Investing for income and growth in emerging markets

Investing for income and growth in emerging markets

Rising dividend payouts

As a result of developments in corporate governance, maturing economies and changing demographics, companies in emerging markets are paying out higher dividends to shareholders than they had previously.

Improved corporate governance

Over the past 20 years, emerging markets have seen widespread improvements in corporate governance. At the outset, booming economic growth had allowed the families or governments that controlled companies to do more or less as they pleased with assets that belonged to all shareholders. As growth slowed however, investors became more aware of the benefits that could accrue from improved governance and started to exert pressure on those companies.

Maturing economies and changing demographics

At the same time, the slower economic growth that comes with maturing economies, together with moderating population growth, has made the high capital spending, debt-fuelled corporate model that aims to capture or at least maintain market share in a rapidly-expanding economy no longer appropriate for most firms. It has been replaced by one focusing more on cashflows and financial prudence.

The Samsung example

For decades Samsung Electronics was seen as a high growth company, generating returns but ploughing them back into the business. The last few years have seen four factors at play that have led to a very different approach:

  • The growth rate of its core businesses has slowed
  • Many of Samsung’s shareholders, largely foreigners, have put pressure on management to improve returns
  • The Samsung group is undergoing a restructure, due partly to generational asset transfer issues
  • Recognition that increased dividend payouts will help longer-term funding for pensioners in Korea

As a result the dividend paid out by Samsung Electronics has grown from KRW 110 in 2012 to KRW 1,138 per share in 2018; a compound annual growth rate of close to 50%.

Many companies now generate sufficient cash to both reinvest in the future growth of their businesses and pay out attractive dividends to shareholders. They also have the management teams in place to ensure that this happens. An increasing part of the returns from equity investing in emerging markets is therefore coming from dividends as opposed to capital gains. As the chart below shows, a quarter of the returns in the last decade have come in the form of dividends paid to shareholders, a ratio that has widened over the last six or seven years.

A portfolio investing in high quality, growing companies who treat the company as belonging to all shareholders and who provide them with a consistently rising income stream should produce strong compounding returns over time. Companies of this nature are increasingly to be found in emerging markets.

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