Each week, a professional investor tells MoneyWeek where she’d put her money now. This week: Ruth Nash, manager, JOHCM Japan Dividend Growth Fund.
Japanese companies have historically been seen as fairly poor dividend-payers. So a dividend fund focused on Japan Inc. may seem like an odd idea. But this view is out of date – since 2003, a dividend culture has been taking root in Japan.
The breakdown of the old cross-shareholding system (where companies would frequently hold large stakes in one another) has made companies more keen to cultivate long-term shareholders through rising pay-outs.
The earnings recovery underway in Japan, resulting from Prime Minister Shinzo Abe’s bold reflationary policies, is fuelling this dividend growth. And with pay-out ratios still low by international standards, this trend has room to run.
Meanwhile, increased supply of dividends is being matched by rising demand for yield from both domestic institutions and private investors. The latter’s interest is likely to surge following the launch of the Nippon Isa (Nisa) in January this year, which should boost retail investors’ appetite for dividend-paying stocks.
For our fund, we look for a combination of dividend growth and yield – these three stocks offer both.
First there’s furniture retailer Nitori (JP: 9843). As an importer, the company has been hurt by the weakness of the yen. Yet it has worked hard to cut costs and still managed to grow profits for the year to February, marking the 27th consecutive year of growth in sales and profits.
The market is concerned about the impact the consumption tax increase will have on retail sales, but we believe this concern is overdone. A focus on higher-end products and ongoing cost-cutting makes it likely that Nitori will beat its forecast for this year. The rising dividend is a sign of management’s confidence.
Sekisui House (JP: 1928) is one of Japan’s major housebuilders. For homebuyers, contracts signed before September 2013 avoided the higher consumption tax rate, so the share prices of the housing stocks have underperformed for the past few months as order growth has slowed down.
However, the drop in orders is likely to be temporary. Japan’s economic revival and the return of inflation means that the housing market should remain buoyant for some time to come.
Sekisui House has just reported its full-year results: it posted a record operating profit margin, raised the dividend for last year and will raise it again this year. The stock trades below book value and yields 3.8%.
Daihatsu (JP: 7262) is a Toyota subsidiary which specialises in fuel-efficient, mini-vehicles and which has leading market positions both at home and in other Asian markets such as Indonesia.
The company recently posted its fourth year in a row of record profits, but the share price has been hit by concerns about demand in Asia and the possibility of a sales slowdown after the consumption tax hike in Japan.
That said, Daihatsu has six new models being launched in the domestic market and, with its dominant position in Indonesia, it should be a long-term beneficiary as growing numbers of Asian consumers buy their first cars.
The company generates an operating profit margin of close to 10% and a return on equity of around 16%. The shares yield 3.3% and trade on less than nine times earnings. With only three out of the ten analysts covering the stock rating it a “buy”, we believe the market is too pessimistic on Daihatsu.