In tight times, Vipshop wows investors with dividend policy

The discount e-commerce company, which has been consistently profitable since 2013, said it will return $250 million to investors through a dividend this year

Key Takeaways:

• Vipshop said it will pay $250 million to investors this year under a newly announced dividend policy, equaling a relatively low payout ratio of about 23%
• The company looks relatively well situated to weather China’s economic downturn due to its focus on bargain-priced clothing and relatively small average order size

By Doug Young

It’s one thing to give back to shareholders by repurchasing your shares. But it’s quite another to give back in the form of a dividend, which puts money directly into shareholder pockets.

Shareholders expressed their gratitude to discount e-commerce company Vipshop Holdings Ltd. (VIPS.US) for its announcement of a new dividend policy concurrent with its latest earnings announcement last week, even though the payout rate wasn’t too eye-popping. The company’s shares jumped 12.6% after the announcement to a high not seen since June 2021. The jump also put the stock ahead for the year, now up 9% since January – something not very many U.S.-listed Chinese companies can boast.

We’re probably oversimplifying slightly to attribute all the investor enthusiasm to the new dividend policy announcement. The reality is that Vipshop has always been one of China’s better-run e-commerce companies, reporting profits every quarter since 2013. Its focus on discounted items from relatively well-known brands also situates it well in the current environment where Chinese consumers are becoming increasingly cautious.

Chairman Eric Shen noted that his company’s average order is typically in the 200 yuan to 300 yuan ($28 to $42) range, which is relatively more affordable for customers who are cutting back on their bigger-ticket purchases for items costing thousands of yuan or more.

“We think that’s an affordable range of prices,” he said on the company’s earnings call, responding to a question about growing consumer caution in China’s slowing economy. “So, we are not too much concerned on that front.”

In the current environment, well-run, cash-rich companies like Vipshop seem well situated not only to weather China’s economic downturn, but also to become investor favorites. That’s because they can use their strong position to return cash to investors through share repurchases and dividends – something money-losing or cash-poor companies can’t do.

Truth be told, Vipshop’s new dividend policy is a bit vague, and its first payout ratio isn’t anything to get too excited about. But any dividend is better than none, and with 26.3 billion yuan in cash at the end of last year, the company can certainly afford to pay one. Under the new policy, Vipshop simply said its board “reserves the discretion” to declare a dividend each year, meaning it’s not even guaranteed that annual dividends will become a regular practice.

Its first dividend of $0.43 per American depositary share (ADS) represents a relatively small return of 2.5% based on the stock price before the latest earnings announcement. The dividend will cost the company $250 million in total, equating to a payout ratio of about 23% of the company’s 1.1 billion yuan net profit for the year. Again, that’s relatively modest compared to payout ratios of 30% to 50% that are considered a general standard for dividend-paying listed companies.

Vipshop is quite the conservative company financially, which is partly why it has been able to stay profitable for more than a decade even as many of its direct rivals have gone out of business. Accordingly, it’s not surprising to see it launch its dividend policy on a relatively conservative note, and it’s quite possible it could boost the payout ratio in the future.

Tightening environment

Next, we’ll look at Vipshop’s latest financials, which reflect the slowing economy and increasingly difficult environment we’ve previously mentioned. Leading those signals are a rapid slowdown in the company’s revenue growth.

Vipshop forecast it would report revenue of between 27.5 billion yuan and 28.9 billion yuan in the first quarter, which would represent growth of 5% at best and, at worst, could represent no growth at all from the 27.5 billion yuan for the year-ago quarter. Either way, the final figure will represent a slowdown from the 9.2% revenue growth the company reported in the fourth quarter, when the figure reached 34.7 billion yuan.

The fourth-quarter growth rate was actually ahead of the third-quarter rate of 5.3%, but trailed the second-quarter’s 13.6% growth, which is reflected in last year’s overall revenue growth of 9.4%. Notably, nearly half of the company’s fourth-quarter sales came from its Super VIP loyalty club members, which is also a growing theme as consumers look for ways to make their money go further by joining such programs.

Here, we should also note the company’s fourth-quarter growth easily beat its earlier forecast for up to 33.3 billion yuan. That seems to indicate that spending on its platform is strengthening, possibly due to more consumers looking for better values.

But all those growth rates were well behind the 21.9% rise in gross merchandise value (GMV) that Vipshop recorded in the fourth quarter, with the figure rising to 66.4 billion yuan for the period. That seems to indicate the company is getting less revenue for every yuan worth of merchandise it sells, which probably reflects the increasingly difficult financial situation for many of its suppliers.

As we’ve previously noted, Vipshop is quite a conservative company financially and looks quite good at controlling costs. Its operating expenses increased just 4.8% in the fourth quarter, or about half the rate of its revenue growth, allowing it to improve its operating margin to 10.6% from 7.9% a year earlier. That helped it to boost its quarterly profit by 32% year-on-year 3 billion yuan.

Even after the jump in its stock price, Vipshop still trades at a relatively low price-to-earnings (P/E) ratio of 11. That’s the same as JD.com (JD.US; 9618.HK), but trails the 14 for Alibaba (BABA.US; 9988.HK) and is well behind the recently surging PDD (PDD.US) which trades at 29 on big hopes for its overseas Temu service.

At the end of the day, Vipshop looks like a long-term survivor in China’s e-commerce landscape and is quite attractive for its relative conservatism and laser-focus on its core outlet-style e-commerce business. Its steps to return more money to shareholders through dividends could boost its attraction to investors, though it may have to become more generous to win over more of those.

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