The Treasury Wine Estates (ASX: TWE) share price has seen a significant rise today, up as high as 3.69% during morning trade and sitting on 2.81% time of writing. With the ASX 200 up less than 1% for the day, TWE's outperformance merits a closer look.
What's behind Treasury Wine's recent performance?
The $12.6 billion wine producer and distributor has operations in Australia, New Zealand, Italy and the United States (US), and exports wine globally. It has seen significant growth, particularly in exports to Asia. The growth of the middle class in China has been a boon for TWE, much as it has been for other food and wine companies serving the growing Chinese demand for high-quality imports in these areas.
This success in the Chinese market has boosted TWE's performance, but it also leaves the company exposed to any events that affect China and Chinese trade relations. TWE has seen some real volatility throughout 2018 and 2019. Much of this has correlated roughly with volatility on the ASX in the same time period, but it's worth noting that in early September 2018 TWE fell earlier and harder than the ASX did on fears of a US–China trade war. From a high of $19.85 on 3 September 2018, it sank as low as $13.52 on 21 November that year. At $17.56 at time of writing, TWE has yet to return to its highs.
With the US and China as Australia's two largest trade partners, Aussie shares are always likely to suffer when tensions rise between these two economic giants, but with so much of its recent growth having come from China and China's immediate neighbours, TWE could be particularly vulnerable.
Of course, this also mean that the inverse could be true. Any easing of tensions or hint of compromise between China and the US would likely be good news for TWE.
TWE's annual results, released Thursday last week, saw the best growth in constant currency net sales revenue in the company's history. Earnings before interest and tax grew in line with the company's expectations, up 25%.
TWE targets a dividend payout ratio of 55–70% of net profit after tax. With a full-year dividend for FY19 of 38 cents, it was firmly on target at 62.9%.
Foolish takeaway
Treasury Wine Estates remains vulnerable to a renewal of international trade tensions, especially as they affect China. Any potential investors should consider that risk before buying. However, with a healthy financial performance, a solid dividend payout ratio and a share price trending upwards towards its previous highs, it should certainly be on your watchlist.
