Dividends, buybacks rising in Japan
Japanese companies have lagged many of their global counterparts when it comes to showering investors with dividends and share buybacks, but that is beginning to change now that a preference to use excess cash for capital expenditures is beginning to wane in the country.
“The potential for higher payouts is enormous,” said Robert Buckland, macro strategist at Citigroup Global Markets, in a recent note to clients.
“There are tentative signs that the Japanese corporate obsession with investment and aversion to payouts is abating.”
Based on Citigroup Inc.’ s research, the ongoing global trend favouring dividends and buybacks over capital expenditures resulted in a 15-per-cent increase in the former and a six-per-cent decline in the latter in 2014.
Nowhere has this shift in capital allocation been greater than in the U.S., where corporations are now paying out almost as much to shareholders as they reinvest for the first time since before the financial crisis.
Buckland expects t his trend to continue in the U.S., but also accelerate outside the world’s biggest economy despite objections from some market participants that diminished capex is a growing threat to earnings growth.
He points to Japan in particular as a potential hotbed for growing dividends and share buybacks.
Japanese-listed companies spent 42 trillion yen on capex and R&D, or 5.3 times as much as they paid out to shareholders in 2014.
“This is below the 7.4 times investment/payout ratio peak reached in 2009 but still way above the level seen in other major markets,” Buckland said. “If it were to move to a U.S.-style 1:1 investment/payout ratio, then dividends and buybacks would be ¥17 trillion higher than their 2014 level.”
Forecasts for 2015 predict increasing dividends and buybacks at the expense of lower capital expenditures in Japan, but Buckland said it remains to be seen just how companies will distribute some of the higher profits they are expected to garner from the weaker yen.
“The government might like them to spend it on higher wage settlements, the CEOs might want to spend it on higher capex or M&A but we suspect that shareholders would most like it spent on dividends and buybacks,” he said.
Pierre Lapointe, head of global strategy and market research at Pavilion Global Markets in Montreal, said many Japanese companies still have significant cash positions that don’t generate any yields or returns for shareholders.
He also noted dividend growth has accelerated, while annual capital expenditure growth has fallen to around six per cent in recent years from almost 20 per cent.
“This is the first time in about 20 years that we witness this type of decoupling
This is the first time in about 20 years that we witness this type of decoupling between capex and dividend growth
between capex and dividend growth, suggesting that companies are becoming cautious on capex, but are warming to the idea of paying dividends with their cash instead,” he said in a note to clients.
The decreased appetite for capex leaves Japanese companies with more resources to increase buybacks, Lapointe said.
The buyback yield on the Nikkei has recently increased, which implies that share repurchases have been increasing faster than the market’s appreciation.
“We wouldn’ t say that Japanese companies have broken decidedly with their long history of low returns to shareholders,” he said. “Still there are encouraging signs that things are changing for the better.”