Dividend payouts by Asia's biggest companies are poised for their biggest increase in six years as profits surge and pressure grows on firms to be more generous with their shareholders.
Across Asia, dividend payouts in 2017 are expected to grow by 12 per cent year-on-year, a Reuters analysis showed, marking the largest increase in payouts since 2011.
That corporate generosity, driven to some extent by improving economic growth, is only partly reflected in the share price, analysts say. If, as consensus forecasts show, earnings growth stays strong into next year and 2019, there is plenty of room for Asian stock markets to rally beyond current multi-year highs.
"2017 is the year when earnings finally recover after five years of disappointing growth in Asia," said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong.
"Accordingly, we see dividends rising, in line with earnings growth."
The numbers, compiled from Thomson Reuters earnings data, show technology companies such as Taiwan Semiconductor Corp, Samsung Electronics Co Ltd and Sony Corp are expecting record profits and higher dividends this year as the launch of new smartphones drives up demand of memory chips and image sensors.
Malaysia's CIMB Group Holdings Bhd, which announced its second-best quarterly earnings in four years in the June quarter, issued an interim dividend of 1.18 billion ringgit ($281.96 million), translating to a dividend payout ratio of 51.6 per cent of first-half profits.
The analysis covered 1,571 Asian companies each with a market capitalisation of at least $1 billion across 12 markets for which Thomson Reuters has available data on dividend estimates. Dividends grew between 0.5 per cent and 9 per cent between 2012 and 2016.
Across the region, corporate profits are climbing owing to higher commodity prices, a revival in global demand for consumer products and an improvement in bank profits as loan growth soars even as funding costs stay low.
The markets have priced in some expectations of these bumper returns but analysts expect earnings and therefore dividends growth to stay strong even in 2018 and 2019, said Benzimra.
"I don't think this is really priced into the market," he said. "If we indeed have this kind of earnings growth, that could lift the market."
MSCI's Asia ex-Japan index has risen about 30 per cent this year and is at its highest since 2007.
Grace Tam, a senior market strategist at HSBC Global Asset Management based in Hong Kong, said free cash flows are higher among Asian companies and investors might find themselves surprised by future payouts.
Thomson Reuters data on the same set of companies showed their total free cash flows for 2017 are estimated at $374 billion- the highest in at least a decade.
Not fully in the price
Asian shares arguably have more room to grow than developed markets such as the United States, based on forward dividend yields, the ratio of estimated dividend payments over the next 12 months to share price.
Taiwan, Hong Kong, Singapore, Malaysia, and Thailand have forward dividend yields in excess of 3 per cent, much higher than United States' 1.9 per cent. Asia's average yield stood at 2.4 per cent.
Yet, Asia's price-to-earnings ratios are lower, ranging from South Korea's 9.6 to China's 13.5, against the global average of 15.4.
The ability of Asian companies to pay dividends has never been in doubt, but their desire to sit on large cash piles has traditionally affected shareholder returns.
Asia's dividend payout ratio stood at 34 per cent over the last 12 months, less than Europe's 45 per cent and North America's 43 per cent, despite Asian profit growth exceeding the other two regions.
Analysts said Asia's dividend culture is likely to change, as government pressure on companies grows.
China, where the securities regulator has vowed to penalise companies that do not pay cash dividends, is seeing rising payouts. Coal miner Shenhua Energy Co proposed a special dividend worth 50 billion yuan ($7.53 billion) earlier this year.
Japan introduced the corporate governance act in 2015, aimed at protecting shareholder rights and enriching their returns. Since its inception, more companies have started to comply with it.
Japan, as well as Hong Kong, Malaysia, Taiwan and Thailand, have introduced stewardship codes aimed at institutional investors agitating for better governance and returns on their investment.
South Korea is expected to adopt the stewardship code this year and has strong backing from new President Moon Jae-in.
Samsung last month said it would double dividends next year to 9.6 trillion won and keep them at that level until 2020, as it responds to investor pressure to share its vast cash reserves.