Why are Chinese companies maintaining or even increasing dividend payments while their global peers rein in on cash flows? To heed the state’s call to reward shareholders – mostly those from the state.

«There has been a particular focus among companies from mainland China, specifically those that count the state as a major investor, on increasing dividend payouts in recent years,» said Catherine Yeung, investment director at Fidelity in a recent white paper.

According to Yeung, state-owned enterprises (SOEs) with strong cash flow have generally been the firms most likely to follow Beijing’s guidance not only to reward shareholders but also to «encourage fundamental investing as part of a drive to reform the stock market». These SOEs are often financial firms, energy producers and real estate developers with cynical profits. 

«[These SOEs] cash distributions help to boost the coffers of various government units that hold SOE shares, especially in a slowing economy,» she added. «Nevertheless, profit outlooks for Chinese companies, in general, remain challenging with the Covid-19 outbreak hurting both exports and domestic consumption. Many other Chinese firms with weak cashflows are cutting or suspending dividends, just like their global peers.»

Dividend Bias

Elsewhere globally, companies are cutting dividends due to regulator instructions, cash flow worries or simply the inability to hold shareholder meetings to approve payouts due to social distancing measures. Compared to 2008 when dividends cuts averaged 20 percent, Fidelity expects payout reductions to double in this downturn. 

But despite the disappointment for income investors, the white paper urged against applying excessive bias based on dividends when picking stocks.

«Equity is a long duration asset and a single year’s dividend is not a major part of the intrinsic value of a business,» the report continued. «In this environment, where indiscriminate selling is producing huge dislocations to valuations, being able to identify the well-run and well-capitalized companies is key, as these are likely to emerge in a position of relative strength on the other side of this crisis.»