Dig into dividend information and investment opportunities from the 2023 annual report. In May 2023, we released "How to Ride Through the Cycle of High Dividend Investment in A-Shares", which reminds the sector allocation value of high-dividend strategies, and recommends the stock selection idea of "high-quality cash flow + stable high dividend + medium dividend yield"; In the "How to Find Investment Opportunities to Increase Dividends" released in March 2024, it is suggested that the focus of high-dividend investment needs to shift from the denominator end to the numerator end, in which the increase in dividend level and the decrease in dividend yield risk compensation are the main considerations. Recently, the 2023 annual reports of listed companies have been released, and the increase in dividend level has become a prominent highlight in the financial report.
Dividend characteristics of A-share listed companies in 2023
The increase in dividend level has become an important highlight of the 2023 annual report. Specifically, the number of A-share participating companies in 2023 will increase from 64.9% in 2022 to 72.4%, and the proportion of dividend companies in 2023 will further increase to 89.4% (vs. 78.6% in 2022) after excluding loss-making listed companies. 2) The overall dividend ratio of A-shares will increase from 41% in 2022 to 42% in 2023, and the dividend ratio after excluding loss-making companies will be 39% (an increase of 2.2 percentage points compared with 2022), of which the dividend ratio of non-financial listed companies will reach 44%, an increase of 3.7 percentage points from 2022. 3) As of May 10, the TTM dividend yield of the CSI Dividend Index was 5.16%, and the TTM dividend yield of the CSI 300 and CSI 300 non-financial were 2.91% and 2.43%, respectively, higher than the yield of the 10-year treasury bond. At present, the dividend yields of major indices are mostly in the historical quantile above the 80% percentile.
At the structural level, the dividend ratio of food and beverage/communication/textile and apparel is in the forefront, specifically:
► High-dividend sectors are mostly located in traditionally undervalued sectors that are biased towards value. From the perspective of dividend yield, based on the cash dividends announced in 2023, the dividend yield of most A-share industries has increased compared with 2022, and the dividend yield corresponding to cash dividends in coal, petroleum and petrochemical and transportation has decreased compared with the cash dividend in 2022, among which the five industries with the highest dividend yield are coal (5.8%), banking (5.4%), petroleum and petrochemical (4.0%), steel (3.5%) and household appliances (3.5%), most of which are undervalued areas.
► Industries with high dividend ratios are mainly concentrated in the consumer industry, communications and coal. From the perspective of dividend ratio, the dividend ratio of most A-share industries will increase in 2023, of which the top five industries with dividend rates are food and beverage (69.6%), communications (64.9%), textiles and apparel (61.5%), coal (59.3%) and light manufacturing (52.8%); In the long run, most industries have achieved an increase in the dividend ratio, such as coal, food and beverage, household appliances, textiles and apparel, light industry manufacturing and media, compared with the center of the past 10 years, and the annualized growth rate of the dividend amount in the past five years has been more than 10%, which is characterized by the decline in the proportion of capital expenditure in the industry and the continuous improvement of free cash flow.
► Specific to the subdivision of secondary industries, we are in the top 20% of the dividend yield and dividend yield at the same time (that is, the dividend yield is greater than 2.8%, the dividend yield is greater than 50%), and the only industries that meet the requirements are coal mining, refining and trading, kitchen and bathroom appliances, communication services, white goods, clothing and home textiles, food processing, railways and highways, jewelry, beverages, dairy products and lighting equipment.
The trend of increasing the dividend level of A-shares will continue, and bring more investment opportunities. On the one hand, the growth of capital expenditure of A-share enterprises has slowed down, and the level of free cash flow has remained relatively good, and the aggregate level has the ability to further increase the level of dividends. On the other hand, since 2023, the China Securities Regulatory Commission has continued to encourage dividend orientation, and in April 2024, the new "National Nine Articles" were released, and the dividend supervision was further strengthened, and we believe that the upward trend in the dividend ratio of A-shares is expected to continue. The current dividend strategy still has medium and long-term investment value in terms of macro logic, but the dividend yield of some traditional dividend sectors has fallen, and the dividend yield ratio of CSI Dividend/CSI 300 has fallen back to the historical average before 2019. In this context, we suggest that the focus of high dividend allocation in the future may shift from the logic of the downward interest rate at the denominator end to the sustainability of dividends at the numerator end, and the increase in the dividend level of A-shares will bring more investment opportunities.
Chart 1: Dividend yields on dividend assets are still at a high level, but their relative attractiveness to the CSI 300 has declined
Source: Wind, CICC Research
Chart 2: A-share capital expenditure slowed down, and the cash dividend ratio continued to increase
Source: Wind, CICC Research
Chart 3: The overall dividend yield of A-share industries will increase in 2023; Coal, banking, petroleum and petrochemical industries have higher dividend yields
Note: Dividend yield as of May 5
Source: Wind, CICC Research
Chart 4: In 2023, the dividend ratio of most A-share industries will increase; The proportion of dividends in the consumer industry and coal industry is relatively high
Note: Loss-making enterprises are excluded
Source: Wind, CICC Research
Figure 5: The main industries with increased dividend ratios are food and beverage, home appliances, textiles and apparel, light manufacturing, media and coal
Note: Dividend yield as of May 5
Source: Wind, CICC Research
Chart 6: Fewer sectors in Quadrant 1 have dividend yields greater than 2.8% and dividend ratios greater than 50%.
Source: Wind, CICC Research
Chart 7: Average free cash flow/owner's equity in the past 3 years for sub-sectors such as liquor, white goods, and coal mining are higher
Source: Wind, CICC Research
Figure 8: In the past year, the current free cash flow/owner's equity of sub-sectors such as aviation and airports, white goods, real estate services, and liquor are relatively high
Source: Wind, CICC Research
Chart 9: Sector breakdown of improved free cash flow over time periods
Note: Current free cash flow/owner's equity ttm for 1Q24
Source: Wind, CICC Research
Chart 10: Dividend ratios and free cash flow/owners' equity are positively correlated with the A-share segment
Note: 2023 data was used for fitting
Source: Wind, CICC Research
How to optimize and select stocks for A-share high-dividend investment?
The level of free cash flow is the most important basis for corporate dividends. In our previous report, we pointed out that free cash flow is the basis of corporate dividends, and its importance is much higher than book cash, and the 2023 annual report data fits into the data that the dividend ratio of the A-share sub-industry is highly positively correlated with free cash flow/owners' equity, but the proportion of book cash lacks this positive correlation. Especially when the inflection point of capital expenditure appears, the supply side of the industry will no longer expand significantly, which often corresponds to the improvement of the industry's free cash flow, and if the book cash assets accumulate simultaneously, the industry or enterprise will have the ability to systematically improve the dividend level. From the perspective of the average free cash flow/owner's equity in the past three years, liquor, white goods and coal mining are the highest, and they are also industries with relatively prominent dividend levels, and the areas with high cash flow and relatively high dividend ratios are mostly concentrated in the downstream consumer industries. The improvement in free cash flow was mostly concentrated in sectors that have recovered from the pandemic, such as aviation airports, professional chains, tourism and scenic spots, and hotels and restaurants.
► Optimize the stock selection strategy with high dividends and high dividends.
In May last year, we released "How to Ride the Cycle of High Dividend Investment in A-Shares", which optimizes the stock selection strategy in response to the pain points of the traditional pure high dividend strategy, focusing on the construction and optimization of the stock selection strategy from the perspectives of high-quality free cash flow, continuous and stable high dividends and medium dividend yield. The selected stocks will be updated at an annual frequency based on the completion of the annual report disclosure on April 30, and the selected stock pool in May 2023 will have a yield of 13.5% as of the end of April 2024, outperforming the CSI 300 Total Return Index by 21.7 percentage points and the CSI Dividend Total Return by 6.3 percentage points. Since 2012, the annualized rate of return has reached 17.9%, outperforming the CSI 300 Total Return Index by 548 percentage points.
Previously, our specific requirements include: 1) Market capitalization and P/E ratio requirements: market value greater than 5 billion yuan, P/E ratio is positive but less than 25 times. 2) Dividend yield standard: the dividend yield of non-financial companies is greater than 3%, and the dividend yield of financial companies is greater than 5%; 3) Dividend standard: the dividend ratio of non-financial companies is greater than 45% in the current year or greater than 45% in 3 years; In finance, the dividend ratio of the current year is greater than 35% or the average dividend ratio of 3 years is greater than 35%; And the amount of dividends does not decrease by more than 5% compared with the previous year; 4) Free cash flow standard: non-financial free cash flow/owner's equity is greater than 8% in the current year, and the average is greater than 6% in the past 3 years; 5) Others: 3-year average ROE is greater than 10% for finance and more than 8% for non-finance. We replicate the previous standard and update the portfolio for the 2023 Annual Report (see Chart 13 of the original report).
The optimization idea includes the differentiation of dividend yield standards in different industries and the consideration of dividend sustainability. 1) Dividend yield: Different industries have their own reasonable dividend yield centers, and the stronger the dividend and fundamental fluctuations, the higher the dividend yield risk compensation, so we require the financial dividend yield to be greater than 5% after optimization, the cyclical dividend yield of non-financial upstream resources, midstream raw materials, real estate and construction is greater than 4%, and the rest of the cyclical industries with weaker cyclical characteristics require a dividend yield of more than 3%. 2) Dividend sustainability: Considering that the current dividend is not overdrawn compared to the company's own conditions, the annual dividend/current annualized free cash flow in 2023 < 80%, or the 2023 dividend/current cash-like assets < 40%. 3) Asset quality requirements: increase accounts receivable/operating income by <60%. (See Chart 14 of the original report for the screening results)
► There is a stock selection strategy that increases dividends or maintains high dividends.
In our "How to Find Investment Opportunities for Dividend Enhancement" released in March this year, we proposed to look for targets with the potential for dividend enhancement, and the first choice was "capital expenditure inflection point + high-quality free cash flow and improvement", and at the same time, the idea of "good cash flow + high cash asset ratio" was considered subferentially. Since March 28, the two portfolios we have constructed from the dividend enhancement potential have risen by 12.7% (preferred) and 6.8% (sub-optimal), respectively, outperforming CSI dividends by 6.9 and 1 percentage point, respectively.
Idea 1, from the perspective of capital expenditure inflection point + high-quality free cash flow and improvement, in addition to the basic indicators, the key points include: 1) capital expenditure/(fixed assets + intangible assets) at the historical quantile of 60% and below; 2) The current free cash flow/owner's equity > 12%, and the average > 10% over the past 3 years, and the free cash flow/owner's equity in the last 2 years has improved compared to the past 2 years; 3) The 2023 dividend is significantly lower than the current free cash flow level, based on the condition that the 2023 dividend/2023 free cash flow < 30% (see Chart 15 of the original report for the updated screening results).
Idea 2: From the perspective of good cash flow + high cash asset ratio, in addition to the basic indicators, the key points include: 1) capital expenditure/(fixed assets + intangible assets) at the historical quantile of 60% and below; 2) Cash-like assets/total assets>30%; 3) Current free cash flow/owner's equity > 8% and an average > 6% over the past 3 years; 4) 2023 dividend/2023 free cash flow < 80%; and 20% dividend/cash-like assets < 20% in 2023 (see Chart 16 of the original report for updated screening results).
Risk Warning: The analysis of dividend sustainability is based on the current objective conditions and existing data, and does not represent the actual decision-making of the listed company in the future.
Chart 11: Our optimized high-dividend strategy has achieved an annualized return of 17.9% since 2012, outperforming CSI's total dividend return by 390 percentage points
Note: 1) As of May 5, 2024; 2) The excess return is compared with the full return of CSI dividends
Source: Wind, CICC Research
Chart 12: Our optimized high-dividend strategy has outperformed CSI's dividend return by 6.3 percentage points since May 2023
Note: 1) As of May 5, 2024; 2) The excess return is compared with the full return of CSI dividends
Source: Wind, CICC Research
Article source:
This article is excerpted from: "Corporate Dividend Investment Opportunities from the 2023 Annual Report", which has been released on May 12, 2024
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