An Overview of Dividends in Japan

Since the COVID 19 pandemic, Japanese stocks and their dividend yields have been back in focus for investors. With a very risk-averse culture, Japanese companies tend to be good at maintaining steady earnings and are therefore able to keep their dividend payments consistent. To understand this more we have presented an overview of dividends in Japan.

Historically, Japanese companies were famous for low dividend payouts as they focused more on hoarding cash as part of their “prepare for the worst” philosophy. Corporate governance issues and a disdain for investors by companies led to them being unfavorably viewed by foreigners. However, this changed ever since Prime Minister Shinzo Abe pushed for stewardship legislation and better corporate governance laws.

This approach worked and led to higher distributions, in terms of both dividends and share buybacks, and a more “investor-friendly” attitude by companies. In fact, the dividend yield of TOPIX increased to 2.5% in 2020, from under 1% in 2006. Furthermore, a record high of 73% of companies on the TOPIX, now have a payout ratio of 30%.

Despite higher payouts, Japanese companies still have a large stockpile of cash. At the end of Fiscal Year 2020, companies listed on the TOPIX held cash on their amounting to JPY 493 trn.

More liquid balance sheets and the fact that there are lax regulations in Japan have made Japanese dividends more attractive. Since these dividends are more sticky and less prone to cuts in comparison to their western counterparts. 

An Overview of Dividends in Japan

For most Japanese companies the fiscal year ends in March, with reports and earnings announcements coming out in April. Although companies release quarterly earnings as well, dividends are primarily paid in April after the end of the fiscal year in March, or in October after the end of the September quarter.

In order to follow the dividend yields of Japanese stocks, an investor can follow the Nikkei 225 High Dividend Yield Stock 50 Index. This index constitutes the top 50 high dividend yield stocks from the Nikkei 225. The index weights are calculated by taking into account the dividend yields of stock and their trading value. Towards the end of 2020, this index had a dividend yield of 4.63%.

Currently, the stocks with the highest weights in the Nikkei 225 High Dividend Yield Stock 50 Index are JAPAN TOBACCO INC., MITSUBISHI UFJ FINANCIAL GROUP, INC., SUMITOMO MITSUI FINANCIAL GROUP, INC., MITSUBISHI CORP., and CANON INC.

Dividends of Japanese companies versus American Companies

As we mentioned earlier, Japanese companies used to have lower dividend yields than their counterparts in the US. But this has changed as Japanese dividend yields have converged with those of the US and are now expected to outpace them. This has been prompted by primarily three factors, the advent of the COVID19 economic recession, prevailing low interest rates in the US, and fortified balance sheets of Japanese companies.

By mid-2020. the dividend yields of both the S;P500 and the Nikkei 225 were at around the same level of 2%. This was astonishing especially if you consider that the dividend yield of the Nikkei 225 increased from a little over 0.5% in 2005 to 2% in 2020.

At the same time, the dividend yield of the S;P500 increased from 1.7% in 2005 to just 1.99% in mid-2020. The main reason why American companies have not felt the need to increase dividend yields is the prevalent zero interest rate environment in the US for the past few.

It is worth noting that the yield on the 2 year Treasury Bills has also come down to almost 0.2% from 5.3% in 2006. On the other hand, Japan has been playing around with zero interest rates for decades.

An oft-cited defense for low yields in the US is that it allows companies to grow their earnings at a faster rate. This is not really true, especially if you consider that earnings of companies on the Nikkei 225 have grown at a CAGR of 8.7% in comparison to the 6.7% compound growth rate of companies on the S;P500.

Secondly, due to the COVID19 pandemic, US firms have had a much harder in keeping consistent payouts due to their relatively less liquid and cash poor balance sheets. And this is why by December 2020, S;P 500’s dividend yield fell down to 1.55%. According to consensus, dividend yields could stay sub 1.5%in 2021.

In contrast, the Nikkei 225’s Dividend Yield fell down to around 1.7% by the end of 2020 and is expected to remain higher than that of the US. Furthermore, Japanese dividends are considered to be safer and upward sticky due to their more cash-rich and fortified balance sheets.

Another contrast between the US and Japanese companies is the relatively lower current ratio of American companies. Naturally, if current liabilities are higher than current assets then it can pose liquidity issues during financial crises and this has held true during the pandemic.

Additionally, the balance sheets of US companies are shored up by a large proportion of intangible assets that includes brand and intellectual properties. Tech companies dominate the S;P500 and naturally intangible assets make up a lot of their balance sheets. This is in contrast to tangible-asset heavy Japanese companies.

As a matter of fact, the Market Cap as % Tangible Book Value for Japanese stocks at the end of March 2020 was 154% while it was1,170% for US stocks. Unsurprisingly, this makes Japanese companies favorably positioned to maintain payouts.

It should be very clear to our readers that Japanese companies are cash-rich, but another aspect to consider is that these companies are also averse to taking debt. In comparison, US firms have always been highly leveraged leading to higher ROE; in fact, the ROE of US companies is almost double that of Japanese companies.

To sum it up for many US investors, the fact that Japanese companies hoard cash was a major pain point, simply because piles of cash do not translate into earnings. But in the current economic scenario, this cash stockpile has turned Japan into an unlikely haven for those looking for steady dividends and payouts.  

Ex-Dividend impact on Japanese stocks

The impact of dividends on Japanese stocks is similar to what generally happens worldwide. Stocks gain when dividends are announced and then fall as soon as they go ex-dividend. Indeed, when a company pays out a dividend then its market cap should fall by that same amount since future shareholders will not be eligible for that cash.

However, the exact price change before and after the stock goes ex-dividend can depend on other factors. Stocks with higher dividend yields will however fall by a larger percentage.

Stock dividend or bonus shares work in a similar fashion as well. Although the company does not pay out in cash, it does issue new shares which can dilute shareholding. As the market cap of the company stays stable, the higher number of shares means that per-share value decreases, which leads to a reduction in share price.

References

https://indexes.nikkei.co.jp/en/nkave/index/profile?cid=6&idx=nk225hdy

https://www.whatinvestment.co.uk/shareholder-returns-emerge-from-japan-as-dividends-fall-elsewhere-2618355/https://www.whatinvestment.co.uk/shareholder-returns-emerge-from-japan-as-dividends-fall-elsewhere-2618355/

https://www.reuters.com/article/japan-stocks-midday/japan-stocks-track-wall-st-higher-ex-dividend-stocks-in-demand-idUKL4N2GP0T8?edition-redirect=uk

https://www.business-standard.com/article/news-cm/japan-market-ends-mixed-on-ex-dividend-selling-120092901263_1.html

https://ycharts.com/indicators/sp_500_dividend_yield#:~:text=S%26P%20500%20Dividend%20Yield%20is,long%20term%20average%20of%201.87%25.

https://indexes.nikkei.co.jp/en/nkave/archives/data?list=dividend

https://www.japantimes.co.jp/news/2020/04/17/business/corporate-business/200-listed-companies-japan-cut-forecasts-analysis-shows/

https://www.bloomberg.com/news/articles/2019-10-30/japan-stocks-appeal-a-growing-133-billion-dividend-pile

https://www.ftadviser.com/investments/2020/04/03/japan-s-dividend-approach-offers-clarity-to-investors/?page=1

https://www.wisdomtree.com/-/media/us-media-files/documents/resource-library/market-insights/weniger-commentary/japan_dividends.pdf

https://www.japantimes.co.jp/news/2019/03/27/business/financial-markets/tokyo-stocks-fall-back-ex-dividend-impact/

https://www.japantimes.co.jp/news/2020/06/22/business/financial-markets/japanese-firms-cash-hoarding-dividends/

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