Why Tencent is a Great Dividend Growth Stock

Although Tencent’s yield isn’t particularly attractive, Tencent is a ‘must-own’ for many dividend growth investors. Here’s why. 

Although Tencent Holdings Ltd (SEHK: 700) pays a relatively small dividend yield – around 0.29% as of April 23 prices – the company is perhaps one of the most attractive dividend growth stocks on the market.

In this article, we’re going to look at why. 

There is room for more dividend growth

Tencent is an attractive dividend growth stock because it has had a consistent history of dividend per share (DPS) growth. There is also the potential for more growth in the future. 

Due to fast profit growth, Tencent’s DPS has increased at a compound annual growth rate of around 27.2% per year, jumping from HK$0.36 in 2014 to HK$1.2 in 2019. 

Given its exposure to secular trends – such as rising Chinese incomes, AI, and fintech – Tencent’s growth is likely to continue. According to Yahoo Finance, analysts expect Tencent to grow at an average rate of 20.4% a year over the next five years.  

Assuming the analysts are right and Tencent’s margins and payout ratios remain similar, Tencent will have an annual DPS of around HK$3.04 in five years, which would mean a yield of 0.74% at 23 April 2020 prices. That’s not bad. 

Tencent’s low payout ratio of around 11% also gives management room to increase the dividend faster than the rate of earnings growth if they choose. If management were to triple the payout ratio to 33% and the analyst growth estimates are correct, Tencent would have a yield of 2.22% (at 23 April 2020 prices) in five years. 

This makes the internet conglomerate a much more interesting dividend investment.

And the good news doesn’t stop there. 

A low payout ratio also means that Tencent’s dividend is dependable.  Even if Tencent’s earnings decline due to the recession, the company will likely continue to have enough earnings to pay the dividend. 

Tencent is very likely to grow

While an attractive dividend yield is great, total returns are even better. 

In terms of total returns, Tencent has performed very well in the past. After debuting in Hong Kong in 2004 at a split adjusted HK$0.74 per share, Tencent’s stock price has grown steadily. On April 23rd, 2020, Tencent’s stock was over HK$400.

Tencent’s stock price has increased due to good execution and the company’s exposure to secular trends, such as Chinese gaming, social media, and fintech. 

Considering that these trends are set to continue, Tencent has a lot of potential to grow its stock in the future. 

Although Tencent’s future growth may not match the growth of its past (due to the law of large numbers), Tencent still has a lot of potential. Plus, Tencent can now expand overseas, which could pay off handsomely for the company. 

Foolish conclusion

Although Tencent’s dividend yield might not look attractive, the tech company’s financial strength and profit growth makes it a great dividend growth stock. 

Dividend investors should certainly keep an eye on the company.