Abe Bid to Boost Company Payouts Adds to Dividend Future Allure

  • Dividends may rise to 45% of profits in 5 years, Khan says
  • Prices on dividend futures now attractive, Carroll says

Japanese Prime Minister Shinzo Abe’s push for companies to pay out more in dividends is boosting the allure of futures contracts betting they’ll heed his call.

The nation’s firms pay out about 30 percent of profits to shareholders as dividends, and that may rise to as much as 45 percent within five years, according to Zuhair Khan, head of research department at Jefferies Japan Ltd. in Tokyo.

Abe has urged companies to boost wages and increase dividends to stockholders to help Japan defeat deflation and bolster growth. He told an investors conference in February that companies must implement corporate governance in an effective manner and applauded companies for already boosting dividend payouts by about 30 percent. 

“That is one of the key goals of Abenomics,” said Khan at Jefferies. “If companies can’t explain what they are using this cash for, then the pressure is very much there for them to return it to shareholders.”

Prices are currently attractive on dividend futures, according to Shane Carroll, equity derivatives strategist at Societe Generale SA. That’s in part because banks have been selling the contracts for technical reasons, he said. Lenders sometimes sell dividend futures when the Nikkei 225 falls as a way to hedge structured notes they’ve issued that track the benchmark, according to Carroll.

The cheaper dividend future prices are luring hedge funds to scoop them up at discounts, he said.

Sales of structured notes tied to Japan’s benchmark index surged 66 percent to $2.5 billion in the first quarter from the last three months of 2015, according to data compiled by Bloomberg.

Banks must pay off the products early if the Nikkei rises to certain levels, but the index has dropped about 12.6 percent this year. The amount of notional outstanding products in the public Nikkei-linked note market has doubled to about $6.5 billion compared to $2.9 billion a year ago, based on Societe Generale estimates.

That means banks have a large hedging requirement on the products, according to Carroll.

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