Close Investments manager keeps faith in high-yielding firms, believing dividends vital to Japan
Close Investments Japanese Equity manager Michael Lindsell is continuing to bank on high-yielding, cash generative companies for future returns.
Lindsell believes dividends are becoming more and more important for the Japanese investor.
"Current dividend yields on the Topix are 1.6%, the highest for ten years on the back of exceptionally strong corporate profits," he said.
"This represents a rise of 0.7% over the past two years."
Despite the rise in dividends, individual ownership in shares among Japanese investors has declined.
More than 50% of investors in Japan prefer the safety of cash deposits, which yield just 0.3% on average.
"The 1.6% yield, although now more than the ten-year Government bond yield, is still not enough to satisfy the income requirement of investors and entice the Japanese investor back into the market," Lindsell said.
The Lindsell Train manager believes a dividend yield of 4% is required to attract investors into equities in Japan although only one stock in the Nikkei 50 is yielding 4%, and just 23% above 2%.
In addition, Lindsell warned against a profits recession in Japan which could hit future Topix returns.
"Much of the fall in the market over the last few months has been the market anticipating a profits recession," he said.
"The profits recovery of the past five years has been very strong.The Topix earnings per share went up more than four times."
As profits wane, Lindsell believes the companies worst hit will be low margin, cyclical firms that are over-indebted.
"There are almost twice as many companies with net debt at 50% or more of their market capitalisation in the Nikkei 225 than the S&P 500," he added.
"At the same time there is just a 0.2% premium on the dividend yield from these debt dependants compared to companies with positive cash balance sheets.
"This anomaly is likely to change."
As a result, Lindsell is investing in high-yielding firms with strong balance sheets in his concentrated 29-stock portfolio.
His fund yields 2.4% against the index average of 1.6%, up 0.6% against the 2005 average.
"Cash generative firms are coming under increasing pressure to work their balance sheets more," he said.
"I am buying companies that have the financial strength to pay out dividends in difficult times and have the ability to pay yields of 4% in the future."
