Where can income investors go now that dividends are being cut across the board? Here is one answer: go to Japan.
The contrast with the situation in Britain could not be starker as far as dividends are concerned. While London-listed firms have been forecast to cut their divis in aggregate by as much as 50pc this year because of coronavirus, Japanese firms will on average trim just a couple of per cent from theirs, stock market analysts say.
How is this possible? “Japanese companies have built up large cash reserves over the years,” said Richard Aston, who runs the Coupland Cardiff Japan Income & Growth Trust. “They also tend to pay out less of their profits to shareholders than their western counterparts.”
As a result, he said, many could easily absorb a temporary fall in earnings with little or no effect on their divis.
Some of this conservative approach is born of the fact that Japan is no stranger to natural disasters such as typhoons and earthquakes, Mr Aston said.
He added: “Companies’ cash reserves have got them through many things in the past. They don’t go in for American-style borrowing to buy back shares, which leaves finances more vulnerable if things go wrong. We see Japan’s dividend outlook as far superior to any other market’s.”
Questor has not previously ventured much into the Tokyo stock market but this dividend resilience makes now a good time. British brokers do not make the purchase of Japanese stocks exactly routine but, as we will describe later, it can be done.
Asked to pick out one reliable dividend payer in particular, Mr Aston plumped for Nippon Telegraph & Telephone (NTT).
Shares in the company, which has a virtual monopoly on domestic landlines as well as an international business and a large stake in Docomo, the mobile network, yield about 4pc and the firm has stated its intention to ensure the stability and sustainability of the dividend.
It has certainly avoided the kind of “over-distribution” of divis that has got some western firms into trouble; it has tended to hand only about 30pc of its profits to shareholders and movement towards a target of 40pc will be slow. “Its divi is based on stable rather than fast-growing profits,” Mr Aston said.
When NTT announced results last week, it said it would raise its full-year dividend and planned to do the same next year. The contrast with our own BT, which scrapped its divi earlier this month, is telling.
Part of the firm’s motivation for paying a stable dividend is the need on the part of the Japanese government for a steady return on its 30pc stake in the company,
But while NTT has been conservative with cash, it is not averse to a bit of “financial engineering” to make itself more efficient. It is, for example, borrowing against or “securitising” its receivables and perhaps in future the income from its data centre business to improve cash flow and boost returns.
“It had been quite slack historically, as it was once a government-owned utility, but is becoming more profitable and more financially efficient,” Mr Aston said.
It is also gradually shedding costs as its workforce shrinks naturally through retirement in a reflection of Japan’s ageing population.
“NTT is a well-managed company and is currently working to boost returns from its overseas operations, which are one source of growth in view of the mature state of the domestic telecoms market,” he added.
Investors in overseas stocks should always have one eye on the currency but Mr Aston said the yen was not currently so strong that he would think twice about buying Japanese shares. He said he expected relative stability in the exchange rate in the foreseeable future.
Investors do need to be aware of a “withholding tax” on dividends from the firm, currently 15.3pc. They may also need to look beyond their normal broker to buy the stock. AJ Bell, for example, will deal but only if you spend £10,000 or more.
This may be too much for Questor readers but Saxo Bank will allow them to invest just 10,000 yen, which is equivalent to about £76.
Questor says: buy
Ticker: TYO: 9432
Share price at close: 2,421 yen
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