China Merchants Holdings Pacific: A Lesson on Negative Dividend Yields

Everyone loves a dividend paying stock, but there are other factors to look out for besides a simple dividend yield figure when it comes to dividend investing. Today, we use a seemingly high dividend yielding stock like China Merchants Holdings Pacific (CMHP) to illustrate what we call negative dividend yield.

Business Description

CMHP is part of the China Merchant Group – a state owned corporation of China. The company currently operates 5 toll roads in China.

China Merchants Holdings Pacific: A Lesson on Negative Dividend Yields

Dividend Record

As one can easily see from the company’s website, CMHP has an excellent dividend record.


Based on its last close price of SGD1.030, the dividend yield for 2014 translates to a high 6.8% which is bound to capture the attention of dividend junkies. In comparison, REITs currently have an average yield of 6.7% so it is not difficult to see the appeal of CMHP as a dividend play.

In addition, toll roads are relatively stable businesses. They are non-cyclical and you generally do not see the business fluctuations as you would in most other companies. This lends further support to the stability of future dividends. Up till now, CMHP does seem like a solid stock from a dividend perspective. It is also appropriate to note that as with most dividend strategies, we ignore the prospect of capital gains.

China Merchants Holdings Pacific Negative Dividend Yield – Another Perspective

While dividends are cash that a shareholder receives for holding a stock, negative dividends are payments that a shareholder makes to a company. These stem from cash calls or dilutive issues which the company make undertake in the form of rights or placements.

Between 2005 and 2014, CMHP had 2 equity issues for acquisitions:

In 2012, it issued HKD1.16bn of 1.25% convertible bonds due 2017. The bonds had a conversion price of SGD0.84 but this has changed somewhat due to dilutive issues. Nevertheless, they are very much still in the money and will be fully converted. The funds were used for the acquisition of Beilun Port Expressway.

In 2014, CHMP purchased Jiurui Expressway for HKD879.4m via 119.4m new shares issued at SGD0.985 and cash consideration of RMB116.8m. SGD0.985 was a 7.7% premium to China Merchant’s closing share price on 18 July 2014.

In total, there was HKD1.86bn of equity issue based on a 1SGD:6HKD exchange rate.

Doing the Math

How much did CMHP pay in dividends then? For the corresponding period, CMHP paid HKD1.71bn of dividends.

Including dividends payable on the balance sheet at 2014, this figure would rise to about HKD2.21bn. Therefore, on a net-net basis, shareholders on a whole received a mere HKD350m in 10 years. In this regard, there is little reward in holding onto the stock.

China Merchants Holdings Pacific Final Words

With dilutive issues, shareholders on a whole receive substantially less than the supposed dividend payments made by a company. The need to raise equity should therefore be an important consideration when investing in a stock, especially for one that is to be regarded as a dividend play. From an individual perspective, it is not as straight forward as what we have considered above. For one, subscription to rights issue is optional. The choice for an individual is then between paying the company more money, or to get diluted and lose his share of future earnings. Neither of them sound good, so the real question is which is the better of two evils? Unfortunately, there is no simple answer. Depending on investor’s time horizon and expectation for capital gains (which we have ignored thus far), the answer will be invariably different.

For CMHP, we believe that it is essentially a REIT in disguise. It pays out relatively high dividends which do not allow it to expand organically. At the same time, the high dividends support its share price, allowing it to raise capital via equity issues for future acquisitions. All in all, not a palatable model for a conservative value investor.

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