Buybacks Are Becoming Popular in Japan
While European equities have certainly gotten attention in 2015, we’d also like to emphasize how well Japan’s equities have been doing. The Nikkei 225 Index was over 20,200 as of May 22, 2015, a level not seen in 15-years.
There is wide debate regarding the effectiveness of Abenomics, but we think that focusing too much on the economic aspects of Abenomics may be missing the point:
An equity investment in Japan is an investment in companies rather than economic growth.
Focus on Shareholder Returns
Programs and policies focused on “shareholder returns” are becoming increasingly popular across Japanese companies. This is likely to address the “problem” of having large stockpiles of cash. Many of these firms are committing to return that cash to shareholders, either through dividends or buybacks.
One reason for this comes from the establishment of the JPX-Nikkei 400, which makes membership contingent on such factors as profitability and return on equity. Disbursing cash to shareholders is one way to boost return on equity.
This type of commitment to shareholders in Japan is not something we saw from Japanese firms during the 15 deflationary years between 1998 and 2013.
How Fast Are Buybacks Growing in Japan?
WisdomTree has a wide toolkit of Japanese equity Indexes. This allows us to zero in on which fundamentals are growing the fastest (dividends, earnings or buybacks) and where Japan’s equity markets are showing the greatest growth. All data reflects the one-year period ending April 30, 2015:
• Performance of at Least 28%: The WisdomTree Japan Real Estate Index was the “low” performer of the group, up 27.93%. This shows that Japanese equities were very strong over the period. In light of such positive returns, if any measure of yield—dividend yield, buyback yield or earnings yield—actually increased, it would be a strong statement about the growth of that fundamental indeed.
• Dividend Yield: Each WisdomTree Index saw its dividend yield decrease—not surprising, given the strong performance we saw.
• Earnings Yield: The WisdomTree Japan Tech, Media and Telecom Index’s earnings yield went from 4.4% to 5.0%—at a time when the Index was up almost 40%. This is a statement of strong earnings growth for the companies in this Index; they actually became less expensive, relative to their earnings, over a period when they were, in aggregate, up almost 40%.
• Buyback Yield: There were only three Indexes that saw their buyback yields decrease: the WisdomTree Japan Financials, Health Care and Real Estate Indexes. Every other Index saw its buyback yield increase, even in the face of strongly positive performance. This proves that, generally speaking, buybacks were growing the fastest relative prices if compared to either dividends or earnings.
Focusing on the WisdomTree Japan Dividend Growth Index
The WisdomTree Japan Dividend Growth Index is designed to focus on companies with high earnings growth potential as well as high quality. We saw that the WisdomTree Japan Hedged Tech, Media and Telecom Index had strong earnings growth and in aggregate increased its trailing 12-month buyback from approximately $1.2 billion to $10 billion. Compared to the MSCI Japan Index benchmark, the Telecommunication Services sector was a greater than 10% over-weight—the largest over-weight of any sector.
It is no accident that the greatest aggregate buybacks—more than $16 billion—were seen for the WisdomTree Japan Dividend Growth Index. The firms in this Index are the embodiment of the Japanese growth and quality theme, and since buying back shares increases return on equity, there is the potential for this Index to tilt toward firms that are buying back shares and thereby focusing on shareholder returns.
Unless otherwise noted, data source is Bloomberg.