Corporates in Japan remain awash with cash. A staggering 56.3% of non-financial companies listed on the Tokyo Stock Exchange (TOPIX) are sitting on net cash balances (see Figure 1), compared with just 18-20% for those on corresponding indices in the US and Europe.
Putting balance sheets to work
Attempts by the Bank of Japan to ignite domestic inflation and kick-start the economy have rendered borrowing money in Japan almost free, yet companies remain hesitant to take advantage of the opportunity – investment in plants and equipment is still 21% below 2007 levels.
It is not uncommon to meet companies in Japan with cash balances exceeding their market capitalisation. Indeed, around 37% of Japanese stocks are currently trading below their book (realisable) value. Unsurprisingly, a market rich with companies trading below break-up value, with cashed-up balance sheets, provides a hunting ground for activist investors. There was a 40% increase in the number of companies they targeted last year. Where they used to be labelled as ‘vultures’ many in Japan now view these activists as constructive.
Profits high and shareholder returns rising
With profit margins at all-time highs and cashflow generation exceeding dividend increases, we are hopeful that shareholder returns can improve further.TOPIX returns from dividends and share buybacks should be around 3.2% this year, roughly 2% and 1.2% respectively. Share buybacks are up 25.9% year-to-date versus the same period in 2017. Buybacks have been broad-based across sectors and the value is only a whisker away from the 2016 peak already. This week when Toshiba announced its first ever share buyback, the share price immediately rose 6.7%. Meanwhile, dividend payouts continue to rise too (see Figure 2).