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Articles by Steve

Steve Russell

Fund Manager

12 December 2019

Last month we looked at how US companies have been mortgaging their future by spending more on share buybacks and dividends than they actually earn, funding shareholder (and management) payments with ever expanding levels of debt.

This month, we look at a market where exactly the opposite is true – Japan.

Once upon a time, Japanese companies were drowning in debt, much as their US counterparts now are. Riding on the back of decades of global dominance and with credit cheap and easily available, Japanese corporates borrowed like there was no tomorrow, with corporate debt to GDP hitting an eye-watering 70% in the early 1990s¹. Sounds familiar?

Not surprisingly this resulted in an almighty hangover. Japan suffered the ‘lost decades’ as its stock market lost 75% of its value by 2010². However, something else changed in this period – Japanese companies discovered prudence, paying back all the excessive debt.

Today, Japanese corporate debt to GDP is less than 5%, compared to 40% in the US. What’s more, 55% of Japanese companies now have net cash on their balance sheets, against just 13% in the US and 15% in the UK³.

Perhaps they have taken caution too far. Take a look at Japanese factory automation giant Keyence⁴. Despite being a $90 billion global leader in this fast growing sector (robotics etc), the company boasts to shareholders it now has ‘enough cash reserves to withstand 17 years without sales revenues’. That’s what I call prudence.

Despite accumulating this embarrassment of riches, Japanese companies today are no slouches in terms of returns to shareholders. The amount paid out in dividends and share buybacks has tripled since 2010⁵ and today the dividend yield on the Tokyo stock market matches or exceeds the US. But they are still only paying out a third of profits in dividends, so there’s room to grow further. (For UK investors the worrying equivalent payout figure for the FTSE 100 index is 88%)⁶.

This has not gone unnoticed. The number of activist funds in Japan seeking to benefit from these cash rich companies has trebled in the last five years⁷, while private equity firms like Bain and KKR are also moving in on this market.

Thankfully Japanese companies, unlike the ‘Three Kings from the Orient’, are focused far more on gold (cash) than frankincense or myrrh. This makes the Japanese stock market the ideal Christmas present for investors seeking safe and growing dividend income, all supported by record levels of cash. Furthermore, rising shareholder activism offers the additional stocking filler of capital gains and takeover activity. No surprise then that Japanese equities are almost a quarter of Ruffer’s total equity holdings.

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