Dividends and Growth Potential: Better Buy Between China Minsheng or ICBC?

美國總統大選在即,「10月驚奇」左右股市發展,不過在肺炎疫情重塑經濟結構,有兩隻增長勢頭強勁的股份當前應買入。

As a result of the COVID-19 outbreak, both China Minsheng and ICBC now offer attractive dividend yields. Which is the better bet?

China Minsheng Banking (SEHK:1988) and ICBC (SEHK:1398) are both leading Chinese banks that benefit from the secular development of China’s economy. As China’s economy continues to develop and average household income in China increases, demands for loans should also increase. 

Both companies have seen shares fall in 2020 due to the COVID-19 outbreak. As a result, both stocks have attractive dividend yields. 

In this article, we will look at which stock of the two is the better buy. We will determine this by comparing the companies on a range of points. 

#1 Return on equity

ICBC is one of China’s ‘big four’ state-owned banks. China Minsheng is one of China’s leading private banks. 

In 2019, ICBC had total assets of RMB 30.1 trillion while China Minsheng reported total assets of RMB 6.68 trillion at the end of that year.

Given ICBC benefits from more economies of scale, and ICBC likely has a lower cost of capital, ICBC’s return on equity is slightly ahead of China Minsheng. 

For 2019, ICBC had a return on weighted average equity of 13.05% while China Minsheng reported a return on weighted average equity of 12.4%. 

The winner here is ICBC. 

#2 Private versus state-owned banks 

Although it might not have the same moat or economies of scale as ICBC, China Minsheng could make smarter loans and return surplus capital to shareholders more wisely. 

Although the two qualities do not matter as much in good times, they might matter more in bad times. From the perspective of private versus state-owned banks, private wins. 

The winner here is China Minsheng.

#3 Past stock performance 

In terms of total returns, which includes dividends and stock splits, ICBC has generated a total return of around 47.5% since May of 2010. 

In the same period, China Minsheng generated a total return of 96%. 

The winner here is China Minsheng,

#4 Dividend payout

According to AAStocks, ICBC paid a total normal dividend per share (DPS) of HK$0.2976 in 2019, giving it a yield of 5.91% as of late May. 

In 2019, China Minsheng paid a DPS of HK$0.419, or a yield of 7.7%, as of late May. Apart from 2017, China Minsheng’s DPS has increased every year from 2015 to 2019. 

Both banks have payout ratios of around 30%-31%. 

Winner: China Minsheng

#5 Growth prospects

Both ICBC and China Minsheng are exposed to secular headwinds from competition. The banks are competing with well-known Chinese fintech companies like Ant Financial and Tencent Holdings (SEHK: 700), as well as foreign banks aiming to increase their operations in China. 

Competition, of course, will always be a given in the market and many fintech players don’t have nearly the same core competencies such as regulatory familiarity or number of branches yet. 

Both ICBC and China Minsheng benefit from China’s economic development. If the two hold market share profitability, both stocks could do well in the future. 

In the long run, China Minsheng might have better growth potential simply because it is smaller than ICBC. It’s a lot easier to grow from a smaller base. 

Winner: China Minsheng

Foolish conclusion

Although both stocks have appealing qualities and a rebound in China’s economy could lift both shares, China Minsheng might be a better investment than ICBC in terms of its dividend and growth potential. 

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