What are we looking for?
Sustainable dividends from global giants downsizing their operations in China.
The screen
IBM this week announced plans to shutter its R&D operations in Asia’s biggest economy. It’s not alone, with a number of prominent multinationals having taken similar steps over the past few years to distance themselves from U.S.-China trade tensions.
Meanwhile, recent moves by the United States and now Canada to impose high tariffs on Chinese electric vehicles just add to tensions – and the fears of global manufacturers now operating in China.
By reducing exposure there, international firms aim to “de-risk” their operations and supply chains. That also lets them take advantage of the lower land costs and wages (depending on the industry) of other countries such as Vietnam, India and Mexico.
We started this search with an extensive list of mostly U.S. multinationals that pay dividends. We then singled out those that are cutting back the size of their Chinese manufacturing/operations while still maintaining a foothold to protect future sales. Next, we applied our Dividend Sustainability Rating system, which awards points to a stock based on key factors:
- One point for five years of continuous dividend payments – two points for more than five;
- Two points if it has raised the payment in the past five years;
- One point for management’s commitment to dividends;
- One point for operating in non-cyclical industries;
- One point for limited exposure to foreign currency rates and freedom from political interference;
- Two points for a strong balance sheet, including manageable debt and adequate cash;
- Two points for a long-term record of positive earnings and cash flow to cover dividends;
- One point if the company is an industry leader.
Companies with 10 to 12 points have the most-secure dividends or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below-average sustainability, one to three points.
More about TSI Network
TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor, and the TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated six stocks: Armonk, N.Y.-based IBM Corp. IBM-N is one of the world’s largest computer companies, with operations in over 175 countries. Stanley Black & Decker Inc., SWK-N based in Connecticut, is a big global manufacturer of hand and power tools. The company significantly scaled back its Chinese operations when, after 25 years, it shut its power-tool factory in Shenzhen in November, 2021. Nike Inc. NKE-N still has many plants in China that are contracted to make its products. But its suppliers continue to relocate production facilities elsewhere, including to Thailand and Vietnam. Investment management firm BlackRock Inc., BLK-N based in New York, is reducing its presence in China as both U.S. and Chinese investment laws become harder to navigate. Steve Madden Ltd. SHOO-Q headquartered in Long Island City, N.Y., designs and sells fashion footwear, accessories and apparel. The company has steadily shifted production out of China in recent years in favour of countries such as Vietnam, Cambodia and Mexico. And finally, Cupertino, Calif.’s Apple Inc. AAPL-Q gets about half of its revenue from iPhone sales. The other half comes from sales of its Mac computers, iPad tablets and other products and services. The company has led the movement out of China, with a focus on transferring significant levels of production to India. (Note: Apple’s meagre dividend yield reflects the recent share price gains for it and other tech stocks.)
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.
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