An ideal Christmas present for investors seeking income

Japanese companies' balance sheets bear gifts western investors can only dream of...

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Dec 16, 2019
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Once upon a time, Japanese companies were drowning in debt, much as their US counterparts are now. 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 1990s[1]. 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 2010[2]. 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 UK[3].

Corporate sector net debt: Japan and the US ($tn)

Source: Japan Ministry of Finance, FRB Deutsche Bank, Dalton Investments 

Perhaps they have taken caution too far. Take a look at Japanese factory automation giant Keyence[4]. 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 2010[5] 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 years[7], 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.

1 Ministry of Finance, Japan
2 Bloomberg
3 Ministry of Finance, Japan and CLSA,Bloomberg
4 Currently held by LF Ruffer Japanese Fund
5 CLSA, Bloomberg
6 CLSA, Bloomberg
7 Shore Capital, IR Japan

Ruffer is a limited liability partnership, registered in England with registered number OC305288 authorised and regulated by the Financial Conduct Authority © Ruffer LLP 2019. The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument. The information contained in the document is fact based and does not constitute investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities should not be construed as a recommendation to buy or sell these securities.


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Ruffer LLP

Ruffer offers financial planners something deliberately different. Your clients like making money, and hate losing it. Most will hate losing money more than they like making it. At Ruffer, this shapes our investment philosophy, and the way we invest. We offer a distinctive all–weather approach, designed to perform in all market conditions. Our focus is on capital preservation and prudent growth, not chasing short–term fads or trends. Since we began in 1994, our investment process hasn’t changed. For over 20 years, it has delivered solid returns well ahead of cash and UK equities. More importantly, it has protected our clients from market crashes, including the bursting of the dot.com bubble and the credit crisis.

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