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Banks play a major role in any country’s economy. For investors looking for strong economic growth, they should focus on emerging economies rather than mature economies. China obviously qualifies as one of the faster-growing economies in the world today, despite growth slowing down from a heady double-digit figure in the 90s to around the 6% to 7% range currently.
The four big Chinese banks which are listed in Hong Kong are:
- Industrial and Commercial Bank (SEHK:1398)
- Bank of China Ltd (SEHK:3988)
- China Construction Bank (SEHK:939) and;
- Agricultural Bank of China (SEHK: 1288).
Investors who are looking for a proxy for economic growth can certainly invest in any of these banks but do these behemoths also qualify as attractive dividend stocks? The table below shows the details:
Source: ICBC, BOC, CCB and ABC 2018 annual reports
Investors enjoy growth plus yield
Using the fiscal year 2018 as an example, it can be seen that each bank pays dividends, and the pay-out ratio (which measures the proportion of profits paid out as dividends) averages 30%. This implies that these banks are still reinvesting the bulk of their dividends for growth, by not paying out too much of their profits.
If banks have a high payout ratio, it may signify limited or poor growth prospects, and the banks will qualify more as dividend stocks. While there is nothing wrong with investing in a bank for its steady dividend, the concern for the investor is whether a bank can maintain its loan book in a moribund economy.
High dividend yields
The next aspect I noticed was the high dividend yields for these banks. Considering these are China’s four largest banks, it was surprising to see yields in the 5% to 6% range across all four banks. One possible reason could be the current USA-China trade war, which has dented sentiment in the stock markets of both China and Hong Kong, causing valuations across the board to fall.
Another reason for the low valuations (and correspondingly high dividend yields) could be worries over bad loans in China as well as the news that the country’s Q2 2019 growth slowed to its slowest in 27 years – at just 6.2%. Investors may feel pessimistic regarding the banks’ loan growth, resulting in lower overall valuations for the big banks.
Consistency of dividends
Despite the economic headwinds, all four banks have been consistently paying a dividend over the last five fiscal years. Though China’s growth is slowing, investors should focus more on the headline growth rate rather than compare it to China’s past growth. The high growth rate is still very respectable and the banks should be able to capitalise on this to continue to grow their business. Investors should, therefore, take comfort in this and take advantage of the high dividend yields to obtain a steady, dependable source of passive income.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang doesn’t own shares in any companies mentioned.