Dividends and yields both grew strongly between 2013 and 2015, both very positive indicators for shareholders. Yield climbed from 0.78% in 2012 to 2.84% in 2014 and 2.64% in 2015, although early expectations for 2016 suggest a 0.84% dividend yield. Lower expectations are based on poor return on equity (ROE) in 2015, as well as below-industry-average return on assets (ROA) and return on capital (ROC). Many expect a cooling off from strong earnings growth over a trailing three-year period.
Dividend Coverage and Payout Ratios
During 2015, LFC had a relatively low dividend payout ratio at 29%. This means a full 71% of earnings were retained by China Life. In a sense, this is a positive for the company because it displays the ability to reinvest and grow, but it also raises red flags because insurance is not a capital-intensive industry. Shareholders might not be getting enough value for their investments.
The company's dividend coverage ratio tells the same story. Dividends for LFC are extremely well covered by net profit at 3.4x coverage; the company could conceivably triple its dividend payout without having to expand future earnings. This signals the potential for growth, but frustrated shareholders might feel they are not receiving their dues. Expect future payout to shareholders to increase; even Chinese companies struggle to maintain 70% net earnings retention and a 3.0x or more coverage ratio.
Balance Sheet Review
Cash on hand for LFC still trails 2012 totals, while current liabilities increased nearly 80% over that period. As is common with financial firms, the market capitalization of LFC is several times higher than the market value of its real assets. Even still, LFC trades at significantly higher multiples than the insurance industry average. On a positive note, there was significant revenue growth over the last two quarters of 2015.
A balance sheet review is critical for putting dividend performance in context, but it is more difficult to get good data for Chinese companies than for domestic companies. Part of the reason is the stringent restrictions placed on foreign investments in the Chinese stock market, which means Chinese companies are less incentivized to offer useful information to American investors. Additionally, a lot of information comes from nonreputable and poorly translated sources, making it tricky to trust public information.
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