Japan firms warm to shareholder returns
TOKYO -- A little over a decade ago, executives at JSR Corp were locked in an intense debate. The Tokyo-based materials maker had been receiving feedback from global investors who felt it could do more to boost shareholder returns.
However, JSR officials had reservations. “We worried that if we raised our dividends we wouldn’t be able to lower them when earnings declined,” says Tsugio Haruki, JSR’s executive managing director and head of investor relations.
JSR no longer thinks that way. The company, which makes synthetic rubber for tyres, films for flat-panel displays and semiconductor materials, and has about $3.3bn in annual revenues, is now a favourite among analysts.
Goldman Sachs, JPMorgan and Macquarie Securities, recommend the stock, and many others applaud the company for regularly buying back its own shares and raising dividend payments.
Its transformation and other cases like it offer evidence that the concept of shareholder returns is finally gaining acceptance among Japanese companies.
“Companies that want to expand globally realise they must think about shareholder value,” says Fumiyuki Takahashi, equity strategist at Barclays Capital Japan.
In recent weeks, a number of companies whose earnings are rising have unexpectedly announced share buy-backs.
This month, Yamaha unveiled a plan to purchase up to 1m shares, for an estimated Y1.2bn ($14m). Nidec says it expects to spend Y25bn for 3m of its own shares. Others, including Rohm, Unicharm and Daito Trust Construction, have made similar announcements.
Deutsche Securities predicts buy-backs will reach Y4,000bn this year, from less than Y1,000bn last year, and that dividends will top Y6,000bn, up from Y5,500bn last year.
Those trends coincide with renewed interest in Japanese equities. Global investors now account for 65 per cent of the value of all trades on the Tokyo Stock Exchange’s first section, according to Barclays Capital Japan’s estimates.
In Canada, the US and Mexico, pensions funds that used not to touch Japanese stocks are giving the market a serious look, analysts say.
On some measures, Japanese stocks look a bargain. More than a third of companies in the Tokyo Stock Price Index, or Topix, have a price-to-book ratio of less than 1.0.
Meanwhile, the average return on equity has rebounded to about 7 per cent from near zero just a year ago, according to Barclays Capital Japan. The Topix’s average dividend yield of 1.86 per cent is now higher than the S&P 500’s, which is 1.8 per cent.
Still, plenty of global investors remain wary of Japanese companies’ reputation for hoarding cash, owning shares in groups they do business with and being stingy with dividends and buy-backs.
Past attempts to change corporate behaviour have had mixed results.
Steel Partners, a US private equity fund, spent six years lobbying the management of Sapporo Holdings and Bull-Dog Sauce for higher dividends and better governance before cashing out last December.
The UK-based hedge fund, Children’s Investment Fund, also tried forceful tactics with J-Power, Japan’s largest electricity wholesaler, but gave up and sold its stockholdings at a loss in 2008.
For JSR, the catalyst was a sixfold rise in net profit from 2000. The company soon attracted global investors who raised their stake from 5 per cent in the late 1990s to more than 30 per cent.
In 2001, annual dividends were a miserly 6 yen per share, and share buy-backs were rare. JSR’s priority was investing its cash in research and development.
But there was another reason for keeping dividends low. Like many Japanese companies, JSR wanted to avoid having to cut dividends if earnings soured. Doing so was considered a betrayal of shareholders’ trust.
Talks with global investors persuaded company executives to change. JSR started increasing dividends in 2003 as earnings soared. It adopted informal targets, aiming to return up to half its net earnings per share to investors in the form of dividends and buy-backs.
“We became comfortable with rewarding shareholders in good times and asking for their tolerance in bad,” says Mr Haruki.
In the fiscal year to March 2009, dividends were 32 yen a share, and the company bought Y8.6bn of its shares. A critical test came last year when, after a dip in earnings caused by the financial crisis, the company lowered its dividend for the first time ever and froze share buy-backs. “We worried about a backlash, but there was none,” says Mr Haruki.
This year, JSR expects net profits to rebound, nearly doubling to Y26bn on a 9.6 per cent rise in sales to Y340bn from the previous year. Anticipating stronger earnings, the company forecasts a rise in the dividend to 32 yen a share and has announced Y1.3bn in share repurchases.
(From the Financial Times, February 24, 2011)
