Japanese industry starting to heed shareholder value

Japanese companies are paying more attention to shareholder value, providing solid income opportunities over the coming years, according to Close Finsbury Japanese manager Michael Lindsell.

Speaking at the recent Investment Week Global Markets Forum, Lindsell noted the payout ratios among Japanese companies have risen as cross shareholdings have fallen.

He noted that historically in the US market, which does not have as strong a dividend culture as the UK, reinvesting income as opposed to spending it has led to returns being some 85-times higher. For example, $1 invested in 1900 would be worth $198 a century later, resulting in an annual compound return of some 5.4%. However, that same dollar plus reinvested dividend would amount to $16,797 over the same timeframe, resulting in almost twice the annual compound rate.

In Japan, dividends have declined rather than risen over the past 30 years, as they have done in most western economies. Dividend yields in the region have not been much above 1% and at times below that, Lindsell noted, adding the main reason for this has been a high amount of cross shareholdings.

As an example, he pointed to the attrition rate within the FTSE, S&P 500 and the Nikkei 225 over the past 20 years. In the UK market, the attrition rate has been 77% between 1983 and 2003, while the S&P has a rate of 66%. This compares to just 33% in the Japan index as the cross shareholdings have helped protect the firms against corporate activity like takeovers, which has led to them paying little attention to shareholder value, he commented.

But with that unwinding and foreign ownership increasing, payout ratios have had to come back into play in this market.

Foreign ownership has moved from 5% to 25% over recent years, Lindsell highlighted, while Japanese pension funds have moved from owning some 5% of the market to 15%.

Adding to the pressure is Japan's demographic picture, which will see the country have the highest proportion of a population above working age in western economies within the next few years.

This number of people seeking income in retirement added to a burgeoning domestic equity market and a low interest rate economy paints a good picture for dividend growth, he noted. Over the next nine years, from 2006 to 2015, the age of Japan's population will rise more quickly than anywhere else in the world, he said.

Weighing in on the positive side of dividend payouts is the fact that this month Japanese companies are able to pay out of consolidated earnings rather than just the earnings derived from the parent company, which Lindsell thinks will help out a lot of firms.

While on the surface payout ratios remain low, Lindsell said the changes become more evident at the individual company level. He cited the example of Kao, a big household name retailer in Japan, which is leading the way with its payout ratio moving from 20% to 100%.

Within the Close fund, all 23 of Lindsell's holdings as at various stages of putting capital to better use, he noted.

Categories: Equities | Investment

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