360 DigiTech’s mediocre dividends, unexciting growth leave investors uninspired

The online loan facilitator is struggling to maintain steady dividends as its net profit declines on faltering revenue growth

Key Takeaways:

• 360 DigiTech kept its dividend steady in last year’s fourth quarter after cutting it every previous period since introducing a dividend policy in 2021
• The company doesn’t expect its business to grow rapidly, even as China’s economy bounces back in the post-pandemic era, as it remains focused on risk management

By Warren Yang

One way a company can attract investors is to pay nice dividends. Another is to offer a compelling growth story. The conundrum for 360 DigiTech Inc. (QFIN.US; 3660.HK) is that it can’t seem to do either, which is one of the key unstated messages in the company’s latest quarterly report.

360 DigiTech is unusual for an emerging company in that it pays regular dividends. But the online loan facilitator hasn’t been particularly generous with its dividend payouts. And, worse yet, it has struggled to keep its dividends steady. At the same time, its growth is faltering as it tries to be more selective when choosing borrowers to minimize the risk of loan defaults. 

These difficulties were on full display in 360 DigiTech’s quarterly results released last Thursday, which showed its net profit fell in last year’s fourth quarter. But the company managed to keep its dividend for the period unchanged at $0.16 per American depository share (ADS), which looks like an achievement, since the company had previously cut the amount every quarter since starting to pay dividends in the third quarter of 2021.

The company isn’t the only one among China’s online loan facilitators using dividends to try to attract investors as their profits sag. Rival FinVolution (FINV.US) has been paying annual dividends in varying amounts since 2019; and Lufax (LU.US) also began paying semi-annual dividends last year.

While 360 DigiTech was able to maintain its dividend at the previous quarter’s level in the latest period, it might have to reduce the figure again. Here’s why. Like many companies, 360 DigiTech pays out a set amount of profits as dividends, and in this case it has said it will use a pay-out rate of 15% to 20%. The fourth-quarter dividend already exceeded that range, though only by a tiny bit, as its net profit dropped by more than a third. This means the company won’t be able to maintain the dividend at its current level if its profit shrinks more, unless it raises its payout rate.

There could be room to do just that, since the 15% to 20% payout ratio is actually quite modest. Bank of China (Hong Kong) Ltd. (2388.HK), one of the largest banks in Hong Kong, has a payout rate of about 35%. Being stingy with dividends isn’t necessarily a bad thing, especially for young, growing companies that often prefer to plow their profits back into their operations to keep growing. But that’s increasingly difficult for 360 DigiTech, founded in 2016, as the company and its peers try to control their risk and contend with increasingly heavy regulation from Beijing.

The company’s total net revenue actually decreased 12% year-on-year to 3.9 billion yuan ($566.4 million) in the fourth quarter. 360 DigiTech’s revenue slipped for the whole year as well, as growth in its total loan facilitation and origination volume slowed to about 16% from 45% in 2021.

Investors unimpressed

Understandably, investors didn’t seem impressed with 360 DigiTech’s fourth-quarter earnings or its latest dividend. Its shares slipped by 8% in the four days after the release of the results, amid broader weakness for financial stocks due to fallout from last week’s collapse of Silicon Valley Bank and Signature Bank. 

360 DigiTech’s business is slowing as the company and its peers shift their focus to risk management from growth after economic disruptions from China’s strict Covid-19 control measures led to rising loan delinquencies. That resulted in sharp increases in the company’s provisions for loan losses, which was a major factor behind its profit erosion.

360 DigiTech’s revenue growth is likely to pick up again when economic conditions improve. But at least for now, it’s unlikely to pursue rapid growth to avoid getting hit with even bigger loan losses. Chinese regulators are also wary of private credit piling up too quickly, meaning any signs of reckless lending could trigger a new crackdown similar to the one that has all but killed China’s once-vibrant peer-to-peer (P2P) lending industry.

Beijing has ended its “zero Covid” policy, so the Chinese economy is poised to bounce back. Even so, 360 DigiTech remains cautious, projecting its loan facilitation and origination this year will increase by a modest 10% to 20%, similar to last year’s growth rate.

“While the macro economy started to show encouraging signs of recovery, the company intends to continue to take a prudent approach in its business planning,” 360 DigiTech said in its latest results.

Analysts polled by Yahoo Finance expect 360 DigiTech’s revenue will grow about 9% this year, which certainly is better than last year’s contraction. But it’s hardly anything to get excited about.

Meanwhile, 360 DigiTech’s cash pile has been growing every year since it went public in 2018. In November, the company raised about $36 million from a secondary listing in Hong Kong, which contributed to growth in its cash holdings. It’s sensible for any company to maintain a sufficient liquidity buffer for a rainy day. But 360 DigiTech’s swelling pile of idle cash could also make one wonder if it’s investing enough for future growth.

The company said it plans to use the $36 million from the Hong Kong share sale to enhance its technology and credit evaluation capabilities, and to expand its user base — in the next three years. For a company that generated well over $250 million in cash from operations last year, that multiyear spending plan looks quite modest. And 360 DigiTech isn’t using its cash to enrich its shareholders with dividends either.

In terms of investment returns, 360 DigiTech is still performing better than some of its peers. The company’s shares are up about 3% from its New York IPO price, whereas shares in another digital loan facilitator, LexinFintech Holdings Ltd. (LX.US), have lost nearly 75% since their IPO in 2017. The total returns for 360 DigiTech shareholders rise further still when you add in all of its dividends over the years. LexinFintech investors don’t get such a bump as the company doesn’t pay dividends. Also, 360 DigiTech’s total dividends for all last year translate to a yield of more than 4% based on its current share price, not a bad figure.

Even so, 360 DigiTech shares are not trading at much of a premium to LexinFintech stock, when measured against their profits. 360 DigiTech now trades at a price-to-earnings (P/E) ratio of about 4.8, pretty much on par with LexinFintech’s multiple. This suggests that investors aren’t so thrilled about 360 DigiTech despite its regular dividend payments. The company might have to fork out a larger share of its profits as dividends to win back investors, or put its cash to better use to find new growth opportunities.

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