The land of the rising dividend
Dan Roberts, Portfolio Manager, Fidelity Global Dividend and Global Enhanced Income Funds
- Japanese companies are increasingly focusing on creating value for shareholders through better capital allocation
- Share buybacks and dividend growth have accelerated sharply following the introduction of 2015’s corporate governance code
- A combination of attractive valuations and a positive earnings outlook creates a good opportunity for stockpickers to benefit from these trends
Japan has been one of the bright spots of the global economy in recent times. Real GDP growth in the final quarter of last year came in at 1.2% in annualised terms, representing the fourth consecutive quarter of growth. Meanwhile, unemployment sits at 3% - the lowest rate since 1995 - and this robust labour market backdrop is helping boost household incomes.
Encouragingly, core CPI turned positive in January. Of course, the Bank of Japan is committed to a target of 2% so there is still some way to go. However, the positive economic backdrop provides a fertile environment for domestic corporates to grow earnings and dividends.
At the market level, it is important to appreciate that Japanese stocks have steadily de-rated for some 25 years. Starting valuations back in the late 1980s were egregiously high and explain in large part the poor relative returns we have seen. However, valuations today are now ‘back in the pack’ and the opportunity for stock selection is in our opinion very good which is why we have been incrementally allocating to Japan over the last 12 months.
Despite many other regions struggling to improve fundamentals, earnings growth has been very strong in the Japanese market over the last two years. But unlike other major equity regions such as the US, Japan has not been rewarded with a re-rating. On a relative basis, clearly this makes Japan more attractive with scope for a positive re-rating as investors reflect the improving macro and corporate environment in Japanese share prices.
Earnings growth and market re-rating: 2 years
Source: Bank of America Merrill Lynch, December 2016. GEM stands for Global Emerging Markets. Graphs are for a 24-month period. Past performance is not a guide to the future.
As a dividend investor, there are also encouraging signs that attitudes towards shareholders are changing, particularly since the introduction of the corporate governance code in 2015 which encourages companies to focus more on capital allocation and creating value for minority shareholders. Since then, dividend growth and the number of share buybacks have accelerated sharply. Bridgestone, for example, a leading tyre manufacturer in Japan, recently announced a buyback which will result in a cancellation of almost 9% of the share base.
Elsewhere, Asahi Group, which is the second largest beer brewer in Japan, is another portfolio holding where management continues to focus on improving capital allocation. When the stock was bought in 2013, it was trading on a material discount to global peers and it has since delivered a total return of around 60%. It has stable defensive earnings thanks to hit product ‘Asahi Super Dry’ which allows it to maintain market share in the beer category. Dividend per share has increased each year since purchase, and we can expect the current dividend yield of 1.28% to grow over time.
With Japan also home to several other conservatively-managed companies that are leaders within their respective niches, it provides a good opportunity for bottom-up stockpickers. Although headline yields are typically lower than those in the UK or Europe, a combination of high free cash flow levels, a strong macroeconomic backdrop and improving capital allocation supports the outlook for dividend growth from here.