CoronavirusApr 3 2020

Japan's dividend approach offers clarity to investors

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Japan's dividend approach offers clarity to investors

Like many other nations, the global outbreak of Covid-19 has seen Japan's economy take a hit in recent months.

The decision to delay this year’s summer Olympics has been an added blow.

While the headline figures may be concerning, history has shown us repeatedly that markets have an uncanny ability to recover from this sort of outbreak.

Having placed our trust in management of companies to be able to cope with operational challenges such as this, they continue to reward their shareholders by retaining their long-term focus on shareholder payouts and corporate governance – the factors that drove our original investment decisions. 

Growing concerns

As the virus has claimed the lives of more than 50,000 people globally so far, it has led markets to crash at levels not seen since the financial crisis and prompted emergency central bank action.

Japan has been no exception to this trend.

History has shown us over and over again that markets will revert to their long-term path when given enough time.

Tourism across the country has taken a  considerable hit following a ban on outbound group travel from China late last month.

Likewise, the closure of cities across China has slowed the many firms reliant on the country for exports, sales, and manufacturing.

Looking forward, now Japan has delayed this year's Olympics many now wonder whether a recession approaches following a 19 per cent drop in the Nikkei 225 year-to-date following a sharp contraction in Q4 2019 GDP.

We have not been immune from these concerns; however, we see no need to alter our core strategic focus because of short-term macro factors.

History has shown us over and over again that markets will revert to their long-term path when given enough time.

As cash hoarding has fallen, the pool of potential income opportunities across Japanese equities has grown.

Just look at how indices around the world finished 2003 strong in spite of a large early-year slump amid the Sars outbreak.

Instead, the most important thing for us is that our holdings remain committed to the long-term goals and commitment that drove our initial investment.

Putting shareholders first

To recap, perhaps the most critical factor for us is corporate governance and the treatment of shareholders, something that Shinzo Abe has fought unprecedentedly hard to improve during his tenure as Japan's prime minister.

The introduction of stewardship legislation has ushered in more favourable corporate attitudes towards investors across the nation and shareholder distributions through dividends and well-timed share buybacks have soared to record highs. 

As cash hoarding has fallen, the pool of potential income opportunities across Japanese equities has grown.

Against this backdrop, we have invested in a portfolio of undervalued stocks that complement expansive strategies and strong balance sheets with a focus on shareholder needs.

This allows us to provide both long-term capital appreciation and income.

Critically, all of the portfolio holdings we have spoken to since the outbreak of coronavirus have indicated that their focus on improving corporate governance and the treatment of shareholders will indeed remain unchanged.

Our investment decisions are based around long-term factors that leverage Japan's ongoing move towards the high corporate governance standards held by the rest of the developed world. 

Not only that, but many have said the long-term factors driving their expansion are ongoing in spite of recent market conditions.

A prime example is Noevir. The leading skincare product manufacturer's latest monthly figures are negative year-on-year due to a consumption driven-demand rush in Q1 2019 and a small impact from reduced inbound tourist demand.

However, the firm sees no underlying change in cosmetic demand. Its prices are stable, and its approach to shareholder returns will not be affected by recent monthly trends.

The stock currently yields 3.9 per cent and its dividend has been growing at around 10 per cent a year consistently.

“This too shall pass”

Our investment decisions are based around long-term factors that leverage Japan's ongoing move towards the high corporate governance standards held by the rest of the developed world. 

Because these will continue to pay dividends – both literally and figuratively – in spite of macro issues like coronavirus, we are somewhat protected against the short-term panic selling currently ravaging the world's equity markets. 

Given our long-term focus and belief that markets will eventually recover, the recent weakness even provides us with an excellent opportunity to add to the Japanese firms sticking to their guns when it comes to corporate governance.

Richard Aston manages the CC Japan Income & Growth Trust