Insights

4 Tailwinds Powering AIA’s Dividend

Here are four reasons why investors find the dividend of one of Asia’s leading insurers so attractive. – AIA Group

AIA Group Ltd (SEHK: 1299) has been a great dividend stock over the past decade.

Due to great execution, AIA’s dividend has grown substantially since it was spun off from AIG, increasing from HK$0.33 per share in 2011 to HK$1.266 per share in 2019.

In recent years, AIA’s total normal dividend has increased by a sizable percentage. In 2019, AIA’s dividend increased 11%. In 2018, the company’s dividend rose 14%.

In a low interest rate world, AIA’s dividend yield of around 1.76% is attractive for a company with AIA’s moat and growth prospects.

Even better, AIA has a fairly low payout ratio of 30% for 2019. Given the relatively low payout ratio, AIA has room to increase or maintain its dividend even if its earnings fall short in some years.

This flexibility makes AIA’s dividend safer than the dividend of many other companies.

Given AIA’s enviable dividend history, here are four tailwinds that could power its dividend growth for the next decade.

1. Mainland China expansion

Mainland China is a huge market, and it’s also been one of the fastest-growing geographies for AIA recently.

There could be a lot more growth for AIA in mainland China’s future if the country continues to open its market up further.

In June, China’s government allowed AIA’s Shanghai branch to convert into a wholly-owned life insurance subsidiary that incorporated in the city.

With the incorporation, AIA could have an easier time expanding in the future if China’s provinces follow the central government’s lead.

2. Rising Asian incomes

According to the Financial Times, “the Asian century is set to begin” as the region’s output more closely reflects its potential.

Over half of the world’s population lives in Asia and the region has historically accounted for over half of world GDP at purchasing power parity in the past.

With rapidly rising incomes in the region, Asia is accounting for more and more of many multinationals’ bottom lines.

Given AIA’s exposure to many leading Asian countries, the insurer is in a great position to take advantage of the rising incomes in the region.

As incomes rise, demand for life insurance will very likely rise. If AIA continues to execute, so will the insurer’s profits.

3. Interest rate normalisation in the long run

Given the coronavirus outbreak, interest rates in many places are really low as governments around the world use monetary policy to try to ramp up economic activity.

Although low rates are good for economic activity in terms of potentially increasing consumer spending and investment, they can be pretty bad for insurers.

Many insurers make more money in higher interest rate environments given their portfolio compositions.

If interest rates normalise, AIA could find it easier to realise a higher rate of return on various debt securities.

With a higher realised rate of return in its portfolio, AIA should have an easier time raising its dividend.

4. AI and technology

AIA is a pretty advanced company in terms of the latest tech. With its tech, AIA can often offer more competitive premiums because it’s more efficient.

The insurer can also potentially gain higher margins by issuing smarter premiums.

With more business and potentially higher margins, AIA can realise more cash flow and its dividend could grow faster.

Foolish bottom line

AIA has exposure to many trends, including rising Asian incomes and the improvement of technology, that could power the potential growth of its dividend over the next decade.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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