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‘Severe Pressure’ Will Force Some Japan Firms to Slash Dividends

‘Severe Pressure’ Will Force Some Japan Firms to Slash Dividends

(Bloomberg) -- As the coronavirus pandemic clouds the earnings outlook for Japan Inc. in the midst of its most important reporting period of the year, it also threatens to crimp payouts to shareholders.

The country’s energy, materials and airline companies are facing “severe pressure” as the virus saps demand for their products and services, Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA, wrote in a note earlier this month. She warned that even defensive sectors such as telecommunications, utilities and consumer goods could have difficulty maintaining payouts.

“Under the trilemma of coronavirus outbreak, weak oil prices and even lower interest rates, some sectors will cut dividends more than the others,” she said. Semiconductors, information & communications technology, health care and real estate are “relatively more resilient” due to their profitability or debt structures.

Key Announcements

The benchmark Topix index is down more than 18% from its December high on virus concerns, but has risen 15% from a March low as investors positioned themselves for results season. Over 2,000 Japanese companies are set to announce earnings for the March-ended quarter over the next six weeks. For a vast majority, this is also the end of the fiscal year, when firms typically announce forecasts for the coming period as well as their outlook for dividends and buybacks.

The nation’s firms have made strides in recent years to improve shareholder returns amid growing global focus on corporate governance and increased pressure from activist investors. The Topix is trading at a dividend yield of over 2.7%, near its all-time high. And Nomura Securities Co. said in a recent note that it expects the total dividend level for Japan Inc. to remain flat at about 14.4 trillion yen ($135 billion) for the latest fiscal year, even as individual companies are forced to lower their payouts.

‘Severe Pressure’ Will Force Some Japan Firms to Slash Dividends

Industrial Impact

Nissan Motor Co. in February said it won’t pay a full-year dividend, as it cut its profit outlook amid ongoing troubles. While the virus has added pressure on the auto industry by severely denting production and demand, Goldman Sachs Group Inc. said it doesn’t expect “across-the-board” reductions in returns at Japanese manufacturers, though it does forecast that Mitsubishi Motors Corp. and Mazda Motor Corp. will forgo payouts, in addition to Nissan.

Other companies that have already announced plans to lower or halt dividends include Nipro Corp., labeled by analyst Campbell Gunn as one of a number of “serial cutters” that have reduced returns multiple times over the years. Other companies that may be prone to “recidivism” in the latest cycle include Nikon Corp., Sanrio Co. and Fanuc Corp., Gunn wrote in an April 7 note on Smartkarma.

Also see: Virus Jeopardizes Japanese Insurer’s Stock-Dividends Strategy

Commodities Hit

Japanese trading houses may reduce payouts by an average of 36% in the event of a prolonged global recession, Thanh Ha Pham, an analyst at Jefferies Japan Ltd, wrote in a report this month. The analyst estimates Itochu Corp. could halve its dividend, while Mitsubishi Corp. and Mitsui & Co. may see reductions of 38% and 25%, respectively.

Pham sees lower risk of such cuts for oil refiners due to their steady core business, but still warns of possibly lower dividends at Idemitsu Kosan Co. and Cosmo Energy Holdings Co. Oil explorer Inpex Corp. could take similar action if crude remains low and profit declines, SMBC Nikko Securities Inc. said. Among other commodities-related firms, Toho Zinc Co. has already cut its payout.

Still, obserevers such as Societe Generale strategist Frank Benzimra say there’s not much to worry about given that Japanese firms aren’t such big dividend payers to begin with. And the fact that they’re still hoarding cash even after improving returns means they have more of a cushion to maintain payouts. Moreover, while Britain’s biggest banks have scrapped dividends at the request of regulators seeking to free up cash for loans, Japan hasn’t placed any restrictions on returns.

©2020 Bloomberg L.P.