What Will Happen to Wharf REIC’s Dividend in 2020?

Will the dividend of one of Hong Kong’s largest real estate companies increase for the year?

Wharf Real Estate Investment Company Ltd (SEHK: 1997) is one of Hong Kong’s largest real estate companies. Like many stocks listed in Hong Kong, the company hasn’t done well in 2020. 

Due to COVID-19 and the macroeconomic slowdown in greater China, shares have fallen from around HK$46.9 at the beginning of the year to around HK$30.3 by March. 

The stock has a dividend of around 6.7% as of March 20th.  

Let’s look at Wharf REIC’s 2019 annual results to determine what will likely happen to the company’s dividend in 2020. 

2019 Results and Dividend

Data from Wharf’s 2019 financial year can help us determine what will happen to the company’s dividend this year. 

In 2019, both Wharf REIC’s underlying net profit and dividend declined. 

Underlying net profit declined 3% year-on-year to HK$9.79 billion, or the equivalent of HK$3.23 per share. Due to an investment property revaluation deficit, the company’s basic earnings per share was HK$1.29. 

Due to the softer financial results, Wharf REIC’s 2019 total dividend per share declined around 3% year-on-year to HK$2.03. Wharf REIC’s total dividend for 2019 represented around 65% of the company’s underlying net profit from hotels and investment properties in Hong Kong. 

Wharf REIC’s 2019 results contracted due to the protests that occurred in the second half of 2019. These protests had a negative effect on tourism, hurting Wharf’s properties. 

2020 Outlook

In terms of the outlook, management writes of great uncertainty due to COVID-19, stating the following: 

“The world [will] likely be preoccupied with the virus outbreak this quarter and next. It is not simple to fathom the damages the virus will leave in its trail and the path to economic and community recovery. Retail and Hotel sectors are not expected to be spared from the brunt of these threats.” 

A COVID-19-induced decline in tourism has caused many businesses in malls to ask for financial relief. 

According to Wharf REIC, the company has granted many of those requests, and its first-quarter 2020 performance will be noticeably affected by “material rent relief measures and marketing aid programmes granted.”

What does this all mean for the company’s dividend?

Based on what we know and managements statements, it’s unlikely that Wharf REIC will increase or keep its dividend the same in 2020.

Hotels and retail property depend a lot on tourism, and they represent a big part of Wharf REIC’s sales and operating profit. 

Judging by Wharf REIC’s stock price, it seems many in the market believe that the dividend for 2020 will fall substantially for the interim period. 

COVID-19 has already done a lot of damage in the first quarter, and it will take some time for tourism from the mainland to return to normal, especially if the protests continue. 

Even if mainland tourism sharply rebounds, there is a possibility of a reversal. Although China has reported no new local infections on some days in March, analysts fear that the number of new local infections could increase as more people return to work and as international travelers infected with COVID-19 return to China. 

The virus is also still doing a lot of economic damage internationally. 

As a result of the international spread, international tourist numbers are unlikely to rebound anytime soon. 

Foolish Conclusion

Wharf REIC has a high-quality asset portfolio, and many consider it a good long-term investment. It just needs to weather the coronavirus. 

When Wharf REIC stock will turn around partly depends on how well China and Hong Kong can prevent COVID-19 from coming back. 

However, based on current market conditions, it’s unlikely the company will increase its dividend in 2020.