Japan Firms’ Habit of Hoarding Cash Becomes Boon for Dividends

(Bloomberg) -- Japanese companies have long been criticized for hoarding too much cash. Now the habit is being touted as a reason to buy Japan stocks, as the coronavirus pandemic dims the outlook for dividend returns elsewhere.

Japan has “improving dividend appeal,” with its companies less prone to payout cuts than those in other countries given their net cash positions and improving governance, Jefferies analysts wrote in a report.

“Japan is better placed versus its peers and is unlikely to see global financial crisis-era cuts,” strategist Shrikant Kale wrote in the report. “Amid deflationary concerns, the race to the bottom in global bond yields bodes well for dividend strategies.”

Lack of capital efficiency, leading to excess cash, has long been cited as a problem for Japanese firms and a reason to undervalue their stocks. Topix-listed firms held 493 trillion yen in cash as of their latest filings, a 75% jump from five years ago, according to data compiled by Bloomberg. Prime Minister Shinzo Abe has been pushing for better stewardship and governance practices since he took office in 2012. Now, the combination of improved dividend payouts and the strong cash balance is being seen as a possible tailwind.

Dividend yield for Topix-listed companies has grown to about 2.5% from less than 1% in 2006, according to Bloomberg-compiled data. They have risen to record levels and the percentage of companies with a payout ratio of more than 30% has climbed to an all-time high of 73%, the report added.

Amid the current uncertainty over shareholder payouts, “Japan is perceived as a safe-dividend haven,” thanks to strong balance sheets and the absence of a regulatory or legal framework restricting distribution unlike Europe or the U.S., Societe Generale strategists wrote in a note on June 9.

“Before, Japan used to have a tendency of showing lower dividends compared to other regions,” said Yunosuke Ikeda, chief equity strategist at Nomura Securities Co. “As the government hasn’t changed its stance of pushing for better governance, it will make dividend cuts difficult, allowing them to be more ‘sticky’ than those of U.S. and European companies.”

A measure of global dividend showed Japan was the fastest-growing region in the world, with almost 75% of companies raising their payouts in 2019, Nomura said in a report dated June 2, which cited data from Janus Henderson. Dividends have soared 173% in ten years, reflecting a growing willingness among the country’s companies to pay a higher ratio of profits to shareholders, the report said.

“Japanese companies have more leeway given how cash rich they originally were,” Ikeda said. “Any decrease in dividends for fiscal 2020 will likely be modest. In the long run, the practice of stable dividend payouts won’t change, meaning there’s a good chance Japan firms will gradually catch up to those in Europe and the U.S.”

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