Japan Inc.’s $104 Billion Investor Payout Set to SurgeDave McCombs and Jason Clenfield
Japan’s companies, long known for stinginess with shareholders, doled out record amounts of cash to investors in the last year. It’s just the start of the payouts.
Dividends and buybacks soared 76 percent to 12.8 trillion yen ($104 billion) in the 12 months ended in March, according to Nomura Holdings Inc., which projects the returns will keep rising. In an example that would have been inconceivable in years past, the secretive robot-maker Fanuc Corp. was prodded by American activist Daniel Loeb into doubling the percentage of profit it would return to shareholders.
This newfound affection for shareholders is born out of necessity, not sudden generosity. The country’s domestic pool of pensions and savings is shrinking with the population, compelling companies to woo investors beyond the traditional base of passive fund managers.
“I used to call Japan a trust-fund baby,” said Jesper Koll, former head of research at JPMorgan Chase & Co. and adviser to Japan’s government. “A trust fund baby can have a C-average because there are no consequences from being lazy. Now Japan is a kid from the Bronx on a scholarship. It’s called survival.”
Japan’s Government Pension Investment Fund, the world’s largest with 130 trillion yen in assets, is forecast to contract by about 2 percent of assets annually over the next five years as retirees draw funds out faster than workers pay in, according to Koll. The country has the world’s highest proportion of people at least 65 years old.
Meanwhile, Japan’s savings rate turned negative in the year ended March 2014 for the first time since the government started keeping records in 1955.
Japanese companies have record profits to share. In the last fiscal year, aggregate net income increased about 5 percent to a record 18.8 trillion yen for 202 of the country’s largest companies, according to data compiled by Bloomberg. Their profit may surge another 17 percent this year, analyst estimates show.
Prime Minister Shinzo Abe is prodding companies to become more responsive to shareholders. Abe advisers worked with the Tokyo Stock Exchange to develop the JPX-Nikkei Index 400, also known as the Shame Index to get companies focused on investors and profitability.
Now companies from Mitsubishi Corp. to Hoya Corp. are raising dividends and announcing billions of dollars worth of share buybacks. Others including Hitachi Ltd. have adopted performance-based pay for executives and bellwethers such as Sony Corp. are setting targets for return on equity, a measure that tends to rise with dividends and buybacks.
“There is a noticeable attention to shareholder value and corporate governance in recent results meetings,” said David Rubenstein, an analyst at Shared Research Inc. in Tokyo.
Loeb’s success with Fanuc may be a sign foreign activists will finally find success in Japan after decades of failure. In the early 1990s, hostile-takeover pioneer T. Boone Pickens said he was giving up on Japan after losing a battle to gain a board seat at auto-parts maker Koito Manufacturing Co. Steel Partners Chairman Warren Lichtenstein ultimately abandoned his takeover bid for beer-maker Sapporo Holdings Inc. in 2007.
Now activists are likely to be drawn by Loeb’s example -- and the record amounts of cash on Japanese balance sheets.
Japan’s companies hold the equivalent of about 40 percent of gross domestic product in cash and equivalents, according to figures in an International Monetary Fund study last year. That’s about double the level for the other Group of Seven developed countries.
IMF researchers Chie Aoyagi and Giovanni Ganellic concluded in the report that better corporate governance would lead Japanese companies to “significantly reduce corporate cash holdings.”
Which companies will be the next to reward shareholders? Kenji Abe, a Tokyo-based analyst at Bank of America’s Merrill Lynch, thinks foreign ownership is a key indicator. In the latest round of earnings, Japanese companies that raised buybacks and dividends tended to have relatively high ratios of foreign investors, he said.
That prompted him to make foreign share ownership of at least 28 percent one of the criteria for a list of companies he thinks are most likely to raise payouts in the current fiscal year. Abe’s 11-company list includes Panasonic Corp., Astellas Pharma Inc., Fuji Heavy Industries Ltd., Konami Corp. and Kakaku.com.
Fuji Heavy climbed to a record in Tokyo trading Thursday, gaining as much as 2.9 percent to 4,827.5 yen before closing at 4,727 yen, 0.8 percent higher on the day. Panasonic rose 0.5 percent, while Kakaku.com added 0.7 percent and Astellas increased 0.2 percent.
Abe’s list is one of many being drawn up by investors, a targeting exercise that has come around before, Koll says.
Cleaning out his desk at JPMorgan, Koll stumbled on a list, first drawn up decades ago, of companies ripe with cash or assets that could, and should, be returned to shareholders. The companies on the list were mostly the same ones that would qualify today, he said.
“Japanese companies need to attract capital from the rest of the world, because the domestic flow is negative, which is what the household sector savings rate is telling you,” Koll says. “If we want to grow, we cannot rely on our domestic brethren; they’re not there.”