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.
The opportunities are many and reflect the fact that Japan has a large number of internationally renowned industry leaders, as well as prominent participants in the growth of other parts of Asia.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.
With annual corporate cashflow at record levels, at an aggregate level Japanese equities have delivered the fastest dividend growth within the major economic regions in the past six years.
This is despite the fact that some of the large index constituents, such as Sony, Panasonic, Toshiba and Hitachi, have actually cut their dividends, in some cases to zero.
We identify exciting investment opportunities as the consensus behaviour in Japan evolves to a consistent trend more easily comparable to those historically associated with Western developed markets, looking for companies that complement expansive business strategies with the need of their shareholders to be rewarded with appropriate annual distributions.
The opportunities are many and reflect the fact that Japan has a large number of internationally renowned industry leaders, as well as prominent participants in the growth of other parts of Asia and dominant domestic players across a wide range of industries.
These opportunities are not confined to large-caps alone, with attractive candidates identified in the mid- and small-cap areas where management incentives are often more closely aligned with those of minority shareholders.
Financial sectors are, however, worthy of discussion given their prominence in the weakest performance grouping over 10 years but relatively high weighting in the CC Japan Growth & Income Trust portfolio.
Over the past few years, the leading companies in the banking and insurance sectors have been at the forefront of the improvements in shareholder return and, consequently, offer a very different outlook. This is no more evident than in the large buybacks announced recently by Mitsubishi UFJ Financial Group (Y100bn) and Tokio Marine Holdings (Y100bn).
Demographics have long been cited as unfavourable in Japan, though the government has been encouraging companies to adopt counter measures to adapt to the changes under Prime Minister Abe’s watchful eye. Therein lie the investment opportunities.
In the case of Japan, the ‘labour crunch’, as it is often called, has presented some compelling investment opportunities particularly in the outsourced labour market.
Mr Abe has also made increasing female participation in the Japanese workforce an essential element of his efforts to revive the Japanese economy.
The combination of a changing attitude to shareholders by larger firms, started some time ago but hastened by Abenomics, and a growing entrepreneurial Japan places the country firmly in the frame for those seeking income from equities over the longer term.
Richard Aston is manager of the CC Japan Growth & Income Trust
