Opinion  

An investment rose by any other name

Richard Aston

Richard Aston

In an unprecedented period of low-to-no growth, equity income has been the sanctuary of many an investor portfolio. Even then, good returns come down, largely, to good stockpicking. 

It’s hard to say whether global growth and income prospects will ever return to the dizzying highs once enjoyed. How many investors long for the halcyon days – finding an undervalued market with near double-digit dividend growth increases year-on-year, mid-30 per cent growth in payout ratios and buyback activity on the up?

We can all dream, of course, yet this market does actually exist and it is Japan. 

However, mention that before detailing the aforementioned fundamentals and some investors baulk.

It is understandable to a certain extent. After all, for decades, many have been citing Japan as the land of investment opportunity only to be disappointed time and time again.

More investors are beginning to look to Japanese equities in the search for income though. So what has caused this apparent turnaround in prospects?

Shareholder returns had, for many years, appeared to be a secondary concern for companies in Japan but there have been notable improvements in shareholder returns in Japan since the early 2000s, as an upswing in the Japanese economy and business restructuring improved corporate free cashflows.

Dialogue between corporate management and their shareholders has markedly improved. Nowhere is this more evident than in the increasing distributions to shareholders in the form of dividends to share buybacks and the general changes in attitudes to how these returns should be conducted in the future.

With the Stewardship and Corporate Governance Codes in place, backed up by the policies of President Shinzo Abe (and his programme of reform called Abenomics), simply retaining this cash is becoming less acceptable.

Many Japanese companies began to embrace more favourable attitudes towards shareholders, for reasons unique to their own situation, from the early part of the last decade. 

As a result, the steady improvement in annual shareholder returns and the greater stability of these returns could justify a re-rating of Japanese equities which continue to yield more than both their US and European counterparts.

It is due to many years of management ‘inefficiency’ that the opportunity in Japan is now significant and corporate balance sheets, in aggregate, are healthy and supported by strong annual free cashflow.

Towards the end of last year, around 50 per cent of listed non-financial companies had net cash on their balance sheet, equating to over Y117trn of unproductive assets which undermine measures of efficiency, such as return on equity.

As a percentage of the entire market, the number of companies and total amount are significantly higher than other major equity markets, including the US. This is a financially secure underlying position providing the basis for many companies to offer improved returns.