Looking at recent headlines, many investors may be discouraged from investing in Japan, but Richard Aston, manager of the CC Japan Income & Growth trust, says investors should look more closely at the wider fundmentals before making a decision about investing.
GDP figures have disappointed, leading to the Bank of Japan to recently take the decision to adopt negative interest rates.But 2015 was a pivotal year for Japanese companies. The introduction of new corporate governance and stewardship codes have established a framework to improve the oversight of directors, engage in constructive dialogue with investors, and increase returns.
There is tangible evidence of the benefits already. With corporate profits set to achieve record highs in the 2015 fiscal year, total shareholder returns, through a combination of dividend payments and share buybacks are also set to achieve all-time highs.
An analysis of company forecasts suggests the total dividends paid by listed companies in Japan will rise by over 10% for its sixth straight year of increase, an almost doubling since 2009.
Importantly, many companies are now emphasising stability and sustainability in their dividend policy, which is in stark comparison to the historic norm of a strict payout ratio based on a percentage of annual earnings.
In addition, the number and value of share repurchases are rising at their fastest pace ever and are set to exceed the 2006 record. The corporate governance reforms are bringing greater attention to capital efficiency and in particular the hoarding of excess cash on company balance sheets.
With the goal of improving return on equity, many companies now regard share buybacks as an important tool to consider alongside operational improvements.
The corporate governance code has brought greater scrutiny on the rationale for the company cross-shareholdings, often regarded as a further inefficiency. It is estimated these account for approximately 10% of the market.
These trends will further differentiate between good and bad companies. Despite the impressive aggregate data, there are still many uncompetitive and highly indebted companies whose goal is survival, rather than any attempt at boosting shareholder return.
Those that have adapted are maintaining or increasing their dividends, in spite of the current economic conditions.
Bull Points
• Corporate governance and stewardship codes have encouraged awareness of sustainable shareholder returns
• Companies in aggregate have ample resources to continue recent trends
Bear Points
• Management resolve to be tested if earnings deteriorate
• No tax incentive to reduce cross-shareholdings
