malaysia
Russia
Singapore
Taiwan
UK USA
35
40
45
50
55
60
65
70
75
80
85
90
95
100
0 10 20 30 40 50 60
% of companies doing buyback
Free float (%)
R = 0.61
Correl: 0.78
T stat: 5.95
Corporate structure does
affect corporate actions
Valuations cannot be the
reasons as buybacks
peaked during the bull
market of 2003-07
Professionally managed
companies with low
promoter holdings
prefer buybacks
Earnings growth volatility
has a strong correlation
with propensity to
do buybacks
High promoter holdings in
Asia will continue to be to
the detriment of buybacks

High earnings-growth
certainty in Asia implies
greater preference for
dividends than buybacks



Global value-accretive buyback picks
Based on our analysis highlighting the characteristics of successful buybacks,
we have identified global stocks that have highest likelihood of doing
successful buybacks. Most of these companies have already engaged in
buybacks. These companies have high free float (>60%), low PE Reilly
(<40%), cheap relative to the local index (<1x), below mid-cycle ROE, low
gearing (<50%) and positive free-cashflow conversion.
Figure 255
Buyback top picks - USA and rest of world separately (sorted by market cap)
BBG Company Cty Sector Mkt cap BB payout
1
Free
12MF PE
12MF
ROE
Gearing FCF Conv
3

(US$m) (L7Y float Current Reilly Relative Div yld 13-14F Reilly (FY0, (L5Y
avg, %) (%) (x) (%) (x) (%) (%) (%)
2
%) avg,%)
USA
AAPL US Apple US Tech HW 427,693 24.9 100.0 9.7 1.1 0.66 2.4 28.9 59.5 (24.6) 115.8
XOM US ExxonMobil US Energy 405,045 68.8 99.9 11.2 20.3 0.75 2.7 19.8 2.5 6.3 75.0
MSFT US Microsoft US Software 229,866 86.1 90.7 9.2 4.0 0.62 3.4 29.8 0.0 (77.0) 115.4
JNJ US JNJ US Pharma 204,208 35.2 100.0 13.9 17.5 0.94 3.3 21.6 12.8 (17.5) 99.5
PFE US Pfizer US Pharma 200,851 59.0 100.0 11.9 28.1 0.80 3.5 19.3 13.2 14.6 116.8
WFC US Wells Fargo US Banks 183,426 34.2 99.9 9.5 22.2 0.65 2.9 12.6 47.3 nm nm
ORCL US Oracle US Software 168,601 49.9 76.6 12.0 7.8 0.81 0.7 23.3 24.7 (32.5) 126.9
MRK US Merck US Pharma 131,670 56.5 100.0 11.3 31.2 0.76 4.1 18.2 9.8 (15.7) 68.8
CSCO US Cisco System US Tech HW 109,247 110.9 99.9 10.2 2.6 0.69 2.7 18.0 14.2 (63.2) 125.9
GS US Goldman Sachs US Div fin 69,706 79.9 98.7 11.2 37.1 0.76 1.3 9.4 5.8 nm nm
USB US US Bancorp US Banks 61,864 32.6 99.9 10.9 26.6 0.74 2.7 15.4 47.6 nm nm
BA US Boeing Co US Cap gds 55,818 74.4 99.7 11.5 30.5 0.78 2.5 55.2 1.2 (53.7) 76.7
EMC US EMC US Tech HW 51,852 106.2 99.7 12.7 1.6 0.86 0.0 15.4 53.9 (19.9) 174.4
WAG US Walgreen Co US Food & drug 37,766 47.8 92.2 11.8 7.4 0.80 2.6 15.7 30.9 22.5 98.3
BK US BNY Mellon US Div fin 31,600 35.6 99.8 12.1 37.0 0.82 2.2 7.4 0.0 nm nm
AFL US Aflac US Insurance 24,821 34.1 97.2 7.6 24.7 0.51 2.9 18.8 0.0 nm nm
SYK US Stryker Corp US Healthcare 23,807 43.8 85.2 14.5 15.3 0.98 1.6 17.5 15.7 (29.5) 94.3
GD US General Dynamics US Cap gds 23,449 40.7 98.8 9.7 25.7 0.66 3.2 19.3 44.8 5.4 99.4
WLP US Wellpoint Health US Healthcare 20,354 111.4 99.7 8.0 18.0 0.54 1.9 10.0 0.0 46.4 72.0
BRCM US Broadcom US Semis 18,464 249.5 89.7 12.2 2.0 0.82 1.3 14.5 46.9 (8.7) 171.9
GLW US Corning US Tech HW 17,640 23.2 99.6 10.7 4.8 0.73 2.9 7.7 2.3 (12.5) 48.1
RTN US Raytheon Co US Cap gds 17,279 66.2 99.8 10.0 15.1 0.68 4.0 21.1 27.7 8.6 95.8
AET US Aetna Inc US Healthcare 16,133 100.5 99.7 8.9 6.5 0.60 1.5 14.6 35.5 28.1 109.3
A US Agilent US Pharma 15,539 146.7 99.8 13.6 4.5 0.92 1.0 19.1 42.8 0.2 91.9
CF US CF Industries US Materials 14,407 79.3 99.8 8.5 26.9 0.57 0.7 21.7 34.0 9.0 129.7
NTAP US NetApp US Tech HW 12,892 261.4 99.3 14.7 5.9 0.99 0.0 16.6 0.0 (96.3) 187.5
SPLS US Staples US Retail 12,539 51.3 99.2 9.0 8.5 0.61 3.5 13.5 12.7 11.0 133.7
HUM US Humana Inc US Healthcare 11,774 14.8 99.6 9.7 35.6 0.66 1.2 13.6 3.5 (72.0) 129.7
WDC US Western Digital US Tech HW 11,327 15.4 90.4 6.1 2.9 0.41 2.1 20.5 45.5 (13.3) 108.9
Rest of world
NOVN VX Novartis CH Pharma 164,831 32.3 92.7 13.4 33.0 0.85 3.7 15.7 0.0 16.8 107.7
SIE GR Siemens AG DE Cap gds 92,477 54.2 95.6 11.7 20.5 0.95 4.2 17.0 58.5 19.8 140.8
SAN SM Banco Santander ES Banks 86,568 85.8 97.6 9.7 38.7 0.67 9.2 8.7 2.0 nm nm
8316 JP SMFG JP Banks 54,447 72.4 97.9 9.6 7.5 0.67 2.8 8.1 51.5 nm nm
LKOH RM Lukoil Hldgs RU Energy 50,804 13.0 90.8 4.6 35.0 0.53 4.3 13.5 36.6 9.1 44.4
9432 JP NTT JP Telecom 50,242 54.3 74.1 8.8 4.5 0.61 4.1 6.6 49.9 37.6 158.7
8411 JP Mizuho Financial JP Banks 48,285 55.9 99.7 10.9 20.4 0.76 3.1 7.6 32.2 nm nm
TSCO LN Tesco GB Food & drug 45,371 13.0 99.6 10.9 22.5 0.83 4.2 13.9 0.0 46.7 16.1
NDA SS Nordea Bank SE Banks 44,353 10.5 65.3 10.5 31.7 0.76 4.2 11.5 53.0 nm nm
INGA NA ING Groep N.V. NL Div fin 38,729 52.0 99.7 6.1 36.8 0.47 1.3 7.1 0.0 nm nm
POT CN Potash Corp CA Materials 36,688 121.2 99.5 13.4 32.0 0.95 2.4 23.4 12.1 35.5 19.4
OCBC SP OCBC SG Banks 27,112 11.4 99.5 12.8 39.6 0.84 3.4 11.1 57.4 nm nm
WPP LN Wpp Group GB Media 19,921 35.4 98.1 13.1 31.3 1.00 3.0 13.6 59.5 37.0 126.3
AV/ LN Aviva PLC GB Insurance 16,965 27.8 99.8 7.6 33.2 0.58 7.0 12.6 44.5 nm nm
DB1 GR Deutsche Boerse DE Div fin 12,257 64.3 90.5 11.7 25.4 0.95 5.0 22.2 0.0 nm nm
086790 KS Hana Financial KR Banks 8,633 10.4 99.3 7.0 13.8 0.66 1.9 8.3 57.9 nm nm
SC CN Shoppers Drug CA Food & drug 8,547 16.4 96.0 14.0 16.2 0.99 2.7 14.0 17.8 23.4 56.1
010140 KS Samsung Heavy KR Cap gds 7,612 61.9 79.0 9.7 34.3 0.90 1.3 14.4 0.0 10.6 27.6
8332 JP Bank of Yokohama JP Banks 6,302 21.7 95.4 10.7 12.3 0.74 2.4 6.4 47.6 nm nm
EMBR3 BZ Embraer S.A. BR Cap gds 6,001 37.3 90.3 15.7 31.4 0.99 8.1 12.2 39.0 (14.8) 61.7
ATLN VX ACTELION CH Pharma 5,701 88.0 82.1 14.3 6.0 0.90 1.8 22.8 42.8 (65.5) 114.5
MF FP Wendel FR Div fin 5,233 51.8 65.0 10.0 36.8 0.76 1.9 10.6 0.2 nm nm
4185 JP JSR JP Materials 4,716 15.8 86.2 13.9 21.4 0.96 1.9 10.5 55.2 (26.6) 103.2
2432 JP DeNA JP Software 4,251 37.7 83.1 7.5 1.7 0.52 1.8 29.1 35.6 (60.9) 101.5
ILU AU Iluka AU Materials 4,245 20.4 99.9 14.4 10.6 0.96 3.5 18.3 26.1 (10.2) 71.0
4902 JP Konica Minolta JP Tech HW 4,224 15.2 97.2 12.1 26.4 0.84 2.4 6.8 15.7 (0.7) 116.8
COB LN Cobham GB Cap gds 3,620 22.4 99.0 10.9 27.1 0.83 4.2 17.7 1.8 22.8 116.9
8358 JP Suruga Bank JP Banks 3,078 38.5 85.6 14.4 24.8 1.00 1.1 9.7 58.5 nm nm
6923 JP Stanley Electric JP Autos 2,776 21.5 96.1 11.9 13.6 0.83 1.9 9.6 53.8 (24.6) 91.1
1
Buyback payout is the ratio between buyback and net profit
2
ROE Reilly is based on last 5-year monthly 12-month forward ROE
3
FCF conversion
is the ratio between free cashflows and net profit. Source: Factset, CLSA Asia-Pacific Markets
Stocks that have highest
probability of doing
successful buybacks



17. Global dividend-wave
As highlighted in the backtesting section, in general, high-dividend-yield
strategies have enjoyed stellar performances across the global markets with
Asia delivering a far superior performance. Although the cumulative
performance since 2000 across the regions has been noteworthy, most of it
was achieved prior to 2005. Notwithstanding recent years, characterised by
the GFC when the risk-aversion became the overriding criterion, the
performance of high-yield stocks has remained soft, highlighting the lack of
conviction over the sustainability of high dividends.
With this backdrop, we present our global and Asian dividend-wave strategy
that focuses not only on capturing high yields but also on generating
consistent outperformance and we call this a theme-for-all-seasons.
Furthermore, we also test these high-yield stocks for their future dividend
sustainability, based on our extensive analysis on identifying the underlying
fundamental characteristics of the firm. Our dividend-wave strategy-selection
process involves following three stages:
1. Screening for high-dividend-yield stocks. We select the fairly liquid
universe along with reasonable reliability over the IBES estimates by
limiting our basket of stocks for three-month average daily turnover more
than US$1m and coverage by three or more analysts. Moreover, within
this universe, we focus mainly on high-dividend-yield stocks that are part
of quintile 1 (Q1) and quintile 2 (Q2). Since 2000, the Q2 average
dividend yield for the MSCI World stocks has been about 3.6% but given
the regional dynamics, we use Q1 and Q2 yield stocks as the base
universe. However, for Asia we have a used a cut-off of 3% given the
underperformance of stocks below this limit as shown in Figure 9.
2. Factor selection to enhance performance of high-yield stocks.
During our analysis of the factors underpinning the performance of the Q1
and Q2 dividend-yield stocks, we observed that one of the key factors
driving the performance has been the structural rerating of the high-yield
stocks. We also saw that the momentum of this rerating gathered pace
between 2000 and 2005 and slowed considerably post 2005. From a
factor perspective this explains the underlying rational behind the
underperformance of high-yield stocks post 2005. Consequently in our
second stage, we aim at identifying the factor that would have, in
conjunction with high-yield stocks, improved the consistency of
outperformance even post 2005. We analysed various factors such as EPS
growth, sustainable growth, ROE, 3M EPS revision, 12-month-forward PE
and Beta. Our analysis highlights that sustainable growth and EPS growth
are the best factors to enhance high-yield stocks performance.
3. Strengthening future dividend sustainability of high-yield stocks.
One key conclusion that emerged out of our dividend-sustainability
analysis is that investors who invest based on a certain forward dividend-
yield assumption should not suddenly notice significant negative DPS
revisions. These revisions suggest that dividends are likely to be cut or be
lowered from the market expectations. Thus to enhance the future
dividend sustainability of our high-dividend-yield stocks, we use the
findings of our DPS revision star-rating system, which is designed to
eliminate stocks likely to witness strong negative DPS revisions. Our
analysis also highlights that low payout, low gearing and high FCF
conversion are crucial for imparting dividend sustainability to high-yield
stocks from a YoY DPS growth perspective and need to be monitored to
ascertain the sustainability of dividends.
Strategy of simply buying
high-dividend-yield stocks
has underperformed
globally since 2008
Our dividend-wave
strategy aims to generate
superior and consistent
outperformance
Focus on quintile 1
and quintile 2
dividend-yield stocks
Sustainable growth and
EPS growth matters most
Sustainability of
dividends is crucial



Selection of factor to enhance performance
Our backtesting analysis highlights that globally the high-dividend-yield
strategy performance has moderated post 2005. Thus, our dividend-wave
strategy not only aims at enhancing the overall returns but also to improve
the consistency of outperformance across the years.
To impart stability and enhance the outperformance of high-dividend-yield
strategy, we tested it in conjunction with several other fundamental factors
over the long and medium term. Our analysis highlights that high-yield stocks
in combination with high free-cashflow conversion have delivered the best
performance, followed by the combination with high sustainable growth.
Figure 256
MSCI World - Factors driving performance of high yield (Q1 and Q2) stocks

Note: Backtest based on MSCI universe with more than 3 analyst coverage. Performance is US$ MSCI
weighted total returns with quarterly rebalancing. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Similarly in Asia Pac ex-Japan, high yield stocks would have delivered the best
performance in combination with low PE and high sustainable growth. It is
interesting to note that high EPS growth stocks would have lowered the
overall performance of high-yield stocks.
Figure 257
MSCI Asia Pac ex-JP - Factors driving performance of high yield (Q1 & Q2) stocks

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sustainable growth
matter most for
Asia Pac ex-Japan
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growth drags the
performance down
Focus on improving
performance of
high-yield stocks
FCF conversion and
Sustainable growth,
matter most for world
Factors to impart stability
and enhance the
outperformance of high



Stage 2: Adding yield to growth
We have firmly established that a strategy to simply pick the highest yield
stocks has a few shortcomings. The key issues are that some of the highest
yield stocks may be either ex-growth or have sustainability issues. Both are
undesired traits for long-term dividend investors. Stocks that are ex-growth
are most likely to underperform during expansion and recovery phases of the
economic cycle. Also stocks that have dividend sustainability issues are likely
to underperform significantly during a downturn or slowdown as investors
become risk-averse and avoid lower-quality stocks.
From a positive viewpoint, we have also demonstrated that stocks that can
grow dividend outperform stocks that are simply consistent dividend payers.
This is true for stocks in both developed and emerging markets. Stocks with
the ability to grow dividends provide the best opportunity to capture total
returns. However, since companies cannot continue to increase payouts to
fund dividend growth, it has to be driven by earnings growth. Therefore, the
ability of companies to grow their earnings in a sustainable way becomes a
key part of running a long-term dividend strategy.
However, long-term growth investors must assess the sustainable growth
potential of a company by looking at its past and future, instead of just
focusing on a volatile short-term YoY EPS growth measure. This is because
companies always have a choice of managing their growth curve, even if
some are bound to have more cyclical growth due to the underlying business
cycles. Sustainable growth is defined as ROE x (1 - payout ratio), and is often
regarded as a proxy to a companys growth potential. The seemingly simple
sustainable growth calculation has actually embedded two assumptions -
retained earnings are the only source of capital and ROE of new capital equals
that of old capital. Given the stability of this growth measure, it is less volatile
and correlated to the countrys GDP growth at an aggregate level.
Our backtests show that sustainable growth outperforms YoY EPS growth for
the World and Asia, though the performance differential is most noticeable for
Asia. Based on this we use both sustainable and EPS growths for World but
use only sustainable growth for Asia. We also find that high-yield stocks in
Asia with a sustainable growth rate of less than 5% or more than 20%
underperform for Asia, and hence prefer stocks within 5-20% range.
Figure 258

Figure 259
Sustainable growth outperforms EPS growth as a factor

APxJ - Sustainable growth sweetspot for high-yield stks

Note: Backtest based on MSCI universe with more than 3 analyst coverage. Performance is US-dollar MSCI weighted total returns.
0
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40
60
80
100
120
140
160
World APxJ
High sustg stocks - High
EPSg stocks (quintile 1)
Cumulative return difference sine 2000 (ppt)
120
220
320
420
520
620
720
<5 5-20 >20
Sustainable growth range (%)
(Index)
Sweetspot for high-yield
(>3%) stocks in Asia
Two assumptions in
sustainable growth
calculation should not
be overlooked
Sustainable growth is the
long-term organic growth
potential of a company

Sustainable growth works
much better for Asia than
EPS growth
Just high-yield could be
ex-growth or lower
quality stocks
Dividend growers
outperform consistent
payers



To have the best of both worlds, our dividend-wave strategy aims at
identifying companies that offer growth along with having high dividend
yields. For World, in Figure 260 we show that both sustainable growth and
next two-year EPS growth in combination with high dividend yield offers
better returns than high dividend yield alone. Similarly, for Asia Pacific ex-
Japan, sustainable growth in combination with high yield helps to enhance the
performance of high-yield stocks over the long term. For world, based on our
Dividend wave 2012 report, we selected stocks with sustainable growth of
more than 12% and EPS growth of more than 10%. But for Asia Pacific ex-
Japan we selected stocks with sustainable growth in the 5-20% range. We
note that the 5-20% range has worked for MSCI World as well. The resultant
strategy has outperformed their MSCI benchmarks by 129ppts and 335ppts
for World and Asia Pac ex-Japan respectively.
Figure 260

Figure 261
World - Sust and EPS growth improves performance

APxJ - Sustainable growth improves performance

Note: Backtest based on MSCI universe with more than 3 analyst coverage. Performance is US-dollar MSCI weighted total returns. Factor quintiles
are rebalanced on quarterly basis. Source: Factset alpha tester, CLSA Asia-Pacific Markets
Also, while the cumulative performance delivered by both the strategies is
noteworthy, whats more important is the consistency demonstrated on a
year-on-year basis. Both the strategies consistently outperformed the
benchmark and high-yield stocks from the respective universe. On average,
high-yield plus growth strategy in MSCI World has outperformed the
benchmark by 7.7ppts since 2000; while in the case of Asia Pacific ex-Japan,
the strategy has outperformed the benchmark by 5.3ppts.
Figure 262

Figure 263
World - YoY OPF after adding growth measures

Asia Pac ex-JP - YoY outperformance after adding Sustg

Note: Backtest based on MSCI universe with more than 3 analyst coverage. Performance is US-dollar MSCI weighted total returns. Factor quintiles
are rebalanced on quarterly basis. Source: Factset alpha tester, CLSA Asia-Pacific Markets
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High yield (Q1&Q2)
MSCI World
(Index)
Adding sustainable growth and EPS growth cut-off enhances
performance of high-yield stocks by 99ppts
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Dividend yield (DY) cutoff
MSCI APxJ
(Index) Sustainable growth adds outperformance to high
yield stock and benchmark by 87ppt and 335ppt
(10)
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Outperformance vs benchmark
Outperformance vs high yield
(% YoY)
Consistent performance by the dividend wave strategy
against the benchmark as well high-yield stocks since 2002
(13.6)
(10)
(5)
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Consistent outperformance against
high yield stocks and the benchmark
during the bull markets
YoY outperformance of
both strategies is
consistent
For World, high-yield plus
growth outperformed
high-yield stocks by
99ppt since 2000

For Asia, high-yield plus
growth outperformed
87ppt since 2000




Performance of DPS revision star-rating across regions
Earlier in the report we highlighted that our DPS revision star-rating system
was effective in differentiating the dividend-yielding stocks that witnessed
significant negative DPS revisions to their consensus forecast DPS over the
past two years. We also checked whether it also helped from a performance
perspective. In Figure 264 we show the cumulative index of the stocks with
different DPS revision star ratings. It highlights that the poor star-rating
stocks, especially those with 0-1 stars have underperformed significantly.
Also, those with rating of four or more have outperformed.
Figure 264
MSCI World dividend-yield
1
stocks: High DPS revision star-rating outperform

1
Stocks with yield more than 2%. Backtest based on MSCI universe with more than 3 analyst coverage.
Performance is US$ MSCI weighted total returns with quarterly rebalancing.
In Figure 265 we further highlight the performance of the star-rating system
across different regions. It shows that the system has worked across different
regions and that the performance differential has been highest for emerging
markets while the system has outperformed the least for Japan.
Figure 265
MSCI dividend-yield
1
stocks: DPS revision star-rating works across regions

1
Stocks with yield more than 2%. Backtest based on MSCI universe with more than 3 analyst coverage.
Performance is US$ MSCI weighted total returns with quarterly rebalancing.
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Globally high dividend sustainability
stocks have outperformed the low
sustainability ones
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since 2000 (%)
Star-rating system works across the different
regions
also helps with
outperformance
Stocks with 5-7 star
ratings have done best
While those with 0-1 star
ratting have
underperformed a lot
DPS star-rating system
has worked across
regions
System worked best in
emerging markets
Highlights the importance
of sustainable dividends
in emerging markets



World - Adding dividend sustainability to high-yield stocks
Our final MSCI global dividend-wave strategy avoids the stocks with low
dividend sustainability. In order to ensure high dividend sustainability, we
avoid stocks with low DPS revision star-rating and also for the high payout
stocks in Asia. The resultant strategy has outperformed the benchmark index
by 204ppt since 2000. Clearly the sustainability factors were able to
marginally boost the overall performance of combined yield plus growth
strategy over the long-term. However the main purpose of adding
sustainability is to ensure that overall strategy doesnt surprise negatively on
the estimated yield.
Figure 266
MSCI World - Dividend sustainability improves performance

From a consistency perspective, the global dividend-wave strategy has
delivered solid performance on a year-on-year basis. The strategy has
outperformed both the MSCI World and high-yield stocks 11 times over the
past 13 years. The strategy produced strong performance during the up-
market years of 2002 to 2007 and continued the winning streak post 2009
after blip in 2008. The strategy has also outperformed high-yield stocks
consistently since 2007.
Figure 267
MSCI World - YoY outperformance of dividend-wave strategy

Note: Backtest based on MSCI universe with more than three analyst coverage. Performance is US$ MSCI
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High yield, high growth and sust dividend
High yield and high sust growth, EPS growth
High yield (Q1&Q2)
MSCI World
(Index)
Adding dividend sustainability criteria enhances overall performance of high-
yield stocks by 129ppts, and outperforms benchmark by 204ppts
(10)
(5)
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Outperformance vs benchmark Outperformance vs high yield
(% YoY)
Consistent performance by the dividend wave strategy against the benchmark
as well high-yield stocks since 2002
(13.4)
In past 13 years, strategy
has underperformed
only twice
MSCI World dividend-
wave strategy
outperformed benchmark
by 204ppt
Strategy also
outperformed high-yield
stocks by 129ppt
also outperformed high-
yield stocks consistently




Asia Pac ex-JP: Adding dividend sustainability to high-yield stocks
Asia Pacific ex-Japan dividend-wave strategy has also delivered strong
performance and has outperformed the benchmark by 586ppts since 2000.
On an annualised performance basis, the strategy delivered 18% returns each
year compared to 8% by the MSCI benchmark. In order to enhance the
sustainability of dividends, we avoided stocks with DPS revision stars less
than four and also avoided stocks with payouts more than 60%. Addition of
sustainability factors have resulted in extra 250ppts over and above the
outperformance delivered by combined yield plus growth strategy.
Figure 268
MSCI Asia Pac ex-JP: Dividend sustainability improves outperformance

The strategy has also delivered solid consistency. Barring 2007 and 2009, the
strategy has outperformed the MSCI Asia Pac ex-Japan benchmark since
2000. The strategy has also outperformed the high-yield stocks consistently
with just two years of underperformance over the last 13 years. On average,
the strategy has outperformed the benchmark and high-yield stocks each
year by 8.3ppts and 4.3ppts, respectively.
Figure 269
MSCI Asia Pac ex-JP - YoY outperformance of dividend-wave strategy

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DY and sustainable cutoff
Dividend yield (DY) cutoff
MSCI APxJ
(Index)
Adding dividend sustainability criteria enhances overall performance of
high yield stocks by 337ppts and outperforms the benchmark by 586ppts
(10)
(5)
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53.0
(% YoY)
Consistent outperformance against high
yield stocks and the benchmark during the
bull markets
26.6
(12.5)
Strategy outperformed
consistently YoY
Against the benchmark,
yearly outperformance
is 8.3ppts . . .
Asian dividend-wave
strategy outperformed
benchmark by 586ppts
since 2000
Strategy outperformed
337ppts since 2000
. . . while against high-
yield stocks it is 4.3ppts



Global dividend-wave strategy
Our main global and Asian dividend picks, based on the dividend-wave
strategy, have high consensus 12-month-forward yield (average yield - 4%),
high sustainable growth, strong balance sheets, solid cashflow, strong DPS
revision star-rating and the ability to deliver the expected payout and yet
retain sufficient earnings for reinvestment to fund future dividend payments.
The screen is limited to stocks with a market cap of more than US$4bn
(US$1bn for Asia), a liquidity cut-off of an average daily turnover of more
than US$5m (US$1m for Asia) and consensus coverage of more than three
analysts. We rebalance the screen on a quarterly basis. The strategy aims for
outperformance on total returns over the medium term.
Figure 270
Microstrategy - Dividend-wave strategy

Stock-selection criteria and results
The quantifiable part of the stock selection process involves:
Wave 1: Size and liquidity screening
Market cap of more than US$4bn (US$1bn for Asia)
Three-month average daily turnover more than US$5m (US$1m for Asia)
Wave 2: Yield, growth and quality
Dividend yield above 3% (above 2% for USA and Japan)
Sustainable growth above 5% (above 3% for Japan)
Wave 3: Dividend sustainability measures
Seven factor DPS revision star-rating (DRSR) of 4 or more.
Net gearing of less than 60% (applicable only for EM)
Payout less than 60% (applicable only for EM)
Note that a few exceptions apply to these stock selection criteria.
Figures 272 and 273 shows our dividend-wave portfolio for Asia and World.
Also, Figure 271 shows the performance of the Asian dividend-wave portfolio
since launch in May 2010.
Dividend wave
strategy explained
Higher yield, sustainable
growth with
sustainable dividends
Large and liquid stocks . . .
. . . offering high yield and
sustainable and
EPS growth . . .
. . . high DPS revision
star-rating and low
payouts and low
net gearing



Asian dividend-wave strategy
Figure 271
Microstrategy Asian dividend wave performance since launch (17 May 2010)

Note: Performance is measured in US$ total return. Weights are based on freefloat adjusted market cap.
Figure 272
Asian dividend-wave stock picks
(US$m)
Div yld
(12MF,
%)
Star
rating
1

12MF
PE (x)
13-14F
EPS
Cagr
(%)
Sustg
(%)
13-14F
ROE
(avg, %)
Payout
(FY1, %)
Gearing
(FY0, %)
Years of
DPS cuts
out of
total
GA US Giant CN Software 1,450 6.4 6/7 6.8 8.5 17.8 31.5 44.8 (74.9) 0/2
MAY MK Maybank MY Banks 22,619 5.7 4/6 12.2 5.9 4.4 14.7 76.2 nm 6/16
177 HK Jiangsu Expway CN Transport 5,275 5.6 4/7 12.8 9.2 4.0 13.4 76.2 25.9 0/14
ANZ AU ANZ Bank AU Banks 77,759 5.5 4/6 12.1 4.5 5.0 14.9 66.2 nm 1/18
2357 TT Asustek TW Tech HW 9,037 5.4 5/7 11.3 7.5 6.6 17.7 56.3 (43.3) 3/12
SCC PM Semirara Mining PH Energy 2,030 5.3 4/7 10.3 8.6 15.8 38.3 67.8 57.2 1/3
3034 TT Novatek TW Semis 2,391 5.2 5/7 12.6 22.0 6.3 23.0 65.8 (38.3) 2/10
CGF AU Challenger AU Div fin 2,001 5.2 4/6 6.3 2.1 11.1 15.6 31.9 nm 0/7
939 HK CCB CN Banks 211,181 5.1 4/6 6.7 5.9 13.5 19.0 34.3 nm 1/6
IAG AU IAG AU Insurance 11,054 5.0 4/6 12.5 21.2 5.1 18.3 60.2 nm 3/11
880 HK SJM HK Cons svcs 14,798 4.9 6/7 15.0 12.0 9.8 35.8 74.0 (100.3) 0/3
TLKM IJ Telkom ID Telecom 19,709 4.9 5/7 13.2 9.7 8.8 24.7 61.3 14.9 5/17
2388 HK Bank of China (HK) HK Banks 36,745 4.8 5/6 13.1 7.0 5.7 14.8 62.8 nm 1/9
LEI AU Leighton AU Cap gds 7,880 4.7 4/7 13.0 20.0 4.0 19.5 53.8 32.1 3/14
033780 KS KT&G KR FBT 9,097 4.4 4/7 12.3 0.1 8.3 15.6 54.3 (14.5) 0/14
RECL IN Rural Electrification IN Div fin 4,303 4.3 4/6 6.0 12.8 14.9 20.0 28.1 nm 2/9
5 HK HSBC HK Banks 206,771 4.3 4/6 11.0 10.3 5.6 10.7 47.0 nm 2/17
WOW AU Woolworths AU Food&drug 41,765 4.2 5/7 16.8 5.7 8.0 27.5 71.0 47.8 0/16
UMWH MK UMW MY Autos 4,569 4.2 5/7 12.8 10.8 9.4 21.1 54.5 (0.3) 6/15
941 HK China Mobile CN Telecom 222,259 4.0 6/7 11.0 1.2 10.0 16.2 43.7 (46.9) 0/9
PGAS IJ Perusahaan Gas ID Utilities 11,907 3.9 5/7 13.9 10.6 16.7 35.2 55.8 (4.4) 3/9
PTT TB PTT TH Energy 34,144 3.9 5/7 8.5 7.7 11.8 16.7 34.4 50.5 2/10
2395 TT Advantech TW Tech HW 2,468 3.9 7/7 16.8 13.3 7.9 24.5 75.8 (15.8) 2/11
MMS AU McMillan Shakes AU Comm svc 1,121 3.8 6/7 16.3 12.1 14.1 35.2 62.5 60.3 1/8
1088 HK Shenhua CN Energy 79,002 3.8 4/7 10.1 4.2 11.6 17.6 38.4 (2.2) 1/6
1882 HK Haitian CN Cap gds 2,038 3.7 4/7 11.1 14.5 13.0 20.3 39.3 (24.3) 2/4
BBL TB Bangkok Bank TH Banks 13,422 3.7 4/6 10.5 12.7 7.7 13.5 39.1 nm 2/10
UOB SP UOB SG Banks 24,568 3.6 4/6 11.3 4.0 6.8 11.5 39.3 nm 4/17
696 HK TravelSky CN Software 1,947 3.6 4/7 10.3 4.9 8.9 13.3 36.8 (46.6) 3/11
GAM MK Gamuda MY Cap gds 2,483 3.6 4/7 12.1 11.8 7.1 14.7 44.2 12.7 5/16
CD SP ComfortDelGro SG Transport 3,210 3.5 4/7 15.4 3.7 5.8 12.2 53.3 0.4 3/9
341 HK Caf de Coral HK Cons svcs 1,711 3.4 6/7 22.4 13.5 4.1 18.4 78.6 (29.0) 2/16
ONGC IN ONGC IN Energy 50,824 3.3 5/7 9.4 13.7 12.5 18.1 32.6 (5.6) 1/14
178 HK Sa Sa HK Retail 2,729 3.3 7/7 21.6 19.4 13.5 46.7 70.6 (36.7) 2/14
MAKRO TB Siam Makro TH Food&drug 3,761 3.2 6/7 26.6 18.7 4.0 39.2 85.9 (42.2) 5/15
SCI SP Sembcorp Ind SG Cap gds 7,869 3.2 4/7 11.9 10.7 11.0 16.6 39.3 (23.2) 4/14
021240 KS Coway KR Cons dur 3,264 3.2 6/7 15.7 25.1 12.6 25.3 51.2 60.7 1/13
ASII IJ Astra Intl ID Autos 32,447 3.1 5/7 14.0 14.2 15.9 27.1 44.8 52.6 2/10
MER PM Meralco PH Utilities 8,400 3.1 4/7 18.7 4.1 9.1 23.0 56.5 (30.9) 4/8
270 HK Guangdong Inv CN Utilities 5,402 3.0 4/7 13.2 4.4 8.0 12.3 38.5 1.3 3/10
1
For details of star rating factors, please refer to Appendix 7. Source: Factset, CLSA Asia-Pacific Markets
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Microstrategy Dividend-wave MSCI Asia Pac ex-JP (Index)
Outperformed by 35% since launch
Our dividend-wave
portfolio has
outperformed by 35%
since launch



Global dividend-wave strategy
Figure 273
MSCI World (ex-Asia) - Dividend-wave stock picks
(US$m)
Div yld
(12MF,
%)
Star
1

rating
12MF
PE (x)
13-14F
EPS Cagr
(avg, %)
Sustg
(%)
13-14F
ROE
(avg, %)
Payout
(FY1, %)
Gearing
(FY0, %)
Years
of DPS
cuts
out of
total
RAI US RAI US FBT 24,318 5.9 6/7 13.6 6.7 6.8 35.9 79.9 nm 0/12
MTN SJ MTN Group ZA Telecom 36,510 5.8 6/7 13.2 10.2 6.5 25.5 71.4 (12.5) 1/11
MUV2 GR Muenchener DE Insurance 32,949 5.2 5/6 8.3 8.9 4.0 10.3 43.3 nm 0/16
SPR GR Axel Springer DE Media 4,625 5.2 5/7 11.6 7.3 6.5 15.5 62.9 27.9 1/14
DG FP Vinci FR Cap gds 29,371 5.2 4/7 9.9 2.0 6.9 13.6 51.6 96.8 0/14
CIEL3 BZ Cielo BR Software 18,527 5.0 5/7 14.4 9.2 33.1 95.6 71.3 73.9 0/2
ALV GR Allianz DE Insurance 64,717 4.8 4/6 8.4 5.7 4.7 10.8 40.4 nm 2/16
BMO CN Bank of Montreal CA Banks 41,037 4.7 4/6 10.3 2.9 7.5 14.1 48.7 nm 0/17
BATS LN British American GB FBT 102,487 4.5 7/7 14.6 9.5 17.3 52.3 64.9 98.3 2/17
FSR SJ Firstrand ZA Div fin 19,730 4.4 6/6 11.0 13.7 10.6 21.1 48.2 nm 1/13
SHBA SS Svenska Handel SE Banks 25,857 4.3 4/6 12.2 6.1 6.4 12.8 52.3 nm 1/17
LKOH RM Lukoil Holdings RU Energy 50,804 4.3 4/7 4.6 2.4 12.0 13.5 19.4 9.1 1/13
NDA SS Nordea Bank SE Banks 44,353 4.2 4/6 10.5 8.5 6.7 11.5 43.9 nm 2/13
SIE GR Siemens AG DE Cap gds 92,477 4.2 5/7 11.7 15.1 9.6 17.0 51.6 19.8 2/18
RY CN RBC CA Banks 89,852 4.0 5/6 11.6 6.7 9.6 18.4 46.3 nm 0/18
ROG VX Roche CH Pharma 190,796 3.9 7/7 13.6 8.2 34.8 58.4 52.8 70.0 0/16
BAS GR BASF DE Materials 93,082 3.9 5/7 11.8 9.9 11.9 19.4 48.3 45.5 2/17
PHIA NA Koninklijke NL Cap gds 28,566 3.7 4/7 13.0 25.6 4.0 12.8 48.5 6.3 1/17
HO FP Thales FR Cap gds 7,168 3.6 4/7 8.6 13.2 8.3 13.3 32.2 (10.2) 1/15
KMB US Kimberly-Clark US HPC 34,846 3.6 5/7 16.1 6.8 16.3 40.9 57.6 0.2 1/17
SU FP Schneider Elec FR Cap gds 41,159 3.5 4/7 13.0 9.7 7.2 12.9 45.8 29.2 4/17
NESN VX Nestle CH FBT 226,320 3.5 6/7 17.3 8.3 6.8 18.3 61.0 nm 0/17
UNA NA Unilever N.V. NL FBT 114,548 3.5 5/7 17.0 8.3 11.6 29.4 59.3 31.0 4/17
MAT US Mattel US Cons dur 12,900 3.4 6/7 14.4 9.2 15.8 30.1 49.9 5.7 2/17
MCD US McDonald's US Cons svcs 95,671 3.4 6/7 16.0 8.8 19.0 41.7 54.8 nm 0/17
MSFT US Microsoft US Software 229,866 3.4 5/7 9.2 7.5 25.2 29.8 31.9 (77.0) 0/9
BVT SJ Bidvest ZA Cap gds 7,502 3.4 4/7 13.2 15.1 11.9 21.2 44.6 24.5 2/15
ITUB4 BZ Itau Unibanc BR Banks 78,025 3.3 4/6 9.9 12.2 13.9 18.7 32.3 nm 2/14
JNJ US JNJ US Pharma 204,208 3.3 5/7 13.9 6.3 12.2 21.6 45.8 nm 0/17
2651 JP Lawson JP Food & drug 7,257 3.1 5/7 18.0 9.6 6.0 16.4 57.2 (15.6) 1/12
PG US P&G US HPC 205,311 3.1 6/7 17.9 6.7 8.2 17.7 55.8 39.9 0/18
APD US Air Products US Materials 18,153 3.1 5/7 14.6 8.8 11.0 18.9 46.0 75.1 0/18
PRU LN Prudential GB Insurance 38,826 3.1 5/6 12.1 10.1 10.9 17.7 37.8 nm 1/17
PEP US PepsiCo US FBT 112,480 3.1 6/7 16.5 7.9 15.6 30.9 51.3 108.5 0/17
GIS US General Mills US FBT 27,089 3.1 7/7 15.7 8.5 12.9 24.5 49.0 108.4 0/17
IMI LN IMI PLC GB Cap gds 5,956 3.1 5/7 13.4 7.5 23.3 34.0 39.9 14.3 0/17
RB/ LN Reckitt Benckiser GB HPC 48,913 3.0 6/7 17.2 1.6 14.4 28.1 52.2 40.2 0/17
GPC US Genuine Parts US Retail 10,554 3.0 5/7 16.3 7.0 10.7 20.6 48.6 (0.9) 0/17
CAG US Conagra Foods US FBT 13,195 3.0 6/7 14.4 13.3 10.1 21.7 46.8 63.8 2/17
UPS US UPS US Transport 75,484 2.9 5/7 16.3 12.4 38.0 95.5 48.3 nm 0/11
EMR US Emerson US Cap gds 41,371 2.9 6/7 15.5 8.7 13.1 23.9 45.6 28.4 0/18
9433 JP KDDI JP Telecom 28,478 2.9 5/7 8.6 20.9 9.4 13.9 27.9 41.6 0/17
2914 JP Japan Tobacco JP FBT 59,407 2.8 7/7 14.3 13.1 12.8 20.8 36.6 3.6 0/17
4503 JP Astellas Pharma JP Pharma 23,318 2.8 7/7 18.5 15.6 4.2 11.4 59.0 (29.4) 1/17
CSCO US Cisco System US Tech HW 109,247 2.7 5/7 10.2 6.6 15.3 18.0 28.3 (63.2) 0/1
OMC US Omnicom US Media 14,340 2.7 5/7 14.3 10.5 18.8 30.1 38.1 nm 1/17
WAG US Walgreen Co US Food & drug 37,766 2.6 5/7 11.8 16.7 10.7 15.7 31.6 22.5 0/18
4452 JP Kao JP HPC 15,005 2.3 7/7 20.8 11.8 5.4 12.2 48.0 (5.6) 0/17
9531 JP Tokyo Gas JP Utilities 12,146 2.1 5/7 11.9 1.7 6.1 9.7 25.1 64.7 0/17
7203 JP Toyota Motor JP Autos 151,472 2.1 4/7 12.3 25.7 5.4 10.7 26.1 85.9 2/17
1
For details of star rating factors, please refer to Appendix 7. Source: Factset, CLSA Asia-Pacific Markets



18. Are dividend growers better than consistent payers?
In our Dividend wave 2012 report published in May 2012, we highlighted the
concept of dividend champions, which are companies with consistently rising
dividends (DPS) and thus form an attractive investment class. These stocks
can almost be considered equivalent to perpetual bonds, which not only pay a
regular coupon, but also provide a significant opportunity for capital
appreciation. This is a strategy that should be attractive more to total-return
focused investors with a low volatility mandate than income investors.
S&Ps three indices - S&P 500

Dividend Aristocrats Index for the US market,
S&P Europe 350 Dividend Aristocrats for the European markets and S&P Pan
Asia Dividend Aristocrats for the broader Asian market - track the
performance of dividend growers. The key condition for inclusion in the US list
is that the company should have continuously increased dividends for a
minimum of 25 years. Similarly, this minimum limit for Europe and Asia is 10
and seven years.
Despite the low yields for some of these stocks, the portfolio itself has low
turnover and is less volatile. In Figure 274 we show the cumulative
performance of a market cap-weighted total return index based on the
current S&P Dividend Aristocrats for the USA and Europe as against the
broader MSCI DM total return index. The chart highlights that these stocks
have outperformed the broader MSCI developed markets universe by 86%
over the last decade.
Figure 274
Total return index - MSCI DM World and S&Ps US & Europe Dividend Aristocrats

Using the market cap weighted performance of the current universe of S&Ps Dividend Aristocrat list.
Source: S&P, Factset, CLSA Asia-Pacific Markets
The key reason for the outperformance by this set of stocks during the past
decade is that they have continued to grow earnings at a steady rate as
compared with the broader universe, while also maintaining certainty about
their dividends. The continuously maintained or increasing DPS signals the
confidence that management has in generating sustainable cashflow to fund
these dividends. This kind of a strategy becomes extremely relevant in a
volatile growth environment, as highlighted by the 18% and 13%
outperformance in 2008 and 2011.
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US & Europe dividend aristocrats (S&P)
(Total return index)
Consistently grown
dividends over a long
period of time
Dividend aristocrats have
outperformed
S&Ps list has a lot of low
Strong fundamentals
drive the outperformance
Globally S&P has three
dividend aristocrat
indices



Dividend growth will catch up
One effect of the GFC has been that dividend growth has fallen behind earnings
during the recovery period. As companies hoarded cash in the aftermath of the
GFC, DPS growth has not kept pace with earnings growth. In Figure 275 we
show that for the USA, dividend growth did not match EPS growth in FY10 and
FY11. The same is true for Europe, although Europe has been focused on
conserving cash since 2005. In Figure 276, we show the results for Asia Pacific
ex-Japan region, where the lag was driven by FY10 results even as balance in
EPS and DPS growth was maintained in FY11. Overall, as the macro situation
eases, we expect DPS growth to outpace EPS growth over the next one-to-two
years to make up for the previous years slip-ups.
Figure 275

Figure 276
MSCI USA: Indexed EPS and DPS (FY0)

MSCI Asia Pacific ex-JP: Indexed EPS and DPS (FY0)

Source: Datastream, CLSA Asia-Pacific Markets
We created our own lists of stocks that have maintained or increased
dividends consistently for the MSCI World universe and the broader Asia
Pacific ex-Japan region (with a turnover more than US$1m and three or more
analysts coverage). For emerging markets (including HK and Singapore) we
only considered stocks with 10 years of financial data and seven continuous
years of dividend payments while for developed markets (ex-HK/Singapore)
the cut-offs were 15 and 12 years. In Figures 277 and 278 we show that
while EPS cut distribution matches the global and Asian list, DPS sustainability
has been higher globally in the past.
Figure 277

Figure 278
Similar frequency of EPS
1
cuts for Asia and World . . .

. . . but DPS volatility has been higher globally

1
A cut is recorded only if the number is lower than the previous year by more than 5%. Source: Factset, CLSA Asia-Pacific Markets
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imminent
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% of years with cuts
MSCI World Broader APxJ Distribution of companies
for EPS cuts (%)
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0 >0-10 10-20 20-30 30-40 >40
% of years with cuts
MSCI World Broader APxJ Distribution of companies
for DPS cuts (%)
Dividend growth has
fallen behind earnings
during recovery periods
Asian EPS cut distribution
is same as that of the
world . . .

. . . However, DPS
sustainability has been
higher globally in the past



Dividend champions versus consistent dividend payers
For stocks with sufficient data history we further shortlisted those with 12-
month forward dividend yields of more than 2% and have maintained or
increased dividends over the past 10 years for emerging markets (including
Singapore and Hong Kong) and the past 15 years for developed markets. We
termed these stocks Consistent dividend payers. A stock is said to have cut
DPS if the current year, if it has dropped more than 5% on the previous year.
We further created a subset of stocks that increased dividends consistently
and termed it as Dividend champions. An increase is recorded if the DPS
amount this year is higher than the previous year. Therefore, in our study,
dividend champions are a subset of consistent dividend payers. A comparison
of the total returns for the consistent dividend payers and dividend champions
against the overall market suggests that these stocks have outperformed.
Figure 279
Total return index (yearly) - Global dividend champions

Using the free-float adjusted market cap weighted performance of the current MSCI universe.
A similar exercise for the broader Asia Pacific ex-Japan region highlighted
even better results for the past 10 years despite the Asian dividend volatility.
Figure 280
Total return index (yearly) - Asian dividend champions

Free-float adjusted market cap weighted performance of the current listed Asia Pac ex-Japan universe
with turnover > US$1m and three or more analyst coverage. Source: Factset, CLSA Asia-Pacific Markets
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Dividend champions
Consistent dividend payers
All stocks
Index
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
YTD
Dividend champions
Consistent dividend payers
All stocks
Index
Criteria for
selection explained
Outperformance has
improved over time
Outperformance even
better by Asian
dividend champions



Furthermore, along expected lines, dividend champions have witnessed a
significant increase in dividend since 2002, compared with the regional
benchmarks. In Figures 281 and 282, we highlight the DPS index for both
global and Asian dividend champions compared with the regional
benchmarks. It is surprising to note that, although we used a list of stocks
that grew dividends, the DPS Cagr is still relatively strong at 30%.
DPS index - Global dividend champions DPS index - Asian dividend champions

Note: Global dividend champions are from MSCI AC World and Asian dividend champions are from all currently listed Asia Pac ex-Japan stocks with
turnover > US$1m and three or more analyst coverage. DPS growth is calculated based on aggregate dividends appropriated on like-to-like basis
each year. Source: Factset, CLSA Asia-Pacific Market
Stock characteristics of dividend champions
A factor exposure study of the global dividend champions based on current
universe of MSCI AC world highlights that one of the key characteristics is
earnings certainty followed by ROE and sustainable growth. However, it is
also interesting to note that the YoY EPS growth and capital intensity is lower
than the rest of global universe. In short, the companies in this basket are
quality stocks with good businesses and solid free-cashflow-generation
capabilities. The lower capital intensity yet higher ROE highlights that, these
companies are averse to value-destroying investment opportunities and focus
instead on value accretive, higher marginal ROE investments.
Figure 283
Factor exposure (current) - Global Dividend champions (MSCI AC world)

Note: Factor exposure is calculated based on factor median of the global dividend champions relative to
the MSCI AC World universe. Track record is the percentage of years with no dividend cut over the last 10
years. Source: Factset, CLSA Asia-Pacific Markets
50
100
150
200
250
300
350
400
99 00 01 02 03 04 05 06 07 08 09 10 11
Global dividend champions
MSCI AC World
(DPS Index)
DPS Cagr: 11.0%
DPS Cagr: 6.0%
0
500
1,000
1,500
2,000
2,500
99 00 01 02 03 04 05 06 07 08 09 10 11
Asian dividend champions
MSCI Asia Pac ex-JP
(DPS Index)
DPS Cagr: 29.9%
DPS Cagr: 9.5%
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2.8 (Exposure relative to universe, x)
Champions have
significantly better
dividend growth
Factors study of
global champion stocks
Global champions have
high earnings certainty



We did similar analysis for our Asia Pacific ex-Japan dividend-champion
basket to identify their key distinguishing factors relative to the broader Asia
Pacific ex-Japan universe. Similar to the global exercise, earnings certainty
matters most. However, for Asia, free-cashflow yield stood out as the second
best with 1.8% for dividend champions, close to double that of the broader
universe. However, unlike the developed-market peers these stocks strong
balance sheets have less gearing compared to the broader universe. While
the future YoY EPS and DPS growth seems lower than the rest of the
universe, the sustainable growth for this set of stocks is higher, indicating
that these companies focus on sustainable growth rather than YoY growth.
Figure 284
Factor exposure (current) - Asian dividend champions

Note: Universe is all the currently listed Asia Pac ex-Japan stocks with turnover > US$1m and three or
more analyst coverage. Factor exposure is calculated based on factor median of the Asian dividend
champions relative to the universe. Track record is the percentage of years with no dividend cut over the
last 10 years. Source: Factset, CLSA Asia-Pacific Markets
An analysis of the consistent dividend payers highlights similar characteristics
as observed with the dividend champions for both global and Asian region.
The global consistent dividend payers grow their dividends at a slightly lower
yet sustainable and consistent rate compared with the overall universe but
still faster than the earnings growth. For Asia, compared to the dividend
champions, consistent dividend payers have strong FCF conversion record.
Factor exposure - Global consistent dividend payers Factor exposure - Asian consistent dividend payers

Note: Factor exposure is calculated based on factor median of the consistent dividend payer universe relative to the universe. Track record is the
percentage of years with no dividend cut over the last 10 years. Source: Factset, CLSA Asia-Pacific Markets
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2.2
Asian champions have
strong FCF yield
and low gearing
Asian champions have
strong FCF conversion
YoY growth may be
lower but sustainable
growth is higher



Identifying future dividend champions
While it is important to understand the current characteristics of dividend
champions, it also crucial to analyse the stocks from a prospective basis to
identify the factors that underpin them becoming the dividend champions of
the future. In Figures 287 and 288, we highlight the characteristics essential
to becoming dividend champions from both global and Asian perspective. Our
analysis of the current dividend champions for the 2002 factor exposure
brings to the fore similar findings, with only gearing being the stark
differentiator. Global dividend champions had lower gearing than the rest of
the universe in 2002, while other fundamental factors have witnessed modest
improvement over the last few years. Most notably, dividend champions have
managed to enhance their ROEs, while reducing capital intensity.
Factor exposure (2002) - Global dividend champions Global dividend champions - Factor exposure trend

Note: Factor exposure is calculated based on factor median of the global dividend champions relative to the MSCI AC World universe. Track record
is the percentage of years with no dividend cut over the last 10 years. Source: Factset, CLSA Asia-Pacific Markets
Asian dividend champions had similar characteristics in 2002 as is seen today.
Moreover few factors such as earnings certainty and ROE have witnessed
sequential improvement, while the gearing has consistently come off.
Improvement in quality is also reflected in the PB rerating of the basket.
Factor exposure (2002) - Asian dividend champions Asian dividend champions - Factor exposure trend

Note: Universe is all the currently listed Asia Pac ex-Japan stocks with turnover > US$1m and three or more analyst coverage. Factor exposure is
calculated based on factor median of the Asian dividend champions relative to the universe. Track record is the percentage of years with no
dividend cut over the last 10 years. Source: Factset, CLSA Asia-Pacific Markets
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2002 2005
2009 Current
Identifying future
champions based on
characteristics analysis
in 2002
have consistently
maintained higher quality
Dividend champions have
consistently improved
ROE and FCF conversion
relative to the universe



Global dividend champions
In selecting our global dividend champions we look for stocks that can
continue growing dividends consistently instead of just maintaining dividends.
Based on our characteristics study we have selected stocks with robust
sustainable growth (>6%), high earnings certainty (>8x), strong quality
(ROEs >10%), payout still to peak (<60%) and low debt worries (net gearing
<80%). These stocks also have a solid track record of increasing dividends
but most importantly have a strong record of generating FCF higher than the
dividends. Companies with growing FCF and low debt-servicing needs can
easily plough the excess cash to increase the dividends. In Figure 291 we
present a shortlist of global stocks (ex-Asia) that meet these criteria.
Figure 291
Global dividend champions (sorted by market cap, ex-Asia)
Code Name Cty Sector Mkt cap Earns Sustg FCF Conv Gearing 13-14F 12MF FCF>Div DPS Track
(US$m) Cert (%) (L5Y (FY0, ROE Payout Div yld Track Record
(x) avg, %) %) (avg, %) (%) record (Increase/
total)
WMT US Wal-Mart Stores US Food & drug 233,999 192.7 14.7 73.6 66.5 21.9 32.9 2.6 17/19 16/17
MSFT US Microsoft US Software 229,866 39.1 25.2 115.4 (77.0) 29.8 31.4 3.4 18/19 8/9
PG US P&G US HPC 205,311 76.1 8.2 103.5 39.9 17.7 56.1 3.1 18/19 18/18
JNJ US JNJ US Pharma 204,208 124.5 12.2 99.5 nm 21.6 45.6 3.3 18/18 17/17
ROG VX Roche Hldg CH Pharma 190,796 33.2 34.8 120.5 70.0 58.4 53.0 3.9 16/18 14/16
KO US Coca-Cola US FBT 166,426 71.1 14.2 88.7 49.0 29.1 51.5 3.0 19/19 17/17
NOVN VX Novartis CH Pharma 164,831 12.5 9.3 107.7 16.8 15.7 48.7 3.7 17/18 11/17
SAN FP Sanofi FR Pharma 129,176 37.8 7.7 111.7 14.2 13.1 48.6 4.2 13/14 11/16
INTC US Intel US Semis 104,821 12.6 12.7 100.6 (9.2) 18.1 45.5 4.3 18/18 14/17
MCD US McDonald's US Cons svcs 95,671 61.1 19.0 84.6 nm 41.7 54.7 3.4 17/18 16/17
MC FP Lvmh FR Cons dur 94,237 16.4 8.7 83.9 18.8 14.9 42.6 2.5 14/18 13/17
BAYN GR Bayer DE Pharma 81,583 32.0 13.5 127.6 35.7 20.7 34.5 3.0 15/19 12/17
UPS US UPS US Transport 75,484 62.3 38.0 76.9 nm 95.5 47.4 2.9 11/13 8/11
RB/ LN Reckitt Benckiser GB HPC 48,913 17.0 14.4 93.0 40.2 28.1 52.3 3.0 19/19 12/17
BN FP Danone FR FBT 41,667 40.7 7.3 98.0 57.5 13.9 48.6 3.1 19/19 15/17
EMR US Emerson US Cap gds 41,371 82.0 13.1 121.5 28.4 23.9 44.7 2.9 19/19 12/18
TEVA IT Teva IL Pharma 34,989 36.7 14.7 92.9 58.1 17.1 18.8 2.6 16/19 14/15
CDI FP DIOR FR Cons dur 31,339 8.4 10.5 167.3 63.8 16.2 31.3 2.8 16/19 12/17
ADP US ADP US Software 28,738 113.8 10.5 116.9 (25.5) 26.0 56.1 2.8 19/19 18/18
9433 JP KDDI JP Telecom 28,478 9.3 9.4 77.9 41.6 13.9 24.9 2.9 12/15 11/17
GD US General Dynamics US Cap gds 23,449 38.0 13.6 99.4 5.4 19.3 31.3 3.2 19/19 16/17
CPG LN Compass Group GB Cons svcs 22,471 35.5 12.2 98.1 32.7 25.6 49.9 3.0 11/12 9/11
WPP LN Wpp Group GB Media 19,921 38.3 8.3 126.3 37.0 13.6 40.1 3.0 18/19 16/17
RTN US Raytheon Co US Cap gds 17,279 34.1 13.5 95.8 8.6 21.1 41.1 4.0 15/19 8/10
BF/B US Brown-Forman US FBT 13,811 45.2 15.4 99.6 8.3 36.5 35.7 2.7 17/19 14/17
SW FP Sodexho Alliance FR Cons svcs 13,409 19.8 9.1 139.0 41.1 16.9 48.4 2.6 18/19 13/18
ADI US Analog Devices US Semis 13,153 17.7 9.6 108.2 (73.9) 16.5 51.3 2.6 17/19 7/8
WOS LN Wolseley GB Cap gds 12,786 15.1 10.1 121.5 2.8 18.0 37.8 2.5 16/19 14/16
SKFB SS SKF AB SE Cap gds 11,292 11.8 13.1 84.3 31.0 22.5 50.3 3.8 15/19 11/15
ADEN VX Adecco CH Comm svc 10,871 12.4 7.3 116.2 23.4 15.5 48.7 3.6 16/18 10/15
ALFA SS Alfa Laval SE Cap gds 8,952 17.2 13.5 113.9 22.6 22.9 44.9 2.6 11/11 8/9
1878 JP Daito Trust JP Property 7,879 31.6 14.8 99.3 (66.7) 27.7 50.0 4.2 13/14 11/17
COLR BB COLRUYT BE Food & drug 7,569 23.3 11.5 64.8 (18.9) 18.9 42.7 2.9 15/18 14/17
ANDR AV Andritz Ag AT Cap gds 6,846 17.3 12.3 133.0 (131.5) 26.0 53.2 3.1 10/12 9/12
SGE LN Sage Group GB Software 6,802 20.8 9.2 122.5 10.7 19.3 49.5 3.3 19/19 14/18
Growing FCF that are
consistently higher than
dividends and low gearing



We follow a similar set of criteria for selecting our Asian list. Asia earnings
volatility tends to be higher but we have already highlighted earlier that
despite the volatility, Asian dividend growth has been far superior compared
with the World. We relax the payout criteria to less than 75% to include a few
Australian and defensive stocks. We also include a few stocks that have
started paying dividends for only the last few years. In Figure 292 we present
a shortlist of such Asia Pacific ex-Japan stocks.
Figure 292
Asian dividend champions (sorted by market cap)
Code Name Cty Sector Mkt cap Earns Sustg FCF Conv Gearing 13-14F 12MF FCF>Div DPS Track
(US$m) Cert (%) (L5Y (FY0, ROE Payout Div yld Track Record
(x) avg, %) %) (avg, %) (%) record (Increase/
total)
941 HK China Mobile CN Telecom 222,259 33.0 10.0 79.5 (46.9) 16.2 44.6 4.0 16/16 8/9
1088 HK Shenhua CN Energy 79,002 18.6 11.6 41.9 (2.2) 17.6 38.8 3.8 5/8 5/6
ONGC IN ONGC IN Energy 50,824 9.3 12.5 34.7 (5.6) 18.1 31.1 3.3 13/14 9/14
WOW AU Woolworths AU Food & drug 41,765 45.1 8.0 45.1 47.8 27.5 71.1 4.2 5/17 15/16
COAL IN Coal India IN Energy 40,770 13.6 21.5 108.4 (143.1) 30.9 35.3 2.9 3/3 3/3
PTT TB PTT TH Energy 34,144 19.3 11.8 29.4 50.5 16.7 33.1 3.9 7/12 8/10
TLKM IJ Telkom ID Telecom 19,709 22.8 8.8 102.0 14.9 24.7 64.9 4.9 16/17 10/17
880 HK SJM HK Cons svcs 14,798 24.6 9.8 34.1 (100.3) 35.8 74.0 4.9 4/5 3/3
1044 HK Hengan CN HPC 12,727 26.9 10.3 35.6 (8.4) 28.9 61.6 2.7 5/15 9/13
THBEV SP ThaiBev TH FBT 11,362 12.7 9.2 119.2 24.9 27.2 58.6 3.2 6/7 4/6
SMGR IJ Semen Indonesia ID Materials 10,030 22.7 16.5 57.6 (12.0) 29.2 41.9 2.5 11/17 12/15
144 HK China Merchants CN Transport 8,840 12.2 5.6 45.7 39.1 9.2 45.2 2.8 8/15 9/13
2282 HK MGM China CN Cons svcs 8,615 15.1 45.8 na (32.9) 63.3 53.2 3.9 2/2 0/0
WOR AU WorleyParsons AU Energy 6,766 22.0 6.2 80.5 25.0 19.2 63.2 4.0 7/10 7/9
INDF IJ Indofood ID FBT 6,084 21.0 10.1 66.4 (10.8) 16.4 39.3 2.6 13/17 8/12
1212 HK Lifestyle HK Retail 4,167 24.3 12.9 89.0 (19.2) 20.3 40.1 2.7 8/9 6/7
MNCN IJ MNC ID Media 3,822 11.8 13.9 20.0 (24.0) 26.0 42.3 2.4 3/6 2/3
2313 HK Shenzhou Intl CN Cons dur 3,713 19.7 18.8 22.0 (1.2) 23.7 27.1 2.6 4/8 4/6
PTBA IJ Bukit Asam ID Energy 3,699 8.0 15.5 115.2 (83.3) 29.8 52.8 4.6 11/11 6/8
3983 HK BlueChemical CN Materials 3,359 13.4 9.7 63.3 (19.9) 14.1 36.2 3.8 7/7 4/5
SEK AU Seek AU Comm svc 3,022 19.2 16.3 89.5 56.5 25.9 48.9 2.7 8/8 5/7
1177 HK Sino Biopharm CN Pharma 2,976 16.1 7.2 81.6 (56.2) 21.8 59.9 2.5 10/13 8/11
052690 KS Kopec KR Cap gds 2,801 11.9 12.7 98.2 (100.5) 34.8 70.1 3.9 2/3 9/12
3998 HK Bosideng CN Cons dur 2,499 16.9 5.0 65.9 (40.1) 19.5 74.2 7.1 3/6 3/4
2395 TT Advantech TW Tech HW 2,468 26.8 7.9 88.1 (15.8) 24.5 58.3 3.9 9/14 8/11
336 HK Huabao CN Materials 1,759 18.6 17.7 85.9 (21.5) 22.7 30.7 4.2 10/12 5/5
829 HK Shenguan CN FBT 1,663 25.3 17.2 51.9 (33.0) 32.0 48.3 4.1 2/4 2/2
425 HK Minth CN Autos 1,622 11.9 9.5 41.9 (48.7) 13.6 29.0 2.8 4/8 5/6
6121 TT Simplo TW Tech HW 1,372 25.1 11.3 58.8 (29.2) 19.9 46.7 4.4 5/10 8/8
JBH AU JB Hi-Fi AU Retail 1,264 21.9 21.3 75.9 59.7 49.7 61.3 5.5 5/10 5/8
MMS AU McMillan Shakes AU Comm svc 1,121 36.1 14.1 81.3 60.3 35.2 62.6 3.8 8/9 7/8
OSIM SP Osim SG Retail 1,095 47.9 24.6 142.8 (40.7) 38.7 41.3 3.0 10/12 7/9
3044 TT Tripod TW Tech HW 1,044 29.0 7.3 82.1 (24.6) 12.1 45.5 4.6 7/13 8/10
Track less stellar than
world but have higher
growth potential



19. Shadow defensives
In our Shadow defensives report, we introduced an index of the Asian stocks
that belong to cyclical sectors but display true defensive characteristics. We
called them shadow defensives. These stocks have high earnings certainty,
behave like defensives but are much cheaper. In Figure 293, we show that
defensives are trading at 39% premium to cyclicals, compared with the
historical average of 15% since 2000. Despite these peak relative valuations,
we believe that the macro conditions are not conducive enough to warrant a
mean reversion.
Figure 293
MSCI Asia ex-Japan relative PE: Cyclicals, defensives and financials

Note: Defensives include GICS Level 1 consumer staples, telecom, utilities and healthcare sectors while
cyclicals includes materials, energy, tech, consumer discretionary, industrials and property.
Source: MSCI, Factset, CLSA Asia-Pacific Markets
Our analysis highlights that SDs provide an ideal launchpad for a seamless
transition from defensives into cyclicals and vice-versa. In Figure 294 we
show that the shadow defensives have shown an 82% correlation since 2009
but are much cheaper than the defensives. This high correlation suggests that
shadow defensives would protect investors if the recent optimism turns out to
be another false dawn.
Figure 294
MSCI Asia ex-Japan: Relative PE of defensives and shadow defensives

Note: Shadow defensives are cyclicals companies with 12MF dividend yield >2.5%, earnings
certainty>10x and next 2Y-average ROE>10%, rebalanced on yearly basis within MSCI Asia ex-Japan
(ex-finance) universe. Source: MSCI, Factset, CLSA Asia-Pacific Markets
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
D
e
c

9
9
D
e
c

0
0
D
e
c

0
1
D
e
c

0
2
D
e
c

0
3
D
e
c

0
4
D
e
c

0
5
D
e
c

0
6
D
e
c

0
7
D
e
c

0
8
D
e
c

0
9
D
e
c

1
0
D
e
c

1
1
D
e
c

1
2
Cyclicals
Defensives
Financials
Defensives are trading at 39% permium
to cyclicals versus the historical average
of just 15% since 2000
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
D
e
c

0
4
J
u
n

0
5
D
e
c

0
5
J
u
n

0
6
D
e
c

0
6
J
u
n

0
7
D
e
c

0
7
J
u
n

0
8
D
e
c

0
8
J
u
n

0
9
D
e
c

0
9
J
u
n

1
0
D
e
c

1
0
J
u
n

1
1
D
e
c

1
1
J
u
n

1
2
D
e
c

1
2
Shadow defensives
Defensives
Correlation since May
2009: 82%
Defensives are trading
at 39% premium to
cyclicals
Shadow defensives are
cheaper than defensives
in Asia

Historical performance
makes them a good
basket to hold around
turning points



Cross-cycle performance supports case for shadow defensives
Shadow defensives performance highlights the inherent benefits of holding
these stocks during inflexion points. We identified various short cycles since
the onset of the GFC and analysed the performance of each of the three
baskets, namely, shadow defensives, defensives and cyclicals, since then. The
Asia shadow-defensive basket has not only outperformed the cyclicals during
the downmarket, but also outperformed defensives during the upmarket.
Thus, in a nutshell, these are the stocks to hold if an investor believes the
recovery is on the horizon but is uncertain about its timing. So instead of
getting an early exposure to cyclicals, which might result in significant
underperformance should the crisis protract, exposure to shadow defensives
will cushion the downside.
Figure 295
AxJ shadow defensives - Cross-cycle returns relative to cyclicals and defensives

Note: SD = Shadow defensives (rebalanced on monthly basis). GFC = Global financial crisis, 2012 = bear
market rally in 2012. Source: MSCI, Factset, CLSA Asia-Pacific Markets
It is worth noting that our shadow-defensives basket has also delivered
handsome performance since its launch on 27 July 2012. The basket has not
only outperformed the region, but has also outperformed both cyclicals and
defensives over the same period.
Figure 296
Asia Pacific ex-Japan - Performance of shadow defensive stocks since launch

Note: Performance is measured in US$ total return from 27-Jul-2012 to 19-Feb-2013. Weights are based
on freefloat adjusted market cap. Source: Factset, CLSA Asia-Pacific Markets
(21)
(16)
(11)
(6)
(1)
4
9
14
GFC
(Dec 07-Feb
09)
EU-crisis
(Apr 11-Dec
11)
EU-crisis
(Feb 12-Aug
12)
Post-GFC
(Feb 09-May
09)
2012
(Dec 11-Feb
12)
2012
(Aug 12-Dec
12)
O-PF relative to defensives
O-PF relative to cyclicals
(%)
Defensives > SD > Cyclicals
Downmarkets Upmarkets
Defensives < SD <
Cyclicals
25.3
0
5
10
15
20
25
Defensives Cyclicals MSCI APxJ Shadow defensives
Defensives Cyclicals
MSCI APxJ Shadow defensives
Performance (%)
Shadow defensives
outperformed cyclicals
during downmarkets . . .

. . . but outperformed
defensives during
market upturns
worth holding during
turning points
Shadow defensive stocks
have outperformed
defensive . . .

. . . and cyclical
stocks as well



Top shadow-defensive picks for Asia
In Figure 297 we highlight our shortlist of shadow defensives within Asia
Pacific ex-Japan. These stocks form part of the original shadow defensive
index, ie, cyclicals with high earnings certainty (>10x), dividend yield (2.5%)
and ROEs (>10%). Additionally, our short list has stocks with:
A good DPS track record (not more than three cuts every 10 years)
Cheap based on 12-month PE and PB Reilly less than 65%
Solid FCF conversion (based on the last five-year average)
Figure 297
Asia Pacific ex -Japan - Shadow defensives stock screen (market cap >US$1bn)
(US$m)
12MF
div yld
(%)
12M
fwd
PE (x)
12M
trl
PB (x)
Reilly (%) 13-14F
ROE
(avg,
%)
EPS
cert
(x)
Payout
(FY1,
%)
FCF conv
(5Y, avg,
%)
DPS
cut rec
(yrs)
12MF
PE
12MT
PB
2330 TT TSMC TW Semis 91,783 2.8 14.7 4.1 14.5 65.0 23.2 14.9 42.9 74.5 0/8
1088 HK Shenhua CN Energy 79,002 3.8 10.1 1.9 10.6 2.7 17.6 18.6 38.4 41.9 1/6
ONGC IN ONGC IN Energy 50,824 3.3 9.4 1.8 57.8 28.8 18.1 10.0 32.6 34.7 1/14
SIME MK Sime Darby MY Cap gds 17,920 3.7 13.8 2.0 38.3 33.9 14.3 10.2 53.4 23.6 3/16
KEP SP Keppel Corp SG Cap gds 17,023 3.9 13.3 2.3 56.0 38.5 16.2 11.3 51.5 8.7 4/17
880 HK SJM HK Cons svcs 14,798 4.9 15.0 5.7 58.8 65.0 35.8 24.6 74.0 34.1 0/3
BXB AU Brambles AU Comm svc 13,122 3.5 17.7 4.4 44.2 25.6 23.9 19.3 64.4 53.5 4/18
BJAUT IN Bajaj Auto IN Autos 10,545 2.8 14.9 7.6 39.3 52.8 42.5 22.8 44.2 71.0 3/12
ORI AU Orica AU Materials 10,188 3.8 13.2 3.0 56.7 48.2 21.5 29.7 50.3 37.7 4/15
2357 TT Asustek TW Tech HW 9,037 5.4 11.3 2.1 42.0 34.7 17.7 23.1 56.3 107.5 3/12
SCI SP Sembcorp Ind SG Cap gds 7,869 3.2 11.9 2.1 36.9 44.5 16.6 18.7 39.3 88.0 4/14
551 HK Yue Yuen HK Cons dur 5,795 4.2 9.9 1.4 55.2 17.2 13.6 12.3 41.1 33.9 2/13
3673 TT TPK TW Tech HW 5,383 3.4 11.1 3.8 28.8 13.1 31.9 10.0 38.3 0.1 0/0
1101 TT Taiwan Cement TW Materials 4,874 5.0 14.9 1.5 43.3 41.8 10.2 15.3 80.6 40.2 3/12
576 HK Zhejiang Expway CN Transport 3,753 5.7 13.2 1.5 38.9 21.2 11.0 15.9 75.2 116.5 0/14
CD SP ComfortDelGro SG Transport 3,210 3.5 15.4 2.0 53.3 35.7 12.2 25.0 53.3 74.1 3/9
3998 HK Bosideng CN Cons dur 2,499 7.1 10.3 2.1 41.0 46.9 19.5 16.9 75.1 65.9 0/4
GAM MK Gamuda MY Cap gds 2,483 3.6 12.1 1.8 28.7 36.8 14.7 19.1 44.2 16.6 5/16
3034 TT Novatek TW Semis 2,391 5.2 12.6 3.1 26.2 23.0 23.0 11.9 65.8 105.4 2/10
051600 KS Korea Plant Ser KR Comm svc 2,271 3.6 17.5 4.8 47.3 64.7 24.0 10.9 63.1 75.1 2/12
861 HK Digital China CN Tech HW 1,657 4.1 8.3 1.6 36.3 32.3 18.4 13.5 34.0 43.3 3/11
TTCH IN Tata Chemicals IN Materials 1,598 3.1 9.1 1.2 47.5 4.8 13.6 10.7 31.6 79.5 1/17
Note: PE/PB Reilly based on 10Y history (minimum three-year history needed). Source: Factset, CLSA Asia-Pacific Markets

worth holding during
turning points



20. Dividend-wave calendar (ex-date strategy)
In a perfectly efficient market, dividends should be a non-event from a short-
term price-performance perspective, since they imply companies transferring
part of their value back to shareholders. If anything, given the tax impact on
dividends, it is a suboptimal transfer of value and hence should be a negative
on a total-return basis. However, stocks in the real world have a tendency to
run up before the ex-dates. This may be explained by some investors
inclination to hold on until the ex-date and other investors with an income
focus seeing an immediate return on buying stocks before the ex-date.
Our study for the MSCI EM universe calculates the relative performance of
stocks against the relevant country index during the two-month window
around the ex-dates from 2004-12. The results highlight that stocks do run
up before their ex-dates and investors would have averaged close to 2.2%
outperformance over a month with a success rate of 58%.
Figure 298
MSCI EM - Performance of ex-date strategy since 2004

Note: Excess total return calculated against the MSCI regional index in local currency.
We also find that most of this performance would have been generated during
relative bull markets (>25% return) rather than mildly positive or bear
markets, and the arbitrage opportunities have diminished over time.
Figure 299

Figure 300
EM: Performance during bull markets

Performance during mildly positive or bear markets

Note: Excess total return calculated against the MSCI country index. Source: CLSA Asia-Pacific Markets, Factset
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
-30D -24D -18D -12D -6D 0D +6D +12D +18D +24D +30D
Average Median
Ex date
Excess return relative to day 0 (%)
(10)
(8)
(6)
(4)
(2)
0
2
4
-30D -24D -18D -12D -6D 0D +6D +12D+18D+24D+30D
2006
2007
2009
Ex date
(3)
(2)
(1)
0
1
2
3
-30D -24D -18D -12D -6D 0D +6D +12D+18D+24D+30D
2004 2005
2008 2010
2011 2012
Ex date
Short-term excess returns
by holding stocks before
their ex-dates

Works best during bull
markets; arbitrage
opportunities
have diminished

Study focuses on MSCI
universe with data
from 2004-11

Average 2.2% excess
return for a 30-day
holding period



We also highlight that investors holding stocks to benefit from the ex-date
strategy would have been better off disposing of the positions immediately
after the ex-date. In the past, some markets have seen post-ex-date drifts,
but such a phenomenon has been absent except for 2006.
We also tested the strategy for different levels of dividend yields. As
expected, we found that the ex-date strategy works better for stocks with
higher dividend yields, as the attraction of holding on to a high-yield stock or
getting into it just before the ex-date is highest when the returns are
significant. The average outperformance would have been over 3% for stocks
with dividend yields of more than 5%. For low-yield stocks, it is better to
enter a bit later.
Figure 301

Figure 302
MSCI EM - Stocks with yield of 1-5%

MSCI EM - Stocks with yield >5%

Note: Total returns outperformance calculated against the MSCI regional index in local currency. Source: CLSA Asia-Pacific Markets, Factset
We also checked the performance of the ex-date strategy for the MSCI AC
World index and the MSCI US index stocks. Our study shows that the strategy
has worked globally with an average 1.4% excess return over a 30-day
holding period. The performance has been muted for the US universe at only
0.4% excess return over a 12-day holding period. Just like Asia, for both the
World and the USA, investors would have been better off by exiting
immediately after the dividend ex-date.
Figure 303

Figure 304
World - Performance of ex-date strategy since 2004

MSCI US - Performance of ex-date strategy since 2004

Note: Excess total return calculated against the relevant MSCI index. Source: CLSA Asia-Pacific Markets, Factset
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
-30D -24D -18D -12D -6D 0D +6D +12D+18D+24D+30D
Average
Median
Ex date
(3.0)
(2.5)
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
-30D -24D -18D -12D -6D 0D +6D +12D+18D+24D+30D
Average
Median
Ex date
(1.4)
(1.2)
(1.0)
(0.8)
(0.6)
(0.4)
(0.2)
0.0
0.2
-30D -24D -18D -12D -6D 0D +6D +12D+18D+24D+30D
Average
Median
Ex date
(0.6)
(0.5)
(0.4)
(0.3)
(0.2)
(0.1)
0.0
0.1
0.2
-30D -24D -18D -12D -6D 0D +6D +12D+18D+24D+30D
Average
Median
Ex date
Has worked globally
though outperformance is
small compared to Asia

Investors better off
by disposing of the
position immediately
after the ex-date

Works better for
high-yield stocks




Global dividend calendar
We earlier highlighted that dividend ex-dates do have a significant bearing on
the stock prices and that the magnitude of performance varies among
regions. However, it is important to note that the ex-dates of different
markets and regions are spread across the calendar. Therefore, there is
always an opportunity to profit from the markets inefficiency by playing this
ex-date strategy throughout the year. Figure 305 highlights the month-wise
breakdown of the number of companies by region, whose ex-dates would fall
in that particular month, enabling investors to ride this cycle to the fullest.
Figure 305
MSCI World - Regions to play the dividend ex-date strategy over next 12 months (% of ex-date stocks/region)
Month Region 1 Region 2 Region 3 Region 4 Region 5 Region 6
Mar 13 Japan (41%) USA (27%) Others (12%) Europe (8%) Asia ex-JP (7%) Australia (4%)
Apr 13 Europe (36%) Others (24%) USA (22%) Asia ex-JP (17%)
May 13 Europe (32%) USA (26%) Asia ex-JP (22%) Others (17%) Australia (2%)
Jun 13 Asia ex-JP (48%) Europe (24%) Others (12%) Japan (10%) Australia (6%)
Jul 13 Asia ex-JP (73%) Europe (17%) Others (9%) USA (1%) Japan (1%)
Aug 13 Asia ex-JP (74%) Others (9%) Europe (8%) Australia (6%) Japan (2%) USA (1%)
Sep 13 Asia ex-JP (63%) Others (30%) Europe (7%)
Oct 13 Others (50%) Europe (20%) USA (10%) Asia ex-JP (10%) Japan (10%)
Nov 13 Others (38%) Europe (25%) Asia ex-JP (25%) USA (38%)
Dec 13 Asia ex-JP (83%) Japan (6%) Others (6%) USA (2%) Europe (2%)
Jan 14 Europe (56%) Asia ex-JP (22%) USA (11%) Others (11%)
Feb 14 Others (50%) Asia ex-JP (25%) USA (25%)
Note: Next DPS is an estimate based on "BBG projected dividend" or "BBG DPS estimate (adjusted for the dividend frequency), Bloomberg dividend
estimate used unless the dividend is already declared. Source: Bloomberg, CLSA Asia-Pacific Markets
For global income-focused investors, the spread of ex-dates throughout the
year allows them to capture dividends on a consistent basis. Figure 306
highlights the gross dividend yield on offer during the rest of the year by
month. It is evident that beginning of the year is when most of the dividends
are paid out for the previous fiscal year.
Figure 306
MSCI World - Monthly gross dividend yield

Note: Next DPS is an estimate based on "BBG projected dividend" or "BBG DPS estimate (adjusted for
the dividend frequency), Bloomberg dividend estimate used unless the dividend is already declared
Figure 307 highlights the performance of the ex-date strategy over years. It
also highlights the best entry and exit date for each market.
1.0
1.7
1.5
2.2
2.7
2.1
1.5
0.7
2.8
1.6
3.3
2.7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
(%)
Investors can benefit
efficiently out of market
inefficiency by trading
around ex-date
Beginning of the year
offers lucrative yields
Detailed ex-date results
Global markets also offer
lucrative yields during
most of the months




Performance of ex-date strategy
Figure 307
MSCI markets - Performance of ex-date strategy over time
CN HK IN ID KR MY SG TW TH AU APxJ US EU EM World
2012
Entry Date -5D -24D -25D -30D -13D -26D -29D -17D -30D -30D -27D -30D -30D -30D -30D
Exit Date +7D +16D +25D +25D +3D +15D +21D +16D +3D +20D +25D +30D +25D +22D +29D
Avg Excess Return (%) 1.4 3.0 3.7 2.9 0.4 2.2 1.1 5.2 3.5 2.3 1.5 1.3 1.7 2.8 3.0
Median Excess Return (%) 0.4 3.0 2.6 0.5 (0.4) 2.4 2.1 4.7 2.8 2.1 1.3 1.0 1.5 2.4 2.4
Success Rate (%) 59.2 56.8 82.7 54.5 64.3 72.5 61.3 86.0 83.0 76.8 60.8 67.9 64.0 50.8 64.1
2011
Entry date -30D -16D -18D -13D -1D -25D -3D -29D -21D -30D -26D -24D -30D -22D -27D
Exit date +1D +19D +9D +27D +27D +19D 0D +14D +25D +16D +2D +25D +27D +2D +27D
Avg excess return (%) 1.9 2.9 3.4 2.4 2.6 3.2 0.3 6.5 3.7 3.3 2.4 1.1 2.3 2.0 1.8
Median excess return (%) 0.6 2.1 4.6 2.6 2.0 1.8 0.3 5.4 4.1 2.8 1.9 1.2 2.0 1.5 1.6
Success rate (%) 45.9 37.5 48.9 65.7 71.7 63.3 51.7 40.7 46.2 49.6 48.0 57.2 49.1 53.6 51.1
2010
Exit date 0D +4D +27D +30D +1D +30D 0D +26D +8D +29D 0D +30D +2D 0D +30D
Success rate (%) 50.2 75.0 80.5 100.0 77.1 79.1 57.6 76.9 83.8 73.7 57.0 66.8 58.9 57.0 60.8
2009
Exit date +21D +11D +26D 0D +11D +25D +19D +23D 0D +27D +22D +30D +21D +22D +27D
Median excess return (%) 0.7 4.3 3.8 1.8 1.1 2.4 2.8 (1.8) 5.0 5.9 (0.4) (0.1) 3.3 0.5 (0.3)
Success rate (%) 78.2 80.4 79.1 83.3 74.5 82.9 81.3 85.7 81.1 84.2 82.1 64.8 80.2 76.9 71.1
2008
Exit date 0D +10D +13D +2D +1D +12D 0D +12D +1D +7D 0D +1D +1D 0D +3D
Success rate (%) 44.0 38.2 51.2 25.0 71.1 42.2 46.9 50.0 63.9 51.9 49.2 48.0 53.0 47.8 44.7
2007
Exit date +2D +5D +21D +1D +8D +1D 0D +8D 0D +2D +2D +2D +1D +2D +2D
Median excess return (%) 3.5 1.1 2.7 (1.1) 2.7 (0.2) 2.3 5.1 (0.1) 0.2 0.5 (0.3) 0.4 (0.0) (0.5)
Success rate (%) 72.5 65.5 73.1 71.4 47.6 70.8 52.9 80.0 45.9 66.7 64.7 53.3 61.8 65.2 55.7
2006
Exit date +30D 0D +27D +1D +3D +25D +30D +27D +30D +29D +30D +15D +1D +30D +29D
Median excess return (%) 8.1 2.2 (0.1) 1.1 3.3 1.1 (0.9) (0.5) 5.0 (0.4) 3.3 0.4 0.8 4.4 (0.5)
Success rate (%) 80.4 76.4 70.9 60.0 72.1 70.7 63.6 79.5 75.7 84.9 76.5 62.4 58.6 74.5 64.7
2005
Exit date +1D +8D +15D +5D +12D 0D +1D +9D +9D 0D +1D +28D +30D +1D +1D
Median excess return (%) 0.2 0.8 1.0 13.3 2.2 0.4 2.9 1.1 2.1 0.7 0.1 (0.2) 0.5 0.4 (0.1)
Success rate (%) 54.0 51.7 84.3 100.0 73.0 68.3 81.3 68.4 61.1 75.0 56.4 57.3 70.3 57.9 57.0
2004-2012
Entry Date -29D -24D -25D -3D -4D -25D -30D -22D -24D -21D -29D -24D -30D -30D -29D
Exit Date +1D +21D +25D +1D +2D +30D 0D +12D +1D +7D +1D +30D +1D +1D +1D
Avg Excess Return (%) 2.5 2.6 3.1 0.6 2.2 1.7 1.6 4.0 2.2 2.4 2.1 0.8 1.4 1.7 2.2
Median Excess Return (%) (1.6) 1.1 2.2 0.7 1.3 1.2 1.3 2.4 1.5 1.3 0.5 0.5 0.6 1.2 0.3
Success Rate (%) 54.5 57.4 66.9 66.7 67.9 61.4 67.4 60.9 63.9 64.5 57.5 58.7 58.2 59.3 57.9

Appendices Microstrategy


Appendix 1: Yield characteristics
Sustainable growth a better proxy for growth
MSCI World: Current sustainable growth versus LT avg for dividend-yield ranges

Note: Sustainable growth is bottom-up aggregated using median values.
MSCI regions and markets: Sustainable growth for stocks with dividend yield >3%

Note: Sustainable growth is bottom-up aggregated using median values. Source: Factset alpha tester,
CLSA Asia-Pacific Markets
MSCI World: Sustainable growth for dividend yield and payout ranges

Note: Dividend yield buckets have median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
0
2
4
6
8
10
12
0-2 2-3 3-4 4-5 5-7 >7
Sustainable growth (%)
Sustainable
growth too
low for
stocks with
yield more
than 7%
0
2
4
6
8
10
12
14
C
h
i
n
a
S
A
f
K
o
r
e
a
U
K
E
M
A
S
E
A
N
A
x
J
L
a
t
a
m
H
K
U
S
A
W
o
r
l
d
E
u
r
o
p
e
D
M
T
a
i
w
a
n
A
u
s
t
Sustainable growth (%)
A number of stocks with dividend
yield more than 3% have
sustainable growth > 6%
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 12.4 12.4 na na na na na 12.2
20-40 9.3 9.6 10.2 10.7 10.9 na 10.2 9.3
40-60 4.9 7.5 8.0 7.8 8.1 na 7.8 7.6
60-80 na 4.0 4.7 4.4 5.0 5.2 4.6 4.6
>80 na na 2.0 1.8 1.6 1.4 1.5 1.4
All 10.2 8.5 7.8 6.5 5.1 3.2 6.4 8.2
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 11.9 11.5 na na na na na 11.8
20-40 9.0 9.1 10.2 11.2 11.7 na 10.8 9.3
40-60 7.9 7.7 8.3 7.1 6.7 na 7.6 7.7
60-80 3.2 6.2 5.5 5.7 4.7 4.6 5.0 5.0
>80 0.8 1.7 2.5 1.3 1.3 0.8 1.3 1.4
All 9.6 8.3 7.9 6.4 3.9 1.8 6.4 8.1
Sust. growth
(%, since 2003)
Dividend yield ranges (%)
P
a
y
o
u
t
s
Sust. growth
(%, current)
P
a
y
o
u
t
s
Tech and telecom sectors
relative weight increased
but materials, autos and
utilities have lost out
Investors need a different
strategy to invest in
high-yield stocks in
Asia and EM
However, 5-7% dividend



Median sustainable growth of stocks in different yield ranges
Div yields <2% 2-3% 3-4% 4-5% 5-7% >7% >3%
MSCI regions L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now
World 10.2 9.6 8.5 8.3 7.8 7.9 6.5 6.4 5.1 3.9 3.2 1.8 6.3 6.3
DM 9.8 9.5 7.7 7.9 6.9 7.2 5.4 5.5 3.8 3.7 2.0 0.9 5.4 5.4
EM 11.0 10.2 10.4 9.9 9.7 9.2 9.1 8.3 7.3 6.2 5.2 na 8.2 7.8
Asia ex-JP 11.1 10.5 9.2 8.8 8.2 8.2 7.2 7.8 6.0 3.6 4.9 2.7 7.2 7.6
AP ex-JP 11.1 10.5 9.1 8.5 7.8 8.1 6.3 7.1 4.8 2.5 3.1 1.3 6.1 6.5
Asean 8.3 9.1 9.3 10.8 8.1 8.3 6.9 7.8 5.6 2.6 4.1 na 6.7 7.8
Europe 10.3 10.2 9.3 9.9 7.5 7.6 6.5 6.4 5.3 4.9 3.5 3.3 6.3 6.1
Latam 9.3 7.3 10.5 10.2 10.7 9.1 10.8 7.1 7.6 6.8 4.4 na 8.7 7.0
Japan 4.9 4.8 4.5 4.5 3.7 4.2 2.9 4.2 2.0 na 2.4 na 3.4 4.2
USA 13.1 13.0 10.5 11.5 8.0 9.0 4.5 4.0 2.5 5.5 1.3 0.1 5.8 6.4
MSCI markets
Australia 6.6 4.1 8.0 4.4 6.2 6.7 4.1 4.1 2.3 1.4 1.6 1.3 3.0 2.5
China 11.3 10.8 9.7 9.0 8.7 11.2 8.6 11.8 9.6 11.1 10.5 na 9.1 11.2
HK 8.1 9.3 5.9 6.5 6.0 6.4 5.9 7.7 6.7 10.4 8.3 na 6.0 7.0
India 16.6 14.3 14.1 13.4 13.9 13.9 13.8 na 12.0 na 15.6 na 14.1 14.4
Indonesia 18.5 18.0 14.4 12.3 13.1 16.5 15.3 11.6 15.2 9.6 15.1 na 14.6 15.4
Korea 11.2 10.5 9.3 7.8 10.1 8.0 10.0 9.8 7.7 na 7.0 na 9.3 8.6
Malaysia 8.5 10.4 7.6 7.4 6.4 8.1 4.8 4.6 4.7 3.9 1.8 na 5.2 7.2
Singapore 7.6 8.1 8.7 10.0 6.5 8.8 5.2 5.0 2.9 2.7 2.3 na 4.9 5.6
South Africa 8.3 5.9 12.4 11.3 12.7 10.4 13.4 10.5 12.1 7.1 7.2 na 12.5 10.0
Taiwan 4.2 6.6 6.1 5.1 6.5 5.9 6.1 4.4 5.7 4.3 5.0 na 5.5 5.1
Thailand 4.8 9.4 11.9 13.6 10.9 7.8 9.2 12.5 6.7 0.0 4.2 na 8.5 8.8
UK 12.5 11.0 10.4 12.5 9.1 11.1 7.0 6.0 6.0 7.3 3.6 2.3 7.6 7.9
1
Yield and earnings certainty
MSCI regions and markets: Earnings certainty for stocks with dividend yield >3%

Note: Earnings certainty is bottom-up aggregated using median values.
MSCI World: Earnings certainty for dividend yield and payout ranges

Note: Dividend yield buckets have median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
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Earnings certainty (x)
EM's earnings certainty
is low but improving
36 37
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 13.9 9.3 na na na na na 12.7
20-40 14.8 13.5 11.1 9.4 8.4 na 10.1 12.8
40-60 8.7 13.9 15.8 14.4 11.9 na 14.1 13.6
60-80 na 9.4 14.0 16.0 14.6 10.9 14.4 13.6
>80 na na 8.1 11.3 13.5 11.8 12.0 10.8
All 12.8 12.3 12.7 13.1 12.8 10.0 12.6 12.7
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 14.4 12.3 na na na na na 13.9
20-40 15.5 15.4 11.5 11.3 11.0 na 11.4 14.8
40-60 10.2 15.0 17.4 16.2 13.9 na 16.2 15.2
60-80 6.3 11.7 19.6 25.4 16.0 13.9 19.4 18.0
>80 1.6 4.8 14.9 13.3 16.9 11.7 13.8 12.3
All 13.4 14.7 15.8 16.5 15.4 11.7 15.4 14.7
EPS certainty
(x, since 2003)
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EPS certainty
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Median earnings certainty of stocks in different yield ranges
Div yields <2% 2-3% 3-4% 4-5% 5-7% >7% >3%
MSCI regions L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now
World 12.8 13.4 12.3 14.7 12.7 15.8 13.1 16.5 12.8 15.4 10.0 11.7 12.5 15.1
DM 16.0 18.2 14.0 16.4 14.7 18.3 15.2 19.6 14.4 16.0 11.9 11.7 14.2 17.2
EM 7.6 8.6 8.8 11.1 9.9 11.2 10.3 12.6 10.5 14.6 9.0 na 10.1 12.4
Asia ex-JP 7.9 8.7 9.0 11.1 10.1 11.7 10.5 12.5 11.2 15.5 10.4 17.4 10.5 12.6
AP ex-JP 7.9 8.7 9.3 11.1 10.7 11.7 11.7 14.2 13.2 16.4 12.8 17.4 11.9 14.1
Asean 7.1 10.1 9.4 11.9 10.4 15.7 11.0 12.4 12.5 19.6 11.3 na 11.4 15.4
Europe 9.1 9.7 12.2 15.1 11.7 14.7 11.8 14.1 11.6 13.8 9.5 9.7 11.4 13.7
Latam 6.5 8.6 6.6 9.0 8.1 13.7 8.4 7.2 7.7 15.0 6.5 na 7.3 10.4
Japan 12.1 12.3 10.9 11.1 8.6 12.1 8.8 7.1 5.6 na 8.2 na 8.3 11.4
USA 33.3 34.9 35.4 32.8 38.9 39.1 38.0 36.9 29.7 35.2 16.6 13.8 35.9 36.9
MSCI markets
Australia 8.9 4.6 12.5 11.4 15.8 10.8 18.0 30.0 19.9 19.9 20.2 18.1 19.3 20.1
China 7.5 8.3 9.4 11.0 9.2 10.6 9.9 14.2 9.3 10.6 8.1 na 9.5 10.9
HK 6.7 9.1 7.8 12.5 10.3 13.9 13.0 12.4 12.8 8.4 7.8 na 11.5 12.4
India 10.1 10.9 11.1 12.5 11.7 10.3 9.4 na 7.6 na 9.3 na 10.7 9.5
Indonesia 7.6 22.4 9.8 15.8 10.3 17.6 11.1 10.0 8.9 15.4 8.1 na 10.1 16.5
Korea 7.4 8.4 7.5 9.8 8.9 14.6 8.1 8.4 7.3 na 6.5 na 8.2 10.4
Malaysia 6.7 7.2 9.3 9.3 9.5 16.7 10.8 12.4 14.0 22.2 13.8 na 11.4 16.7
Singapore 6.4 7.4 7.4 6.3 11.8 13.5 12.8 17.2 16.4 14.3 13.1 na 13.4 16.4
South Africa 5.1 4.6 11.1 14.0 14.6 19.3 18.6 22.6 15.9 12.8 14.4 na 16.4 21.1
Taiwan 4.5 3.6 7.8 10.7 10.1 14.7 10.3 13.7 11.2 16.3 11.5 na 10.6 15.0
Thailand 4.5 12.4 10.2 15.7 9.9 13.7 9.5 9.5 10.3 33.7 9.4 na 9.7 13.7
UK 10.2 9.6 16.6 21.0 17.0 20.9 15.7 17.3 14.3 18.8 9.6 7.0 15.5 18.8
1
Yield and quality (ROE)
MSCI regions and markets: ROE for stocks with dividend yield >3%

Note: ROEs is bottom-up aggregated using median values.
MSCI World: Next 2Y average ROE for dividend-yield and payout ranges

Note: Dividend-yield buckets have median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
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EM high-yield stocks
offer much higher ROEs
Next 2-year average ROE (%)
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 14.5 15.3 na na na na na 14.4
20-40 13.2 14.5 15.6 15.9 17.2 na 15.8 14.0
40-60 8.1 14.5 16.0 16.2 16.6 na 15.6 15.0
60-80 na 8.8 13.9 13.8 15.3 17.9 14.5 13.7
>80 na na 8.7 11.0 12.1 15.1 12.3 11.1
All 13.5 13.4 14.9 14.8 14.9 17.1 14.9 14.2
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 13.7 12.2 na na na na na 13.7
20-40 12.1 13.2 14.6 15.5 16.9 na 14.8 13.4
40-60 9.8 14.7 17.3 14.0 12.4 na 15.0 14.7
60-80 6.0 15.1 16.2 17.2 15.3 12.1 15.6 15.2
>80 3.7 4.4 9.5 8.4 10.7 11.6 10.0 9.4
All 12.0 13.0 15.7 13.9 13.6 11.6 14.5 13.7
ROE (2Y avg)
(%, since 2003)
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ROE (2Y avg)
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Median ROEs of stocks in different yield ranges
Div yields <2% 2-3% 3-4% 4-5% 5-7% >7% >3%
MSCI regions L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now
World 13.5 12.0 13.4 13.0 14.9 15.7 14.8 13.9 14.9 13.6 17.1 11.6 14.8 14.3
DM 13.4 11.9 12.4 12.1 14.3 15.2 13.5 12.5 13.2 11.5 12.1 11.4 13.3 12.9
EM 14.2 12.1 15.1 14.5 16.3 16.5 17.4 15.4 18.3 18.4 20.4 na 17.7 16.7
Asia ex-JP 14.2 12.1 13.9 12.4 14.8 15.4 15.6 15.4 16.9 18.2 20.4 11.0 16.0 15.8
AP ex-JP 14.3 12.0 13.8 12.4 15.0 15.4 15.2 14.8 15.6 13.6 16.2 15.0 15.4 14.7
Asean 10.8 12.0 13.7 15.5 15.4 16.6 16.0 16.3 17.6 28.2 23.0 na 16.7 16.9
Europe 14.8 14.2 15.5 15.4 15.2 14.7 14.2 13.6 14.0 12.6 15.5 12.5 14.0 13.6
Latam 13.0 9.3 15.9 16.0 18.6 19.0 21.8 12.6 21.0 17.6 20.2 na 20.5 17.1
Japan 8.2 7.7 7.8 7.1 8.0 8.1 8.8 6.7 8.5 na 5.2 na 8.1 7.3
USA 16.6 16.3 17.2 17.9 16.2 18.8 13.6 11.7 10.6 10.9 10.6 8.9 14.1 15.3
MSCI markets
Australia 12.8 6.1 16.1 10.1 16.5 19.7 13.8 13.0 12.1 9.0 8.8 15.0 12.2 11.2
China 14.1 13.0 14.4 13.0 14.2 14.6 14.6 17.1 16.6 16.2 20.0 na 15.2 16.1
HK 8.5 5.0 7.1 6.9 11.7 10.2 14.7 14.8 19.6 16.6 21.2 na 14.5 14.5
India 20.6 17.4 19.9 19.4 23.1 18.4 21.7 na 20.1 na 21.5 na 23.1 18.8
Indonesia 24.4 23.1 22.3 18.4 23.2 24.4 28.3 25.1 24.9 37.1 27.3 na 25.3 26.5
Korea 15.0 10.9 12.5 8.2 14.0 11.3 15.5 16.2 14.3 na 18.0 na 14.3 11.3
Malaysia 11.3 11.3 11.7 10.0 13.0 14.2 14.3 16.3 16.3 30.1 30.5 na 15.0 15.0
Singapore 8.9 6.8 9.8 7.9 12.4 14.4 14.4 13.2 16.2 16.9 23.1 na 14.4 13.9
South Africa 16.2 11.7 17.1 23.6 21.7 18.9 22.2 21.1 25.5 30.0 26.3 na 22.0 21.1
Taiwan 7.1 6.8 10.9 9.4 14.5 15.1 14.8 11.1 16.8 18.0 18.7 na 16.1 13.7
Thailand 11.2 20.1 16.4 20.6 18.4 18.0 16.6 14.7 19.5 91.0 20.8 na 17.9 17.6
UK 16.1 15.5 17.7 19.3 17.9 20.0 16.2 15.2 16.6 15.0 15.9 13.0 16.9 18.1
1
Yield and earnings value
MSCI regions and markets: Forward PE for stocks with dividend yield >3%

Note: Aggregated PE is based on weighted average. Source: Factset alpha tester, CLSA Asia-Pacific Markets
MSCI World: 12M-forward PE for dividend-yield and payout ranges

Note: Dividend-yield buckets have weighted average values.
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PE (x)
High dividend-yield
stocks within EM
are still the
cheapest
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 14.4 8.1 na na na na na 13.9
20-40 16.9 12.7 9.9 7.8 6.4 na 9.1 13.2
40-60 24.5 17.2 13.4 11.0 9.0 na 11.5 12.9
60-80 na 22.2 17.4 14.5 11.9 8.9 13.2 13.6
>80 na na 25.0 19.7 15.3 11.4 15.7 17.0
All 16.1 13.9 12.3 11.4 10.5 8.9 11.5 13.5
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 13.3 7.5 na na na na na 11.9
20-40 16.2 11.7 9.2 7.9 7.5 na 8.7 11.7
40-60 22.7 17.4 13.9 10.9 8.4 na 11.9 12.9
60-80 23.0 21.7 18.1 14.9 12.2 8.9 13.9 14.2
>80 27.9 26.1 22.6 23.3 14.9 11.8 16.5 17.5
All 14.9 12.4 12.5 11.4 10.5 10.5 11.6 12.6
12MF PE
(x, since 2003)
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12MF PE
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80% payout are the
most expensive
HK and Taiwan high-yield
stocks are the most
expensive . . .

. . . China is the
cheapest market for
high-yield stocks



Weighted average PE of stocks in different yield ranges
Div yields <2% 2-3% 3-4% 4-5% 5-7% >7% >3%
MSCI regions L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
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Now L10Y
1
Now L10Y
1
Now
World 16.1 14.9 13.9 12.4 12.3 12.5 11.4 11.4 10.5 10.5 8.9 10.5 11.5 11.6
DM 16.1 15.4 14.1 12.4 12.5 12.6 11.6 12.1 10.5 10.9 9.2 10.6 11.7 12.0
EM 13.6 12.7 11.2 12.1 10.3 11.8 9.5 8.5 9.2 7.6 8.8 na 9.4 9.3
Asia ex-JP 14.3 12.6 12.7 13.4 11.8 12.2 11.1 9.8 10.9 10.4 9.4 19.1 11.0 10.8
AP ex-JP 14.3 12.7 12.8 13.5 12.5 12.7 11.8 10.8 11.9 12.5 10.2 14.9 11.9 12.0
Asean 16.2 17.4 13.7 14.3 12.8 13.3 11.9 12.4 12.7 15.1 11.7 na 12.5 13.2
Europe 16.4 14.0 14.0 13.3 12.2 12.8 11.0 10.5 9.8 9.0 8.7 9.5 11.0 10.6
Latam 17.6 21.7 12.1 13.3 10.1 13.5 9.1 7.7 8.4 10.1 7.7 na 8.9 10.4
Japan 17.4 18.4 13.4 12.5 13.5 10.6 11.7 12.2 11.1 na 5.0 na 12.5 10.9
USA 15.5 15.2 13.7 11.9 12.5 12.4 12.3 14.3 12.4 13.8 10.5 12.1 12.3 12.9
MSCI markets
Australia 15.2 16.6 15.5 15.0 16.5 14.0 14.6 15.1 12.7 13.3 11.6 12.3 13.4 13.7
China 17.1 16.3 12.4 12.0 10.8 9.3 9.8 7.9 8.1 6.6 5.9 na 9.9 8.1
HK 17.9 17.1 17.2 15.9 16.7 16.7 13.9 13.6 12.4 16.9 8.0 na 14.6 15.4
India 15.9 14.7 13.1 16.5 11.4 7.8 8.9 na 7.2 na 4.9 na 10.2 7.6
Indonesia 13.8 13.7 13.4 16.0 12.0 13.4 11.3 12.9 8.4 12.5 6.7 na 11.3 13.2
Korea 11.0 8.8 8.4 9.0 7.3 7.5 7.8 9.5 8.0 na 8.3 na 7.6 8.8
Malaysia 14.9 16.2 13.6 12.7 14.3 13.8 14.0 14.5 13.7 13.8 14.4 na 14.1 14.1
Singapore 19.2 19.4 13.9 13.4 13.2 13.0 12.7 13.1 14.9 17.6 13.1 na 13.2 13.4
South Africa 14.6 13.7 13.4 15.8 10.8 11.1 9.9 10.7 9.4 13.2 9.2 na 10.0 11.4
Taiwan 15.5 19.9 13.8 14.1 13.4 15.4 12.8 12.8 11.5 13.6 9.3 na 11.7 14.1
Thailand 15.6 32.1 12.5 14.7 10.5 13.4 9.3 9.3 9.7 16.0 9.7 na 9.8 11.3
UK 15.0 15.1 14.1 13.2 12.6 12.3 10.9 10.8 9.9 9.7 9.5 10.6 11.2 10.7
1
Yield and growth
MSCI regions and markets: EPS Cagr for stocks with dividend yield >3%

Note: EPS growth is bottom-up aggregated using median values.
MSCI World: Next 2Y-EPS Cagr for dividend yield and payout ranges

Note: Dividend-yield buckets have median values. Source: Factset alpha tester, CLSA Asia-Pacific Markets
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Next 2-year EPS cagr (%)
Long-term: Yield and growth
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 15.7 11.4 na na na na na 15.4
20-40 14.2 11.4 9.5 9.1 5.7 na 8.8 12.5
40-60 16.2 11.9 10.0 8.2 7.2 na 8.8 10.1
60-80 na 14.9 11.2 8.5 6.3 3.2 8.0 8.7
>80 na na 12.6 8.7 4.8 3.0 5.8 6.4
All 15.0 11.7 10.3 8.5 6.1 3.7 8.5 12.1
<2 2-3 3-4 4-5 5-7 >7 >3 All
0-20 13.9 7.7 na na na na na 13.1
20-40 13.4 9.9 6.0 2.9 (0.1) na 4.9 10.7
40-60 18.9 10.5 7.8 5.9 1.4 na 6.3 8.1
60-80 13.9 15.2 8.1 5.2 3.5 0.8 5.0 5.9
>80 11.5 11.8 10.9 5.0 3.7 (4.1) 2.9 3.7
All 13.9 10.2 7.6 5.0 2.8 (4.0) 5.0 9.5
Fwd EPS cagr
(%, since 2003)
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Fwd EPS cagr
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Stocks with over 80%
payouts are mostly
ex-growth
Europe offers the lowest
growth among the high-
yield stocks



Median EPS growth of stocks in different yield ranges
Div yields <2% 2-3% 3-4% 4-5% 5-7% >7% >3%
MSCI regions L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now L10Y
1
Now
World 15.0 13.9 11.7 10.2 10.3 7.6 8.5 5.0 6.1 2.8 3.7 (4.0) 8.4 4.9
DM 14.0 13.0 10.7 10.0 9.1 6.8 7.1 4.6 4.7 2.7 1.5 (5.9) 6.9 4.6
EM 20.9 16.9 16.1 11.7 14.1 8.5 12.8 6.4 9.7 3.2 6.1 na 11.8 6.3
Asia ex-JP 20.0 15.8 14.6 11.7 11.9 7.6 10.2 6.7 7.5 2.9 5.0 1.6 9.7 6.6
AP ex-JP 20.2 16.2 14.7 11.8 12.4 8.4 10.3 6.6 6.8 4.5 3.3 (1.1) 9.0 6.4
Asean 16.8 13.5 14.7 12.8 12.2 9.7 9.9 6.0 6.3 2.2 3.8 na 8.9 7.9
Europe 16.5 10.6 12.2 11.4 9.6 6.1 7.6 3.3 4.0 0.9 1.2 (4.5) 7.3 3.3
Latam 25.0 20.9 20.4 8.9 16.4 10.5 15.6 2.9 10.3 2.8 7.9 na 13.5 5.3
Japan 13.7 14.4 11.1 15.2 5.2 8.9 5.6 0.0 1.7 na 51.0 na 6.1 7.5
USA 14.4 12.9 9.8 8.8 7.8 6.5 4.4 1.5 1.5 5.3 2.0 (8.1) 5.8 5.1
MSCI markets
Australia 26.6 20.1 15.1 14.3 13.5 10.0 10.4 5.6 5.5 4.7 2.5 (1.8) 7.6 5.1
China 22.5 9.9 14.4 14.5 14.4 3.7 12.4 8.0 10.5 0.2 12.4 na 12.9 3.7
HK 15.7 19.3 9.0 4.1 10.4 4.1 7.5 7.4 6.5 8.3 (1.6) na 7.9 7.4
India 20.2 19.7 12.9 11.8 11.0 12.9 8.9 na 3.0 na (8.0) na 10.3 13.6
Indonesia 20.4 14.0 18.6 13.7 16.0 10.7 14.4 0.3 13.2 (16.5) 1.9 na 14.5 5.5
Korea 20.2 19.4 14.4 (8.3) 12.4 9.5 7.8 0.4 4.6 na (3.5) na 8.2 2.4
Malaysia 16.2 9.4 14.7 7.0 10.3 8.8 9.2 13.4 5.8 (0.8) 3.8 na 8.2 9.2
Philippines 15.5 14.1 14.4 14.5 9.9 (1.8) 13.0 na 7.5 na 2.8 na 9.3 (1.8)
Singapore 15.7 (6.1) 10.7 12.6 8.4 8.7 8.1 4.4 6.2 7.6 0.0 na 7.5 6.7
South Africa 31.8 17.8 22.2 16.9 17.9 14.2 16.5 11.6 14.9 11.8 12.7 na 16.0 13.4
Taiwan 25.2 15.0 19.6 13.7 13.2 7.6 11.1 8.7 9.0 9.2 4.4 na 10.3 8.4
Thailand 29.1 44.0 13.2 18.1 15.7 20.6 12.2 (2.6) 8.9 31.8 5.5 na 9.9 18.1
UK 15.7 7.2 11.4 7.5 8.4 7.6 7.2 2.6 3.8 2.8 0.0 (10.1) 7.1 4.5
1



Appendix 2: Yield and payout
MSCI regions and markets - Yield versus payout

MSCI World sectors - Yield versus payout

World
EM
DM
APxJ
AsiaxJ
USA
Europe
Latin America
Brazil
Canada
Chile
China
Colombia
France
Germany
HK
Indonesia
Italy
Japan
Malaysia
Mexico
Peru
Philippines
Singapore
South Africa
Taiwan
Thailand
UK
1.5
2.0
2.5
3.0
3.5
4.0
4.5
28.0 30.0 32.0 34.0 36.0 38.0 40.0 42.0 44.0 46.0 48.0 50.0
12MF Dividend yield (%)
Payout (N2Y avg, %)
India (22.7, 1.6)
Korea (10.3, 1.2)
Australia (64.2, 4.7)
Autos
Banks
Cap gds
Comm svc
Cons dur
Cons svcs
Div fin
Energy
Food & drug
FBT
Healthcare
HPC
Insurance
Materials
Media
Pharma
Retail
Semis
Software
Tech HW
Transport
1.0
1.5
2.0
2.5
3.0
3.5
4.0
18 21 24 27 30 33 36 39 42 45 48 51
12MF Dividend yield (%)
Real estate (70.3, 3.5, 3)
Telecom (62.7, 5.1, 4.2)
Utilities (61.0, 4.6, 3.3)
Payout (N2Y avg, %)
USA has lower dividend
yield and payout relative
than the rest of the world

Telecom and utilities have
high dividend yield
and payout




Appendix 3: EPS versus DPS growth
MSCI regions and markets - EPS versus DPS growth

MSCI World sectors - EPS versus DPS growth

World
EM
DM
APxJ
AsiaxJ USA
Europe
Latin America
Australia
Brazil
Canada
China
France
HK
India
Indonesia
Italy
Korea
Malaysia
Peru
Philippines
South Africa
Thailand
UK
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
7.0 9.0 11.0 13.0 15.0 17.0
EPS cagr (13-14F, %)
DPS cagr (13-14F, %)
Mexico (14.3, 17.1)
Chile (21.1, 2.8)
Colombia (2.6, -3.3)
Germany (3.2, 4.9)
Singapore (4.9, 4.6)
Japan (26.4, 8.3)
Taiwan (19.0, 7.8)
Banks
Cap gds
Comm svc
Energy
Food & drug
FBT
HPC
Insurance
Materials
Media
Pharma
Real estate
Retail
Semis
Software
Telecom
Transport
Utilities
2
3
4
5
6
7
8
9
10
11
5 7 9 11 13 15 17
EPS cagr (13-14F, %)
Autos (8.1. 15.5, 2.7)
DPS cagr (13-14F, %)
Cons dur (57.1, 12.5, 1.5)
Cons svcs (12.0, 0.3, 1.5)
Div fin (18.2, 23.3, 4.7)
Healthcare (4.4, -1.8, 2.5)
Tech HW (11.2, 30.6, 4.3)
EM and Asia ex-Japan
have better EPS and DPS
growth compared
to other regions

Diversified finance and
consumer durables have
higher EPS and
DPS growth




Appendix 4: Dividend tax
Dividend and capital-gains tax in detail
In the following figure we show the implications of increase and decrease in
corporate capital-gains tax on the economy as a whole.
Implications of increase/decrease in LT capital-gains tax rate on corporates

Australia:
Corporate Tax:
Capital gains:
Capital gains that companies derive are taxed at 30% the corporate rate.
Tax losses may be utilised and carried forward indefinitely to offset future
assessable income. However, capital losses can only be offset against
capital gains. The carryback of losses is not permitted.
Dividends:
Dividend received from local to local and foreign are taxable but can be
offset with the amount of franking credit on dividends paid by local
companies.
Dividend received from non-resident companies are tax exempt if the
recipient is a local company that has a 10% or greater interest in the
foreign company.
Personal tax:
Capital gains:
Residents are liable for tax on capital gains (subject to double-tax relief).
Capital gains are included in taxable income for calculation of tax liability.
On assets held for more than one year, individuals are taxed on half the
capital gains.
Dividends:
Dividends received by residents from local companies are taxable but can
offset with the amount of franking credit on dividends paid by companies.
A recipient of a fully-franked dividend on the top marginal rate will
effectively pay about 15% tax on the cash amount of the dividend. The top
marginal rate in Australia is 45%.
Increase in
CGT rate
Lock in effect
Decrease in new investments
Less capital re-allocation
Less economic growth.
Decrease in
CGT rate
Attract foreign investments
Promote entrepreneurship
High savings rate
High economic growth
tax for Australia in detail

Implications of long-term
capital-gains tax
on corporates



China:
Corporate tax:
Capital gains:
Capital gains and losses of companies are generally combined with other
operating income and taxed at the applicable company tax rate.
Dividends:
An exemption applies for dividends paid by a resident enterprise to
another resident enterprise (with certain limits).
Dividends received from a foreign entity are included in taxable income
and subject to income tax at a rate of 25%. A 10% withholding tax is
levied on dividends paid to a non-resident company unless anything is
mentioned under a tax treaty.
Personal tax:
Capital gains:
Individuals capital gains are taxable in China at a 20% rate.
Dividends:
Resident and non-residents pay 20% withholding tax and its final.
Hong Kong:
Corporate tax:
Capital gains:
There is no capital-gains tax in Hong Kong and capital gains are not
subject to corporate or personal income tax.
Dividends:
Dividend income, whether from Hong Kong or overseas, is not taxable.
Dividends paid to either a resident or non-resident of Hong Kong is not
subject to any withholding tax.
Personal tax:
Capital gains:
Capital gains for residents are not taxable in Hong Kong.
Dividends:
Dividend income is not taxed but gains from the exercise of share options
are taxable.
India:
Corporate tax:
Capital gains:
Capital-gains tax in India depends on whether the gains are long or short
term.
Capital gains
Short term Long term
Shares are held for less than a year Shares are held for more than a year
Gains are subject to STT and taxed at 16.22% Tax is exempt, if transaction is subject to STT.
When such transaction is not subject to STT, a
10% tax applies (without indexation)
Capital losses can be set off with any capital gain Capital losses can be set off only with LTCG
No carry forward apply here Capital loss can be carried forward for 8 years
against gain of same type in subsequent years
Source: CLSA Asia-Pacific Markets, Income tax department
Corporate and personal
tax in detail for China

not taxed for residents
or corporates

Indias long- and short-
term capital gains.
Dividends are taxable for
residents and corporates




Dividend distributed tax:
Companies have to pay 15% dividend distribution tax (DDT), 5%
surcharge and 3% education cess on DDT and surcharge. So total tax
incidence is 16.22%.
Personal tax:
Capital gains:
Similar set of rules applicable in India for residents as applicable for
corporations.
Dividend distributed tax:
Dividends from India companies are not subject to tax in the hands of
shareholders and dividends can be repatriated, if dividend tax is paid by
the company. However, the company paying the dividends is subject to
DDT at an effective rate of 16.22%.
Indonesia:
Corporate tax:
Capital gains:
Capital gains are taxable as ordinary income and capital losses are tax-
deductible. Losses may be carried forward for five years following the year
the loss was incurred.
Dividends:
Dividends paid by a domestic corporate to a resident company are subject
to a 15% withholding tax and non-resident are subject to 20% withholding
tax unless the rate is reduced under a tax treaty.
Personal tax:
Capital gains:
Gains on shares listed in Indonesia are taxed at 0.1% of the transaction
value. An additional tax of 0.5% applies to the share value of founder
shares at the time of an IPO.
Dividends:
A 10% withholding tax is imposed on dividends paid to resident individual.
Philippines:
Corporate tax:
Capital gains:
Capital gains from the sale of shares not traded through the Philippine
Stock Exchange are taxed at the rate of 5% on the first P100,000 and
10% thereafter.
Sales of stocks in a domestic corporation through the Philippine Stock
Exchange or through IPO are subject to a tax on the transaction at a rate
of 50% of 1% of the selling price.
Losses can be carried forward for three years.
A 10% surtax is levied on improperly accumulated earnings.
Dividends:
Dividends received by local or foreign companies from a Philippines
corporation are not subject to income tax.
Details on capital and
dividend tax in Indonesia
Capital and dividend tax
in Philippines

Dividend distribution tax
is charged as a
withholding tax in India
Dividends received by
residents taxed at 10%



Dividends received by non-resident foreign corporation from domestic
corporations are subject to a 30% final tax. However, the tax is withheld
at a reduced rate of 15% in certain circumstances, provided the country of
the non-resident allows a tax credit of 15%.
Personal tax:
Capital gains:
An individual is subject to capital-gains tax on the sale of shares not
traded on the exchange at a rate of 5% of the net gain not exceeding
P100,000 and 10% on the excess.
Gains derived from the sale of shares listed and traded on the stock
exchange are taxed at 50% of 1% of the gross sales price.
Dividends:
Dividends received by residents are subject to tax at 10%.
Singapore:
Corporate tax:
Capital gains:
Singapore does not tax capital gains.
Dividends:
Singapore operates a tier-1 corporate tax system, under which corporate
tax paid on a companys profit is final. Any dividends paid are tax exempt
in the hands of the recipient. No withholding tax is levied on dividends paid
by company residents in Singapore.
Personal tax:
Capital gains and dividend tax:
Singapore does not tax capital gains for residents. Any dividends paid are
tax exempt in the hands of recipient.
Taiwan:
Corporate tax:
Capital gains:
Capital gains are treated as ordinary income and taxed at a standard rate
of 17%.
Dividends:
For local corporates, the dividends received are not considered as taxable
income. Imputed tax credits do not apply to non-resident shareholders.
Non-resident corporates face a 20% withholding tax.
An additional 10% tax will be imposed on any current earnings that remain
undistributed by the end of following year. Non-resident shareholders may
use 10% surtax as on offset against dividend withholding tax.
Personal tax:
Capital gains:
Capital gains from the sale of shares in a domestic company are subject to
individual income tax. Tax rates for residents are progressive up to 40%.
Dividends:
Taiwan residents do not pay any withholding tax but they get the dividend
imputation credit attached to their dividend. Non-residents individuals
have to pay 20% withholding tax.
Like Hong Kong,
Singapore does not levy
tax on dividends and
capital gains

Capital gains for sale of
shares are subject to
income tax on residents
up to 40%




Thailand:
Corporate tax:
Capital gain:
Capital gains are treated as normal corporate income tax with no
restrictions on the use of capital losses to offset taxable profit. The normal
corporate tax rate is 20%.
Dividends:
Dividends paid to local and foreign companies are subject to a 10%
withholding tax (exempt, if certain requirements are met).
Personal tax:
Capital gains:
Capital gains are exempt from personal income tax if the shares sold were
of a public company registered on the stock exchange of Thailand.
Dividends:
A resident individual taxpayer who gets dividends has a choice of including
the dividend in assessable income or paying a final withholding tax at 10%
and excludes such dividend from their income.
Dividends from any board of an investment-supported company are tax-
exempt.
Japan:
Corporate tax:
Capital gains:
Capital gains are taxable as ordinary income; capital losses are generally
deductible. The national standard corporation tax rate for FY13 of 25.5%
applies to ordinary corporations with share capital exceeding 100m.
However, a 10% surtax will be imposed therefore the national corporate
tax rate will be 28.05%.
Carry forward of net operating losses is applicable for nine years.
Dividends:
Dividends received by a local corporation from another local corporation
are excluded from taxable income for corporate income-tax purposes if the
recipient holds 25% or more of the shares in the dividend-paying
corporation for at least six months before the dividend determination. If a
corporation holds less than 25% of the shares or for less than six months
before the dividend determination, 50% of the dividends received may be
excluded.
Foreign dividend exemption system exempts 95% of dividends received by
a local company from its qualifying shareholdings of 25% or more in
foreign companies (held for at least six months before the dividend
determination).
20.42% withholding tax is normally levied on dividend distribution to non-
residents unless the rate is reduced under a tax treaty.
Personal tax:
Capital gains:
Individuals are taxed on the gains from sale of shares at 20% and 10% for
listed shares
Dividends:
20.4% withholding tax is normally levied on dividend distributions to non-
residents and residents unless the rate is reduced under a tax treaty.
Dividends paid to local
and foreign companies
are subject to 10%
withholding tax

Carry forward of
corporate operating
losses under capital gains
applicable for nine years
Residents taxed at 20%
on gains from share sales



Malaysia:
Corporate tax:
Capital gains:
Capital gains are not taxed in Malaysia.
Dividends:
Single-tier system (STS): Dividends paid by companies using the STS are
not taxable. Companies in Malaysia have until 31 December 2013 to adopt
the STS.
Personal tax:
Capital gains:
Capital gains are not taxed in Malaysia.
Dividends:
Imputation tax system: Resident individual get IRB rebates (the difference
between corporate tax and individual progressive tax rate) for annual
taxable income.
No tax will be levied on STS.
Korea:
Corporate tax:
Capital gains:
Capital gains or losses are usually reflected in normal taxable income
subject to corporate income tax.
Tax
Tax rate Tax slabs
10% First 200m won
20% Above 200m won - 20bn won
22% Above 20bn won
Source: CLSA Asia-Pacific Markets, National tax service
A local surtax of 10% of the corporate income tax due applies.
Dividends:
Withholding taxes to resident companies are not applicable.
The dividend received reduction (DRD) is available for dividend income
received by a Korean resident company from another Korean company.
Dividend received deduction (DRD) of 30% to 100% is granted based on
shareholding tax ratio.
Korea: Dividend received deduction
(%) Equity ratio Deduction ratio
Listed company 100 100

>30 50

<30 30
Non Listed company 100 100

>50 50

<50 30
Source: CLSA Asia-Pacific Markets, Ministry of strategy and Finance
Non-resident companies pay 22% withholding tax. The rate may be
reduced under a tax treaty.
Personal tax:
Capital gains:
Gains from the transfer of listed stock are exempt from tax. However,
when the total stake of shareholder together with related parties (major
shareholder) in a listed company exceeds 3% or market value held by
Malaysia does not levy
capital gains tax on
corporates and residents

Capital gains or losses
taxed under normal
income and subject to
corporate-income tax

Dividend received
reduction is available for
Korean resident company



shareholder is more than equal to 10bn won, the capital gains are taxed at
the rate of 22% including surtax. If the holding period is less than one
year, 33% would be applied.
If the above mentioned stake is in small or medium sized company, the
gains are subject to tax at 11% including surtax.
Dividends:
Dividends paid to residents are subject to 20% withholding tax, plus the
local surtax. Total incidental tax is 22%.
USA:
Corporate tax:
Capital gains:
Gains recognised by corporations on capital assets are taxed at the same
rate as ordinary income.
Dividends:
For domestic corporations, dividends are included in taxable income. A
dividend received deduction is available for dividends received by a corporate
shareholder from a domestic corporation based on shareholding ratio.
USA: Dividend received deduction
Equity ratio Deduction ratio (%)
<20% 70
>20% and non-controlling shareholder 80
Member of same affiliated group 100
Source: CLSA Asia-Pacific Markets, www.irs.gov
Dividends paid by domestic corporations to foreign corporation generally
subjected to a 30% US withholding tax on gross amount unless rate is
reduced under applicable tax treaty or income is ECI.
Personal tax:
Capital-gains tax and dividend-tax rates:
Capital gains and dividend-tax rates increased to 20% for US taxpayers
earning more than US$400,000 (US$450,000 for married filing jointly) per
year effective 1 January 2013. Most US taxpayers earning up to
US$400,000 per year will continue to pay capital gains and dividend tax at
a rate of 15%. Medicare tax is applicable on residents taxpayers earning
more than US$200,000 at the rate of 3.8%
UK:
Corporate tax:
Capital gains:
Capital gains form part of a company's taxable profits and taxed with 23%
corporation rate effective from 1 April 2013.
Trading losses can be carried forward indefinitely (unless there is a change
of ownership of the company and a major change in the nature and
conduct of the trade within three years), but can only be offset against
trading income. Capital losses can be off set against capital gains and can
only be carried forward.
Dividends:
Dividend exemption applies to most dividends unless received by a bank
and insurance company.
No withholding tax on dividends paid by UK companies, although a 20%
withholding tax generally applies to distributions paid by a Reit from tax-
exempt rental profit.
USA recently increased
capital gains and dividend
tax to 23.8% including
medicare for residents
Tax levy based on
income slabs

No withholding tax on
dividends paid by
UK companies



Personal tax:
Capital gains:
Capital gains or losses on the disposal of a shareholding attract the
following tax rates:
UK: Personal capital-gains tax slabs 2013
Tax rate Tax slabs
28% If income in excess of 34,370
18% If taxable income is less than 34,371
Source: CLSA Asia-Pacific Markets, HM revenue and customs
Dividends:
There are three different income-tax rates on UK dividends. The rate
depends on whether taxable income falls within or above the basic or
higher-rate income-tax limits. The basic rate income tax limit is 34,370
and the higher tax limit is 150,000 for 2012-13.
Dividend tax rates 2013
Dividend income Tax rate applicable
If income is less than 34,370 10
If income is less than 150,000 32.5
If income is above the higher tax limit 42.5
Source: CLSA Asia-Pacific Markets, HM revenue and customs
Brazil
Corporate tax:
Capital gains:
Capital gains are treated the same as ordinary income. Capital gains
derived by non-residents on investments registered with central bank are
subject to a 15% withholding tax. If the capital gains are derived by a tax
haven resident, the rate is increased to 25%.
Dividends:
Dividend received from other Brazilian companies is not included in taxable
income. No withholding tax is imposed on dividend distributions to non-
residents that are paid from profits.
Personal tax:
Capital gains:
Capital gains are subject to a flat 15% rate.
Dividends:
Dividend received from local sources is tax exempt.
South Africa
Corporate tax:
Capital gains:
66.6% of capital gains are included in taxable income and taxed at the
normal income tax rate applicable. Trading losses may be carried forward
indefinitely. The carryback of losses is not permitted. Normal tax rate are
28% for companies.
Dividends:
Dividends paid to individuals and foreign corporates will be subject to a
15% dividend withholding tax.
Dividends from local
sources are exempt;
residents subject to a flat
15% capital-gains tax

South Africa levies 15%
dividend tax for
corporations and
individuals
Disposal of shareholding
levied at an 18-28% rate



Personal tax:
Capital gains:
33.3% of capital gains are included in taxable income to be taxed at the
normal rates applicable to individuals. Normal tax rate are progressive up
to 40%.
Dividends:
15% dividend tax is withheld by corporates when distributing to resident
and non-resident individuals.
Russia
Corporate tax:
Capital gains:
Capital gains are included in ordinary income and taxed at the normal
corporate rate of 20%. Exemption applies when gains are realised on the
sale of unquoted shares and participations in Russian companies, and on
quoted shares in high-technology Russian companies that are acquired
after January 2011 and held for more than five years.
Losses may be carried forward for 10 years.
Dividends:
Dividends in Russia are taxed as follows: 9% at source- for dividends paid
by one local companies to another (exemption to this rules applies when
any foreign or local corporate pay dividend to local corporate provided that
the local company has owned no less than 50% of the company for at
least 365 consecutive days). A 15% tax at source for dividends paid by
local companies to foreign ones.
Personal tax:
Dividends:
Residents receiving dividends from local or foreign corporate are taxed at
9% rate whereas non-residents receiving dividends from local corporates
are taxed at a 15% rate withheld at source.
Capital gains:
Gains realised on the sale of shares and securities are subject to income
tax at the normal rate, which is a flat rate of 13%.
Turkey
Corporate tax:
Capital gains:
Capital gains derived by a company are taxable at an ordinary income tax
rate of 20%. Tax losses may be carried forward for five years.
Dividends:
Dividends paid by a resident to another resident company are exempt from
corporate income tax in the hands of shareholder. Dividends paid to a non-
residents company are subject to a 15% withholding tax.
Personal tax:
Capital gains:
Capital gains derived from the sales of securities and capital market instruments
are subject to income tax at a marginal rate of 18%.
Capital gains from the disposal of Turkish corporation shares held for more
than two years are exempt from tax.
Capital losses in Russia
carried forward 10 years
A 15% withholding tax is
applicable on
foreign corporates




Dividends:
Dividends received from Turkish companies to residents or non-residents
are subject to 15% withholding tax.
France
Corporate tax:
Capital gains:
Capital gains are subject to corporate tax at a 35% standard rate (33.33%
+ 5% temporary surtax) for companies with turnover exceeding 250m.
Dividends:
Dividends paid to a non-residents shareholder are subject to 30.9%
(including surtax) withholding tax calculated on gross dividend, unless a
tax treaty provides for a lower rate. Dividends paid by French corporations
to a qualifying EU parent are exempted from withholding tax.
Personal tax:
Capital gains:
Capital gains derived from the sales of securities and capital-market
instruments are subject to income tax at 45% (plus special social security
surcharges for French residents, amounting to approximately 15.5%).
Effective rate on capital gain is 51.9%.
Dividends:
Dividends are exempt under personal taxation policy.
Germany
Corporate tax:
Capital gains:
Capital gains are typically taxed at a 15% corporate-tax rate. The
municipal trade tax typically ranges from 14-17%.The effective corporate
rate (including solidarity surcharge and trade tax) ranges between 30%
and 33%.
Dividends:
Dividends received by a German resident corporation from both resident
and foreign corporations are effectively 95% tax exempt.
5% of dividends is included in profit and taxed at standard corporate tax rate.
Non-resident corporation are eligible for a 40% refund, giving rise to
effective rate of 15.83%, unless the rate is reduced under a tax treaty.
Personal tax:
Capital gains:
60% of the capital gains from the sale of shares are taxable at normal
rates if the taxpayer has held a direct or indirect interest of 1% or more in
corporation within the previous past five years. The entire capital gains
from the sale of shares is subject to a flat 26.4% tax rate including surtax,
regardless of how long the shareholding has been held if the taxpayer
holds less than 1%.
Dividends:
Withholding tax of 26.4% (including solidarity surcharge) is applicable to
all dividends received.
Dividends included in
taxable income and
charged at 35% for
corporates
Withholding tax of 15%
levied on residents and
non-residents
Dividends received by a
German corporate are
95% tax exempt
Withholding tax of 26.4%
on dividends received by
an individual



Appendix 5: Performance table
MSCI world - Performance of high yields with other factors
In the below table, we highlight the annualised performance of combination of
dividend yield and a few key factors. The matrix highlights the performance of
dividend yield and factor ranges over the medium and long term. High-
dividend paying baskets have performed consistently better for all factors
over the long term. It is worth noting that within the high dividend paying
stocks, the baskets with high earnings growth, high ROE, low FCF
conversions, large cash holdings and low beta stocks have performed better.
MSCI AC world - Annualised performance of other factors combined with global dividend-yield brackets

Note: Backtest based on MSCI AC World universe with more than 3 analyst coverage. Performance is MSCI weighted US$ total return with monthly
rebalancing. All excludes stocks that do not have factor data for the factors on the vertical grid. Source: Factset alpha tester, CLSA Asia-Pacific Markets
<2 2-3 3-4 4-5 5-7 >7 All <2 2-3 3-4 4-5 5-7 >7 All
<20 1.2 12.7 13.7 17.4 na na 2.8 5.2 12.5 9.2 (0.4) na na 5.8
20-40 (0.4) 5.8 8.7 12.8 21.7 19.5 3.0 4.6 6.1 6.9 5.9 20.0 20.9 6.0
40-60 0.1 6.5 5.7 4.5 11.2 8.5 4.2 6.0 9.1 5.8 6.5 2.2 (3.3) 5.7
60-80 2.8 1.1 2.2 7.4 15.3 4.3 4.7 9.1 3.5 6.0 8.8 10.6 2.3 6.7
>80 (5.0) (5.1) 3.0 0.9 9.8 10.5 1.6 (5.0) 6.0 4.3 3.3 7.3 3.8 4.0
All 0.5 5.1 7.3 7.5 14.1 11.9 3.0 4.8 6.8 6.4 6.3 7.8 1.9 5.6
<5 1.8 2.8 6.1 8.4 12.0 10.3 3.9 5.4 4.9 4.9 9.0 5.9 (1.0) 4.9
5-10 2.7 5.3 5.6 5.4 12.0 19.5 5.1 5.1 7.2 4.1 3.9 6.8 3.5 6.0
10-15 3.2 5.1 9.3 7.8 20.7 6.3 5.1 6.2 6.5 9.4 3.3 11.9 8.6 6.9
15-20 (1.0) 4.1 5.9 7.4 13.0 28.2 1.6 4.3 7.5 3.6 8.9 7.8 32.5 6.3
>20 (1.8) 4.4 9.5 9.8 20.1 11.2 1.5 4.8 4.2 8.8 7.0 19.2 6.6 6.6
All 0.4 5.1 7.3 7.4 14.1 11.2 2.9 4.8 6.9 6.3 6.1 7.7 2.2 5.6
<5 (1.7) 3.8 4.9 6.8 12.8 14.5 2.1 2.5 3.2 2.9 3.1 8.8 4.8 3.7
5-10 0.7 5.8 9.2 7.0 12.6 0.7 3.2 2.8 8.4 7.8 5.4 4.3 (2.6) 4.7
10-15 0.5 5.9 8.0 5.9 15.4 15.2 3.2 4.8 8.0 7.3 6.6 5.1 5.1 6.1
15-20 (1.0) 4.6 8.0 16.1 16.7 10.7 1.2 4.9 8.6 6.8 17.0 15.3 0.8 6.9
>20 0.6 2.1 0.1 13.6 7.7 2.0 0.2 8.2 4.7 3.9 14.3 12.0 8.2 7.0
All 0.5 5.1 7.3 7.7 13.3 11.4 2.8 4.8 6.8 6.3 6.1 7.5 2.0 5.5
<5 (3.3) 7.8 (3.7) 3.8 11.4 4.3 (2.3) 2.7 8.1 (6.4) 1.6 8.1 2.0 1.7
5-10 (3.5) 4.6 6.4 6.6 11.4 12.0 (0.1) 0.9 4.5 5.7 6.3 7.7 2.9 2.5
10-15 1.2 5.0 6.1 7.2 10.7 4.9 2.8 4.5 6.4 6.7 2.7 3.2 (1.9) 4.1
15-20 1.7 5.6 7.8 7.7 13.5 15.7 4.1 5.5 6.4 6.6 7.0 4.8 (4.7) 5.2
>20 0.0 3.7 5.8 10.7 14.2 11.2 2.6 5.7 7.6 6.2 9.5 11.3 6.7 7.0
All (0.1) 4.9 6.8 7.7 12.9 10.1 2.5 4.8 6.8 6.3 6.1 7.5 1.9 5.5
<0 (3.2) 0.9 7.4 6.8 9.4 20.7 0.1 1.8 5.3 9.0 9.2 6.9 9.5 4.8
0-40 0.1 5.7 13.0 11.6 15.9 14.0 3.3 4.4 8.2 11.0 6.7 8.2 8.6 6.5
40-80 1.7 6.5 10.5 9.8 13.8 6.4 4.4 6.6 9.3 9.2 11.1 10.2 10.3 8.4
80-120 2.5 5.6 10.0 15.2 19.0 11.7 4.3 7.7 7.4 7.0 10.6 11.3 1.7 7.6
>120 0.2 7.0 6.7 9.2 12.9 14.4 2.7 5.1 7.9 5.7 4.2 12.5 9.0 6.3
All 0.7 5.4 8.9 9.9 13.6 14.7 3.1 5.7 8.1 8.1 9.0 10.0 5.8 7.0
<5 1.4 4.5 9.2 11.1 13.4 12.1 4.2 6.0 6.6 6.7 9.5 10.0 1.7 7.0
5-10 (0.8) 10.0 11.3 7.9 14.7 20.9 4.6 1.9 10.0 12.2 7.5 8.1 8.3 7.0
10-15 0.4 2.9 7.7 13.0 12.6 18.1 2.6 7.0 8.7 9.1 14.2 12.2 13.7 8.8
15-20 (0.5) 2.4 5.5 14.3 15.5 17.7 0.9 4.7 7.2 6.3 11.0 19.1 14.9 5.9
>20 0.6 3.4 4.5 11.7 11.4 8.2 0.7 6.6 7.7 5.2 7.2 10.9 7.6 6.5
All 0.5 5.5 8.9 9.9 13.6 14.9 3.0 5.6 8.2 8.1 9.0 10.0 6.2 7.0
<0.5 3.6 4.4 10.7 15.7 18.7 18.1 8.4 5.0 4.8 9.6 12.2 16.2 10.7 8.8
0.5-1.0 4.2 5.4 7.9 5.6 15.4 12.8 5.3 7.0 7.5 7.4 4.8 10.0 3.8 6.8
1.0-1.5 (0.8) 4.6 6.0 7.2 7.7 5.0 1.2 3.5 5.5 5.1 5.5 3.4 6.6 3.9
1.5-2.0 (5.7) (6.1) 4.5 (12.7) 10.1 3.7 (4.3) 1.8 5.0 0.3 8.4 7.6 (0.2) 2.9
>2.0 (10.7) na na na na (7.7) (13.6) (1.1) na na na na (10.1) (6.0)
All 0.4 5.1 7.2 7.4 13.7 11.3 2.8 4.8 6.8 6.2 6.0 7.5 2.0 5.5
B
e
t
a
Annualised
performance
(%)
Dividend-yields brackets (%) Dividend-yields brackets (%)
P
a
y
o
u
t

(
%
)
N
2
Y

E
P
S
g

(
%
)
S
u
s
t
g

(
%
)
N
2
Y

R
O
E

(
%
)
F
C
F

c
o
n
v

(
%
)
C
a
s
h
/
T
A

(
%
)
have performed better in
the long term



MSCI Asia Pac ex-JP: Performance of high yields with other factors
The below table highlights the performance of dividend-yield baskets in
combination with other key factor for MSCI Asia Pacific ex-Japan region. The
results are in line with global findings with high-yield stocks delivering better
performance over the long term. High-yield stocks have delivered better
performance in conjunction with low to medium payouts, moderate earnings
and sustainable growth, high ROE, low FCF conversions, high cash holdings
and low beta.
MSCI Asia Pac ex-JP - Annualised performance of other factors combined with APxJ dividend-yield brackets

Note: Backtest based on MSCI AC World universe with more than 3 analyst coverage. Performance is MSCI weighted US$ total return with monthly
rebalancing. All excludes stocks that do not have factor data for the factors on the vertical grid. Source: Factset alpha tester, CLSA Asia-Pacific Markets
<2 2-3 3-4 4-5 5-7 >7 All <2 2-3 3-4 4-5 5-7 >7 All
<20 4.8 10.5 15.9 na na na 6.1 11.8 7.7 21.1 na na na 12.0
20-40 4.7 9.7 18.4 18.7 21.1 16.7 10.9 10.6 9.7 18.0 19.3 7.6 na 12.7
40-60 (0.1) 6.2 10.8 16.6 22.0 16.5 11.5 5.4 10.4 10.5 14.1 15.3 (3.2) 12.1
60-80 na 2.0 7.9 9.0 16.9 25.0 10.0 na 7.6 8.3 8.9 14.4 17.0 12.6
>80 na (3.4) 7.0 16.6 15.0 14.2 12.1 na 3.0 13.8 11.3 12.2 9.7 10.5
All 4.8 6.7 10.3 14.9 17.8 19.8 9.1 11.6 9.9 12.1 12.1 13.5 15.1 11.7
<5 7.9 8.4 7.1 21.5 14.8 17.6 11.2 12.0 11.9 9.5 15.7 13.2 16.0 12.6
5-10 0.3 2.9 12.1 17.6 16.6 20.7 12.6 4.3 4.5 11.3 16.7 14.7 8.7 12.6
10-15 6.8 5.8 19.5 6.3 21.7 8.8 11.9 15.3 15.9 22.5 1.9 13.6 (4.8) 13.1
15-20 5.2 3.9 15.8 15.9 22.2 na 6.6 7.6 6.7 11.5 10.4 19.5 na 8.7
>20 1.0 8.3 7.2 8.8 20.4 13.8 5.3 8.5 9.9 10.6 10.7 11.5 3.0 9.9
All 4.8 6.7 10.4 15.0 18.1 19.5 9.0 11.5 9.9 12.1 12.1 13.7 15.3 11.7
<5 0.1 (0.6) 5.3 13.0 14.9 16.9 8.1 7.1 3.2 6.1 8.6 13.6 12.8 10.4
5-10 4.1 7.3 13.6 14.1 20.6 17.4 10.4 9.9 8.8 14.1 10.6 15.3 7.0 10.1
10-15 3.8 9.4 11.6 11.0 19.1 na 8.7 11.9 12.5 18.2 15.4 5.6 na 13.7
15-20 7.4 4.4 16.4 2.9 17.4 na 9.1 18.1 14.6 13.5 9.2 13.5 na 15.7
>20 8.9 8.4 3.8 4.5 3.6 na 8.9 11.9 18.1 0.6 9.6 2.7 na 12.1
All 4.6 6.9 10.6 15.0 17.9 19.0 9.0 11.4 10.0 12.0 12.1 13.5 14.9 11.6
<5 (6.4) 4.1 1.1 (5.1) na na (1.8) (0.3) 12.5 (5.4) (10.0) na na 4.2
5-10 3.6 3.2 11.7 18.4 17.2 20.1 8.0 9.2 3.7 12.6 14.4 15.3 15.2 9.0
10-15 4.3 7.0 10.4 13.3 16.8 14.9 9.3 8.2 10.6 9.8 10.2 13.5 6.0 11.0
15-20 8.4 13.5 11.6 12.9 15.1 32.3 11.6 17.0 13.2 12.6 12.4 9.6 22.2 11.7
>20 4.8 7.4 6.1 16.5 18.0 13.8 8.7 12.3 10.5 11.8 13.0 12.4 7.0 12.3
All 4.7 6.9 10.6 15.2 17.8 19.2 9.0 11.4 10.0 12.0 12.1 13.5 14.9 11.6
<-50 (6.1) (1.3) 4.8 8.9 13.3 21.8 1.6 2.3 3.7 2.6 (0.7) 15.4 13.1 4.6
-50-0 2.4 7.8 5.5 13.4 2.6 na 3.4 7.6 7.5 15.0 11.4 1.6 na 8.2
0-50 8.5 6.7 13.2 16.9 19.2 21.3 12.5 10.4 10.2 16.0 17.0 14.9 21.1 14.2
50-100 4.9 6.9 6.1 21.2 17.9 15.3 8.2 14.7 10.0 7.7 16.0 15.1 8.5 12.0
>100 6.2 11.1 12.9 12.3 18.6 15.6 9.9 15.6 11.3 12.2 10.5 15.8 8.7 12.0
All 3.8 7.0 10.3 17.3 17.1 15.9 8.0 11.0 10.1 11.9 13.7 14.4 10.0 11.5
<5 1.8 6.7 9.6 16.8 15.0 11.0 8.2 7.7 7.9 11.8 11.4 11.2 2.5 9.5
5-10 2.2 5.3 13.7 20.7 16.9 19.5 9.6 5.2 6.5 14.9 19.1 12.2 18.0 11.4
10-15 5.1 3.4 12.0 2.6 19.3 16.3 8.2 8.0 15.8 22.5 1.2 18.5 11.2 11.2
15-20 0.8 15.5 14.7 8.5 18.1 17.3 10.2 14.2 14.0 14.8 16.9 16.9 20.4 15.6
>20 1.2 4.4 4.4 20.6 18.3 4.1 3.8 13.4 12.9 6.7 16.3 16.7 (2.7) 12.3
All 3.8 7.1 10.6 17.3 17.3 15.7 8.1 10.8 10.2 11.9 13.6 14.4 9.6 11.5
<0.4 2.8 14.5 9.2 12.7 16.8 18.4 12.5 6.6 10.8 10.4 12.6 14.0 18.8 14.5
0.4-0.8 9.7 8.1 15.5 13.5 15.2 20.9 10.9 12.2 12.7 13.4 10.5 12.2 11.3 10.6
0.8-1.2 5.6 6.3 8.3 12.9 21.3 13.7 9.9 13.5 8.0 10.3 8.7 13.0 11.1 11.3
1.2-1.6 2.3 4.5 7.9 16.0 18.4 12.4 5.4 9.5 10.3 13.2 18.3 15.1 0.9 11.9
>1.6 0.3 5.4 (5.5) (2.0) 18.3 na 6.3 2.8 9.3 11.1 8.7 30.5 na 11.0
All 4.7 6.9 10.6 14.9 18.2 18.8 9.0 11.6 10.0 12.0 12.1 13.5 14.9 11.7
B
e
t
a
Annualised
performance
(%)
Dividend-yields brackets (%) Dividend-yields brackets (%)
P
a
y
o
u
t

(
%
)
N
2
Y

E
P
S
g

(
%
)
S
u
s
t
g

(
%
)
N
2
Y

R
O
E

(
%
)
F
C
F

c
o
n
v

(
%
)
C
a
s
h
/
T
A

(
%
)
have done well in
Asia Pac ex-Japan as well



Appendix 6: Rating of high-yield stocks
Asia ex-Japan
1
: Top-50 dividend-yield stocks and their DPS revision star rating
Code Name Cty Sector Mkt cap 12MF Payout Factor data Rating
(US$m) Div (FY1, 3M EPS FCF Conv EPS Cagr Earns 13-14F Beta DPS cut
Yld %) rev (FY0, 13-14F Cert ROE (x) Track
(%) (%) %) (%) (x) (avg,%) record
1378 HK Hongqiao CN Materials 3,134 10.2 28.3 (1.7) (57.0) 13.1 12.3 24.8 1.3 na 2/6
INTUCH TB Intouch TH Telecom 7,193 7.5 96.7 3.9 64.9 17.3 10.4 76.4 0.6 41.7 5/7
3998 HK Bosideng CN Cons dur 2,499 7.1 75.1 (0.9) 48.5 8.1 16.9 19.5 1.1 0.0 4/7
HPHT SP HPH Trust SG Transport 7,272 7.0 171.3 (1.3) 151.8 3.0 15.1 3.6 1.1 na 2/6
303 HK VTech HK Tech HW 2,895 7.0 96.0 (1.0) 94.3 7.5 26.0 38.3 0.5 18.8 5/7
ITMG IJ ITM ID Energy 4,733 6.6 85.7 (0.2) 95.5 (2.2) 15.2 34.3 1.2 33.3 4/7
ADVANC TB AIS TH Telecom 19,910 6.5 99.6 (0.8) 183.6 11.4 11.6 90.7 0.6 21.4 5/7
TEL PM PLDT PH Telecom 15,112 6.4 100.0 (0.0) 125.4 6.2 32.3 29.3 0.8 7.1 6/7
2382 TT Quanta TW Tech HW 8,805 6.2 65.4 (1.1) (21.6) 8.3 17.3 19.3 1.2 9.1 3/7
2301 TT Lite-On Tech TW Tech HW 3,249 6.2 71.8 (0.5) 93.5 9.4 24.4 11.4 0.9 18.2 4/7
MAXIS MK Maxis MY Telecom 15,538 6.2 140.0 (1.9) 99.3 5.5 16.7 34.8 0.3 0.0 5/7
GLO PM Globe Telecom PH Telecom 3,783 6.1 91.2 0.1 118.2 3.0 5.3 22.9 0.8 25.0 4/7
215 HK Hutchison Telecom HK Telecom 2,218 5.9 75.0 0.4 35.0 9.4 15.9 12.2 0.3 0.0 4/7
MLT SP MapletreeLog SG Real estate 2,432 5.8 95.9 0.2 (81.6) 2.0 18.5 8.0 0.6 33.3 3/7
SPH SP SPH SG Media 5,364 5.8 102.2 (1.1) (83.9) 2.2 14.3 16.9 0.5 41.2 3/7
KREIT SP K-Reit SG Real estate 2,923 5.8 136.2 1.3 (31.1) 13.0 5.6 4.9 0.8 18.2 4/7
2777 HK Guangzhou R&F CN Real estate 5,544 5.7 38.5 1.0 1.4 11.8 10.8 18.7 1.7 14.3 4/7
2325 TT SPIL TW Semis 3,151 5.7 82.7 (4.9) 42.4 12.8 8.2 10.7 1.2 37.5 1/7
MAY MK Maybank MY Banks 22,619 5.7 76.2 0.5 na 5.9 22.6 14.7 1.0 37.5 4/6
177 HK Jiangsu Expway CN Transport 5,275 5.6 76.2 (0.2) 150.6 9.2 10.5 13.4 0.6 0.0 4/7
088980 KS Macquarie Korea KR Div fin 2,075 5.5 99.1 1.0 na (3.1) 9.5 7.2 0.1 33.3 2/6
AREIT SP Ascendas SG Real estate 4,776 5.5 103.7 (0.2) 49.1 4.7 11.3 8.1 0.5 12.5 4/7
017670 KS SK Telecom KR Telecom 12,732 5.5 50.9 0.4 168.4 (1.6) 6.5 11.6 0.2 14.3 4/7
DTAC TB DTAC TH Telecom 6,858 5.5 91.5 0.3 123.7 12.6 8.8 35.5 0.4 0.0 6/7
3333 HK Evergrande CN Real estate 7,586 5.5 27.7 (1.9) (148.6) 8.9 7.1 21.9 2.1 0.0 2/7
4904 TT Far EasTone TW Telecom 8,098 5.4 98.6 (0.7) 146.3 16.0 14.4 19.1 0.2 30.0 5/7
3045 TT Taiwan Mobile TW Telecom 9,434 5.4 92.1 (1.9) 118.1 9.9 20.0 32.0 0.1 30.0 4/7
M1 SP M1 SG Telecom 2,059 5.4 82.3 (1.6) 103.7 9.5 15.9 45.8 0.4 33.3 4/7
SCC PM Semirara Mining PH Energy 2,030 5.3 67.8 (0.3) 70.1 8.6 9.8 38.3 0.9 33.3 4/7
1813 HK KWG Property CN Real estate 2,033 5.3 27.8 0.2 (3.1) 15.3 11.8 15.2 1.9 25.0 3/7
3988 HK Bank of China CN Banks 137,515 5.3 33.8 0.9 na 5.4 20.6 15.3 1.1 14.3 4/6
2324 TT Compal TW Tech HW 3,052 5.2 72.0 (3.9) 246.5 17.0 7.0 8.0 1.1 35.7 2/7
410 HK Soho China CN Real estate 4,103 5.2 35.8 (2.8) (121.0) (19.2) 5.9 11.1 1.0 33.3 1/7
2412 TT Chunghwa Telecom TW Telecom 24,563 5.1 92.7 (2.1) 102.1 1.9 16.2 11.3 0.2 27.3 3/7
SUN SP Suntec Reit SG Real estate 3,258 5.1 130.0 (1.0) 30.7 (10.2) 4.1 3.6 0.9 33.3 1/7
3231 TT Wistron TW Tech HW 2,462 5.1 56.6 (1.4) (25.8) 11.5 13.0 11.8 1.3 12.5 2/7
939 HK CCB CN Banks 211,181 5.1 34.3 0.5 na 5.9 17.4 19.0 1.2 16.7 4/6
STH SP StarHub SG Telecom 5,676 5.1 97.2 0.4 116.0 3.1 16.6 887.0 0.4 0.0 6/7
1398 HK ICBC CN Banks 259,029 5.0 34.7 0.3 na 7.2 23.6 19.7 1.4 0.0 4/6
1101 TT Taiwan Cement TW Materials 4,874 5.0 80.6 (0.7) 55.6 12.0 15.3 10.2 1.1 25.0 3/7
DIGI MK Digi MY Telecom 12,062 5.0 105.9 (1.0) 140.1 24.4 14.4 344.7 0.9 20.0 6/7
SATS SP SATS SG Transport 2,659 5.0 81.2 (0.5) 57.6 7.9 24.4 14.7 0.8 46.2 4/7
CCT SP CCT SG Real estate 3,756 5.0 109.5 0.3 113.6 2.1 13.6 5.0 0.8 14.3 4/7
2347 TT Synnex Tech TW Tech HW 3,257 4.9 86.8 (1.2) (76.1) 14.6 20.7 15.7 0.7 23.1 4/7
ROTH MK BAT Malaysia MY FBT 5,353 4.9 99.2 0.1 102.3 2.1 44.5 166.7 0.8 33.3 5/7
TLKM IJ Telkom ID Telecom 19,709 4.9 61.3 0.8 152.8 9.7 22.8 24.7 0.5 29.4 5/7
1
Asia ex-Japan universe with market cap > US$2bn. Source: Factset, CLSA Asia-Pacific Markets



Australia
1
and China
2
(%) (%) %) (%) (x) (avg,%) record
Australia
SYD AU Sydney Airport AU Transport 6,080 7.0 244.2 (0.7) 563.6 6.2 2.8 8.4 0.6 11.1 3/7
CFX AU CFS Retail AU Real estate 6,034 6.7 100.7 0.0 42.3 7.2 45.8 6.4 0.5 6.7 4/7
SGP AU Stockland AU Real estate 8,102 6.7 98.8 (3.7) (63.7) (4.7) 11.2 7.0 0.6 21.4 2/7
WRT AU Westfield Retail AU Real estate 9,567 6.4 98.9 (0.1) 58.2 3.1 126.8 5.6 0.6 na 4/6
NAB AU NAB AU Banks 68,232 6.4 74.5 0.3 na 5.0 24.0 14.1 1.3 5.6 3/6
TLS AU Telstra AU Telecom 59,365 6.2 93.6 0.8 150.9 6.0 29.4 32.3 0.4 22.2 5/7
WBC AU Westpac AU Banks 92,522 6.1 80.6 0.1 na 3.1 43.3 14.9 1.3 5.6 4/6
SUN AU Suncorp AU Insurance 14,862 5.9 76.0 1.0 na 21.2 18.4 8.1 0.9 20.0 5/6
MGR AU Mirvac AU Real estate 5,454 5.8 79.6 0.0 54.9 4.6 41.6 6.5 0.8 14.3 5/7
DXS AU Dexus AU Real estate 5,039 5.7 76.6 0.0 79.3 1.3 22.8 7.4 0.7 25.0 4/7
ANZ AU ANZ Bank AU Banks 77,759 5.5 66.2 (0.0) na 4.5 34.2 14.9 1.2 5.6 4/6
CBA AU CBA AU Banks 110,712 5.4 77.7 0.8 na 2.7 33.2 17.7 0.9 5.9 5/6
GPT AU GPT Group AU Real estate 6,882 5.4 80.9 0.1 60.8 3.7 46.8 6.6 0.5 26.7 4/7
TCL AU Transurban AU Transport 9,225 5.4 292.5 (6.4) 27.5 71.7 2.5 4.8 0.4 11.1 3/7
QBE AU QBE AU Insurance 16,448 5.2 61.1 (3.3) na 20.4 11.5 12.3 1.1 25.0 1/6
MQG AU Macquarie AU Div fin 13,205 5.2 67.6 0.3 na 20.7 16.4 9.8 1.5 23.5 3/6
ASX AU ASX AU Div fin 6,416 5.2 90.2 0.2 na 4.0 33.6 11.6 0.6 23.1 3/6
AMP AU AMP AU Insurance 15,911 5.2 82.1 (0.0) na 11.9 12.6 13.8 1.2 38.5 2/6
IAG AU IAG AU Insurance 11,054 5.0 60.2 3.3 na 21.2 9.4 18.3 0.8 27.3 4/6
WES AU Wesfarmers AU Food & drug 47,156 4.8 89.5 (0.6) 47.0 9.7 26.7 9.5 0.8 23.5 2/7
LEI AU Leighton AU Cap gds 7,880 4.7 53.8 (0.1) (35.0) 20.0 7.4 19.5 1.5 21.4 4/7
WDC AU Westfield Group AU Real estate 25,486 4.7 77.1 (0.1) 101.1 5.2 30.9 9.0 0.5 28.6 4/7
AMC AU Amcor AU Materials 11,056 4.7 70.9 0.0 63.3 9.6 19.7 20.5 0.5 11.8 6/7
GMG AU Goodman AU Real estate 7,476 4.5 59.8 (0.2) 32.6 13.5 40.7 10.5 1.1 28.6 3/7
SHL AU Sonic Healthcare AU Healthcare 5,644 4.5 70.7 (0.1) 97.9 7.7 27.9 13.0 0.8 0.0 5/7
China
1378 HK Hongqiao CN Materials 3,134 10.2 28.3 (1.7) (57.0) 13.1 12.3 24.8 1.3 na 2/6
3998 HK Bosideng CN Cons dur 2,499 7.1 75.1 (0.9) 48.5 8.1 16.9 19.5 1.1 0.0 4/7
2777 HK Guangzhou R&F CN Real estate 5,544 5.7 38.5 1.0 1.4 11.8 10.8 18.7 1.7 14.3 4/7
3333 HK Evergrande CN Real estate 7,586 5.5 27.7 (1.9) (148.6) 8.9 7.1 21.9 2.1 0.0 2/7
1813 HK KWG Property CN Real estate 2,033 5.3 27.8 0.2 (3.1) 15.3 11.8 15.2 1.9 25.0 3/7
3988 HK Bank of China CN Banks 137,515 5.3 33.8 0.9 na 5.4 20.6 15.3 1.1 14.3 4/6
410 HK Soho China CN Real estate 4,103 5.2 35.8 (2.8) (121.0) (19.2) 5.9 11.1 1.0 33.3 1/7
939 HK CCB CN Banks 211,181 5.1 34.3 0.5 na 5.9 17.4 19.0 1.2 16.7 4/6
1398 HK ICBC CN Banks 259,029 5.0 34.7 0.3 na 7.2 23.6 19.7 1.4 0.0 4/6
902 HK Huaneng Power CN Utilities 14,120 4.8 52.4 1.6 300.6 20.5 9.0 13.6 0.4 15.4 5/7
1288 HK Agricultural Bank CN Banks 177,175 4.7 32.6 0.7 na 10.2 11.1 18.8 1.3 50.0 3/6
1836 HK Stella International CN Cons dur 2,469 4.6 69.8 (0.4) (13.6) 11.4 21.4 17.6 0.5 50.0 4/7
991 HK Datang Power CN Utilities 5,819 4.6 41.8 0.8 (685.7) 23.1 5.1 10.3 0.8 23.1 3/7
2007 HK Country Garden CN Real estate 9,380 4.5 34.6 0.6 (91.3) 13.9 13.6 18.8 1.8 25.0 3/7
3618 HK CRC Bank CN Banks 5,589 4.5 28.3 1.5 na 10.5 14.1 16.5 1.8 na 4/5
2020 HK Anta Sports CN Cons dur 2,538 4.5 67.2 (1.8) 76.7 (10.3) 15.1 14.6 1.2 0.0 4/7
998 HK Citic Bank CN Banks 31,435 4.3 25.1 0.7 na 5.3 15.3 15.5 1.5 33.3 3/6
363 HK Shanghai Industrial CN Cap gds 3,719 4.2 39.6 1.1 (52.7) (0.4) 4.6 8.4 1.1 7.1 2/7
123 HK Guangzhou Inv CN Real estate 3,306 4.1 32.8 0.8 (125.8) 14.7 6.0 10.8 1.2 62.5 2/7
3383 HK Agile Property CN Real estate 4,502 4.1 25.3 (0.8) (118.0) 10.9 12.0 17.0 1.9 16.7 3/7
857 HK PetroChina CN Energy 251,129 4.1 45.5 (2.1) 12.3 12.6 12.0 12.6 1.0 36.4 1/7
941 HK China Mobile CN Telecom 222,259 4.0 43.7 (0.3) 79.3 1.2 33.0 16.2 0.5 0.0 6/7
386 HK Sinopec CN Energy 97,632 4.0 33.7 (0.2) 11.2 13.0 8.2 12.9 0.8 10.0 4/7
1
Australia universe with market cap > US$5bn.
2
China universe with market cap > US$2bn. Source: Factset, CLSA Asia-Pacific Markets



Japan
1
(%) (%) %) (%) (x) (avg,%) record
9437 JP NTT docomo JP Telecom 63,115 4.4 49.0 (1.7) 84.3 3.4 25.2 9.3 0.4 7.1 5/7
8053 JP Sumitomo JP Cap gds 16,195 4.3 25.0 (1.2) 40.0 2.5 25.3 12.0 1.1 11.8 2/7
1878 JP Daito Trust JP Real estate 7,879 4.2 49.9 (0.5) 163.2 7.7 31.6 27.7 0.6 11.8 4/7
7912 JP Dai Nippon Printing JP Comml svcs 5,215 4.1 144.5 1.9 370.4 27.0 12.1 2.6 1.2 5.9 5/7
4911 JP Shiseido JP HPC 5,526 4.1 130.1 (7.4) 138.3 27.1 4.2 7.9 0.6 0.0 4/7
9432 JP NTT JP Telecom 50,242 4.1 35.6 (1.5) 138.6 3.9 21.0 6.6 0.5 5.9 4/7
7751 JP Canon JP Tech HW 42,506 3.9 51.2 6.7 30.2 21.0 9.9 11.1 1.0 0.0 4/7
8001 JP Itochu JP Cap gds 17,908 3.9 22.6 1.8 21.0 6.5 32.7 16.0 1.1 21.4 3/7
4523 JP Eisai JP Pharma 12,492 3.9 84.1 (3.0) 108.9 3.7 9.5 12.7 0.4 0.0 4/7
5201 JP Asahi Glass JP Cap gds 7,673 3.9 55.6 (2.5) 24.5 9.8 4.3 6.2 1.3 23.5 1/7
4502 JP Takeda Pharma JP Pharma 40,658 3.9 83.9 0.6 178.6 (3.2) 11.7 7.1 0.5 0.0 5/7
4568 JP Daiichi Sankyo JP Pharma 11,941 3.8 84.3 2.2 55.6 16.1 8.4 7.8 0.7 16.7 3/7
4528 JP Ono Pharma JP Pharma 5,594 3.8 79.7 (0.7) 80.4 3.1 16.4 6.4 0.3 5.9 4/7
8031 JP Mitsui JP Cap gds 27,616 3.7 25.1 (1.3) 3.6 10.2 20.0 11.9 1.2 11.8 3/7
7741 JP Hoya JP Tech HW 8,345 3.7 48.9 (2.0) 41.5 (2.2) 10.8 13.6 0.9 0.0 4/7
8002 JP Marubeni JP Cap gds 12,765 3.7 20.6 0.1 16.7 5.6 35.6 17.6 1.3 28.6 3/7
9201 JP JAL JP Transport 7,510 3.6 15.6 1.6 83.5 (1.2) 16.3 23.9 0.0 100.0 5/7
4508 JP Mitsubish TP JP Pharma 7,543 3.4 55.8 (3.7) 50.5 6.8 17.7 6.0 0.4 5.9 3/7
7752 JP Ricoh JP Tech HW 8,072 3.3 56.6 5.3 219.8 41.2 7.6 7.4 1.4 11.8 3/7
8058 JP Mitsubishi Corp JP Cap gds 34,789 3.2 24.5 (0.6) 30.0 10.4 21.5 10.1 1.2 11.8 3/7
5020 JP JX JP Energy 14,714 3.2 27.1 5.6 37.0 15.4 7.9 9.2 1.2 0.0 4/7
7201 JP Nissan Motor JP Auto 42,988 3.2 30.5 (0.1) (92.0) 24.0 9.5 12.8 1.2 23.1 3/7
2651 JP Lawson JP Food & drug 7,257 3.1 57.2 0.6 145.5 9.6 17.6 16.4 0.2 8.3 5/7
9021 JP JR West JP Transport 7,660 3.1 36.0 0.7 (51.5) 5.8 28.3 8.2 0.3 12.5 4/7
8411 JP Mizuho Financial JP Banks 48,285 3.1 29.4 3.4 na (5.5) 8.2 7.6 1.2 25.0 1/6
1928 JP Sekisui House JP Cons dur 7,404 2.9 37.3 0.6 (12.9) 19.0 21.7 7.3 0.8 13.3 4/7
4188 JP Mitsubishi Chemical JP Materials 6,850 2.9 112.8 (5.0) 189.0 83.6 3.8 5.6 1.5 28.6 2/7
8308 JP Resona JP Banks 10,894 2.9 14.5 6.1 na (24.3) 5.0 7.0 0.9 22.2 1/6
8725 JP MS Insurance JP Insurance 13,077 2.9 65.9 (3.4) na 26.8 2.7 5.3 1.4 0.0 2/6
9433 JP KDDI JP Telecom 28,478 2.9 27.9 (0.2) 129.9 20.9 9.3 13.9 0.5 0.0 5/7
7262 JP Daihatsu JP Auto 8,881 2.9 27.7 2.6 208.5 2.7 17.3 14.1 0.8 13.3 5/7
8316 JP SMFG JP Banks 54,447 2.8 22.3 5.0 na (7.5) 10.8 8.1 1.2 11.1 3/6
2914 JP Japan Tobacco JP FBT 59,407 2.8 36.6 2.0 132.5 13.1 25.0 20.8 0.6 0.0 7/7
2503 JP Kirin JP FBT 12,021 2.8 49.3 3.0 133.2 3.0 5.8 6.2 0.8 6.7 4/7
4503 JP Astellas Pharma JP Pharma 23,318 2.8 59.0 1.0 112.4 15.6 20.8 11.4 0.5 5.9 7/7
4151 JP Kyowa Hakko JP Pharma 5,183 2.7 47.6 0.3 57.4 0.9 6.5 4.5 0.5 11.8 2/7
4578 JP Otsuka Hldg JP Pharma 17,775 2.7 28.3 2.1 110.1 16.0 23.7 10.8 0.3 0.0 7/7
3407 JP Asahi Kasei JP Materials 8,086 2.6 39.5 (0.9) 103.3 20.1 15.7 8.8 1.0 5.9 5/7
7974 JP Nintendo JP Software 12,499 2.6 125.7 2.6 86.4 161.8 1.9 5.1 0.9 20.0 3/7
4817 JP Jupiter Telecom JP Media 8,237 2.6 45.2 0.8 166.5 3.8 17.6 9.2 0.1 0.0 6/7
8309 JP SMT JP Banks 15,380 2.5 27.5 2.1 na 5.0 14.3 6.4 1.3 41.7 2/6
7267 JP Honda Motor JP Auto 69,220 2.5 32.5 1.8 (162.5) 23.8 12.5 12.3 1.4 11.8 4/7
4507 JP Shionogi JP Pharma 5,996 2.5 39.6 3.1 75.8 9.6 10.5 10.5 0.6 0.0 5/7
3382 JP Seven & I JP Food & drug 26,934 2.5 37.5 0.0 133.3 11.0 14.0 8.7 0.7 0.0 7/7
8306 JP MUFG JP Banks 80,776 2.4 24.5 2.1 na 3.3 17.2 6.5 1.2 30.8 2/6
9532 JP Osaka Gas JP Utilities 7,826 2.4 27.4 (0.4) 80.3 (0.4) 12.6 7.7 0.2 0.0 3/7
8267 JP Aeon JP Food & drug 8,998 2.4 26.6 (0.8) (96.7) 6.1 10.9 7.1 0.7 0.0 3/7
8332 JP Bank of Yokohama JP Banks 6,302 2.4 24.3 1.0 na 0.1 23.7 6.4 0.8 0.0 4/6
4901 JP Fujifilm JP Tech HW 9,617 2.3 41.1 2.1 23.6 26.0 8.1 3.9 1.3 12.5 2/7
9202 JP ANA JP Transport 6,887 2.3 33.5 (1.6) 54.6 14.7 9.7 6.5 0.5 30.0 2/7
1
Japan universe with market cap > US$5bn. Source: Factset, CLSA Asia-Pacific Markets



North America
1
(%) (%) %) (%) (x) (avg,%) record
AGNC US American Capital Agency US Real estate 10,716 13.9 107.8 2.5 131.9 (0.8) 7.7 12.6 0.5 0.0 4/7
NLY US Annaly Capital Mgmt US Real estate 14,085 10.0 110.2 (2.6) 737.6 (0.7) 5.1 9.4 0.4 35.7 2/7
CTL US Centurytel Inc US Telecom 25,206 7.8 98.7 (0.2) 206.5 1.7 27.3 6.9 0.6 0.0 4/7
CPG CN Crescent Point Energy CA Energy 13,572 7.2 273.8 (2.2) 35.8 (11.4) 7.0 3.6 1.0 0.0 1/7
COS CN Canadian Oil Sands CA Energy 10,192 6.5 75.6 (0.4) 79.3 (2.6) 5.5 21.0 1.4 27.3 1/7
RAI US RAI US FBT 24,318 5.9 79.9 0.7 83.6 6.7 39.4 35.9 0.4 0.0 6/7
MO US Altria US FBT 68,206 5.5 77.6 0.5 89.6 7.7 67.4 126.2 0.4 11.8 6/7
FE US Firstenergy Corp US Utilities 16,934 5.4 65.7 (0.1) 46.5 (4.9) 50.1 9.2 0.6 0.0 4/7
ETR US Entergy Corp US Utilities 11,478 5.4 68.5 (2.5) (14.8) (12.1) 27.3 9.0 0.6 11.8 1/7
HFC US HollyFrontier US Energy 10,629 5.4 34.9 4.3 93.3 (19.1) 10.3 18.0 1.4 0.0 4/7
LMT US Lockheed Martin US Cap gds 28,110 5.4 52.0 3.1 22.6 3.3 62.8 136.8 0.6 5.9 4/7
BCE CN BCE Inc CA Telecom 34,398 5.2 73.2 (1.3) 61.9 0.7 20.7 19.1 0.2 11.8 2/7
T US AT&T Inc US Telecom 198,549 5.1 71.8 (0.5) 246.2 8.3 64.3 15.6 0.6 5.9 5/7
SLF CN Sun Life Financial CA Insurance 17,468 5.0 56.0 (1.4) na (1.9) 35.8 12.2 1.0 0.0 2/6
EXC US Exelon Corp US Utilities 26,850 5.0 62.7 (1.8) 20.5 (10.5) 36.5 9.1 0.6 11.8 2/7
IGM CN IGM Financial CA Div fin 11,030 5.0 71.3 1.0 na 6.3 44.7 17.2 0.5 0.0 5/6
HCN US HEALTH CARE REIT US Real estate 16,309 4.8 315.9 (0.1) (5,357.4) 26.3 13.9 3.9 0.8 5.9 3/7
PPL US Ppl Corp US Utilities 17,598 4.8 60.8 (0.1) (21.3) (5.2) 53.4 11.4 0.4 11.8 3/7
PWF CN Power Financial CA Insurance 20,270 4.8 58.7 0.6 na 8.5 71.0 14.8 0.8 0.0 6/6
VZ US Verizon Comm US Telecom 124,681 4.8 76.2 (1.2) 1,300.1 16.5 30.4 20.9 0.5 0.0 5/7
DO US Diamond OD US Energy 10,440 4.7 77.0 (3.0) 67.3 22.3 12.3 16.7 1.1 21.4 2/7
PEG US Public Sv Enterprise Co US Utilities 15,774 4.7 59.1 (0.1) 103.1 (2.0) 41.5 10.5 0.6 0.0 5/7
BMO CN BMO CA Banks 41,037 4.7 48.7 0.3 na 2.9 34.1 14.1 0.7 0.0 4/6
COP US ConocoPhillips US Energy 70,406 4.7 48.2 (1.0) (3.5) 7.2 6.2 12.7 1.1 0.0 2/7
CM CN CIBC CA Banks 33,692 4.7 45.9 0.2 na 4.6 33.1 20.5 0.7 0.0 5/6
COST US Costco US Food & drug 44,500 4.6 182.1 0.0 92.3 12.4 66.1 17.2 0.6 0.0 7/7
SO US Southern Co US Utilities 38,392 4.6 73.2 (0.8) 62.6 3.8 65.9 12.4 0.3 0.0 3/7
GWO CN Great-West Lifeco CA Insurance 24,649 4.6 55.7 0.2 na 12.6 28.0 15.4 0.7 7.1 4/6
DUK US Duke Energy Corp US Utilities 48,393 4.6 71.3 (0.4) (32.6) 3.3 60.9 8.2 0.4 11.8 2/7
ECA CN Encana Corp. CA Energy 14,212 4.5 121.6 (1.9) (70.1) 0.7 2.4 7.4 1.2 25.0 0/7
NA CN NBC CA Banks 12,810 4.4 41.8 (0.1) na 4.7 66.6 18.5 0.6 0.0 5/6
HCP US HCP Inc US Real estate 21,024 4.4 105.4 (0.4) (125.9) 6.3 32.7 8.4 0.9 0.0 3/7
STX US Seagate US Tech HW 12,194 4.4 27.5 0.2 91.6 (9.4) 19.3 53.3 1.4 33.3 3/7
ED US Consolidated Edison US Utilities 16,659 4.3 64.5 (0.7) 111.3 1.4 69.9 9.0 0.4 0.0 4/7
TRI CN Thomson Reuters CA Media 25,277 4.3 71.8 (5.6) 139.0 (2.4) 22.1 8.6 0.5 7.1 2/7
POW CN Power Corp. of Canada CA Insurance 12,080 4.3 54.2 (0.2) na 10.2 35.4 11.7 0.9 0.0 3/6
INTC US Intel US Semis 104,821 4.3 46.7 (0.1) 77.3 (0.6) 12.6 18.1 1.0 0.0 3/7
PCG US Pg&E Corp US Utilities 18,308 4.3 57.0 (0.3) (35.4) (0.3) 40.9 9.5 0.4 23.1 2/7
SJR/B CN Shaw CA Media 10,409 4.3 61.6 0.8 47.8 1.5 29.7 18.1 0.4 0.0 4/7
AEP US American Electric Power US Utilities 21,975 4.3 61.4 (0.3) 50.4 3.4 68.6 9.8 0.5 11.8 2/7
WMB US Williams Cos US Energy 21,976 4.3 108.5 (3.2) 62.5 18.0 20.1 15.0 1.4 11.8 2/7
KRFT US Kraft Foods US FBT 27,381 4.3 63.7 (1.5) 123.9 6.6 25.3 27.6 0.0 na 3/6
SE US Spectra Engy US Energy 18,557 4.2 82.0 (5.9) 206.9 7.2 24.5 11.1 0.9 0.0 3/7
MRK US Merck US Pharma 131,670 4.1 46.8 (0.5) 81.0 (0.5) 37.7 18.2 0.6 0.0 5/7
BNS CN Scotiabank CA Banks 69,543 4.1 45.9 0.1 na 7.8 59.8 16.2 0.7 0.0 6/6
PM US Philip Morris Intl US FBT 147,750 4.1 62.6 (0.2) 110.5 10.8 93.1 (282.5) 0.7 25.0 4/7
NEM US Newmont Mining US Materials 21,327 4.1 39.8 (4.3) 27.2 21.6 23.2 15.0 0.6 11.8 3/7
D US Dominion Resources US Utilities 31,092 4.1 65.9 (0.2) (39.0) 8.0 52.3 15.5 0.5 0.0 5/7
TD CN TD Bank CA Banks 76,390 4.1 41.8 (0.4) na 6.3 45.4 15.5 0.8 0.0 4/6
KMI US Kinder Morgan US Energy 30,093 4.0 111.6 (1.2) (3.6) 76.4 5.0 8.7 0.5 0.0 3/7
1
North America universe with market cap > US$10bn. Source: Factset, CLSA Asia-Pacific Markets



1
(%) (%) %) (%) (x) (avg,%) record
GMKN RM Norilsk Nickel RU Materials 31,557 11.5 65.1 1.7 56.9 14.0 5.2 22.7 0.6 22.2 4/7
FTE FP France Telecom FR Telecom 29,858 10.9 74.1 (1.9) 138.1 (4.6) 9.6 10.4 0.7 7.7 3/7
BELG BB Belgacom SA BE Telecom 10,315 10.1 106.3 0.2 103.8 (4.9) 20.3 22.6 0.6 10.0 6/7
GSZ FP GDF-SUEZ FR Utilities 47,620 10.1 92.9 (2.5) 139.0 (2.0) 16.4 5.1 1.1 0.0 3/7
TTKOM TI TURK TELEKOM TR Telecom 14,684 9.5 92.6 (1.0) 47.3 (0.5) 13.4 39.6 0.4 33.3 3/7
SAN SM Santander ES Banks 86,568 9.2 92.7 (2.0) na 16.6 4.1 8.7 1.3 17.6 1/6
EDP PL EDP SA PT Utilities 11,684 7.8 65.2 (0.6) 50.5 0.2 19.0 11.6 1.0 30.8 1/7
EDF FP EDF FR Utilities 35,499 7.8 61.9 (3.7) (93.6) (7.6) 9.6 10.7 1.0 16.7 0/7
TLSN SS Teliasonera AB SE Telecom 31,228 7.8 79.6 (0.2) 119.4 (3.1) 13.2 15.8 0.7 17.6 4/7
IBE SM Iberdrola ES Utilities 33,098 7.8 73.8 (0.9) 56.6 (5.4) 19.5 7.0 1.0 6.3 2/7
IAM MC Maroc Telecom MA Telecom 11,244 7.7 99.4 (0.0) 91.5 1.6 24.3 41.2 1.2 10.0 5/7
CEZ CP Cez Group CZ Utilities 17,266 7.4 58.3 (0.8) 20.8 (2.9) 19.0 15.0 0.6 20.0 3/7
VOD SJ VODACOM GROUP ZA Telecom 20,782 7.3 94.2 0.7 113.4 5.8 33.9 64.4 0.7 33.3 5/7
TEF SM Telefonica ES Telecom 65,976 7.3 11.7 (1.1) 181.9 2.4 8.0 21.0 0.8 23.1 3/7
RWE GR Rwe Stamm DE Utilities 23,107 7.3 50.3 (0.4) (30.9) (3.0) 15.1 13.8 1.0 20.0 2/7
PZU PW PZU PL Insurance 11,364 7.1 74.7 1.7 na (7.8) 14.4 19.4 0.7 0.0 5/6
SRG IM SNAM IT Utilities 17,079 7.0 91.2 (0.7) (4.9) 5.2 25.0 16.6 0.5 10.0 4/7
AV/ LN Aviva GB Insurance 16,965 7.0 55.2 (2.3) na 6.1 6.4 12.6 1.7 14.3 0/6
DTE GR Deutsche Telekom DE Telecom 53,082 6.7 107.6 0.6 316.7 7.1 6.8 10.7 0.7 23.1 3/7
ZURN VX Zurich Finl Services CH Insurance 42,234 6.7 64.2 (2.3) na 11.7 10.7 12.1 1.2 20.0 1/6
TCELL TI Turkcell TR Telecom 13,695 6.6 85.0 2.0 31.4 8.2 17.3 17.4 0.7 42.9 5/7
VOD LN Vodafone Group GB Telecom 135,462 6.6 70.1 (0.5) 57.8 6.3 16.2 10.8 0.6 6.3 3/7
MFON LI MegaFon RU Telecom 17,067 6.6 86.1 0.0 55.0 15.4 11.2 35.4 0.0 na 4/6
CABK SM CaixaBank ES Banks 17,562 6.6 172.3 (20.8) na 149.0 4.0 5.1 0.8 25.0 2/6
FUM1V FH Fortum Oyj FI Utilities 16,653 6.5 75.1 (1.6) (3.1) (5.5) 10.8 11.1 0.7 7.1 2/7
FP FP Total Fina Elf FR Energy 122,361 6.5 45.3 (0.6) 13.8 (0.9) 12.2 14.9 0.8 0.0 3/7
KIO SJ Kumba Iron Ore ZA Materials 21,710 6.4 84.0 (1.5) 109.2 8.0 8.0 77.5 1.4 25.0 2/7
VIV FP VIVENDI FR Telecom 28,358 6.4 49.8 (0.8) 160.9 1.2 10.0 11.1 0.8 23.1 2/7
MBT US Mobile TeleSystems RU Telecom 19,551 6.4 66.9 0.1 86.7 11.6 8.0 48.7 1.0 23.1 4/7
AZN LN AstraZeneca PLC GB Pharma 60,360 6.3 51.5 (2.1) 31.9 (9.1) 14.5 24.2 0.6 0.0 4/7
ENI IM ENI S.p.A. IT Energy 100,528 6.2 53.9 (1.9) 13.0 5.5 10.5 11.9 0.8 6.3 2/7
SSE LN SSE PLC GB Utilities 21,550 6.2 73.5 (0.2) (17.3) 5.8 20.3 22.8 0.4 0.0 5/7
NG/ LN National Grid PLC GB Utilities 39,885 6.1 75.5 (0.6) 49.0 2.6 30.3 18.4 0.3 0.0 4/7
BA/ LN BAE Systems PLC GB Cap gds 19,318 6.1 49.0 (0.3) 6.6 2.4 15.7 25.0 0.9 0.0 5/7
GAS SM Gas Natural SDG SA ES Utilities 19,974 6.1 62.7 1.2 51.4 2.7 17.0 10.8 0.9 11.8 4/7
EOAN GR E. ON AG DE Utilities 33,120 6.0 55.8 (4.9) 14.5 (18.0) 5.4 7.3 1.1 12.5 1/7
SWEDA SS Swedbank AB SE Banks 25,870 6.0 69.9 0.9 na 1.2 8.5 13.6 1.3 14.3 1/6
ATL IM Atlantia S.p.A. IT Transport 12,245 5.9 73.3 (0.0) 258.7 3.9 8.5 17.7 0.8 9.1 5/7
CS FP Axa FR Insurance 43,349 5.9 40.0 0.1 na 7.6 12.6 10.0 1.7 11.8 2/6
REP SM Repsol SA ES Energy 28,041 5.8 55.9 1.0 (68.0) 6.6 12.1 8.3 1.0 17.6 1/7
GAZP RM Gazprom OAO RU Energy 108,771 5.8 17.1 (0.1) 6.3 (5.1) 14.3 11.4 0.8 18.2 3/7
MTN SJ MTN Group ZA Telecom 36,510 5.8 71.4 (0.2) 63.4 10.2 11.7 25.5 0.9 9.1 6/7
KGH PW Kghm PL Materials 12,201 5.7 69.7 1.0 79.0 (11.7) 15.6 16.4 1.6 44.4 4/7
MEO GR Metro Stamm DE Food & drug 10,085 5.7 55.7 (0.6) 101.6 7.2 7.5 12.4 0.9 0.0 3/7
BBVA SM BBVA ES Banks 54,178 5.7 55.8 0.3 na 6.5 5.7 10.7 1.4 23.5 1/6
URKA RM Uralkali RU Materials 22,339 5.5 77.5 (1.2) 105.2 9.5 31.0 29.6 0.6 30.0 5/7
TEL NO Telenor ASA NO Telecom 34,337 5.5 65.8 (0.5) 42.2 1.7 12.6 20.3 0.8 26.7 2/7
LGEN LN Legal & General GB Insurance 14,270 5.5 53.3 (0.3) na 6.9 13.4 14.3 1.5 11.8 3/6
ABE SM Abertis ES Transport 13,958 5.5 76.8 (2.7) 103.6 6.1 9.9 19.9 0.8 7.7 4/7
SCMN VX Swisscom CH Telecom 22,957 5.4 68.1 (0.9) 94.9 (1.9) 17.5 32.5 0.5 7.7 5/7
1
Europe, Middle East and Africa universe with market cap > US$10bn. Source: Factset, CLSA Asia-Pacific Markets



Latin America
1
(%) (%) %) (%) (x) (avg,%) record
OIBR3 BZ Oi SA BR Telecom 8,368 13.3 247.6 (7.2) 91.6 (28.7) 2.1 3.3 0.7 75.0 1/7
GETI4 BZ AES Tiete SA BR Utilities 3,977 13.2 108.3 0.1 89.7 5.1 16.6 54.5 0.2 27.3 6/7
LIGT3 BZ Light SA BR Utilities 2,100 9.7 82.3 1.0 (86.8) 15.6 5.5 14.9 0.4 75.0 3/7
CMIG4 BZ Cemig BR Utilities 11,573 8.4 67.5 0.7 45.0 (21.4) 5.6 18.7 0.4 41.7 3/7
EMBR3 BZ Embraer SA BR Cap gds 6,001 8.1 96.4 (3.9) 141.8 17.4 10.0 12.2 0.6 60.0 4/7
VIVT4 BZ Telefonica Brasil BR Telecom 28,398 7.9 97.1 (1.3) 87.6 7.3 9.1 11.1 0.3 53.8 3/7
CPFE3 BZ CPFL Energia BR Utilities 9,820 7.3 85.8 (2.4) 37.2 1.8 9.3 18.6 0.3 14.3 4/7
ENBR3 BZ EDP - EDB BR Utilities 2,914 6.6 80.8 (3.2) 139.2 26.0 4.4 11.0 0.3 16.7 4/7
BBAS3 BZ Banco do Brasil BR Banks 35,059 6.1 41.0 (1.0) na 2.5 15.0 15.7 1.0 15.4 2/6
AGUAS/A CI Aguas Andinas SA CL Utilities 4,494 6.1 92.9 1.0 71.1 10.3 50.6 19.1 0.5 28.6 6/7
ELET6 BZ Eletrobras BR Utilities 8,595 5.9 23.5 (4.0) (103.7) (56.3) 3.8 0.6 0.7 25.0 2/7
ENTEL CI Entel CL Telecom 5,126 5.9 71.1 (2.5) 54.3 10.8 5.5 20.5 0.6 23.1 3/7
ENDESA CI Endesa CL Utilities 14,209 5.1 65.2 4.3 125.4 53.0 6.1 16.5 0.9 26.7 4/7
CPLE6 BZ Copel BR Utilities 4,485 5.1 34.2 0.2 (42.6) 14.8 7.2 8.7 0.4 0.0 4/7
CIEL3 BZ Cielo BR Software 18,527 5.0 71.3 (0.1) 49.9 9.2 12.8 95.6 0.4 0.0 5/7
TBLE3 BZ Tractebel Energia BR Utilities 11,613 5.0 68.9 0.8 135.0 5.7 7.8 27.3 0.2 37.5 4/7
PETR3 BZ Petrobras BR Energy 119,546 4.9 28.8 (3.7) (110.4) 27.5 6.5 8.2 1.1 42.9 1/7
MPLU3 BZ Multiplus SA BR Comml svcs 3,483 4.9 103.1 (0.1) 211.5 22.7 12.5 116.1 0.5 100.0 6/7
CHILE CI Banco de Chile CL Banks 14,956 4.3 66.0 (0.1) na 5.6 36.7 22.7 0.9 50.0 3/6
ENERSIS CI Enersis SA CL Utilities 13,007 4.1 61.1 (7.1) 211.1 5.2 4.2 10.1 1.0 45.5 1/7
BVMF3 BZ BM&F Bov BR Div fin 13,532 4.1 55.6 (0.6) na 10.4 10.3 8.5 1.1 33.3 2/6
TIMP3 BZ TIM Participacoes BR Telecom 10,692 4.0 42.4 (1.4) 82.9 13.7 16.7 12.0 0.6 50.0 4/7
BRAP4 BZ Bradespar SA BR Materials 5,428 4.0 53.2 (2.9) 31.5 10.2 3.3 11.6 1.2 42.9 0/7
ECOPETL CB Ecopetrol SA CO Energy 130,836 4.0 56.6 0.2 81.2 (1.2) 7.1 26.3 1.0 50.0 3/7
CRUZ3 BZ Souza Cruz BR FBT 25,318 4.0 95.8 1.3 95.3 13.6 20.5 108.9 0.2 13.3 7/7
CCRO3 BZ CCR BR Transport 18,240 3.9 88.0 (0.2) 136.9 23.4 9.9 45.1 0.3 44.4 6/7
NATU3 BZ Natura Cosmetic BR HPC 11,589 3.9 87.4 (0.2) 105.0 16.0 22.6 76.8 0.5 11.1 7/7
ODPV3 BZ Odontoprev BR Healthcare 2,711 3.9 83.7 (1.7) 82.7 22.0 18.5 31.8 0.5 25.0 6/7
BSAN CI Santander-Chile CL Banks 14,352 3.8 54.9 (3.2) na 15.8 13.8 21.2 1.0 20.0 4/6
SCCO US Southern Copper PE Materials 33,324 3.8 55.6 1.0 44.3 10.7 7.6 42.7 1.6 29.4 3/7
PFDAVVND CB Banco Davivienda CO Banks 6,004 3.6 33.8 (0.0) na 23.5 67.0 19.2 0.3 100.0 5/6
PSSA3 BZ Porto Seguro BR Insurance 3,884 3.6 41.0 0.4 na 12.8 13.6 14.6 0.6 41.7 4/6
AMBV4 BZ Ambev BR FBT 147,416 3.5 75.6 0.3 109.3 11.0 35.7 41.0 0.2 20.0 6/7
CSMG3 BZ COPASA BR Utilities 2,907 3.5 34.7 (1.3) (6.4) 11.0 7.9 10.5 0.5 40.0 1/7
GMEXICOB MM GMexico MX Materials 29,027 3.4 41.5 1.4 (1.5) 6.8 7.3 29.2 1.5 44.4 2/7
KIMBERA MM Kimber MX HPC 8,813 3.4 92.2 0.2 142.6 12.6 56.7 63.9 0.7 13.3 6/7
GENER CI AES Gener CL Utilities 5,544 3.3 104.0 (5.0) (67.2) 26.5 7.9 12.4 0.8 58.3 1/7
SBSP3 BZ Sabesp BR Utilities 10,274 3.3 32.1 0.5 40.1 16.2 8.2 17.0 0.5 33.3 3/7
HGTX3 BZ Companhia Hering BR Retailing 3,127 3.2 56.2 (1.8) 74.0 15.5 17.3 40.9 0.7 0.0 6/7
BBDC4 BZ B Bradesco BR Banks 70,237 3.2 34.5 (1.4) na 11.1 29.3 17.3 0.9 33.3 1/6
CORPBANC CI CorpBanca CL Banks 4,260 3.2 77.9 (2.0) na 21.0 13.8 16.5 0.9 14.3 3/6
ECOR3 BZ EcoRodovias BR Transport 4,947 3.2 52.1 0.5 81.1 23.9 8.7 24.4 0.2 0.0 6/7
MRVE3 BZ MRV Engenharia BR Cons dur 2,736 3.1 24.9 (2.4) (80.9) 11.2 8.1 16.6 1.3 0.0 1/7
CYRE3 BZ CBR BR Cons dur 3,628 3.0 23.8 (2.0) (61.8) 18.7 6.7 15.8 1.3 42.9 1/7
POMO4 BZ MarcoPolo BR Cap gds 3,023 3.0 51.5 (2.3) 87.9 15.5 9.0 24.8 0.8 42.9 4/7
GMODELOC MM Modelo MX FBT 27,549 3.0 80.2 0.8 137.9 9.4 11.4 17.6 0.5 21.4 6/7
LREN3 BZ Lojas Ren BR Retailing 4,948 3.0 70.4 0.3 (6.4) 18.8 19.2 33.1 0.8 28.6 5/7
SULA11 BZ Sul America BR Insurance 2,577 2.9 45.9 0.3 na 18.4 8.2 14.4 0.6 25.0 4/6
OHLB3 BZ Arteris SA BR Transport 3,586 2.9 41.7 (1.7) 38.2 7.8 9.0 24.3 0.2 20.0 4/7
CTIP3 BZ Cetip SA BR Div fin 3,233 2.8 32.1 (1.1) na 22.1 7.5 25.7 0.4 33.3 3/6
1
Latin America universe with market cap > US$2bn. Source: Factset, CLSA Asia-Pacific Markets



Appendix 7: Dividend-wave stocks
Star rating for our Asian dividend wave stock picks
Code Name Cty Sector Mkt cap 12MF Payout Factor data Star
(US$m) Div (FY1, 3M EPS FCF Conv EPS Cagr Earns 13-14F Beta DPS cut rating
(%) (%) %) (%) (x) (avg,%) record
1
2.4 52.6 (0.3) 48.3 9.9 13.6 14.6 1.0 21.4
GA US Giant CN Software 1,450 6.4 44.8 0.4 117.1 8.5 20.6 31.5 0.5 0.0 6/7
MAY MK Maybank MY Banks 22,619 5.7 76.2 0.5 na 5.9 22.6 14.7 1.0 37.5 4/6
ANZ AU ANZ Bank AU Banks 77,759 5.5 66.2 (0.0) na 4.5 34.2 14.9 1.2 5.6 4/6
SCC PM Semirara Mining PH Energy 2,030 5.3 67.8 (0.3) 70.1 8.6 9.8 38.3 0.9 33.3 4/7
CGF AU Challenger AU Div fin 2,001 5.2 31.9 2.5 na 2.1 13.9 15.6 1.1 0.0 4/6
939 HK CCB CN Banks 211,181 5.1 34.3 0.5 na 5.9 17.4 19.0 1.2 16.7 4/6
IAG AU IAG AU Insurance 11,054 5.0 60.2 3.3 na 21.2 9.4 18.3 0.8 27.3 4/6
TLKM IJ Telkom ID Telecom 19,709 4.9 61.3 0.8 152.8 9.7 22.8 24.7 0.5 29.4 5/7
2388 HK BOC (HK) HK Banks 36,745 4.8 62.8 0.1 na 7.0 19.8 14.8 0.9 11.1 5/6
LEI AU Leighton AU Cap gds 7,880 4.7 53.8 (0.1) (35.0) 20.0 7.4 19.5 1.5 21.4 4/7
033780 KS KT&G KR FBT 9,097 4.4 54.3 (4.1) 57.2 0.1 10.7 15.6 0.0 0.0 4/7
RECL IN Rural Electrification IN Div fin 4,303 4.3 28.1 2.3 na 12.8 7.4 20.0 1.3 21.0 4/6
5 HK HSBC HK Banks 206,771 4.3 47.0 (0.3) na 10.3 5.2 10.7 1.0 11.8 4/6
WOW AU Woolworths AU Food & drug 41,765 4.2 71.0 (0.1) 32.0 5.7 45.1 27.5 0.4 0.0 5/7
UMWH MK UMW MY Autos 4,569 4.2 54.5 2.3 139.2 10.8 11.8 21.1 0.6 40.0 5/7
941 HK China Mobile CN Telecom 222,259 4.0 43.7 (0.3) 79.3 1.2 33.0 16.2 0.5 0.0 6/7
PGAS IJ Perusahaan Gas ID Utilities 11,907 3.9 55.8 0.4 128.6 10.6 17.5 35.2 1.1 33.3 5/7
PTT TB PTT TH Energy 34,144 3.9 34.4 (0.0) 68.8 7.7 19.3 16.7 1.3 20.0 5/7
2395 TT Advantech TW Tech HW 2,468 3.9 75.8 (0.2) 48.3 13.3 26.8 24.5 0.7 18.2 7/7
MMS AU McMillan Shakes AU Comm svc 1,121 3.8 62.5 2.1 27.1 12.1 36.1 35.2 0.6 12.5 6/7
1088 HK Shenhua CN Energy 79,002 3.8 38.4 (0.6) 56.5 4.2 18.6 17.6 1.2 16.7 4/7
1882 HK Haitian CN Cap gds 2,038 3.7 39.3 (0.1) 23.7 14.5 14.6 20.3 1.2 50.0 4/7
BBL TB Bangkok Bank TH Banks 13,422 3.7 39.1 (0.0) na 12.7 18.4 13.5 1.1 20.0 4/6
UOB SP UOB SG Banks 24,568 3.6 39.3 (0.2) na 4.0 33.2 11.5 1.0 23.5 4/6
696 HK TravelSky CN Software 1,947 3.6 36.8 (0.1) 105.8 4.9 34.3 13.3 0.8 27.3 4/7
GAM MK Gamuda MY Cap gds 2,483 3.6 44.2 0.2 6.2 11.8 19.1 14.7 1.5 31.3 4/7
CD SP ComfortDelGro SG Transport 3,210 3.5 53.3 0.1 64.3 3.7 25.0 12.2 0.6 33.3 4/7
341 HK Caf de Coral HK Cons svcs 1,711 3.4 78.6 0.2 32.3 13.5 14.7 18.4 0.3 12.5 6/7
ONGC IN ONGC IN Energy 50,824 3.3 32.6 1.3 21.2 13.7 10.0 18.1 0.6 7.1 5/7
178 HK Sa Sa HK Retail 2,729 3.3 70.6 0.8 56.8 19.4 26.1 46.7 1.0 14.3 7/7
MAKRO TB Siam Makro TH Food & drug 3,761 3.2 85.9 (0.2) 87.1 18.7 27.5 39.2 0.9 33.3 6/7
SCI SP Sembcorp Ind SG Cap gds 7,869 3.2 39.3 (0.2) (14.2) 10.7 18.7 16.6 1.3 28.6 4/7
021240 KS Coway KR Cons dur 3,264 3.2 51.2 0.0 (4.4) 25.1 18.0 25.3 0.7 7.7 6/7
ASII IJ Astra Intl ID Autos 32,447 3.1 44.8 (0.3) (5.1) 14.2 25.9 27.1 1.4 20.0 5/7
MER PM Meralco PH Utilities 8,400 3.1 56.5 0.4 192.4 4.1 13.5 23.0 0.9 50.0 4/7
270 HK Guangdong Inv CN Utilities 5,402 3.0 38.5 (0.2) 96.5 4.4 11.0 12.3 0.5 30.0 4/7
1
It represents the median value of those factors for MSCI Asia Pacific ex-Japan universe. Source: Factset, CLSA Asia-Pacific Markets



Star rating for our Global dividend wave stock picks
Code Name Cty Sector Mkt cap 12MF Payout Factor data Star
(US$m) Div (FY1, 3M EPS FCF Conv EPS Cagr Earns 13-14F Beta DPS cut rating
(%) (%) %) (%) (x) (avg,%) record
Japan
1
1.9 44.3 (0.1) 80.4 9.7 10.2 8.0 0.9 7.1
2651 JP Lawson JP Food & drug 7,257 3.1 57.2 0.6 145.5 9.6 17.6 16.4 0.2 8.3 5/7
9433 JP KDDI JP Telecom 28,478 2.9 27.9 (0.2) 129.9 20.9 9.3 13.9 0.5 0.0 5/7
2914 JP Japan Tobacco JP FBT 59,407 2.8 36.6 2.0 132.5 13.1 25.0 20.8 0.6 0.0 7/7
4503 JP Astellas Pharma JP Pharma 23,318 2.8 59.0 1.0 112.4 15.6 20.8 11.4 0.5 5.9 7/7
4452 JP Kao JP HPC 15,005 2.3 48.0 2.1 145.7 11.8 12.7 12.2 0.4 0.0 7/7
9531 JP Tokyo Gas JP Utilities 12,146 2.1 25.1 1.3 20.2 1.7 19.9 9.7 0.2 0.0 5/7
7203 JP Toyota Motor JP Autos 151,472 2.1 26.1 5.3 (28.1) 25.7 13.8 10.7 1.2 11.8 4/7
North America
1
1.8 56.6 (0.2) 81.0 7.0 32.1 14.2 0.9 0.0
RAI US RAI US FBT 24,318 5.9 79.9 0.7 83.6 6.7 39.4 35.9 0.4 0.0 6/7
BMO CN Bank of Montreal CA Banks 41,037 4.7 48.7 0.3 na 2.9 34.1 14.1 0.7 0.0 4/6
RY CN RBC CA Banks 89,852 4.0 46.3 0.3 na 6.7 64.4 18.4 0.7 0.0 5/6
KMB US Kimberly-Clark US HPC 34,846 3.6 57.6 0.1 113.6 6.8 73.6 40.9 0.3 5.9 5/7
MAT US Mattel US Cons dur 12,900 3.4 49.9 0.7 166.0 9.2 36.6 30.1 0.8 11.8 6/7
MCD US McDonald's US Cons svcs 95,671 3.4 54.8 (0.1) 80.9 8.8 61.1 41.7 0.5 0.0 6/7
MSFT US Microsoft US Software 229,866 3.4 31.9 (0.9) 136.5 7.5 39.1 29.8 0.9 0.0 5/7
JNJ US JNJ US Pharma 204,208 3.3 45.8 (0.9) 89.1 6.3 124.5 21.6 0.5 0.0 5/7
PG US P&G US HPC 205,311 3.1 55.8 1.2 86.1 6.7 76.1 17.7 0.4 0.0 6/7
APD US Air Products US Materials 18,153 3.1 46.0 0.3 21.4 8.8 86.2 18.9 1.0 0.0 5/7
PEP US PepsiCo US FBT 112,480 3.1 51.3 (0.2) 79.8 7.9 92.5 30.9 0.4 0.0 6/7
GIS US General Mills US FBT 27,089 3.1 49.0 0.1 100.5 8.5 98.4 24.5 0.3 0.0 7/7
GPC US Genuine Parts US Retail 10,554 3.0 48.6 0.0 92.3 7.0 288.0 20.6 0.9 0.0 5/7
CAG US Conagra Foods US FBT 13,195 3.0 46.8 2.8 136.1 13.3 32.2 21.7 0.4 11.8 6/7
UPS US UPS US Transport 75,484 2.9 48.3 (0.8) 134.0 12.4 62.3 95.5 0.9 0.0 5/7
EMR US Emerson US Cap gds 41,371 2.9 45.6 0.2 102.9 8.7 82.0 23.9 1.2 0.0 6/7
CSCO US Cisco System US Tech HW 109,247 2.7 28.3 0.4 122.6 6.6 62.3 18.0 1.1 0.0 5/7
OMC US Omnicom US Media 14,340 2.7 38.1 0.0 145.6 10.5 40.1 30.1 1.3 5.9 5/7
WAG US Walgreen Co US Food & drug 37,766 2.6 31.6 (0.5) 133.8 16.7 28.9 15.7 0.7 0.0 5/7
1
3.3 50.6 (0.4) 63.3 8.2 13.3 14.5 0.9 12.5
MTN SJ MTN Group ZA Telecom 36,510 5.8 71.4 (0.2) 63.4 10.2 11.7 25.5 0.9 9.1 6/7
FSR SJ Firstrand ZA Div fin 19,730 4.4 48.2 0.2 na 13.7 20.1 21.1 0.9 7.7 6/6
BVT SJ Bidvest ZA Cap gds 7,502 3.4 44.6 0.4 39.4 15.1 22.4 21.2 1.0 13.3 4/7
MUV2 GR Muenchener DE Insurance 32,949 5.2 43.3 0.6 na 8.9 14.3 10.3 0.9 0.0 5/6
SPR GR Axel Springer DE Media 4,625 5.2 62.9 0.5 109.3 7.3 10.2 15.5 0.7 7.1 5/7
DG FP Vinci FR Cap gds 29,371 5.2 51.6 0.4 155.9 2.0 23.6 13.6 1.1 0.0 4/7
ALV GR Allianz DE Insurance 64,717 4.8 40.4 0.5 na 5.7 17.6 10.8 1.0 12.5 4/6
BATS LN British American GB FBT 102,487 4.5 64.9 (0.0) 122.3 9.5 111.5 52.3 0.6 11.8 7/7
SHBA SS Svenska Handel SE Banks 25,857 4.3 52.3 0.1 na 6.1 19.1 12.8 0.9 5.9 4/6
LKOH RM Lukoil Holdings RU Energy 50,804 4.3 19.4 2.6 59.0 2.4 13.4 13.5 0.5 7.7 4/7
NDA SS Nordea Bank SE Banks 44,353 4.2 43.9 0.5 na 8.5 15.4 11.5 1.0 15.4 4/6
SIE GR Siemens AG DE Cap gds 92,477 4.2 51.6 0.1 82.1 15.1 13.0 17.0 1.0 11.1 5/7
ROG VX Roche CH Pharma 190,796 3.9 52.8 (0.4) 107.3 8.2 33.2 58.4 0.9 0.0 7/7
BAS GR BASF DE Materials 93,082 3.9 48.3 0.2 62.6 9.9 14.5 19.4 1.1 11.8 5/7
PHIA NA Koninklijke NL Cap gds 28,566 3.7 48.5 1.4 177.3 25.6 7.0 12.8 1.2 5.9 4/7
HO FP Thales FR Cap gds 7,168 3.6 32.2 (0.7) 52.4 13.2 15.5 13.3 0.6 6.7 4/7
SU FP Schneider Elec FR Cap gds 41,159 3.5 45.8 (0.3) 74.0 9.7 20.4 12.9 1.3 23.5 4/7
NESN VX Nestle CH FBT 226,320 3.5 61.0 (0.4) 47.7 8.3 33.0 18.3 0.6 0.0 6/7
UNA NA Unilever N.V. NL FBT 114,548 3.5 59.3 (0.7) 103.5 8.3 21.0 29.4 0.5 23.5 5/7
PRU LN Prudential GB Insurance 38,826 3.1 37.8 0.6 na 10.1 14.2 17.7 1.3 5.9 5/6
IMI LN IMI PLC GB Cap gds 5,956 3.1 39.9 0.5 68.8 7.5 27.6 34.0 1.7 0.0 5/7
RB/ LN Reckitt Benckiser GB HPC 48,913 3.0 52.2 1.8 88.6 1.6 17.0 28.1 0.6 0.0 6/7
Latin America
1
2.4 55.2 (1.0) 60.9 12.2 9.0 17.6 0.7 30.0
CIEL3 BZ Cielo BR Software 18,527 5.0 71.3 (0.1) 49.9 9.2 12.8 95.6 0.4 0.0 5/7
ITUB4 BZ Itau Unibanc BR Banks 78,025 3.3 32.3 (0.8) na 12.2 18.7 18.7 1.1 14.3 4/6
1
It represents the median value of those factors for the respective region. Source: Factset, CLSA Asia-Pacific Markets



Appendix 8: Basel-3 guidelines
Asia pacific: National regulators Basel-3 guidelines
Country Status Phase-in
commences
Tier 1
(%)
CET1
(%)
Conservation
buffer (%)
SIFI
(%)
Total
(%)
BICS
Guidelines
Final version of Basel 3 last revised June, 2011 1 Jan 2013 6.0 4.5 2.5 7.0
Australia Final rules for capital issued September, 2012 1 Jan 2013 6.0 4.5 2.5 7.0
China New capital regulation combining Basel 2, 2.5
and Basel 3 issued in June, 2012
1 Jan 2013 6.0 5.0 2.5 1.0 8.5
Hong Kong Capital rules amended October, 2012 1 Jan 2013 6.0 4.5 2.5 7.0
India Final capital regulations issued May, 2012. 1 Jan 2013 7.0 5.5 2.5 8.0
Indonesia Consultative paper on Basel 3 issued June, 2012 na 6.0 4.5 2.5 7.0
Japan Final rules issued March, 2012, but capital
buffers not to be finalised until 2015
1 Apr 2013 6.0 4.5 4.5
Korea Draft regulation issued September, 2012 Delayed 2014 6.0 4.5 2.5 7.0
Malaysia Guidelines on Basel-3 capital adequacy issued
November, 2012
1 Jan 2013 6.0 4.5 2.5 7.0
Philippines Implementation guidelines issued December,
2012
1 Jan 2014 7.5 6.0 2.5 8.5
Singapore Final rules published September, 2012 1 Jan 2013 8.0 6.5 2.5 9.0
Taiwan Published guidelines in April, 2012 1 Jan 2013 6.0 4.5 2.5 7.0
Thailand Notification on capital adequacy framework
under Basel 3 December, 2012
1 Jan 2013 6.0 4.5 2.5 7.0
SIFI-Systematically important financial institutions, only applicable in China. Total denotes aggregate of CET 1 CAR, Buffers and SIFI ratio. Source:
CLSA Asia-Pacific Markets

Microstrategy


Notes

Microstrategy


Notes

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2013 CLSA Asia-Pacific Markets ("CLSA").
Key to CLSA/Credit Agricole Securities investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater
absolute return; O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be
less than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to
provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock against the
12-month forecast return (including dividends) for the local market where the stock is traded. 01/01/2013
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