Artificial Intelligence Stocks Unlikely to Become Dividend Targets for Vermilion Asia Fund

(Bloomberg) - For Asian investors worried about overheating in artificial-intelligence stocks, one top fund manager offers a surprising reason to keep buying them: dividends.

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"All of the tech companies we own in Asia have net cash balance sheets, they're all paying dividends now, and we expect all of them to increase their dividends as they grow earnings over the next couple of years," Sam Konrad, co-manager of Vermilion Asia Income Strategies, said in an interview. In contrast, he said, U.S. peers are "not as focused on paying dividends.

The income fund is known for investing in lower-risk stocks with solid returns, such as banks or utilities, and Conrad says his strategy has boosted his technology holdings to a record high of about 32%, which is now the fund's top allocation. Taiwan Semiconductor Manufacturing Co., Asia's largest chip maker, is now the fund's top allocation.

The artificial-intelligence boom has fueled an uptick in the region's tech stocks, though they've largely lagged the big gains of their U.S. counterparts like Nvidia Corp. That's kept prices relatively low, and few investors are prepared to call a halt to the strong trading, which has seen many stocks hit record highs.

"When we compare the valuations of our Asian tech holdings to U.S. tech stocks and even historically, they are really attractive," Conrad said. Over the past five years, the $2 billion Jupiter Asian Income Strategy has beaten its 97% peer group.

TSMC's estimated earnings for next year are about 19 times its five-year average, compared with 27 times the Philadelphia semiconductor index. As of February, MediaTek, the largest shareholder in Conrad's portfolio, had a FY2024 dividend yield of 5.2%, while Nvidia's dividend yield was 0.02%.

Dividend growth is also better in Asia. According to data compiled by Bloomberg, stocks in the Bloomberg Asia Pacific Semiconductors Index are expected to see their dividend yields increase by nearly 30% over the next 12 months, compared to 20% for the Philadelphia Chip Index.

Conrad said he prefers "global leaders" that can outperform their U.S. counterparts in terms of technology and capabilities. While the U.S. is known for its high-profile design and the software companies that make the曏 consumer, Asia still has many key, lesser-known contractors and suppliers.

"We don't know which U.S. tech giants are going to develop killer apps or killer products or services," he said." It doesn't matter, because whoever it is, they're going to need semiconductors made by companies that we own. Their AI data servers need to be managed and manufactured by our companies in Asia. They want to buy memory from our companies.

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