The Most Wonderful Time of the Year (for Japanese Equities)
March 31 marks the end of Japan’s fiscal year, making it a very important point from which to gauge how Japanese stocks are behaving and, ultimately, whether Abenomics is having any real impact. Firms Very Focused on Raising Return-on-Equity (ROE) During the 15 years of deflation from 1998 to 2013, Japan became known for being a very low return-on-equity market compared to other global options such as the U.S. or Europe. Firms simply hoarded cash on their balance sheets. In early 2014, the inception of the JPX-Nikkei 400 provided a catalyst for an important change in behaviour, because the measure of ROE (specifically averaged over the past three years) was a key metric for inclusion. Almost overnight, hoarding cash went from being the accepted practice to a reason corporate management teams could face negative attention by not having a high enough ROE to gain inclusion in the JPX-Nikkei 400, and no corporate manager in Japan wants such a stigma attached to their firm. FANUC Exemplifies a Shareholder Return Policy One of the first Japanese companies to report earnings for the period ending March 31, 2015, FANUC announced an innovative shareholder return policy. The company had ¥991.2 billion ($8.25 billion) in cash on hand, a figure that had increased 20% from the prior year. FANUC has a 50% global market share of numerical control devices and an operating profit margin of 40%.
Source: Keita Sekiguchi, “In About-Face, FANUC Turns Friendly to Shareholders,” Nikkei Asian Review, 4/30/15
Payout Ratio from 30% to 60%: As FANUC doubled its dividend payout ratio, from 30% to 60%, its dividend went from ¥170.06 per share to ¥636.62 per share—a big jump. This means that the company believes it can sustain paying out more than half its profits to shareholders on an ongoing basis, which is a very significant move. As of May 1, 2015, the aggregate dividend payout ratio for the Tokyo Stock Price Index (TOPIX) was only about 27%, meaning that FANUC is making a strong statement.
Combining with a Flexible Buyback Plan: FANUC didn&rsqrsquo;t stop with the dividend policy; the company also announced a flexible share buyback program. The way it’s written allows for FANUC to purchase greater amounts of its shares as it attains greater and greater profitability.
Ongoing Commitment to Shareholders Is New for Japan
These kinds of corporate shifts are what we find most exciting in Japan. FANUC’s example is made even more powerful given its ongoing commitment to shareholder returns rather than a single dividend raise or buyback. Specifically, the five-year average total return ratio, meaning the ratio of combined dividend and share buybacks, over the total amount of consolidated net profit over a five-year period, is aimed at not exceeding 80%. If FANUC is more profitable, shareholders should expect greater dividends and buybacks with this policy, just as they should expect less if FANUC is less profitable. What’s telling is that the firm considers that the 20% of net income retained from this policy is still more than enough to represent substantial future investment.
Corporate Reform Isn’t Only about Dividends and Buybacks
The concluding point that we’d like to make is that although the focus on shareholder returns such as dividend and buyback increases has been an important catalyst and gets a lot of attention, it’s not the only part of the picture. Firms are also increasingly looking to appoint more outside directors to their boards, as part of a government-led initiative to improve corporate governance. FANUC proceeded in that direction as well, having appointed at least two independent board members to the company’s board. We take this as another positive sign that Japan Inc. is moving in the right direction for shareholders.
Investors sharing this sentiment may consider the following UCITS ETF:
WisdomTree Japan Equity UCITS ETF – USD Hedged (DXJ)
 Source: Keita Sekiguchi, “In About-Face, FANUC Turns Friendly to Shareholders,” Nikkei Asian Review, 4/30/15  Source: Japan Exchange Group JPX-Nikkei 400 Methodology All data is sourced from WisdomTree Europe and Bloomberg, unless otherwise stated.
WisdomTree Europe Ltd is an appointed representative of Mirabella Financial Services LLP which is authorised and regulated by the Financial Conduct Authority. The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. An investment in ETPs is dependent on the performance of the underlying index, less costs, but it is not expected to match that performance precisely. ETPs involve numerous risks including among others, general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the ETP, exchange rate risks, interest rate risks, inflationary risks, liquidity risks and legal and regulatory risks. ETPs offering daily leveraged or daily short exposures (“Leveraged ETPs”) are products which feature specific risks that prospective investors should understand before investing in them. Higher volatility of the underlying indices and holding periods longer than a day may have an adverse impact on the performance of Leveraged ETPs. As such, Leveraged ETPs are intended for financially sophisticated investors who wish to take a short term view on the underlying indices. As a consequence, WisdomTree Europe Ltd is not promoting or marketing BOOST ETPs to Retail Clients. Investors should refer to the section entitled "Risk Factors" and “Economic Overview of the ETP Securities” in the Prospectus for further details of these and other risks associated with an investment in Leveraged ETPs and consult their financial advisors as needed. Within the United Kingdom, this document is only made available to professional clients and eligible counterparties as defined by the FCA. Under no circumstances should this document be forwarded to anyone in the United Kingdom who is not a professional client or eligible counterparty as defined by the FCA.This marketing information is intended for professional clients & sophisticated investors (as defined in the glossary of the FCA Handbook) only. This marketing information is derived from information generally available to the public from sources believed to be reliable although WisdomTree Europe Ltd does not warrant the accuracy or completeness of such information. All registered trademarks referred to herein have been licensed for use. None of the products discussed above are sponsored, endorsed, sold or promoted by any registered trademark owner and such owners make no representation or warranty regarding the advisability on dealing in any of the ETPs.