March 31 marks the end of Japan’s fiscal year, making it a very important point from which to gauge how Japanese stocks are behaving and, ultimately, whether Abenomics is having any real impact.
Based on what we’re seeing so far, we remain extremely excited for the prospects of Japanese equities.
Firms Very Focused on Raising Return-on-Equity (ROE)
During the 15 years of deflation from 1998 to 2013, Japan became known for being a very low return-on-equity market compared to other global options such as the U.S. or Europe. Firms simply hoarded cash on their balance sheets. In early 2014, the inception of the JPX-Nikkei 400 provided a catalyst for an important change in behavior, because the measure of ROE (specifically averaged over the past three years) was a key metric for inclusion.
Almost overnight, hoarding cash went from being the accepted practice to a reason corporate management teams could face negative attention by not having a high enough ROE to gain inclusion in the JPX-Nikkei 400, and no corporate manager in Japan wants such a stigma attached to their firm.
FANUC Exemplifies a Shareholder Return Policy
One of the first Japanese companies to report earnings for the period ending March 31, 2015, FANUC announced an innovative shareholder return policy. The company had ¥991.2 billion ($8.25 billion) in cash on hand, a figure that had increased 20% from the prior year. FANUC has a 50% global market share of numerical control devices and an operating profit margin of 40% 1.
• Payout Ratio from 30% to 60%: As FANUC doubled its dividend payout ratio, from 30% to 60%, its dividend went from ¥170.06 per share to ¥636.62 per share—a big jump. This means that the company believes it can sustain paying out more than half its profits to shareholders on an ongoing basis, which is a very significant move. As of May 1, 2015, the aggregate dividend payout ratio for the Tokyo Stock Price Index (TOPIX) was only about 27%, meaning that FANUC is making a strong statement.
• Combining with a Flexible Buyback Plan: FANUC didn’t stop with the dividend policy; the company also announced a flexible share buyback program. The way it’s written allows for FANUC to purchase greater amounts of its shares as it attains greater and greater profitability.