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In Land of Negative Rates, Kyushu Railway Dangles Dividend

  • JR Kyushu’s Japan IPO to test market struggling for returns
  • IPO indicative price holds out 3.06% annualized dividend

In Japan, where bonds can yield less than zero percent, a bullet train operator planning a $3.8 billion share sale is promising investors dividend returns that would beat most of the country’s stocks.

State-owned Kyushu Railway Co., currently gauging investor appetite for what could be the world’s second-biggest initial public offering this year, has an annualized dividend yield of 3.06 percent. That compares with 2.09 percent for the benchmark Topix index, which has declined about 13 percent this year.

The IPO is set to test a market where more than half the 1,700 trillion yen ($16.6 trillion) in household savings is held as cash and bank deposits amid dwindling returns due to the central bank’s negative interest-rate policy. In an industry where East Japan Railway Co. and Central Japan Railway Co. have profit margins that rival Apple Inc.’s, JR Kyushu is coming out with the nation’s largest rail share sale in more than a decade.

“JR Kyushu is putting the focus on its dividend,” said Mitsushige Akino, an executive officer at Ichiyoshi Investment Management Co., adding that he would take part in the book building. “Individual investors will buy shares that have a high dividend.”

The company has proposed a dividend of 37.5 yen for the six months through March and the annualized yield was calculated based on an indicative price of 2,450 yen for the IPO. Japan is set to reveal JR Kyushu’s IPO price range on Thursday and the final price on Oct. 17. Listing is scheduled for Oct. 25. Besides the payout, the operator of bullet trains, hotels and restaurants on Japan’s third-largest island is also offering fare discounts to potential investors in a bid to drum up demand for the share sale.

The projected dividend yield at the indicative price lags only behind Aozora Bank Ltd.’s 5.39 percent and Solasto Corp.’s 3.07 percent on the Topix, which counts 1,970 members, according to data compiled by Bloomberg. It is double that of JR East, the nation’s biggest train operator, which debuted in 1993.

“Investors are probably expecting the stock to be a high dividend yield stock,” said Tsutomu Yamada, an analyst at Kabu.com Securities Co. in Tokyo. “The cheaper the pricing, the more attractive it will be.”

The 392 billion yen IPO involves the sale of all 160 million shares held by Japan Railway Construction, Transport and Technology Agency, which fully owns JR Kyushu. More than half of the shares are targeted for individual investors. The sale is part of a government plan started in the 1990s to privatize the nation’s train operators created from the breakup of Japan Railways in 1987.

Real Estate

JR Kyushu, which gets most of its profits from real estate and station building businesses, is the fourth of the JR firms selling shares to the public and the IPO would be the biggest for 2016 after Postal Savings Bank of China Co., which raised $7.4 billion in a Hong Kong share sale last month.

“It’s basically a real estate company,” said Shota Watanabe, a fund manager at Rheos Capital Works Inc., adding he’s “not so interested” as his fund focuses only on “high-growth companies.” “Still, it has pretty good perks for individual shareholders. For those living in Kyushu it looks pretty attractive,” he said.

Brokerages held eight out of 10 investor meetings last month in Kyushu, with the other two being in Tokyo and Osaka, according to the underwriters. Nomura Holdings Inc., Mitsubishi UFJ Morgan Stanley Securities Co. and JPMorgan Chase & Co. are global coordinators for the company’s IPO, while SMBC Nikko Securities Inc. and Goldman Sachs Group Inc. will also lead the global offering.

Based in Fukuoka City, about 890 kilometers (550 miles) southwest of Tokyo, the railway is benefiting from record overseas visitors to Japan, spurring demand for its hotels, shops and restaurants, as well as train travel. Visitors to Kyushu from overseas reached 2.8 million last year, more than doubling from 1.3 million two years earlier, according to the transport ministry.

JR Kyushu predicts net income of 38.2 billion yen in the year ending March 31, with sales forecast to increase 0.2 percent to 379 billion yen.

“It’s a long-term asset stock,” said Kabu.com Securities’ Yamada. “It’s difficult to see their profits halving unless there’s some extraordinary circumstance.”

The company earned 20.4 billion yen in operating profit from its station and real estate business last fiscal year, compared with total operating income of 20.8 billion yen. It had an operating loss of 10.5 billion yen on its transportation business, while its retail business’ operating profit was 3.4 billion yen.

The shares may also prove attractive given that interest rates on bank accounts and the country’s benchmark bonds are close to nothing, said Masahiro Yamaguchi, a senior market analyst at SMBC Trust Bank Ltd.

“With zero interest rates, a high dividend is attractive,” Yamaguchi said. “Japanese inbound tourism is having a wide impact that I feel is reaching Fukuoka. That impact has spread significantly.”

— With assistance by Yuko Takeo, and Takahiko Hyuga

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